SEC Votes To Propose Amendments To Investment Adviser Rules; Next Up: Proxy Access

Yesterday, the U.S. Securities and Exchange Commission voted unanimously to propose amendments to rule 206(4)-2 under the Investment Advisers Act of 1940 and related forms and rules.

Highlights of Proposal
Following are highlights of the proposal, based on information contained in the SEC Press Release issued after the meeting:

• investment advisers with custody of client assets to undergo an annual “surprise exam” by an independent public accountant to verify those assets exist held under custody exist, and disclose in public filings with the Commission, among other things, the identity of the independent public accountant that performs its “surprise exam,” and amend its filings to report if it changes accountants. The accountant would have to report the termination of its engagement with the adviser and, if applicable, any problems with the examination that led to the termination of its engagement. If the accountants find any material discrepancies during the surprise examination, they would have to report them to the Commission.
• investment advisers whose client assets are not held or controlled by a firm independent of the adviser to obtain a written report (commonly called a SAS 70 report), prepared by a PCAOB-registered and inspected accountant, that, among other things: describes the controls in place, tests the operating effectiveness of those controls, and provides the results of those tests.
• investment advisers to comply with reporting requirements (set forth in the proposed rule) designed to alert the SEC staff and investors to potential problems at an adviser, and provide the Commission with important information for risk assessment purposes.
• all custodians holding advisory client assets to directly deliver custodial statements to advisory clients rather than through the investment adviser, and that advisers opening custody accounts for clients instruct those clients to compare account statements they receive from the custodian with those received from the adviser. The Commission notes: "These additional safeguards would make it more difficult for an adviser to prepare false account statements, and more likely that clients would find discrepancies."

There will be a 60-day comment period on the proposed rule amendments (ending 60 days after the proposal is published in the Federal Register.) Read more about the investment adviser proposed rules in: SEC Press Release; Statements at SEC open meeting by: Chairman Mary L. Schapiro, Commissioner Troy A. Paredes.

Next Up: Proxy Access
As noted in this Sunshine Act Notice, the SEC will meet on Wednesday, May 20 on the topic of proxy access, specifically, to: "consider whether to propose changes to the federal proxy rules to facilitate director nominations by shareholders." Broc Romanek writes on this subject today in TheCorporateCounsel.net blog in his post: Proposal Rumor: Proxy Access Threshhold of 1% Ownership?

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