SEC Director Champ Remarks on Investment Adviser Regulation (Important Speech) (with Lofchie Comment)

Steven Lofchie Commentary by Steven Lofchie

SEC Director, Division of Investment Management, Norm Champ delivered a speech in which he discussed investment adviser regulation during the legal and compliance forum on institutional advisory services. Major points in the speech are summarized below:

As to Form PF, he noted that users of the Form may be "unsure" about how to answer a question and should "take a reasonable approach" and "document that approach."

As to the JOBS Act, he stated that the SEC was reviewing comment letters as to permissible advertising by private funds.

As to fiduciary issues, he said that the IM Staff had recommended that broker-dealers and investment advisers be subject to a "uniform fiduciary standard" when they "provide personalized investment advice."

He warned advisers that were no longer qualified to be registered with the SEC that they deregister and register with the various states as appropriate.

He said that the SEC was continuing to study the use of derivatives by registered investment companies and that the SEC staff would, for now, allow new non-leveraged ETFs to use derivatives, subject to certain conditions.

He said that the IM staff has started a new Risk and Examination Group that will conduct "rigorous quantitative and qualitative analyses of the investment management industry, including detailed analyses of strategically important investment advisers and investment companies."

He said that IM priorities are (i) dealing with the application of the JOBS Act to private advisers, (ii) providing additional guidance on securities valuation and (iii) performing more rigorous cost-benefit analyses of rules.

View speech in full here (links externally to SEC website).


As to Form PF, I am pleased that this speech confirms my advice to clients that the Form, in unfortunately large part, makes no sense and that clients would just have to decide in some arbitrary way what many of the questions mean. While I take comfort in not being wrong on this advice (and I hope my clients will too), it is disappointing because I am sure that tens of millions of dollars has been spent gathering information that will not be comparable across funds, and that probably would not be useful even if it were consistent. That is, when I look at many of the most seemingly important questions as to financial information and leverage, it is obvious that these questions were not written in a way that will elicit useful data. In short, it is clear that the questions in the Form should have been better tested before the Form was released. In criticizing the Form, I don't intend to position myself as an opponent of anything that the government does. To the contrary, I believe that the country would be well served by the regulators knowing as much as is reasonably possible about how funds invest and are leveraged from a big-picture perspective. What is disturbing is that the collection of material financial data as to the fund industry in the aggregate is an example of a goal that many people in the financial industry would support (including myself, a generally fierce critic of all things D-F), provided that the degree of effort required is consistent with the benefit provided to society. Yet, in practice, the Form requires a huge amount of time and money, the resulting data is going to be a mess, and who knows how long it will take to make improvements.

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