Dec. 5, 2019

DSIO Director Explains What Fund Managers Should Expect From New CFTC Thematic Review

Joshua Sterling, the Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO), recently announced that his Division would soon be starting a thematic review of certain swap dealers and commodity pool operators (CPOs) to better understand the markets that the CFTC oversees, as well as the activity of registrants in those markets. Although the DSIO has authority for overseeing the derivatives markets, Sterling has stated it has not conducted direct reviews of CPOs and swap dealers. Thus, this review is intended to “mitigate the potential for blind spots in [the DSIO’s] oversight and enhance [its] engagement with registrants.” To help fund managers better contextualize this review and what it will involve, the Hedge Fund Law Report recently spoke with Sterling. This article sets forth his thoughts, including on the genesis of the thematic review program; the expected scope and process of the reviews; the role of enforcement in the review process; and the expected guidance or other information to be produced at the end of the review process. For coverage of another CFTC initiative, see “Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement” (Oct. 19, 2017).

SEC Proposes Expanding Permissible Performance Advertising Practices With Favorable Treatment for Private Fund Managers

The SEC has proposed amendments (Proposed Rule) to Rule 206(4)‑1 under the Investment Advisers Act of 1940, known as the “Advertising Rule” (Current Rule), that, if adopted, would provide much-needed updates to reflect changes in technology, the expectations of investors seeking advisory services and the evolution of industry practices. The Proposed Rule establishes a principles-based approach to regulating advertisements, eschewing a prescriptive regulatory framework. In addition to permitting the use of certain testimonials, endorsements and past investment advice in advertisements, the Proposed Rule would, under certain circumstances, permit the use of performance results prohibited by the Current Rule. In a guest article, Genna Garver and Kurt Wolfe, partner and associate, respectively, at Troutman Sanders, review the current regulatory framework for performance advertising; summarize the key changes in the Proposed Rule; and discuss the potential effect of the Proposed Rule, if enacted in its current form, on private fund managers. For more on the need for updates to the Current Rule, see our two-part series “Is the Advertising Rule Obsolete?”: Part One (Aug. 29, 2019); and Part Two (Sep. 5, 2019). For additional commentary from Garver, see “Connecticut Welcomes You! Federal Financial Regulatory Reform Restores Connecticut’s Authority Over Hedge Fund Advisers” (Jul. 30, 2010); and “Implications of the Volcker Rule – Managing Hedge Fund Affiliates With Banks” (Mar. 11, 2010).

HFLR Fireside Chat With SEC Commissioner Hester M. Peirce Explores Rule Updates, Technological Change, Role of Enforcement and Hot‑Button Issues (Part Two of Two)

In January 2018, Hester M. Peirce was appointed a Commissioner to the SEC. Her experience at the SEC, however, dates to 2000, when she joined the Division of Investment Management as a staff attorney. Since becoming Commissioner, she has not been afraid to speak her mind and sometimes take positions that differ from those of her fellow Commissioners. The Hedge Fund Law Report recently held a webinar in which Associate Editor Robin L. Barton had a conversation with Commissioner Peirce on a wide range of topics of interest to private fund managers. This two‑part series summarizes the key takeaways from the webinar. This article sets forth Peirce’s perspectives on the need for updates to various SEC rules, including those pertaining to advertising and custody; managing technological change in rulemaking; the proper role of enforcement; hot-button issues; and unwritten rules. The first article detailed Peirce’s views on the fiduciary duty for investment advisers; the accredited investor standard; and the duties and liabilities of chief compliance officers. See “Key Takeaways for Private Fund Managers From SEC’s Latest Reg Flex Agenda” (Aug. 15, 2019).

Annual Walkers Fundamentals Seminar Explores Private Fund Trends, Fees and Other Key Terms

At the recent Walkers Fundamentals Seminar 2019, global managing partner Ingrid Pierce and partner Denise Wong discussed the current private equity and hedge fund landscape, including broad trends in fund formation and key terms, as well as local trends and terms in Asia. This article covers the key takeaways from that presentation. See our coverage of the 2018 Walkers Fundamentals seminar: “Fund Launches, Asset Flows, Strategies, Durations, Fees, Governance and Hot Topics” (Dec. 20, 2018); and “Suspensions, Liquidations and Restructurings” (Jan. 17, 2019).

Advisers Must Act on Red Flags to Avoid SEC Claims of Failure to Supervise

The SEC expects advisers to follow their stated policies and procedures and to exercise reasonable supervision over their employees. It also expects advisers to act promptly and properly even when they merely suspect potential trouble. In yet another example of these expectations, the SEC recently claimed that an SEC-registered investment adviser failed to act promptly when alerted to irregularities, on separate occasions, by a compliance consultant and its broker. As a result, the adviser failed to discover that one of its investment adviser representatives had been engaged in a long-running cherry picking scheme. This article analyzes the settlement order with the adviser, as well as the parallel settlement order with the representative. See “The Duty to Supervise: Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers (Part One of Three)” (Sep. 6, 2018).

Former AUSA Joins Greenberg Traurig in New York

David I. Miller, a former federal prosecutor, has joined the New York office of Greenberg Traurig as a shareholder in its litigation practice. Miller focuses his practice on white collar criminal defense; government and internal investigations; securities and commodities enforcement; related complex civil litigation; cryptocurrency; Bank Secrecy Act, anti-money laundering and Foreign Corrupt Practices Act issues; and national security matters. For additional insights from Miller, see our three‑part series “What Fund Managers Need to Know About Corporate Access”: The Risks and Rewards of Speaking Directly With Issuer Management (Nov. 15, 2018); Six Front-End Controls to Manage the Risk of Inadvertently Receiving MNPI (Nov. 29, 2018); and Implementing Testing and Preparing for SEC Scrutiny (Dec. 13, 2018).