IA Act Unwrapped™ - Elements Offered in Level 1 and Level 2
IA ACT Unwrapped™ was developed for the ultimate ease-of-use in accessing information related to the Investment Advisers Act of 1940.
The IA Act Unwrapped™ Level 1 Regulatory Database, specifically designed for Compliance Officers and Legal Staff, contains a REGULATORY DATABASE set up as a Matrix of the Rules under the Investment Advisers Act with categories of information related to each Rule.
IA Act Unwrapped™ Level 1 also contains the full text of the Investment Advisers Act of 1940.
IA Act Unwrapped™ Level 2, in addition to the matrix of categories shown above, and the Investment Advisers Act of 1940, offers more extensive Databases containing all Releases promulgated under the Advisers Act, select No-Action Letters and Enforcement Cases, Glossary & Definitions, and information relating to SEC Examinations of Investment Advisers. These Databases are all fully-text searchable.
These various elements, as they are presented in IA Act Unwrapped™ and how they are used by the SEC, are described below.
RULES
The IA Act Unwrapped™ Regulatory Database will always reflect the current-to-the-day version of the Rules, with historical links to adopting and amending Releases.
About the Rules
Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President. The SEC engages in rulemaking to maintain fair and orderly markets and to protect investors by altering regulations or creating new ones.
The Federal Register is the official daily publication where the SEC and other federal agencies first publish proposed regulations for comment, adopted final regulations, explanations of actions taken, and announcements of significant interpretations of the law.
After publication in the Federal Register, final regulations are then arranged by subject into the Code of Federal Regulations (CFR). SEC rules are found in Chapter II of Title 17, under the heading “Commodity and Securities Exchanges”. Chapters are divided into parts which cover particular topics. Parts are then divided into sections which correspond to rule numbers.
Rules that are promulgated under the Investment Advisers Act of 1940 always fall under 17 CFR Part 275.
For example, in other publications and websites you may see a rule under the Advisers Act shown as:
§275.204-2 Books and records to be maintained by investment advisers.
- or -
17 CFR Part 275.204-2 Books and records to be maintained by investment advisers.
This is exactly the same rule identified as:
Rule 204-2 Books and records to be maintained by investment advisers.
For ease of navigation within the Regulatory Database, Rules under the Investment Advisers Act are also shown by the colloquial names. For instance, Rule 204-2 mentioned above will be shown as Rule 204-2 Books & Records.
You will note that the rules do not appear to be in a particular numerical order. This is because the rule numbers correspond to the sections under the Investment Advisers Act under which they are promulgated.
For instance, all Rules that begin with the number “204” (Rule 204-1, Rule 204-2, and Rule 204-3) all fall under the same regulatory section of the Advisers Act, that is, “Sec. 204. Annual and Other Reports”.
In addition, the SEC has retained several placeholders for “reserved” rules that are no longer effective, such as: Rule 203a-5, Rule 203a-6, Rule 204-4 and Rule 204-5.
RELEASES
IA Act Unwrapped™ Level 1 offers access to Final Releases – both adopting and amending, along with Interpretative Releases relating to the specific Rules.
IA Act Unwrapped™ Level 2 offers access to ALL Releases promulgated under the Advisers Act, from Release IA-1 issued October 7, 1940, through the current Release issued today. These include Proposing Releases, Final Releases, Interpretative Releases, Opinions, Orders, Notices, and Regulatory Agendas.
It is important to note that, although the text of a particular Rule may be very succinct, the full text of the Releases provide in-depth background information about the origin of specific rules. The Releases include, for example, the SEC’s staff’s basis for drafting a particular rule, changes from earlier proposed rules, and a summary of public comments. Even the Footnotes often offer a wealth of valuable information. We strongly advise you to read through the Releases to gain a fuller understanding of the SEC's intent for the rules.
About the Releases
The Commission is legally obligated, under the Administrative Procedures Act to be transparent. As such, there are clear requirements for rulemaking.
Once the Commission proposes a rule (in a “Proposing Release”), it then formally seeks public comment. The Commission nearly always asks for comments not only on the specific rule it has chosen to propose, but also on a wide range of potential changes it might make. This enables the Commission to obtain effective feedback from all interested parties. All comments received are recorded and displayed on the SEC's website, which provides a record of each rule from proposal to adoption, including meetings with commenters on the proposed rule. This transparency is significant because it enables commenters to react to, and counter or expand upon, the views submitted by others. Many take advantage of these opportunities.
At times, the Commission issues a concept release — as it did recently with respect to equity markets structure — to seek written comments from a broad range of persons, even prior to issuing a rule proposal.
Sometimes the Commission will extend or reopen a comment period in order to solicit additional advice and guidance on a more tailored approach or simply to give interested parties more time to comment, which can be particularly important when the rulemaking is complex.
