Q&A Your Questions Answered


A Compliance Officer's Best Tools and Tips for the SEC Exam Process

On September 13, MyComplianceOffice co-hosted a webinar with Milne Legal. Our presenters Dustin Milne, Charles Lerner and Laetitia Mantel discussed what an investment advisory firm outside of the US needs to consider when dealing with the US. This included discussions on what defines a US person, when to register with the SEC, how to handle a SEC exam and what sort of compliance program you should have in place

 You can download a full copy of the slides from this webinar.


Full video transcript available below:

Here's one of the questions that have come in from somebody who says they're registered with the SEC as a registered investment adviser but not as a broker dealer. Is there some bright line for knowing when the firm needs to register as a broker dealer?

Here's one of the questions that have come in from somebody who says they're registered with the SEC as a registered investment adviser but not as a broker dealer. Is there some bright line for knowing when the firm needs to register as a broker dealer?

 To Charles' question, whether there's a bright line for registering as a broker dealer ... This is something we frequently get asked by our RA clients. What I will say is first, the hallmark of broker dealer comes down to whether you do receive a transaction-based fee. That's the hallmark. It's certainly not the complete analysis. Are you participating somehow in that brokerage fee? With that being said, the registration of a broker dealer comes under the Exchange Act of 1934. It's a totally different definition, which essentially is do you effect transactions on behalf of others for compensation? The effect of transactions is key.

I would advise you to sit down with your council. The regulatory environment for investment advisers and broker dealers is a totally different analysis. I wish I could be more precise, but it really takes a lot more time to get into the details. Pay attention to that transaction fee; it's the hallmark of that analysis.

Question number two. This looks like a good question for Charles. What is your advice for Chief Compliance Officers and how likely is it that the SEC would bring an enforcement action directly against a Compliance Officer?

This has been a problematic issues in the states over the last several years as the SEC has brought some actions against Chief Compliance Officers and then there's been some push-back by people who are Chief Compliance Officers and lawyers and others criticizing the SEC for taking actions.

What it seems that the trend is, though, if the Chief Compliance Officer is involved in the illegal conduct, then clearly that's something that the SEC would include the Chief Compliance Officer. They're not only the Chief Compliance Officer but they're involved in the illegal conduct.

The second kind of situation where it can arise is where the Chief Compliance Officer is totally negligent in their duties. Either they knew something was going on and didn't do something about it or they had totally inadequate policies and procedures that have not taken into account what the SEC expects. Although this hasn't happened, hot button issues these days for the SEC are wrap fees, cyber security, business continuity, insider trading ... Those are areas that the SEC saw real poor policies and procedures, or if you had policies and procedures and the Chief Compliance Officer wasn't following ... That would be a possibility that they could be involved with enforcement actions. 

They're a little more reticent these days, I think, and take a bit more care whether to bring a case against a Chief Compliance Officer.

Okay, and the final question. Thank you, Charles, for that. The final question here. We thank you everyone for your time; we know we're running over a little bit. I'll get to the last one here. Again, encourage others to write us directly if we have not addressed your question; we apologize for that.

The last question that we'll address is what if a non-U.S. adviser is funded by a U.S. firm that is not registered in the United States?

I would begin with that subsidiary, the non-U.S. entity. I would look at it's business, go over the same points we've discussed today. Is it an investment adviser, is it providing investment adviser services to a U.S. person? Assuming that we want to register that subsidiary outside the United States with the SEC, the important thing is with the parent entity, funding it, is that clear independence is set up when it comes to the subsidiary providing investment advice to its client. We don't want it to be some sort of flow through or even sham that the U.S. parent set up, not wanting to register itself and setting up, funding this non-U.S. entity.

As long as the non-U.S. entity is an independent entity, has it's independent board members, if you will, making it's own investment advisory services and activities, providing it's own independent advice ... There's a famous no-action letter essentially referred to as the Ellis principles ... You would need to look at that with your council. This would certainly be possible.

We would talk more about the parents, but just looking at the non-U.S. piece, assuming it met the criteria of investment adviser, there was not an exemption, we just want to make sure that it was clearly independent from the parent entity. The funding itself does not cause us any concerns. That would be reported in your ADV, the affiliation to the parent, but you should be able to establish that independence. It's done quite often. Okay.


This webinar was co-hosted with Milne Legal. To learn more visit www.milnelegal.com 

Find out how MCO can help

Request a demo today to learn how MyComplianceOffice puts you in command of your compliance program, synchronizing your business needs with regulation. 

Request a Demo



Download our four page Portfolio of Solutions to learn about;

  • Personal Trade Monitoring
  • Gifts & Entertainment
  • Political Contributions
  • Third Party vendor risk management
  • Trade surveillance
  • And more

Brochure Download