1. Considerations in Regulating Investment Advisers May 2016 Dalia Osman Blass Assistant Chief Counsel Division of Investment Management U.S. Securities and Exchange Commission 1 Disclaimer - The SEC as a matter of policy disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation do not necessarily reflect the views of the Commission, the Commissioners, or of the staff of the Commission.

2. Agenda Who is an Investment Adviser Registration Principles-Based Regulatory Approach Disclosure and Reporting Obligations Additional Duties 2

3. Who is an Investment Adviser 3

4. Definition of Investment Adviser Any person or firm that: for compensation is engaged in the business of Providing advice to others or issuing reports or analyses regarding securities 4

5. Definition of Investment Adviser “Compensation” is broadly interpreted as any economic benefit Factors to determine whether an adviser is “engaged in the business” include: Holding out as an adviser Receipt of compensation for advice Frequency and specificity of advice provided “Advice” defined broadly (includes market trends, statistical or historical data, types of securities, advice to not invest, etc.) 5

6. Definition of Investment Adviser Exclusions from the definition of investment adviser: Certain Non U.S. Advisers Broker-dealers Family offices Certain Publishers Domestic banks and bank holding companies U.S. branches and agencies of foreign banks Lawyers, accountants, engineers, and teachers U.S. Government securities advisers Credit rating agencies U.S. Government and political subdivisions Any other person excluded by SEC rule or order 6

7. Advisers Exempt or Prohibited From Registration Any person that meets the definition of investment adviser must register with the SEC, unless exempt or prohibited Act provides several voluntary exemptions from registration Exempt advisers: Private fund advisers Foreign private advisers Venture Capital advisers Certain Non-U.S. advisers Intra-state advisers Advisers to insurance companies Charitable organizations Commodity trading advisers 7

8. Private Fund Adviser Exemption available to an adviser to private funds that have less than $150 million in assets under management in the U.S. “private funds” is an issuer of securities that would be an investment company “but for” the exceptions provided in sections 3(c)(1) or 3(c)(7) of the Investment Company Act Adviser that has any other type of client is not eligible for this exemption The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) added this new, optional exemption Not subject to most SEC rules but required to submit limited reports to the SEC and subject to examination 8

9. Foreign Private Adviser Available to a Foreign Private Adviser that: Has no place of business in the U.S. Has fewer than 15 clients in the U.S. and investors in the U.S. in private funds advised by the adviser Less than US$25 million in assets under management for U.S. investors Does not hold itself out to the public in the U.S. as an adviser The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) added this new, optional exemption Foreign private advisers are not subject to most SEC rules and are not required to submit reports to the SEC 9

10. Venture Capital Adviser Available to an adviser that solely advises one or more “venture capital funds” as defined by SEC rule To qualify a fund must be a “private fund” that: represents to investors that it pursues a venture capital strategy; does not provide investors with redemption rights holds no more than 20% of the fund’s assets in non-“qualifying investments” does not borrow (or otherwise incur leverage) more than 15% of the fund’s assets, and then only on a short-term basis (i.e., for no more than 120-days). Not subject to most SEC rules but required to submit limited reports to the SEC and subject to examination 10

11. Non-U.S. Advisers Adviser that uses U.S. jurisdictional means in connection with its business as an adviser must register with the SEC (unless exempt). SEC staff previously took the position that once registered foreign advisers were subject to all of the substantive provisions of the Advisers Act with respect to their U.S. and foreign clients Problem: foreign advisers could not engage in practices that were common in their home countries but prohibited by the Act Now, the staff uses a “conduct and effects” test: acts in the U.S. are sufficient to trigger application of the Advisers Act, while acts outside the U.S. trigger application of the Advisers Act only the extent such acts affect U.S. investors or U.S. securities markets. 11

12. Non-U.S. Adviser Exemptions Non-U.S. Advisers may rely on Foreign Private Adviser or Venture Capital Adviser exemptions. Foreign Private: An adviser with a principal office and place of business outside the United States may exclude consideration of non-U.S. clients, i.e., it may rely on the exemption if : all of its clients that are U.S. persons are qualifying private funds any management at a U.S. place of business by the adviser is solely attributed to $150 million of private fund assets Venture Capital: exemption is available but (unlike the private fund adviser exception) such an adviser may not disregard its non-U.S. advisory activities. Thus, all of an adviser’s clients, including non-U.S. clients, must be venture capital funds. 12

13. Advisers Prohibited from Registering with SEC Two categories subject to state regulation not SEC Small advisers – advisers with less than US$25 million assets under management Mid-sized advisers – with certain limited exceptions, advisers that have between US$25 and US$100 million in assets under management (new) Exemptions from this prohibition: The Advisers Act and SEC rules carve out certain advisers from these AUM tests Advisers to registered investment companies, Non-U.S. advisers, advisers to business development companies, pension consultants, affiliated advisers, newly formed advisers, multi- state advisers, and internet advisers 13

14. Registration 14

15. Who must register Firm on behalf of itself and employees Affiliates Integration: Cannot circumvent registration by separately registering if operationally integrated Non U.S. Adviser: Non-U.S. adviser does not have to register if it provides advice to U.S. persons through a U.S. registered affiliate. Relying Adviser: single registration on behalf of multiple advisers under common control. 15

16. Registration Process Form ADV Information about the adviser’s background and business practices Electronic filing (IARD system) Publicly available Within 45 days after filing Form ADV, SEC must grant registration or begin proceedings to deny registration. Only grounds for denial are prohibited status of the adviser or prohibited acts by the adviser adverse to the public interest. Adviser is obligated to ensure that Form ADV is up to date; material changes must be made promptly while other changes must be made within 90 days of the adviser’s fiscal year end. 16

17. Withdrawal or Cancellation If a registered adviser ceases to conduct business as an investment adviser or is otherwise no longer able to remain registered with the SEC, the adviser must withdraw its registration by filing Form ADV-W The SEC may cancel an adviser’s registration on its own volition (typical for defunct advisers who neglect to file Form ADV-W). The SEC is currently in the process of cancelling the registrations of certain advisers, many of whom failed to withdraw after Dodd-Frank changed the threshold of assets under management for eligibility 17

18. Registration Facts 712 (6%) SEC-registered investment advisers have their principal office and place of business outside the U.S. This represents 54 different countries There are 11,012 SEC-registered investment advisers There were 17,832 state-registered investment advisers as of October 1, 2013 1,017 (39%) SEC exempt reporting advisers have their principal office and place of business outside the U.S. There are 2,611 SEC exempt reporting advisers filing reports with the SEC 509 SEC-registered advisers reported 1,013 other offices that are not located in the U.S. 929 (8%) SEC-registered investment advisers are also registered with 61 different foreign financial regulatory authorities United Kingdom – Financial Conduct Authority (250 advisers) Canada – Ontario Securities Commission (193 advisers) Ireland – Central Bank of Ireland (146 advisers) 18

19. Regulation 19

20. Principles-Based Regulatory Approach—Fiduciary Duty The guiding principle: advisers are fiduciaries who must act in the best interests of their clients Advisers owe their clients undivided loyalty, and may not engage in activity that conflicts with a client’s interest without client’s consent Principal is not in Act, rules or contract. It stems from nature of relationship between adviser and client Made enforceable by anti-fraud provision of Advisers Act which prohibits misstatements or misleading omissions of material fact and other fraudulent acts These principles apply to anyone meeting the definition of investment adviser, whether registered or not 20

21. Fiduciary Duty Several obligations flow from an adviser’s fiduciary duties : Full disclosure of material facts to clients and duty to avoid misleading them Conflicts of Interest – may not engage in activity that conflicts with a client’s interest without client’s informed consent Disciplinary Events & Precarious Financial Conditions – must disclose Financial condition likely to impair ability to meet contractual obligations Disciplinary events of adviser and certain officers within past 10 years 21

22. Fiduciary Duty Suitable Advice - As fiduciaries, investment advisers owe their clients a duty to provide only suitable investment advice; advice must be suitable for the specific client. Reasonable Basis for Recommendations Best Execution of clients’ transactions – Execute transactions in such a manner that the client’s total cost or proceeds in each transaction is the most favorable under the circumstances; consider the full range and quality of a broker’s services, including execution capability, commission rate, financial responsibility, responsiveness to the adviser, and the value of research services provided. Consider: Inter-positioning, directed trades, use of brokerage affiliates, soft dollars Proxy Voting 22

23. Conflicts of Interest Advisers Act seeks to eliminate or at least expose all of conflicts of interest which might incline an Adviser to render advice that is not interest of client by: Restricting activities, such as: Principal Transactions Soft Dollars Custody Allocation of Trades Disclosure (Part 2 Form ADV, the “Brochure Rule”) 23

