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    Nov. 15, 2018

What Fund Managers Need to Know About Corporate Access: The Risks and Rewards of Speaking Directly With Issuer Management (Part One of Three)

Many equity-focused fund managers have long regarded meetings with senior management at publicly traded companies as an integral aspect of their research processes. While Regulation FD prohibits company executives from selectively disclosing material information to investors, many fund analysts and portfolio managers still derive value from these meetings by learning immaterial information or simply observing the executives’ body language and tone of voice when answering certain questions. This three-part series explores the practice of fund managers meeting with officers and executives of publicly traded companies – frequently referred to as “corporate access.” This first article provides an overview of the context in which meetings between fund managers and issuers arise; the goals of corporate access; ways brokers are compensated for facilitating these meetings; and two key legal risks presented by this practice. The second article will discuss how advisers can design policies to minimize the risks associated with these meetings, as well as six front-end controls that advisers should consider adopting. The third article will analyze several testing mechanisms that managers can use to ensure compliance with their policies governing corporate access, along with the SEC’s expectations regarding an adviser’s oversight, controls and procedures related to communications with issuer management. See “How Can Hedge Fund Managers Talk to Corporate Insiders Without Violating Applicable Insider Trading Laws?” (Oct. 29, 2009).

New York State Releases Final Anti-Sexual Harassment Model Policy and Training Materials

In April 2018, New York State (NYS) enacted a law imposing new anti-sexual harassment requirements on all private employers based in New York, regardless of size. To help employers comply with the new policy and training requirements, the state released draft versions of a model anti-sexual harassment policy, a complaint form and training materials on August 23, 2018. See “What Fund Managers Need to Know About Recent Developments to the New Anti-Sexual Harassment Policy and Training Requirements in New York City and New York State” (Sep. 13, 2018). Following a public comment period, NYS recently released final versions of the model sexual harassment prevention materials. Employers may adapt and use these materials to comply with the new policy and training requirements and meet newly revised deadlines. This article highlights the key changes made to the draft materials, as well as the new deadlines for compliance with the training requirements. For more information on the NYS and the New York City requirements, see our two-part series: “Key Elements of New York’s New Anti-Sexual Harassment Policy and Training Requirements” (Jun. 14, 2018); and “Ways Fund Managers Can Comply With New York’s New Anti-Sexual Harassment Policy and Training Requirements” (Jun. 21, 2018). See also “HFLR Program Looks at Recent Developments and Trends in Employment Law Relevant to Fund Managers” (Jul. 26, 2018).

CFTC Proposes Amendments to Regulations to Codify Existing Relief for CPOs and CTAs

In February 2017, CFTC Chairman J. Christopher Giancarlo announced Project KISS – for “Keep it Simple, Stupid” – an initiative designed to simplify and reduce the cost of CFTC rules, regulations and practices. To facilitate this process, the CFTC requested and reviewed public comments on regulatory reform. See “New CFTC Chair Outlines Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform” (Nov. 9, 2017). The CFTC recently announced the first tangible product of Project KISS: proposed amendments to regulations that would codify existing CFTC staff advisory and no-action letter relief for commodity pool operators and commodity trading advisors. This article summarizes the key proposals, with commentary from experienced lawyers, including a former CFTC attorney. For coverage of additional initiatives by the CFTC, see “Settlements With Three Major Banks and Five Individual Enforcement Actions Follow CFTC Anti-Spoofing Initiative” (Feb. 15, 2018); and “Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement” (Oct. 19, 2017).

Lessons for Fund Managers From the SEC’s First Identity Theft Red Flags Rule Settlement

SEC-registered investment adviser Voya’s $1‑million settlement with the SEC for alleged violations of the so-called “Safeguards Rule” and the “Identity Theft Red Flags Rule” shows that the SEC is willing to act when it believes firms could have done more to prevent cyber attacks. This proceeding demonstrates the SEC’s expectations that fund managers and other companies not only have cybersecurity policies and procedures in place, but also properly implement them and have compliance and audit procedures to ensure they are working as intended. This article analyzes the circumstances underlying the order, which involved a network intrusion by people impersonating third-party contractors, and its lessons, including what mistakes Voya made, how fund managers can avoid them and what the settlement says about SEC cybersecurity enforcement. See our three-part series on how fund managers should structure their cybersecurity programs: “Background and Best Practices” (Mar. 22, 2018); “CISO Hiring, Governance Structures and the Role of the CCO” (Apr. 5, 2018); and “Stakeholder Communication, Outsourcing, Co-Sourcing and Managing Third Parties” (Apr. 12, 2018).

ACA Panel Examines Compliance Issues Faced by Credit Managers

A recent ACA Compliance Group (ACA) webinar examined compliance issues faced by credit managers, including valuation, access to material nonpublic information, trade allocation, best execution and custody. The program featured Joel Stocksdale and Lisa Ollar, senior principal consultants at ACA, along with Kai Lee, managing director, chief compliance officer and associate general counsel of Oak Hill Advisors, L.P. This article summarizes the key takeaways from the program. For coverage of another ACA program featuring Stocksdale, see our two‑part series on mitigating insider trading risk: “Relevant Laws and Regulations; Internal Controls; Restricted Lists; Confidentiality Agreements; Personal Trading; Testing; and Training” (Sep. 27, 2018); and “Expert Networks, Political Intelligence, Meetings With Management, Data Rooms, Information Barriers and Office Sharing” (Oct. 11, 2018).

SEC Continues to Pursue Advisers That Provide Inadequate Disclosures About Mutual Fund Share Class Selection Practices and Other Conflicts of Interest

The SEC’s focus on protecting retail investors continues unabated. In a recent enforcement proceeding against a dually registered investment adviser and broker-dealer, the SEC claimed that the firm made inadequate disclosures to clients about the fees it received from a third‑party custodian that it recommended to clients, as well as about its selection of mutual fund share classes that charged 12b-1 fees when lower‑fee classes were available. This article analyzes the alleged compliance failures and the terms of the settlement order. For other recent enforcement actions involving mutual fund share class recommendations, see “SEC Settles Three Additional Enforcement Actions for Inadequate Share-Class Disclosures” (May 17, 2018); “Ameriprise Settlement Reflects Continued SEC Focus on Conflicts of Interest and Retail Investors” (Apr. 19, 2018); and “Recent SEC Settlement Evidences Agency’s Continued Aggressive Enforcement of Conflicts of Interest” (Sep. 21, 2017).

Former SEC Senior Counsel Joins Cahill’s Securities and Regulatory Enforcement Practice

Cahill Gordon & Reindel LLP announced that C. Wallace DeWitt, most recently senior counsel to SEC Commissioner Michael S. Piwowar, has joined as counsel in its securities and regulatory enforcement practice. Working from the firm’s Washington, D.C., office, DeWitt will serve as a regulatory lawyer covering securities law and will handle transactional and enforcement matters. He has experience advising global financial institutions and foreign private issuers on U.S. securities and banking matters, as well as financial reform legislation, regulations and compliance.

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