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    Jan. 31, 2019

What a Recent SEC Opinion on a FINRA Disciplinary Action Says About CCO and CEO Liability (Part Two of Two)

After the SEC brought several enforcement actions against chief compliance officers (CCOs) in 2014 and 2015, CCOs protested that they were being unfairly targeted by the SEC and held to an unreasonable standard. To alleviate those concerns, Andrew Ceresney, then-Director of the SEC’s Division of Enforcement, gave a speech that reiterated the SEC’s support for CCOs and its intent to avoid charging CCOs who have exercised their compliance duties in good faith. See “SEC Enforcement Director Assures CCOs They Need Not Fear SEC Action Absent Wrongdoing” (Nov. 19, 2015). A recent SEC opinion upholding a FINRA disciplinary action against a broker-dealer’s CCO seems to reinforce the SEC’s stance on CCO liability and suggests that CEOs may also face personal liability in certain circumstances when CCOs fail to fulfill their duties. This second article in our two-part series examines the key takeaways from the SEC’s opinion on FINRA’s disciplinary action against the applicable CCO, including implications for personal liability for fund manager CCOs and CEOs. The first article analyzed the FINRA disciplinary action and explored the SEC’s opinion. For additional insight from SEC officials on CCO liability, see “Commissioner Gallagher’s Dissent in SEC Enforcement Action Against Hedge Fund Manager Misses the Mark” (Jul. 30, 2015); “SEC Commissioner Issues Statement Supporting Hedge Fund Manager Chief Compliance Officers” (Jul. 16, 2015); and “SEC Commissioner Speaks Out Against Trend Toward Strict Liability for Compliance Personnel” (Jun. 25, 2015).

How Private Fund Managers Can Navigate the Final Regulations on Partnership Representatives (Part One of Two)

The new partnership audit rules introduced by the Bipartisan Budget Act of 2015, effective for audits of tax years beginning after December 31, 2017, replaced the “tax matters partner” position with that of a “partnership representative,” whose role it is to act on behalf of a partnership in the case of an audit by the U.S. Internal Revenue Service (IRS). In August 2018, the U.S. Department of the Treasury and the IRS published final regulations (Treasury Regulations) under the Internal Revenue Code, which gave some insight into designation, authority and removal of a partnership representative. Although some uncertainty continues to surround this new position, the guidance provided by the Treasury Regulations helps answer a number of questions regarding the role and best practices for filling it. In a two-part guest series, Amanda H. Nussbaum and Kimberly A. Condoulis, partner and associate, respectively, at Proskauer Rose, provide an overview of the Treasury Regulations. This first article discusses in detail the process for selecting a partnership representative and the authority of the partnership representative. The second article will address the removal of a partnership representative by the partnership, resignation of a partnership representative and key factors that partnerships should consider when selecting a partnership representative. For more on how the Bipartisan Budget Act of 2015 affects partnership audits, see our two-part series “A Bipartisan Problem for Private Funds”: How Current Regulations Complicate IRS Audits of Partnerships (Apr. 21, 2016); and How Revised Regulations Facilitate IRS Audits of Partnerships (Apr. 28, 2016). For additional commentary from Nussbaum, see “New Tax Law Carries Implications for Private Funds” (Feb. 1, 2018).

Retail Investors Again Top OCIE Exam Priorities in 2019; Digital Assets Join List

The SEC Office of Compliance Inspections and Examinations (OCIE) recently issued its 2019 Examination Priorities. All five of last year’s priorities – i.e., retail investors; critical market infrastructure; FINRA and the Municipal Securities Rulemaking Board; cybersecurity; and anti-money laundering – remain priorities this year, with digital assets added as a sixth priority. In the press release announcing the priorities, SEC Chairman Jay Clayton observed, “OCIE continues to thoughtfully approach its examination program, leveraging technology and the SEC staff’s industry expertise. As these examination priorities show, OCIE will maintain its focus on critical market infrastructure and Main Street investors in 2019.” This article analyzes the 2019 priorities and the accompanying message from OCIE leadership. See also our coverage of OCIE’s 2018 Examination Priorities; 2017 Examination Priorities; and 2016 Examination Priorities.

How Luxembourg Is Affected by Regulatory Developments and the E.U. Retail Distribution Environment (Part Two of Two)

The Association of the Luxembourg Fund Industry (ALFI) recently presented a seminar that outlined the Luxembourg funds industry, Brexit, regulatory developments and fund distribution. The seminar, which featured panel discussions with representatives from financial services, asset management, legal and accounting firms, was hosted by ALFI chairman Denise Voss. This article, the second in a two-part series, examines the panelists’ views on E.U. regulatory developments concerning, among other things, substance requirements and delegation, as well as the E.U. retail distribution environment. The first article covered the portions of the seminar that discussed the current condition of the Luxembourg funds industry and the status and implications of Brexit. For more from ALFI, see “Luxembourg Fund Structures Evolve to Meet the Needs of the Private Fund Industry” (Oct. 13, 2016).

Advisers Must Ensure the Accuracy of Backtested Performance Claims

Performance advertising in general, and backtesting in particular, are perennial sources of potential trouble for fund managers. See “Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017). A recent enforcement action is a reminder that managers must provide complete and accurate disclosures when using backtested performance and oversee any service providers involved in the backtesting process. In this particular case, a third-party service provider’s use of inaccurate valuation dates and misapplication of a registered investment adviser’s investment model during backtesting resulted in an overstatement of the backtested results of that model by more than 40 percent, which the adviser incorporated into its advertising. This article analyzes the SEC’s settlement order against the adviser. See “How Investment Advisers Can Mitigate Common Advertising Risks” (Jul. 19, 2018); and our three-part advertising compliance series: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

William E. Turner II Joins Steptoe’s Chicago Office

Steptoe & Johnson announced that William E. Turner II has joined the firm’s Chicago office as a partner. Turner brings more than two decades of experience in corporate and securities law, primarily with application to mergers and acquisitions; fund formation; investment transactions; and cryptocurrency. He will reside in the firm’s corporate group and also work in the blockchain and cryptocurrency practice. See our three-part series on blockchain and the financial services industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).

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