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Compliance July 19, 2010
Advisers Should Take Note of Financial Reform Bill Provisions
Certain provisions of the financial reform legislation approved by the U.S. Senate last week may affect financial advisers.
Reported by Sara Kelly
While advisers are perhaps not directly subject to the strictest investigations and restrictions that will be imposed over the coming months, some will likely be held to a higher standard of accountability.
Investment advisers – with the exceptions of those who manage venture capital or private equity funds – are required to register with the Securities and Exchange Commission (SEC). Registered investment advisers will be subject to a new fiduciary standard that requires them “to take steps to safeguard client assets over which [they have] custody, including, without limitation, verification of such assets by an independent public accountant.”
The legislation also gives the SEC the authority to impose a fiduciary duty on brokers who give investment advice.
Investment advisers should also pay attention to the provisions on hedge funds because the bill raises the asset threshold for federal regulation from $25 – $100 million―a move expected to increase considerably the number of advisers under state supervision.
The legislation also requires hedge funds and private equity advisors to register with the SEC as investment advisers and provide information about their trades and portfolios necessary to assess systemic risk. Those advisers who manage private funds are expected to maintain records – and provide annual reports to the SEC – that include information regarding:
- The amount of assets under management and use of leverage;
- Counterpart credit risk exposure;
- Trading and investment positions;
- Their funds’ valuation policies and practices;
- The types of assets held; and
- Their trading practices.
The bill instructs the SEC to conduct inspections of private funds, and states that all such records and reports – including any of side investments or side letters that lend more favorable rights to some investors over others – are to be made available for review.
The SEC will conduct a study to evaluate the current standards and directives imposed by the SEC, FINRA, and other federal and state regulation for their effectiveness and any potential gaps or overlaps that may exist. If any such problems are found, within two years of the bill’s enactment date, the SEC will commence a rulemaking that takes into account the conclusions and recommendations of the study to address those oversights.
Further information can be found at http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf.
To see the bill in its entirety, go to http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf .