Celebrating 75 years


October 2, 2015

The 75th anniversary of just about anything connotes celebration, longevity, dignity, and depending upon your search engine results, gifts of either diamonds or platinum. Odds are there was no parade of well-wishers bearing gaily-wrapped packages at the offices of the Securities and Exchange Commission last week, but they acknowledged a momentous occasion regardless.

On September 29th, the SEC recognized the 75th anniversary of the passage of both the Investment Company Act and the Investment Advisers Act. These two incredibly important pieces of legislation were passed in 1940, largely in response to the lack of structure and fraud that negatively affected all investors, and specifically small investors, during and after the market crash of 1929. At the time, the passage of the Acts was heralded as something of a miracle, given not only the degree of cooperation between the private and public sectors, but also their unanimous passage in both houses of Congress.

(That last sentence alone is worthy of a moment of silence.)

To provide some background, the Investment Company Act regulates “registered investment companies”, commonly known as open-ended mutual funds, closed-end mutual funds, and most recently, exchange-traded funds. Some broad protections the Act offers investors are full and fair disclosure of material details about funds, regulation of certain investment strategies, a requirement to maintain a certain percentage of cash for investors seeking to sell, registration with the SEC, and a requisite and 75%-independent board of directors. Today this information lives in the prospectus and statement of additional information (SAI) that all registered funds must maintain. While fund managers make every attempt to communicate this information in plain English, we recognize it is neither easy nor entertaining reading. However, it is important reading. Ours are located at http://www.alfrankfunds.com/resources/ and http://innealtafunds.com/innealta-resources/fund-documents, and we encourage current and prospective clients, as well as casual visitors, to read them.

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The Investment Advisers Act set forth regulations for those entities (either a company or an individual) that advise upon the aforementioned funds – or who provide investment advice to individual investors. This Act contains fewer specific directives than the Investment Company Act but is no less important. It strives to protect investors with anti-fraud provisions and the imposition of a fiduciary duty, meaning we must disclosure all of the information an investor would reasonably need to make an informed investment decision. Such disclosures include potential conflicts of interest regarding the sale of a product and an adviser’s compensation, misleading advertising and/or performance figures, possible expenses and loans to affiliated companies, and misleading clients about investments in such affiliated entities. It is important to note that there is no distinction between willful and accidental misstatements or omissions of fact – we are bound to these rules regardless. Subsequent amendments to the Act delineate with which entity an investment adviser must register; larger advisers must register with the SEC and smaller advisers with their state. I invite you to peruse our disclosure documents. Our Form ADV Part 1 can be found at http://www.adviserinfo.sec.gov/IAPD/Firm/108517 and Parts 2A and 2B are located at the bottom of our webpage: afamcapital.com.

Why is all of this important? To start, the amount of money involved is staggering. When the Acts were passed in 1940, the asset management industry held approximately $2 billion in assets, $1 billion of which was held in registered funds. In a recent speech, SEC chairwoman White stated that as of the end of last year, the SEC “oversees registered investment companies with a combined $18.8 trillion in assets and registered investment advisors with approximately $67 trillion in regulatory assets under management”. If you have an account with money manager, own a mutual fund, or participate in a 401(k) through your employer with fund options – that is your money. Before 1940, the landscape was a potential wild west, and a study mandated in 1935 found systemic abuses and dysfunction. What would be newsworthy today was a matter of routine, and the Investment Company Act and Investment Advisors Act made great strides in changing that.

While not perfect, the legislation passed 75 years ago provided a solid foundation of regulation that has stood the test of time. The next 75 years will undoubtedly see the addition of new investment vehicles and strategies, and the SEC and compliance officers alike will be working hard to remain current and ensure that the rules still apply.

Elizabeth Willmore
Chief Compliance Officer
10/02/2015

385-AFAM-10/02/2015

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