Can You Handle the Truth? SEC Targeting False Information on Advisers’ ADVs

investment advisor complianceAs part of its stepped up enforcement activities, the Securities and Exchange Commission is targeting investment advisers who have been less than truthful on their registration forms. This includes inaccurate information related to education, assets under management, and other aspects of their firm.

In testimony before the Senate Banking Subcommittee on Securities, Insurance and Investment, Robert Khuzami, director of the commission’s Division of Enforcement, explained the rationale behind the review: “If they come face to face with inspectors early on … they’re going to know that we’re watching, and they’re going to be unlikely to graduate to larger frauds.”

The scope of the SEC review remains unclear; although Mr. Khuzami did indicate the commission was selecting firms “on the basis of those that have not been subject to examination for some period of time.”

The SEC examined just 8% of the nearly 12,000 investment advisers registered with the commission in fiscal 2011, which ended Sept. 30. In addition, about 38% of advisers have never undergone SEC review.

It is also unclear how examinations will be impacted when the Dodd-Frank changes are implemented this year. The SEC’s burden will be lessened when about 3,200 investment advisers with assets under management of less than $100 million switch to state registration. However, the SEC will take on oversight of about 750 private-fund advisers previously not subject to registration.

The Message for Advisers

Advisers need to carefully review all the information contained in their ADVs and other documents submitted to the SEC.  Advisers should pay particular attention to the assets under management calculation in light of the changes to the rules for computation.

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