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Remarks to 2015 IAA Compliance Conference

Dave Grim, Acting Director, Division of Investment Management

Arlington, VA

March 6, 2015


Good afternoon everyone, and thank you for that kind introduction. Before I begin, let me remind you that the views I express are my own and do not necessarily reflect the views of the Commission, any of the Commissioners, or any other colleague on the staff of the Commission.[1]

It is a privilege to be here today at this important conference on compliance issues affecting investment advisers. The Division of Investment Management has tremendous personnel located in Washington, DC, New York, Philadelphia, Fort Worth and San Francisco, and I am pleased to be joined at this conference by some of the Division’s most knowledgeable and talented staff. Yesterday Sara Cortes, Senior Special Counsel in our Rulemaking Office, participated in a breakout session on Proxy Voting Policies and Procedures. Earlier today Alpa Patel, Branch Chief in our Private Funds Branch sat on a panel discussing a Life Cycle of a Trade; Kris Easter Guidroz, Senior Special Counsel in our Risk and Examinations Office, discussed Anti-Money Laundering Sanction Considerations for Advisers; and later this afternoon, Melissa Gainor, Senior Counsel in our Rulemaking Office, will discuss relevant advertising issues for investment advisers.

Today I want to touch upon some initiatives we are very excited about, and which the Division will be devoting a lot of attention to throughout the year. More specifically, my remarks today outline in more detail a plan to enhance and strengthen the Commission's regulatory programs in response to an evolving asset management landscape that Chair White announced in a speech last December.[2] The staff has been developing three sets of recommendations to address the increasingly complex portfolio composition and operations of today’s asset management industry. The first of these seeks to modernize and enhance data reporting for both registered funds and investment advisers. The second set of recommendations would require registered funds to have controls in place to more effectively identify and manage the risks related to the diverse composition of their portfolios, including liquidity management and the use of derivatives in mutual funds and ETFs. The third initiative focuses on planning for (i) the impact on investors of market stress events, and (ii) when an adviser is no longer able to serve its clients.

Yesterday at an Investment Management Institute conference in New York, I discussed the enhanced data reporting, derivatives, and liquidity rulemaking initiatives through a historical lens as these issues have applied to registered investment companies. I discussed, for example, the Commission's successful data-gathering-and-analysis experience with money market funds under Form N-MFP. I noted that the staff believes that the collection of enhanced data for other investment companies can improve the effectiveness of the Commission’s risk monitoring, oversight, examination, and enforcement programs. Today, I plan to discuss how certain issues underlying some of these initiatives have historically impacted investment advisers. I hope this two-step approach will help all better understand the background of these initiatives.

Enhanced Data Reporting

The modern-day SEC is an agency that increasingly relies on technology and specialized expertise. The innovative use of data and analytical tools contributes to the staff’s ability to make better and more informed policy recommendations and enhances our investor protection efforts. One way to further this goal is to modernize our collection of data.

The origins of the Investment Advisers Act itself are based on the importance of collecting useful adviser data. As originally enacted, the Advisers Act sought to create a “compulsory census” of the investment adviser industry through a registration and reporting process that would provide the Commission with information regarding the number of people engaged in the advisory business, their associations, the extent of their authority, their backgrounds and their handling of client funds.[3] In a congressionally-mandated study of investment advisory services in the late 1930s, Commission staff reasoned that this census approach would protect investors from the unregulated “fringe” offering investment advisory services.[4]

The modern day incarnation of the “registration and reporting process” envisioned 75 years ago is Form ADV. As you know, to apply for registration with the Commission as an investment adviser, an applicant must complete Form ADV and file Parts 1A and 2A of the form electronically through the Investment Adviser Registration Depository (“IARD”). Information submitted on Form ADV is used by the Commission to process registrations and to manage its regulatory and examination program.[5] Form ADV also provides prospective clients with information designed to permit them to make an informed decision about whether to engage an adviser.[6]

The registration and reporting requirements of Form ADV have been updated over time to address an evolving investment advisory industry. For example, in an effort to take advantage of developments in information technology to provide investors with better access to fund and adviser information,[7] in 2000 the Commission modernized the adviser registration program by requiring the Form to be filed electronically through IARD, and made available to the public through the SEC’s website. [8] Electronic filings have resulted in investors having timely access to the latest reports and filings made by funds and advisers. In addition, in connection with 2009 amendments to the custody and recordkeeping rules under the Advisers Act, amendments to Form ADV were designed to provide the Commission and the public with better information about the custodial practices of registered investment advisers.[9] In 2010, Part 2 of Form ADV was amended and divided into two sections, Parts 2A and B.[10] Part 2A requires an adviser to prepare a narrative “brochure” that includes information about the adviser’s business practices, investment strategies, fees, conflicts of interest, and disciplinary information. Part 2B is the “brochure supplement” that contains information about each advisory employee, including educational background and business experience, among other things.

