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SEC Emphasizes Exemptive Order Compliance

June 5, 2013

 

Do you rely on an exemptive order from the Investment Company Act of 1940 or a no-action letter related to the Investment Advisers Act of 1940? Take heed. In May 2013, the Securities and Exchange Commission’s (“SEC”) Division of Investment Management warned that advisers and other entities relying on exemptive orders should implement policies and procedures to ensure ongoing compliance with each representation in and condition of the orders (“Guidance”).[1] This Guidance follows the February 2013 announcement by the SEC’s National Exam Program that exemptive order compliance will be an examination focus area for 2013.[2] Although not specifically addressed in the Guidance, entities relying on no-action letters should be mindful of complying with relief granted from statutory or rule requirements.

Exemptive Orders

The SEC is broadly empowered to exempt persons, transactions or securities from the statutes, rules and regulations within its purview. The Division of Investment Management provides exemptive relief under the Investment Company Act and the Advisers Act to regulated entities, including investment companies and investment advisers, by means of an exemptive order. An exemptive order often requires applicants to comply with certain conditions, and relies on representations by the applicant in granting an exemption.

Entities that receive and rely upon exemptive orders are at risk of violating the federal securities laws if they fail to comply with the representations and conditions of such orders. To minimize this risk, the Guidance suggests that entities implement written policies and procedures designed to ensure compliance with the conditions and representations in an exemptive order. This recommendation builds on firms’ preexisting obligations to adopt, implement and annually review written policies and procedures to ensure compliance with securities laws, including: Rule 206(4)-7 under the Advisers Act and Rule 38a-1 under the Investment Company Act.

No-Action Letters

Many entities seek assurances from the Division of Investment Management that it will not recommend enforcement action to the SEC based on particular conduct (i.e., “no-action” letters), or may rely on no-action letters previously issued to another entity, as permissible. Although the Guidance does not explicitly address no-action letters, compliance with the representations made in seeking a no-action letter and any conditions imposed in the letter is also essential. As with exemptive orders, entities should adopt policies designed to ensure compliance, and review the policies on at least an annual basis to evaluate their adequacy and effectiveness.[3]

O’Melveny & Myers is available to provide assistance in reviewing your policies and procedures to ensure that you are in compliance with applicable SEC relief provided via exemptive orders or no-action letters. For questions or additional information, please contact Heather Traeger at (202) 383-5232, or Kris Easter at (202) 383-5364.

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[1] SEC Guidance Update, Compliance With Exemptive Orders, No. 2013-02 (May 2013) , available at: http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-02.pdf  
[2] National Exam Program: Examination Priorities for 2013 (February 21, 2013) available at: http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2013.pdf  
[3] As a reminder, non-compliance with the terms of a no-action letter may or may not result in a potential violation of the federal securities laws or rules depending on the underlying conduct and the relief sought and provided.

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This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Heather Traeger, an O'Melveny partner licensed to practice law in the District of Columbia and Texas, Kris Easter, an O'Melveny counsel licensed to practice law in Texas, and Mattie Hutton, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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