2017 Year-In-Review for Investment Advisers:

SEC Exams, Enforcement Actions, Guidance, & More

December 18, 2017

Like a great morning routine sets you up for an amazing day, taking some steps now to plan,
schedule, and allocate resources will lay the foundation for a less stressful and more successful
2018. In this article, we provide a head start by assessing the current regulatory environment and
landscape, and by looking back at the key events that shaped 2017.
By recent standards, it has been a slow year for new compliance regulations. One could attribute
this to the new administration and the changing of the guard within the leadership ranks at the
SEC. However, the SEC remains busy and active casting a bigger net with technological
improvements and sharpening its focus on its perennial priorities.

At a high level, our greatest priorities and where we allocate our limited resources do not really
change over time, and nor should they. We are always going to be focused on retail investors. These
are often the most vulnerable market participants who are most in need of our protection. We are
also always going to be focused on cyber-related issues, which are only continuing to increase in
number and impact. Finally, we are always going to be focused on issues raised by the conduct of
investment advisers, broker-dealers, and other registrants, on financial fraud and disclosure issues
involving public companies, and on insider trading.
-Co-Director of Enforcement, Stephanie Avakian, Oct. 26, 2017

To pursue these longstanding initiatives and sharpen its focus, the SEC established two new
enforcement task forces – cyber and retail. As for technological improvements, two substantial
reporting rulemakings began taking effect in 2017 that will empower the SEC with more
monitoring and analytical capabilities: (1) investment companies began preparing for the
Investment Company Reporting Modernization Rule (including, N-PORT and N-CEN); and (2)
investment advisers are subject to amendments to the Form ADV 1. We’ve linked an Investment
Adviser Association published checklist here to help prepare and respond to this reporting change.
We also looked at select info from the SEC databases, including, registered investment adviser,
exempt reporting adviser, and private fund statistics, and extracted themes from the various SEC
Annual Reports. Like a large ship changing course, much of these examination and enforcement
trends were set in motion under the prior SEC leadership, so I’d be careful attributing any of these
changes to the new administration or current SEC leadership. That said, we all like quantitative
comparisons so here are a few stats to think about while drinking that very green smoothie as part
of your new year health goals.

1
See IC-32314 & IA-4509
 By the Numbers
2016 2017
2
SEC Staffing (# of full-time employees) 4,554 4,794 3
SEC Registered Investment Advisers 12,242 4 12,694 5
Exempt Reporting Advisers 3,302 6 3,588 7
Broker-Dealers 4,064 8 3,918 9
Private Equity Funds/Advisers 10 9,700/1,017(Q1 16) 10,350/1,084 (Q1 17)
Hedge Funds/Advisers 11 8,897/1,689 (Q1 16) 9,036/1,676 (Q1 17)
Real Estate Funds/Advisers 12 2,093/290 (Q1 16) 2,422/307 (Q1 17)
RIA Examinations 13 11% (FY 2016) 15% (FY 2017)

Lastly, we dug through the SEC’s archives and news stories to develop a chronological listing of
key events that we believe most shaped 2017. We encourage you to use this timeline to evaluate
compliance needs and trainings for the New Year. We would also be happy to send along – free of
charge – other planning and scheduling templates, such as, compliance and filing calendars, risk
matrices, compliance resource and budget analysis tools, training slides or other resources that
may help keep you organized.
Happy New Year,
Brad & Azra
HighCamp is a boutique consulting and outsourcing firm that specializes in regulatory compliance
and operational support for SEC registered alternative investment managers. For more
information, please contact Brad Burgtorf at brad@highcampcompliance.com or Azra Hafizovic at
azra@highcampcompliance.com.

2
SEC Agency Financial Report, Fiscal Year 2016
3
SEC Agency Financial Report, Fiscal Year 2017
4
Registered Investment Advisers, December 2016, Data Download. https://www.sec.gov/help/foiadocsinvafoiahtm.html
5
Registered Investment Advisers, December 2017, Data Download. https://www.sec.gov/help/foiadocsinvafoiahtm.html
6
Exempt Reporting Advisers, December 2016, Data Download. https://www.sec.gov/help/foiadocsinvafoiahtm.html
7
Exempt Reporting Advisers, December 2017, Data Download. https://www.sec.gov/help/foiadocsinvafoiahtm.html
8
Active Broker-Dealers, December 2016, Data Download. https://www.sec.gov/help/foiadocsbdfoiahtm.html
9
Active Broker-Dealers, December 2017, Data Download. https://www.sec.gov/help/foiadocsbdfoiahtm.html
10
Private Fund Statistics, First Calendar Quarter 2017, October 23, 2017. https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-
statistics-2017-q1-accessible.pdf
11
See FN No. 10.
12
See FN No. 10.
13
https://www.sec.gov/reports-and-publications/annual-reports/sec-2017-agency-financial-report
 Key IA Compliance Events of 2017