The Form has also been updated to address evolving standards on the types of entities that should be registered with the Commission as investment advisers. In 2011, the Commission adopted significant changes to Form ADV in connection with the implementation of the Dodd-Frank Act and the registration of investment advisers to private funds.[11] Specifically, the Commission amended the Form to require private fund advisers to disclose key characteristics of each private fund they advise.[12] The Commission also adopted amendments to require private fund advisers to disclose information about service providers that serve in certain gatekeeping roles.[13] In adopting the amendments, the Commission noted that the data collected on Form ADV was critically important to the Commission’s regulatory program and ability to protect investors.[14] Also in 2011, the Commission adopted Form PF to collect data about private fund activities from private fund advisers, as required by the Dodd-Frank Act. Pursuant to that Act, the data provided on Form PF is intended to assist the Financial Stability Oversight Council in its assessment of systemic risk in the U.S. financial system and also is available to the Commission to pursue its core regulatory activities. The data collected on Form PF complements the data collected on Form ADV, and provides the SEC with a more comprehensive overview of private funds in light of the Commission’s increased oversight responsibility for advisers to such funds.

In connection with the Chair’s objective of enhancing risk monitoring and regulatory safeguards for the asset management industry, Division staff has been analyzing ways to enhance the Commission’s registration and regulatory and examination program, improve the usefulness of Form ADV for prospective and current advisory clients, and increase the effectiveness by which advisers report information to the Commission. In 2012, the staff issued a No-Action Letter to address the registration issues that arise from the unique legal structures of private fund advisers.[15] A private fund adviser is often organized through multiple legal entities for a variety of reasons, including to address tax or liability issues, but Form ADV is designed to elicit information about, and to effect the registration of, advisers that operate as single legal entities. By addressing umbrella registration of private fund investment advisers, the staff no-action position set forth in the 2012 ABA Letter has enabled private fund advisers to register in a way that is more consistent with operations of the private fund industry.

In addition, Division staff has been reviewing the types of information filed by investment advisers, on Forms ADV and PF and otherwise, and considering whether there is additional information that would be useful for risk assessment purposes. Information about separately managed accounts, for instance, is an area where further information may be useful. Collecting more data on separately managed accounts, where the adviser manages assets on behalf of a particular client, may also better inform the Commission about the totality of the advisory industry and inform examination priorities and the assessment of the risks associated with those accounts, which are a significant portion of the business of many investment advisers.[16]

Enhancing the information disclosed by investment advisers is expected to assist risk profiling for examinations, enhance the staff’s overall understanding of asset management activities, and allow advisory clients and potential advisory clients to make more informed decisions about the selection and retention of investment advisers.

Transition Plans

The Chair stated in her December speech, “If we have learned nothing else from the financial crisis, it is that we must test and plan for the worst.”[17] To that end, the Chair noted, the Commission “must take steps to ensure that firms have a plan for transitioning their clients’ assets when circumstances warrant.”[18] The staff is therefore developing a recommendation to require investment advisers to create transition plans to prepare for a major disruption in their business.

The staff’s recommendation regarding transition plans will be informed by current requirements for registered investment advisers, and designed to complement existing compliance programs. For instance, as part of the compliance programs required by rule 206(4)-7 under the Advisers Act, registered investment advisers are required to adopt and implement written policies and procedures reasonably designed to prevent the adviser from violating the Investment Advisers Act.[19] In the Compliance Rule adopting release, the Commission stated that it expected an adviser's policies and procedures, at a minimum, to address business continuity plans to the extent they are relevant to the adviser.[20]

In 2003, the year the Compliance Rule was proposed and adopted, the development of business continuity plans was influenced by the events of the time, such as Y2K and September 11th. While planning for such events remains just as important today as it was then, advisers are well served by planning for a variety of other kinds of events that could significantly impact the firm. Transition plans could be more designed to limit the risks associated with major disruptions in the unique operation of an adviser’s business, such as the departure of key personnel, or disruptions resulting from an adviser’s dissolution.[21] To better understand these risks, it is important to recognize the unique aspects associated with winding down an investment adviser are different than those associated with other kinds of financial firms.[22] Client assets are not the assets of an adviser,[23] and advisers routinely exit the market without significant market impact; those exits, however, are not without challenges, and those challenges may differ depending on the adviser’s clients.[24] For example, if there are restrictions on investors’ ability to access or move assets away from an adviser — or, more generally, de facto limitations imposed by illiquid assets or market conditions — a clear transition plan for that adviser could benefit investors and the market.[25]

The process of creating a transition plan in advance of an actual impending dissolution or other severe disruption of an adviser’s operations could better prepare advisers and their clients to deal with a transition and its attendant risks if one were required.

