Introduction

On September 14, 2017, the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examination (“OCIE”) released its latest Risk Alert titled “The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers” which is based on the results of over 1,000 examinations of registered investment advisers, including examinations in connection with the SEC’s “Touting Initiative” focused on accolades used by advisers in marketing materials.[1]

Over the past few years, private equity compliance has been a focus of the Securities and Exchange Commission’s (“SEC”) Office of Compliance, Inspections and Examination (“OCIE”), and has been the topic of a variety of public speeches and comments from senior SEC personnel.[1]  Not surprisingly, private equity private equity advisers have remained a top SEC Examination Priority during that time period.[2]

On December 29, 2016, the United States Tax Court handed down a decision in the case of Fleischer v. Commissioner of Internal Revenue[1] which focused on the tax issue of whether Mr. Fleischer or his wholly-owned S-Corporation(“S-Corp”)[2] had to report the earned income that was at issue in the case.  In addition to the tax issues, the decision provides additional guidance relating to some often misunderstood issues regarding entity formation, structure and operations that relate directly to small businesses, including a large number of financial industry advisers. 

In his May 2014 speech titled “Spreading Sunshine in Private Equity,” Andrew Bowden, the Director of the Office of Compliance, Inspections and Examination (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) publicly announced that the private equity sector had become a focus for OCIE.[1]  Over the next two years, the financial services industry has seen a continued and increasing focus by OCIE, and by the SEC’s Division of Enforcement, on the private equity space.  Recent comments by Jane Jarcho, the new Deputy Director of OCIE, indicate that private equity advisers and their funds will remain as a high priority for the SEC in 2017.[2]

There are many reasons why an investment adviser representative (“IAR”) or registered representative (“RR”) might decide to change companies or "break away" from a registered investment adviser or broker-dealer.  Even when an individual has a strong relationship with his or her current employer, there may be are a variety of compelling motivations to make a change.  Jacko Law Group, PC (“JLG”) has seen an increase in activity where IARs and RRs are forming their own independent businesses or combining with other existing investment advisers and broker-dealers. 

A Focus on Private Equity

The past year has seen interesting developments for private equity funds and, in many cases, their recently registered investment advisers.  Ever since Andrew Bowden’s “Spreading Sunshine in Private Equity” speech[1] that announced private equity’s emergence as a focus area for the Securities and Exchange Commission (“SEC”), the industry has seen a steady increase in the amount of regulatory attention and scrutiny on private equity advisers and funds.[2]  While much of the focus has centered on fees and expenses, other important compliance areas are certainly fodder for the SEC’s Division of Enforcement.

One important decision in the lifecycle of a growing company is when to hire its first in-house counsel.  Frequently, this issue arises at a time in the evolution of an organization before there is a need for a full-time employee in this role or room in the corporate budget for a highly compensated general counsel.  Other factors may drive the decision of whether to hire an internal attorney including costs, how the function will integrate with the current management and whether there is enough work for a full time employee.  When to devote resources to this role is equally important as how to devote those resources. 

When an individual leaves a broker-dealer or an investment advisory firm, the former company has an obligation to notify regulatory authorities of the departure and for reasons other than a voluntary or partial termination, is required to provide an explanation of the reasons that the employee-employer relationship ended.