Remaining in Compliance Gets Tougher
May 29, 2000
NEW YORK - The changing regulatory environment in the mutual fund industry has created ambiguous legal standards that require fund advisers to establish new procedures to protect themselves from enforcement proceedings, said industry lawyers.
"By the end of the year I think you'll see major changes in the regulatory landscape," said Richard D. Marshall, a partner with Kirkpatrick & Lockhart LLP, of Washington D.C. A rule proposal that would change how fund advisers disclose fund information and the SEC's increased vigilance on issues like performance advertising are reshaping the regulatory environment, he said.
Also, individuals are bringing complaints against investment advisers and fund companies that regulators have not, said William A. Schmidt, a partner with Paul Hastings Janofsky & Walker LLP, of Los Angeles. For example, the Department of Labor, which has jurisdiction over financial adviser's practices under ERISA rules, has concentrated on cases of technical prohibitive transactions, Schmidt said. Now, other kinds of claims are showing up in private litigation.
Schmidt made his comments at the Investment Adviser Compliance Forum sponsored by the Institute for International Research here last week.
Performance advertising is a major issue the SEC is closely watching, said Dana L. Platt, a partner with Kirkpatrick & Lockhart LLP. In light of recent enforcement proceedings against companies like Scudder Kemper of New York and Dreyfus of New York, compliance departments need to be especially watchful on this issue, she said. The best defense against an enforcement proceeding is good record-keeping, she said.
"If you're going to misrepresent your performance figures, you aren't going to have documentation to back it up," she said. The best defense against an enforcement proceeding is to have thorough records of all trade ticket memos, she said. She also recommends firms keep detailed minutes of board meetings.
"The SEC is using board minutes to determine the amount of [directors'] oversight of compliance issues," she said.
Another issue facing fund companies is the proposed changes in Form ADV, the form that describes adviser business practices, industry lawyers said.
The SEC's proposal to revise the form to include more information has too many vague provisions that would interfere with a firm's ability to conduct business, said Lee Pickard, a partner with Pickard & Djinis of Washington, D.C.
In particular, Pickard took issue with the proposed rule's amendment concerning best trade execution as it relates to soft dollar policies.
The rule calls for greater disclosure of adviser's so-called "soft dollar" policies. The new rule would require an adviser that receives research or other products or services in connection with client securities transactions to disclose the arrangement and discuss the conflicts of interest that result in a narrative. Currently, firms must respond to multiple choice questions and fill in blanks to describe their soft-dollar practices.
"[The amended ADV rule proposal] is burdensome to everyone," Pickard said. "I would urge everyone to comment on this. There are some terrible, misguided things here. The only people who are smiling are the lawyers. ... the lawyers are going to be busy, busy, busy and this is not in the public's best interests."
The SEC has made the proposal to discourage firms from engaging in soft-dollar practices, said Paul S. Atkins, a partner with PriceWaterhouseCoopers of New York.
"It will be a nightmare to keep up to date," he said. "We're talking about a lot of paperwork here."