A Release that adopts, or amends a rule is known as a “Final Release” or “Adopting Release” or “Amending Release”.
The prefixes included in the release numbers identify the Act pursuant to which the rule was promulgated. All Releases under the Investment Advisers Act of 1940 begin with the prefix “IA”. However, since the Advisers Act was adopted so long ago, early Releases under the Advisers Act often had different prefixes, such as “IAA-”.
For consistency and ease-of-use, all Releases in the Regulatory Database are prefixed by IA-, regardless of their date (e.g. IA-40, IA-1092, IA-2628).
It is important to note that the date of the releases reported on the SEC’s website is the date of the Commission’s approval and not the publication date in the Federal Register.
In other publications and websites you may see a Release shown with a Federal Register (FR) reference number as opposed to an Advisers Act Release number (IA-).
This can be confusing, as it may be difficult, if not impossible, to realize that the Federal Register Release 68 FR 6593 is the same as Investment Advisers Act Release No. IA-2106, which, incidentally, adopted the recent Rule 206(4)-6, the Proxy Voting Rule.
Because the National Archives and Records Administration on its GPO Access website only maintains in electronic format the Federal Registers from 1994 (Volume 59) through today, it may be very difficult for an individual to access earlier Releases. However, the Regulatory Databases link the Advisers Act Rules to all adopting and amending releases.
In addition, the Regulatory Database references Final Rule Releases and Amending Releases by both the Advisers Act Release (e.g., IA-2106) and the Federal Register Release (68 FR 6593). The Database will link to the exact same Release using either of these sources.
DESCRIPTION – PLAIN ENGLISH
The IA Act Unwrapped™ Regulatory Database offers a plain English description of each Rule.
About Plain English
The SEC has taken a very strong stand on the use of plain English over the past couple of decades. The SEC issued its “A Plain English Handbook – How to create clear SEC disclosure documents” in August, 1998.
More recently, the SEC updated Form ADV Part 2 in Release No. IA-3060, to require investment advisers to provide clients with narrative brochures containing plain English descriptions of the advisers' businesses, services, and conflicts of interest.
In light of the SEC’s focus on plain English, we have chosen to offer a plain English description of the Advisers Act Rules. In most instances we offer the SEC’s own description of the Rule. It should be noted, however, that an investment adviser must refer to, and abide by the content of the Rule itself, not the plain English description.
DISCLOSURE & RECORDS
The IA Act Unwrapped™ Regulatory Database also offers, within its matrix of information, particular disclosure and recordkeeping requirements under each Rule, for instance, under Rule 206(4)-6, Requirements for Investment Advisers that Vote Proxies of Clients’ Securities. It is important to note that many of these same requirements may be listed under the Books and Records Rule, but we have also broken them out under the individual rules for your convenience.
About Disclosure and Recordkeeping
As a registered adviser, you must make and keep true, accurate and current, certain books and records relating to your investment advisory business (under “the Books and Records Rule” — Rule 204-2). The books and records that you must make and keep are quite specific.
Some advisers are required to maintain additional records. For example, advisers that have custody and possession of clients’ funds and/or securities must make and keep additional records that are described in the Books and Records Rule (Rule 204-2, paragraph (b)), and advisers who provide investment supervisory or management services to any client must also make and keep specific additional records (which are described in Rule 204-2, paragraph (c)).
You must keep these records for specified periods of time, and in an easily accessible location.
The SEC expects investment advisers to provide clearly written, meaningful, current disclosure of its business practices, conflicts of interest and background of the investment adviser and advisory personnel.
NO-ACTION LETTERS
IA Act Unwrapped™ Level 1 offers, in its Regulatory Database, access to certain important, and or recent, No-Action Letters issued under the Advisers Act. These are accessible through the matrix segmented by each particular Rule under which they apply.
IA Act Unwrapped™ Level 2, has in addition to the No-Action Letters in Level 1, a more extensive database of No-Action letters issued under the Advisers Act. These are fully-text searchable and may also be viewed by Name or by Date.
About No-Action Letters
An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a "no-action" letter from the SEC staff. Most no-action letters describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual’s or entity's original letter. The SEC staff sometimes responds in the form of a no-action letter to requests for clarification of the legality of certain activities.
The Division of Investment Management regulates investment companies (such as mutual funds, closed-end funds, UITs, ETFs, and interval funds), including variable insurance products, and federally registered investment advisers. Therefore, no-action letters relating to the Investment Advisers Act of 1940 would be written by staff of the SEC’s Division of Investment Management.
The Division of Investment Management “generally permits third parties to rely on no-action or interpretive letters to the extent that the third party’s facts and circumstances are substantially similar to those described in the underlying request for a no-action or interpretive letter” (See Footnote 1 – T. Rowe Price No-Action Response, dated October 8, 2009).