24. Restriction on Activities Principal Transactions: The Advisers Act prohibits an adviser, acting as principal for its own account, from knowingly selling any security to or purchasing any security from a client (a “principal transaction”), without notifying the client in writing and obtaining the client’s consent before the completion of the transaction. No blanket notifications/consents Exception: Temporary rule permits an adviser that also is registered as a Broker-Dealer to comply with notification requirement by providing oral (instead of written) notice Non-discretionary account Written, revocable prospective consent Inform before each transaction Dividing line between broker and adviser? 24

25. Restriction on Activities Soft Dollars: Statutory safe harbor under Exchange Act of 1934 from liability for breach of fiduciary duties when advisers purchase brokerage and research products and services with client money under specified circumstances Services limited to “research” or “brokerage” Constitute lawful and appropriate assistance to the adviser in the performance of its investment decision-making duties Adviser determines in good faith that the commission payments are reasonable in light of the value of services received A benefit to the Adviser that is statutorily provided 25

26. Restrictions on Activities Safekeeping of Client Assets—Custody Advisers Act rules prohibit an adviser from having custody of client funds or securities unless certain requirements are met: Keep assets with a “qualified custodian” Qualified custodian sends quarterly account statements directly to the advisory clients Undergo an annual surprise examination by an independent public accountant to verify client assets; and Unless client assets are maintained by an independent qualified custodian (i.e., a custodian that is not the adviser itself or a related person), obtain a report of the internal controls relating to the custody of those assets from an independent public accountant that is registered with and subject to regular inspection by the Public Company Accounting Oversight Board 26

27. Restrictions on Activities (cont.) Payment of Referral Fees Advisers are generally prohibited from paying a cash fee, directly or indirectly, to a third party (a “solicitor”) for referring clients to the adviser unless the arrangement complies with a number of conditions. Solicitors generally will not be required to register separately as advisers if they comply with these conditions. Incentive-Based Compensation Under the Dodd-Frank Act the SEC, together with the U.S. banking regulators, proposed a joint rule that would prohibit incentive-based compensation arrangements at a covered financial institution that provide excessive compensation or that could expose the institution to inappropriate risks that could lead to material financial loss. Covered financial institutions have to create and annually maintain records that document incentive-based compensation structures and demonstrate compliance with the rule. 27

28. Systemic Risk Reporting In October 2011, the SEC adopted new rules requiring registered advisers with at least $150 million in AUM to submit regular reports on new Form PF Form PF is designed to assist the Financial Stability Oversight Counsel (FSOC) in its assessment of systemic risk in the U.S. financial system. Amount of disclosure required depends on size of adviser Smaller advisers provide information regarding strategy, counterparty exposure Larger advisers provide information on value of investments in different asset classes, duration of fixed income holdings, leverage, risk profile, liquidity 28

29. Disclosure and Reporting Obligations Together, the “Brochure Rule” and Part 2 of Form ADV require a registered investment adviser to deliver in Plain English to each of its advisory clients and prospective advisory clients a written disclosure statement describing the adviser’s business practices, investment strategies, fees, conflicts of interest and educational and business background Advisers must disclose promptly to clients and prospective clients legal or disciplinary events that are material to an evaluation of the adviser’s integrity or ability to meet its contractual commitments to clients Must deliver prior to or at time of entering into an advisory contract and annually with a summary of material changes Filed with SEC and publicly available http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Searc h.aspx http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Searc h.aspx 29

30. Rules that Impose Additional Duties Books and records A registered adviser must maintain certain books and records and make them available to the SEC for inspection. Compliance Program Must adopt policies and procedures designed to prevent violations of the Act and review adequacy and effectiveness of these procedures annually. Must designate a CCO to oversee this process Code of Ethics Must establish and enforce policies and procedures designed to prevent misuse of material, nonpublic information by the adviser or any of its associated persons; must have a code of ethics to reinforce the fiduciary principles that govern the investment advisory business and prevent fraud. Includes a duty to supervise employees and other associated persons. 30

31. Additional Resources Resource for the Advisers Act: http://www.sec.gov/about/offices/oia/oia_investman/rplaze- 042012.pdf http://www.sec.gov/about/offices/oia/oia_investman/rplaze- 042012.pdf General resource for Advisers Act issues: http://www.sec.gov/divisions/investment/guidance.shtml#invest ment-adviser-resources http://www.sec.gov/divisions/investment/guidance.shtml#invest ment-adviser-resources 31