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Dec. 9 2001 – Stephen Cutler, Director of the SEC’s Division of Enforcement, on Thursday spoke at the Investment Company Institute’s Securities Law Developments Conference on potential pitfalls in investment company compliance.
The speech focused in part on a September enforcement action against an investment adviser for pricing irregularities by the sub-adviser. Western Asset Management Co., Release No. IA-1980 (Sept. 28, 2001). There the adviser was found to have failed to supervise a portfolio manager employed by a sub-adviser, where the sub-advisory agreement specifically stated that the sub-adviser’s provision of advisory services was subject to the adviser’s supervision.
The adviser had several indications of irregularities, but did not follow-up and review them or even have procedures for doing so. Mr. Cutler noted that the adviser and sub-adviser in that case were related entities but stated that an adviser – sub-adviser relationship between two unrelated entities is equally likely to result in a supervisory relationship.
He then suggested several steps that advisers can take to supervise a sub-adviser:
–One, obtain from employees of the sub annual certifications of compliance with the substantive policies and procedures governing the sub’s responsibilities and with the federal securities laws.
–Two, conduct periodic meetings with compliance personnel at the sub.
–Three, require the sub to provide notice of regulatory examinations and provide copies of any exam reports; then, implement procedures for follow-up on any troubling findings contained in the reports; and
–Finally, periodically reassess supervisory procedures applicable to the sub in light of: Changes in a fund’s investment strategy or portfolio manager, Significant changes in the sub’s business, Dramatic changes in market conditions, or Any other event likely to have a significant impact on the sub’s operations.
Mr. Cutler’s speech is available online at http://www.sec.gov/news/speech/spch527.htm while the Western Asset Management case is available at http://www.sec.gov/litigation/admin/ia-1980.htm
Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to email@example.com
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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