It is recommended that those who rely on a no-action letter keep a copy of that letter available as backup information. This letter can then be produced as additional information for SEC examination staff.
ENFORCEMENT CASES
IA Act Unwrapped™ Level 1 Regulatory Database offers selected Enforcement Cases where we believe they are significant under a particular Rule. For instance, if the SEC issues an important Litigation Release or Advisers Act under a particular Rule, we integrate that Release into the Regulatory Database matrix.
About Enforcement
The SEC’s Division of Enforcement investigates possible violations of securities laws, recommends Commission action when appropriate, either in a federal court or before an administrative law judge, and negotiates settlements.
The Commission can bring a variety of administrative proceedings, which are heard by administrative law judges and the Commission itself. One type of proceeding, for a cease and desist order, may be instituted against any person who violates the federal securities laws. The Commission may order the respondent to disgorge ill-gotten funds in these proceedings. With respect to regulated entities (e.g., brokers, dealers and investment advisers) and their employees, the Commission may institute administrative proceedings to revoke or suspend registration, or to impose bars or suspensions from employment. In proceedings against regulated persons, the Commission is authorized to order the payment of civil penalties as well as disgorgement.
Many of the Releases under the Investment Advisers Act fall under the category of “Administrative Proceedings” - Orders and related materials released by the Commission when administrative proceedings are instituted and/or settled. These are generally named, e.g., ”Release No. IA-3005 - Order In the Matter of Paul H. Heckler, et al”. The Form ADV Glossary defines an “Order” as “a written directive issued pursuant to statutory authority and procedures, including an order of denial, exemption, suspension, or revocation. Unless included in an order, this term does not include special stipulations, undertakings, or agreements relating to payments, limitations on activity or other restrictions.” Orders are used in Form ADV Part 1A, Items 2 and 11, and Form ADV Schedule D, and DRPs.
Other Releases under the Investment Advisers Act fall under the category of “Commission Opinions” - Opinions issued by the Commission on appeal of Initial Decisions or disciplinary decisions issued by self-regulatory organizations (e.g., NYSE or NASD). These are generally named, e.g., “Release No. IA-2926 - Opinion In the Matter of Martin A. Armstrong”.
GUIDANCE
Wherever possible, we have incorporated SEC guidance related to a particular rule. In some instances, such as Rule 206(4)-2 – Custody, this guidance is issued as Frequently Asked Questions. In other instances, such as Rule 206(4)-5 – Political Contributions by Certain Investment Advisers, the guidance is offered as a Small Entity Compliance Guide. As within the Plain English Descriptions, Risks and Testing, we use every opportunity to present this information as it was issued directly from the SEC.
RISKS
Often there are very clear risks associated with a particular Rule. For instance, for investment advisers that do not have custody of client funds or securities, there is always the chance that they may obtain inadvertent custody. In this area of the matrix, we offer insight into possible risks, what the SEC will be looking for reviewing this area during an examination, and wherever possible we offer suggestions on how to alleviate that risk.
TESTING
The Advisers Act and Rules thereunder establish requirements that must be met in order to maintain compliance with each Rule. When SEC Examination Staff reviews an investment adviser, they may take a broad-spectrum approach during that examination, or may take a more focused and specific approach. Nevertheless, the Compliance Programs Rule, Rule 206(4)-7 requires an investment adviser to review its policies and procedures annually to determine their adequacy and effectiveness of their implementation. This review should encompass all areas under the Advisers Act. The review should consider any compliance matters that arose during the previous year, any changes in the business activities of the adviser or its affiliates, and any changes in the Advisers Act or applicable regulations that might suggest a need to revise the policies or procedures. Although the rule requires only annual reviews, advisers should consider the need for interim reviews in response to significant compliance events, changes in business arrangements, and regulatory developments. This area of the matrix offers suggestions on how to test for compliance with specific rules.
DEFINITIONS
Within the IA Act Unwrapped™ Level 1 matrix, all terms relevant to a particular Rule are defined as used in that section.
IA Act Unwrapped™ Level 2 also offers a more extensive Glossary & Definitions Database of terms relevant to investment advisers and to the financial services industry, in general.
INVESTMENT ADVISERS ACT OF 1940
IA Act Unwrapped™ offers access to the full text of the Investment Advisers Act of 1940. It is interesting to note that, even the SEC’s website does not contain the content of the Advisers Act, but rather links to the Act at another source.
The Investment Advisers Act of 1940 changed significantly as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The full text of the Dodd-Frank Act is available online at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf. Please be aware that the full text, in PDF format, is over 800 pages in length.
About the Advisers Act
This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners, with a certain amount of assets under management, compensated for advising others about securities investments, must register with the SEC and conform to regulations designed to protect investors.
