Sep. 14, 2017

Advertising Compliance Series: Ten Best Practices for a Fund Manager to Streamline Its Compliance Review (Part One of Three)

Few tasks create more headaches for compliance officers than reviewing and approving marketing materials. As capital raising has grown more challenging in recent years, compliance officers have become inundated with requests from in-house marketers to review new or modified presentations designed to retain existing investors and secure new allocations. Due to the deliberate nature of the process, compliance is often characterized as a perennial bottleneck, yet the review of advertisements by knowledgeable compliance professionals is critical to minimizing regulatory and litigation risk to the adviser. This three-part series is dedicated to assisting managers with developing and enhancing their advertising compliance policies and practices. This first article discusses what documents fall within the advertisement definition and outlines ten best practices that managers should consider implementing when designing or evaluating their advertising review procedures. The second article will discuss five high-risk areas within marketing materials, provide guidance to compliance officers on what to look for when encountering high-risk content and suggest ways to present this information that meet the needs of both the business development and compliance teams. The third article will explore six different testing mechanisms firms can employ to verify compliance with their advertising procedures. See “A Roadmap for Advisers to Comply With Marketing and Advertising Regulations”: Part One (Aug. 3, 2017); and Part Two (Aug. 10, 2017).

Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds

While the election of Donald J. Trump as U.S. president in November 2016 has proved one of the most divisive events in modern political history, many observers shared a consensus that the new administration could adopt a pro-business, anti-regulation stance, to the benefit of the financial industry and investment funds. With the recent appointments of Jay Clayton as SEC Chair and Dalia Blass as Director of the Division of Investment Management, the contours of the new regulatory regime are finally becoming discernable. Chair Clayton provided further clarity by publicly outlining his guiding principles in a recent address. See “SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017). To help readers understand the current regulatory environment, and the implications of recent and ongoing changes to private fund regulation, the Hedge Fund Law Report has interviewed Seward & Kissel partners Patricia Poglinco and Robert Van Grover about an array of issues, including the SEC’s rulemaking agenda in 2017 and beyond; the fate of the Financial CHOICE Act of 2017; the Commission’s willingness to revisit and reexamine its policies and rules; the reliance on whistleblowers for enforcement purposes; the methodology that regulators will use to root out irregular trading patterns and activities; and the state of cybersecurity defenses and enforcement. These are among the issues that Poglinco, Van Grover and their colleagues will explore in greater depth at the upcoming “Private Funds Forum” co-hosted by Seward & Kissel and Bloomberg BNA to be held on September 27, 2017. For a prior interview with Poglinco and Van Grover, see “How Studying SEC Enforcement Trends Can Help Hedge Fund Managers Prepare for SEC Examinations and Investigations” (Sep. 8, 2016).

In U.S. v. Martoma, Second Circuit Eliminates “Meaningfully Close Personal Relationship” Element Articulated in Newman for Insider Trading Prosecutions

On August 23, 2017, the U.S. Court of Appeals for the Second Circuit issued a ruling in the case of U.S. v. Martoma, upholding the 2014 conviction of former S.A.C. Capital Advisors trader Mathew Martoma for securities fraud and insider trading. The Second Circuit ruling refers to several earlier landmark cases in the evolving jurisprudence regarding insider trading, including U.S. v. Newman, upon which Martoma had drawn heavily in his defense. In the view of the Second Circuit, the Supreme Court’s ruling in Salman v. U.S. supersedes and repudiates certain of Newman’s highly specific requirements to establish insider trading violations, including Newman’s “meaningfully close personal relationship” criterion. The ruling in Martoma is of monumental significance for investment advisers and traders because it weighs the differing legal standards under Newman and Salman and affirms a significantly lower bar for pursuing insider trading charges. This marks a decisive shift in a body of jurisprudence around insider trading that has evolved in numerous directions since the landmark 1983 ruling in Dirks v. SEC. To help readers understand the evolution of this body of law, this article summarizes the Martoma case within the context of earlier rulings and includes the views of attorneys with expertise in insider trading matters. For background on the Martoma case, see “Five Takeaways for Other Hedge Fund Managers From the SEC’s Record $602 Million Insider Trading Settlement With CR Intrinsic” (Mar. 21, 2013); and “Fund Manager CR Intrinsic and Former S.A.C. Portfolio Manager Are Civilly and Criminally Charged in Alleged ‘Record’ $276 Million Insider Trading Scheme” (Nov. 21, 2012).