…how does what we propose to do affect the long-term interests of Mr. and Ms. 401(k)?
- Chairman Jay Clayton, July 12,2017, Remarks at the Economic Club of New York

January
January 12: SEC Announces 2017 Examination Priorities 1
The SEC’s 2017 priorities focused on three themes: retail investors, retirement accounts, and market wide risks.
January 17: BlackRock Charged with Removing Whistleblower Incentives in Separation Agreements 2
BlackRock settled charges with the SEC that its separation agreements with employees caused them to waive
their access to whistleblower awards.
January 17: 10 Firms Violated Pay-to-Play Rule by Accepting Pension Fund Fees Following Campaign
Contributions 3
Firms settled charges that they violated the SEC’s pay-to-play rule by receiving advisory fees within the two-year
prohibitive period after making triggering contributions.
January 20: Inauguration of President Trump

January 26: SEC Charges Two Former Och-Ziff Executives with FCPA Violations 4
SEC settled 13 FCPA enforcement actions in 2017, making FCPA a continued area of focus. 5
 February
February: IM Guidance Update No. 2017-01, Inadvertent Custody: Advisory Contract Versus Custodial Contract
Authority 6
SEC’s Division of Investment Management reminds investment advisers to review provisions in custodial
agreements for inadvertent custody, which the staff has been encountering during examinations.

February 3: Trump Orders DOL To Review the Fiduciary Rule 7

February 5: Patriots Win Super Bowl LI over Falcons 34-28

February 7: Private Equity Adviser Barred from Industry for Improper Withdrawal From Funds 8
Year-over-year actions against private equity managers appeared to decline in 2017. Of those that were brought,
conflicts of interests as result of fees, related parties, and expenses remained the focus.

February 7: Risk Alert: The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment
Advisers 9
This alert summarizes the most common examination deficiencies, which are: 1) Compliance Program Rule; 2)
Regulatory Filings; 3) Custody Rule; 4) Code of Ethics Rule; and 5) Books and Records Rule.

February 21: SEC issues Custody Rule no-action letter clarifying treatment of standing letters of authorization 10
The SEC staff clarified that standing letters of authorization (SLOAs) established by clients with a qualified
custodian that grant the adviser authorization to merely transfer assets to a third party designated by the client
would constitute custody. Until recently, there was confusion within the industry whether such an arrangement
would impute custody to the adviser. Many were taking the stance that the adviser, with proper controls, would
not have authorities under such arrangement to obtain possession of client assets. The SEC staff disagreed. But
an olive branch was extended by the SEC preventing such accounts to be subject to surprise examinations if
certain conditions are met.

February: IM Guidance Update No. 2017-02, Robo-Advisers 11

The crafters of the Advisers Act likely did not anticipate regulating robo-advisers in 1940. This IM Guidance
Update corrals industry and staff inputs to help these increasingly popular investment advisers best meet their
legal obligations under the Advisers Act.
 March
March 7: SEC Proposes Rule Amendments to Improve Municipal Securities Disclosures 12

April
April 5: SEC Adopts JOBS Act Amendments to Help Entrepreneurs and Investors 13
The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it
was enacted on April 5, 2012. Here are some of those adjustments.

April 5: DOL delays Fiduciary Rule to June 9 14

May
May 4: Jay Clayton Sworn in as Chairman of SEC

May 10: Barclays to Pay $97 Million for Overcharging Clients 15

SEC brought charges to multiple large diversified financial firms in 2017 for overcharging client advisory fees. The
Barclays action headlined this area of focus.

May 17: Risk Alert: Cybersecurity: Ransomware Alert 16

The SEC may have lost credibility as a leader in cybersecurity protections after its own systems were hacked later
in 2017 (see below), but all National Exam Program Risk Alerts should be reviewed closely.
 June
June 9: DOL’s Fiduciary Rule Goes into Partial Effect…
…but without any enforcement until July 1, 2019. See November below.

July
July 25: SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities 17
I really REALLY wish I had ignored my ignorance of blockchain currencies and invested in them in July. My
personal investing aside, this report ignited compliance questions around the exploding currency, such as,
whether such investments should be included in employee personal trade reporting under the Code of Ethics Rule.

August
August 7: Risk Alert: Observations from Cybersecurity Examinations
The SEC released the second phase synopsis of its cyber sweep. The release draws attention to improvements
from the industry and areas that still could use improvement. Frankly, the latest staff observations did not
contain anything new. My fly-by briefing aside, all firms will want to take a few minutes to compare the SEC’s
latest warnings and recommendations against your firm's controls for enhancement considerations.
August 21: Hedge Fund Adviser Charged for Inadequate Controls to Prevent Insider Trading 18
This and the related cases are my favorite insider trading actions this year because it includes political
intelligence, exploited acquaintances, and big gains. The stuff that’d make a great movie.

