In a recent speech, the co-chief of the Division of Enforcement’s asset management unit, Julie Riewe, highlighted the history of the five-year-old unit and its recent initiatives. She explained that, out of the unit’s 75 staff, seven are former industry professionals (including mutual fund professionals). However, she also noted that, despite the in-house expertise, staff in the unit are “repeat customers” of the Division of Investment Management. IM staff assist the unit with complex legal issues and with the review of enforcement recommendations for consistency with SEC practice. Additionally, IM staff alert the unit to possible problematic practices to investigate and consult with the unit when drafting rules or guidance.
Riewe noted the unit’s close coordination with the SEC’s Office of Compliance Inspections and Examinations. She insisted that, presumably due to industry concern regarding the presence of enforcement staff in exams, the relationship between the two is “not cause for alarm,” and that the collaboration is “nothing new.” As quoted by Ignites (subscription required), Riewe encouraged the audience to “[t]ake comfort in that [we] will not engage in rulemaking by enforcement,” and that “when cases come out, folks will understand why [they were] sent to enforcement.”
Riewe also highlighted ongoing initiatives and priorities, focusing the bulk of her speech on the unit’s overarching concerns regarding conflicts of interest. She noted that, in nearly every open matter, conflicts are an issue of investigation and stressed the need for an adviser to identify and disclose or eliminate conflicts. She expects the unit to recommend several cases for enforcement action, including action arising from the Distribution in Guise Initiative which has examined “conflicts presented by registered fund advisers using the fund’s assets to grow the fund and, consequently, the adviser’s own fee.” While Riewe acknowledged changes in the industry since the adoption of Rule 12b-1, she argued that the rule “embodies ‘bedrock obligations’ that are useful for funds and their boards,” according to Ignites.
Riewe announced that the unit’s 2015 priorities would include the following with respect to registered investment companies:
- valuation and performance and the advertising of that performance;
- funds deviating from their investment guidelines or pursuing undisclosed strategies;
- fund governance, which includes boards’ and advisers’ discharging of their obligations under Section 15(c) of the Investment Company Act of 1940 when they evaluate advisory and other types of fee arrangements; and
- fund distribution, including whether advisers are causing funds to violate Rule 12b-1 by using fund assets to make distribution payments to intermediaries outside of the funds’ Rule 12b-1 plan, whether funds’ boards are aware of such payments, and how such payments are disclosed to shareholders.
Riewe highlighted a 15(c) enforcement action against Chariot Advisors arising out of misrepresentations to the fund board relating to the adviser’s ability to engage in algorithmic trading. Additionally, she noted the action against F-Squared from December 2014 in which the SEC found that the adviser had materially inflated its track record, causing violations of Section 34(b) of the Investment Company where F-Squared sub-advised funds included the numbers in SEC filings. In the coming year, Riewe expects the unit to bring additional 15(c) and performance advertising cases.