Insights on Operational Due Diligence From the IMDDA and the U.K. Pension Protection Fund

The Investment Management Due Diligence Association (IMDDA) recently kicked off its year-long “Ask the Experts” question-and-answer series with industry professionals, the first of which focused on operational due diligence (ODD). Moderated by Herbert M. Chain, director of education at the IMDDA, and featuring Kevin J. Eastwood, ODD manager at the U.K. Pension Protection Fund and a member of the IMDDA advisory board, the program provided valuable insights to fund managers about ODD, including best practices for conducting ODD on managers and third-party service providers; advice for emerging managers; thoughts about fee and expense transparency; and considerations about cybersecurity. This article summarizes the key takeaways from Chain and Eastwood. For coverage of other IMDDA events, see “How Due Diligence Professionals Approach the Private Fund Review Process” (Jun. 15, 2017); “How Fund Managers Can Prepare for Investor Due Diligence Queries About Cybersecurity Programs” (Feb. 2, 2017); and “How Studying SEC Examinations Can Enhance Investor Due Diligence” (Oct. 6, 2016).

SEC Continues to Bring Enforcement Actions for Compliance Infractions: Undisclosed Conflicts of Interest and Custody Rule Violations

The SEC recently entered a settlement order against a registered investment adviser and two of its principals arising out of their failure to disclose to investors in one of their funds that that fund was investing in another fund advised by the adviser. The manager also ran afoul of the custody rule by failing to timely deliver audited financial statements to the funds’ investors and failing to have those audits conducted by a qualified auditor. This article summarizes the SEC’s charges and the terms of the settlement. For other SEC enforcement actions stemming from undisclosed conflicts of interest, see “SEC Enters Final Judgments in Connection With Allegedly Fraudulent Scheme to Benefit One Fund at the Expense of Another” (Aug. 24, 2017); and “Appropriately Crafted Disclosure of Conflicts of Interest Can Mitigate the Likelihood of an Enforcement Action Against an Investment Adviser” (Oct. 15, 2015).

FCA Director Outlines Regulator’s New Approach to Investigations in Post-Crisis Era

As the financial meltdown of 2008 recedes further into the past, the necessity of retaining and acting upon the lessons of that debacle remains undiminished. The Financial Conduct Authority (FCA), which is responsible for the orderly and stable functioning of the U.K.’s financial markets – and by extension plays a crucial role in maintaining global economic stability – cannot accomplish its tasks if investment funds and other financial firms misconstrue the regulator’s role. One of the most common misperceptions is that any inquiry made by the FCA’s investigators is either part of, or a prelude to, an enforcement action and protracted litigation. As the FCA’s role evolves from crisis-response mode into that of a risk monitor with as vast a responsibility as it has ever had, carrying out highly selective enforcement actions where appropriate, fund managers and other market participants must grasp what the FCA currently does and understand the purpose and tenor of FCA investigations. All these points came across in a recent speech delivered by Jamie Symington, the FCA’s Director of Investigations, at the Legal Week Banking Litigation and Regulation Forum. This article summarizes Symington’s remarks. For a summary of a recent FCA discussion paper, see “FCA Outlines Priorities of Liquidity and Fair Practices for Open-End Funds Investing in Illiquid Assets” (Mar. 16, 2017). See also “FCA Details Three of Its 2017 Priorities: Competition in the Asset Management Market, Liquidity Management and Custodians” (May 4, 2017).

Arne Bolch Joins GSK Luxembourg

GSK Luxembourg has strengthened its investment funds and regulatory practice with the hiring of Arne Bolch as a partner. Bolch advises clients on fund formation, investment fund mergers and acquisitions and regulatory compliance matters, with a particular focus on Reserved Alternative Investment Funds (RAIFs) and Undertakings for Collective Investment in Transferable Securities vehicles. For further analysis of the evolving Luxembourg funds market, see “Luxembourg Fund Structures Evolve to Meet the Needs of the Private Fund Industry” (Oct. 13, 2016); and our two-part series on the RAIF: “Facilitates Access to AIFMD Passport and Marketing to E.U. Investors for Non-E.U. Hedge Fund Managers” (Apr. 21, 2016); and “Offers Marketing Options and Tax Benefits for Non-E.U. Hedge Fund Managers” (Apr. 28, 2016).

McCarthy Tétrault Expands Private Equity Practice

Shevaun McGrath has joined McCarthy Tétrault as a partner in its Toronto office and co-head of the firm’s national private equity practice. McGrath advises institutional investors on fund formation, investments and regulatory compliance issues, and provides counsel to domestic and global corporations on a wide range of matters including mergers, acquisitions, divestitures and fundraising. For insight from McCarthy Tétrault partners, see our two-part series on “How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws”: Part One (Apr. 27, 2017); and Part Two (May 4, 2017); and “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools” (Dec. 4, 2014).