Stress Testing

The staff is also considering ways to implement the new requirements for annual stress testing by large investment advisers and large funds, as required by the Dodd-Frank Act.[26] Implementing this new mandate in asset management, while relatively novel, will help large advisers and funds and the Commission better understand the potential impact of stress events. Building on what the Commission learned about stress testing through money market reform, the staff is evaluating what protocols may be appropriate for investment advisers and investment companies. As with transition planning, the staff is considering how to tailor its recommendations for asset management, as well as for different types of firms.[27]


2015 is an important year for the Division of Investment Management. This year marks the 75th anniversary of both the Investment Company Act and the Investment Advisers Act.

Later this year, we will celebrate this anniversary with a day of roundtables and dialogue, including opportunities to hear from industry pioneers, former regulators and distinguished academics. We are still in the early stages of planning, but we hope that you will be able to join us for this exciting event.

In December Chair White announced several rulemaking initiatives for the Division of Investment Management, which will address the increasingly complex portfolio composition and operations of today's asset management industry. This afternoon I have given you a little perspective on the historical aspects of enhanced data reporting, transition plans, and stress testing as they relate to investment advisers. Yesterday, at the Investment Management Institute conference, I addressed certain initiatives as they relate to the business of investment companies.

As Chair White noted last December, President Roosevelt rightly heralded the Investment Company Act and Investment Advisers Act as milestones in the “vigorous program…to protect the investor.”[28] In this spirit, we are continuing to assess the evolving activities of the asset management industry, while simultaneously balancing the opportunity for abuse with the principle of risk-reward which is at the heart of our capital markets. By ensuring that we are informed through the collection of useful and enhanced data, and anticipating and planning for uncertainty, we are continuing to give life to our mission of: protecting investors, promoting informed investment decisions, and facilitating appropriate innovation.[29]

Thank you for your attention this afternoon, and I hope you enjoy the conference.

[1] I would like to thank my colleagues, Tyler Kirk and Aidan O’Connor, for providing invaluable assistance in preparing these remarks. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

[2] See Mary Jo White, Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry (Dec. 11, 2014), available at (“Chair White 12/11/14 Speech”).

[3] See Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 48 (1940).

[4] See Investment Trusts and Investment Companies: Investment Counsel, Investment Management, Investment Supervisory, and Investment Advisory Services, H.R. Doc. No. 477, 76th Cong., 2d Sess. 27-30 (1939).

[5] See Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 3221 at p. 53 (June 22, 2011) [76 FR 42950 (July 19, 2011)], available at

[6] See id.

[7] The Commission’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system, since 1993, electronically receives, processes and disseminates documents required to be filed with us under the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, and the Investment Company Act of 1940.

[8] See 17 CFR 275.203-1.

[9] See Custody of Funds or Securities of Clients by Investment Advisers, Investment Advisers Act Release No. 2968 (Dec. 30, 2009), available at

[10] See Amendments to Form ADV, Investment Advisers Act Release No. 3060 (July 28, 2010), available at

[11] See supra note 5.

[12] See id., at Section II.C. See also Schedule D, Section 7.B.(1), Question 18(b) of Form ADV Part 1A.

[13] See id.

[14] See id.

[15] See American Bar Association, Business Law Section, SEC Staff No-Action Letter (Jan. 18, 2012), available at (“2012 ABA Letter”).

[16] Chair White 12/11/14 Speech, supra note 2.

[17] Id.

[18] Id.

[19] See Compliance Programs of Investment Companies and Investment Advisers, Investment Advisers Act Release No. 2204 (Dec. 17, 2003), available at

[20] The Compliance Rule adopting release states that fiduciary obligations require advisers to take steps to protect clients’ interests from being placed at risk as a result of the adviser’s inability to provide advisory services after a natural disaster or, in the case of smaller firms, the death of the owner or key personnel. See id. at n.22.

[21] Chair White 12/11/14 Speech, supra note 2.

[22] Id.

[23] Client assets are generally held at a third-party custodian and the creditors of the investment adviser have no claim to the client assets. See, e.g., section 17(f) of the Investment Company Act; 17 CFR 270.17f-1 to 17 CFR 270.17f-7; 17 CFR 275.206(4)-2.

[24] Chair White 12/11/14 Speech, supra note 2.

[25] Id.

[26] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, section 165(i)(2) (codified at 12 U.S.C.A. § 5365).

[27] Chair White 12/11/14 Speech, supra note 2.

[28] Franklin D. Roosevelt, Statement on Signing Two Statutes to Protect Investors (Aug. 23, 1940), available at

[29] The Division of Investment Management works to protect investors; promote informed investment decisions; and facilitate appropriate innovation in investment products and services through regulating the asset management industry.

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