September
September 8: HighCamp Compliance is Born

September 14: Risk Alert: The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations
of Investment Advisers 19
Navigating the Advertisement Rule continues to be a challenge for advisers, but especially alternative managers.
This was a welcomed guidance alert from the SEC and extremely useful for training and education.
September 18: Category 5 Hurricane Maria Slams Puerto Rico
An active hurricane season affected so many this year. Our thoughts and donations still need to be sent to those
affected. From a compliance perspective, the SEC’s 2016 proposed rule requiring investment advisers to adopt
business continuity and transition plans has yet to be adopted. 20

September 20: SEC Chairman Clayton Issues Statement on Cybersecurity 21

Not the good kind of press for the SEC!
September 25: SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail
Investors 22
Chairman White was known for the broken-windows approach. Chairman Clayton will be known for…cyber and
retail task forces??

October
October 2: Rock Legend Tom Petty died at Age 66
October 26: SEC Announces Measures to Facilitate Cross-Border Implementation of the European Union's MiFID
II's Research Provisions 23
MiFID II caused uncertainties for US managers access to broker research. The SEC issued temporary relief that,
among other things, will allow advisers to rely on existing safe harbor when paying broker-dealers for research
and brokerage.
October 26: SEC Names Peter B. Driscoll as Director of the Office of Compliance Inspections and Examinations 24

November
November 7: Risk Alert: Observations from Municipal Advisor Examinations 25

November 13: Fiscal Year 2017 Agency Financial Report 26

SEC reports that OCIE examined 15% of registered investment advisers in Fiscal Year 2017, the highest
percentage in over 10 years.
November 15: SEC Enforcement Division Issues Report on Priorities and FY 2017 Results 27
The Cyber-Unit and Retail Strategy Task forces formed in FY 2017 will continue to push SEC’s focus on retail
investors. Enforcement employs fewer than 1,200 employees so thoughtful allocation of its limited resources,
use of technology, and effective remedies remain a priority. Analytics are downplayed due to the timing from
case initiation to resolution but remain key evaluation metric. Notably, the Commission brought 754 actions
totaling $3.7 billion in disgorgement and penalties, including a record $1.07 billion returned to harmed
investors. Cases against Inv. Adviser/ Inv. Company ranked 3rd on the types of cases, only behind Issuer
Reporting and Securities Offering cases.
November 28: SEC’s Jay Clayton: HF compliance will remain a key focus 28
November 27: DOL further delay’s enforcement of Fiduciary Rule until 2019 29

December
December 5: In the Matter of Brahman Capital Corp. 30
A supervisory control eye opener. This hedge fund manager failed to prevent a recurrence of misconduct and
paid the price.

December 6: #MeToo Named Time Magazine Person of the Year

1
https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2017.pdf
2
https://www.sec.gov/news/pressrelease/2017-14.html
3
https://www.sec.gov/news/pressrelease/2017-15.html
4
https://www.sec.gov/news/pressrelease/2017-34.html
5
https://www.sec.gov/files/enforcement-annual-report-2017.pdf
6
https://www.sec.gov/investment/im-guidance-2017-01.pdf
7
https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule
8
https://www.sec.gov/news/pressrelease/2017-42.html
9
https://www.sec.gov/ocie/Article/risk-alert-5-most-frequent-ia-compliance-topics.pdf
10
https://www.sec.gov/divisions/investment/noaction/2017/investment-adviser-association-022117-206-4.htm
11
https://www.sec.gov/investment/im-guidance-2017-02.pdf
12
https://www.sec.gov/news/pressrelease/2017-57.html
13
https://www.sec.gov/news/press-release/2017-78
14
https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2017-02
15
https://www.sec.gov/news/press-release/2017-98
16
https://www.sec.gov/files/risk-alert-cybersecurity-ransomware-alert.pdf
17
https://www.sec.gov/news/press-release/2017-131
18
https://www.sec.gov/news/press-release/2017-146 & https://www.sec.gov/news/press-release/2017-109
19
https://www.sec.gov/ocie/Article/risk-alert-advertising.pdf
20
https://www.sec.gov/news/pressrelease/2016-133.html
21
https://www.sec.gov/news/press-release/2017-170
22
https://www.sec.gov/news/press-release/2017-176
23
https://www.sec.gov/news/press-release/2017-200-0
24
https://www.sec.gov/news/press-release/2017-201
25
https://www.sec.gov/files/observations-from-municipal-advisor-examinations.pdf
26
https://www.sec.gov/reports-and-publications/annual-reports/sec-2017-agency-financial-report
27
https://www.sec.gov/news/press-release/2017-210
28
https://hfm.global/hfmweek/news/secs-jay-clayton-hf-compliance-will-remain-a-key-focus/
29
https://www.dol.gov/newsroom/releases/ebsa/ebsa20171127-0
30
https://www.sec.gov/litigation/admin/2017/ia-4819.pdf