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Investment Advisor Supervisory Responsibilities

March 15, 2016

Panelists: LORI PATTERSON, CATHERINE DEBONO HOLMES, ROBERT CORNISH, CHRISTOPHER GABBARD

Moderator: KURT REUSS

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Lori Patterson
Baker Donelson

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Catherine DeBono Holmes
JMBM

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Robert Cornish
Phillips Lytle

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Christopher Gabbard
Greenberg Traurig

Chris: An investment advisor is required to supervise all persons that are acting on its behalf. The SEC takes the position that they can sanction an advisor if they fail to reasonably supervise anyone who is acting on the advisor's behalf. Determining whether someone is a supervisor is, again, based on the factual circumstances.

There are a few safe harbors but the best advice is to have some compliance procedures in place or elect a compliance officer in those instances.

Some of additional requirements are that compensation structures need to be disclosed, conflicts of interests have to be more thoroughly disclosed than they necessarily would have to be if you weren't registered.

The SEC is also going to look at you on an annual basis, and under a heightened level of scrutiny because you will be filing Form ADV.

Cathy: I would add that under the SEC rules for registered investment advisors (RIAs), you are required to adopt written supervisory policies and procedures that apply to every aspect of your advisory business.

Custody is a very important issue because if you are an investment advisor, you are deemed to be in control of the cash of the entity, which means you have custody.

Therefore, you have to comply with the custodial rules that apply to registered investment advisors, which require that you get an annual audit of every fund you manage.

Assuming the fund is your client, you have to send an audited financial statement of your fund to every one of the investors by a certain date. As an investment advisor, you are deemed to have a fiduciary obligation to your clients, thus conflicts of interest must be fully disclosed to your client.

When you're talking about your client being the fund, you make those material disclosures in your private placement memorandum (PPM). Our firm does this already in order to comply with the other securities laws. But if you believe that the individual investors in those funds are the fund’s clients then you have an additional duty to disclose any conflict of interest that you may have with those clients.

I would also add that if you are saying you're an investment advisor to individual clients, then you must have a written agreement with each individual client that you advise which describes the terms of the investment advice that you're giving those clients.

In regards to a code of ethics, every SEC-registered investment advisor must have a written code of ethics that pertains to things like personal securities trading. Now, while that has nothing to do with the EB5 regional centers’ activities or with the fund managers, it does suggest that the Investment Advisors Act was never really designed for EB5 regional centers or EB5 funds. It's intended to apply to people whose regular business is investing in traded securities.

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