SEC Oversight of Investment Advisers Explained

🧾 SEC Oversight of Investment Advisers Explained
📘 Understanding How the SEC Regulates Investment Advisers for the Series 65 Exam

The Securities and Exchange Commission (SEC) plays a critical role in regulating investment advisers at the federal level. If you’re preparing for the Series 65 exam, you must clearly understand when the SEC steps in, what it regulates, and how compliance is monitored.

Here’s a full breakdown, simplified for quick learning:

🎯 1. Who the SEC Regulates

The SEC regulates investment advisers who qualify as federal covered advisers. This typically includes advisers that:

• Manage $110 million or more in assets under management (AUM).
• Manage mutual funds or registered investment companies, regardless of AUM.
• Operate in 15 or more states, opting for federal registration to simplify compliance.

📍 Important thresholds:

🎯 2. What SEC Registration Involves

• Filing Form ADV (Part 1 and Part 2):
  • Part 1: Basic business information (ownership, disciplinary history, AUM).
  • Part 2A: Client-facing brochure detailing services, fees, conflicts.
  • Part 2B: Supplement with details about key supervised individuals.
• Annual Updates:
  • Form ADV must be updated at least once per year (within 90 days of fiscal year-end) and promptly for material changes.
• Paying Fees:
  • An initial and annual registration fee applies, based on the firm’s AUM.

🎯 3. SEC Oversight Activities

Once registered, advisers are subject to SEC oversight in these key areas:

• Compliance Programs:
  • Advisers must designate a Chief Compliance Officer (CCO).
  • Must maintain internal controls and policies to detect violations.
• Books and Records Requirements:
  • Maintain detailed records of client communications, advisory contracts, personal securities transactions, and advertising materials.
  • Retain most records for at least 5 years.
• Advertising Rules:
  • Must comply with SEC Marketing Rule (Rule 206(4)-1).
  • Testimonials, endorsements, and third-party ratings are permitted with disclosures.
  • Past performance claims must be fair, balanced, and not misleading.
• Custody Rules:
  • Advisers with custody of client funds must meet additional requirements, such as:
    • Annual surprise audits.
    • Qualified custodian requirements.
    • Client notification of account statements.
• Code of Ethics:
  • Must adopt and enforce a written code of ethics for personal securities trading and fiduciary conduct.

🎯 4. SEC Examination and Enforcement

• Routine Examinations:
  • Advisers can be subject to random or risk-based examinations.
  • Examinations focus on areas like safeguarding client assets, performance claims, conflicts of interest, and cybersecurity policies.
• Enforcement Actions:
  • Violations such as fraud, misleading statements, improper custody, and failure to supervise can result in:
    • Fines
    • Censures
    • Suspension or revocation of registration
    • Referral for criminal prosecution

🎯 5. SEC vs State Regulation (Important for Series 65)

Key rule:
Even SEC-registered advisers must notice file with states where they have a place of business or enough clients to trigger notification requirements.

🚀 Summary: What to Know for Series 65

✔ SEC regulates advisers with $110M+ AUM.
✔ Advisers file Form ADV and update it annually.
✔ Must maintain compliance programs, books and records, and ethical advertising.
✔ Subject to SEC audits and enforcement actions.
✔ Even federal covered advisers must notice file with states.

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Stay sharp. Understand compliance. Pass confidently.