Jul. 12, 2018

Understanding the SEC’s National Exam Program: How OCIE Selects Advisers to Examine (Part One of Two)

The SEC, like the roughly 26,000 registered entities whose activities it is charged with overseeing, must efficiently allocate its resources to accomplish its stated goals. Responsible for examining SEC registrants, the SEC’s Office of Compliance Inspections and Examinations (OCIE) is often forced to make difficult decisions about where to focus its time and efforts when carrying out its four pillars of promoting compliance; preventing fraud; identifying and monitoring risk; and informing policy. Recognizing that the enormous size of the registrant pool prevents it from conducting regular exams of each registered firm, OCIE has repeatedly stated that it employs a risk-based strategy when overseeing market participants within its jurisdiction. This two-part series examines how this risk-based strategy informs the SEC’s National Exam Program. Fund managers can benefit from understanding how the SEC carries out a risk-based examination program, as the strategy shapes both the selection of which advisers to examine and the exams themselves. This first article discusses the steps that the SEC has taken in recent years to increase the number of advisers it examines each year and explores how the risk-based strategy employed by OCIE informs which advisers are selected for examination. The second article will analyze the types of exams OCIE conducts, recent trends in examinations, how the risk-based strategy translates into risk-based examinations and ways fund managers can determine the type of exam OCIE is conducting. See “What Hedge Fund Managers Need to Know About Getting Through an SEC Examination (Part One of Two)” (Jun. 16, 2016).

How the New York Court of Appeals’ Limitation on Martin Act Liability Affects Fund Managers

The Martin Act (Act) – New York’s broad “blue sky law” – has been used extensively by the New York Attorney General (NY AG) to investigate and combat securities fraud occurring in New York. Although the Act may only be enforced by the NY AG, it authorizes both criminal and civil charges and, importantly, does not require proof of scienter or reliance to successfully bring a claim. As a result, the Act has been a favored tool of past Attorneys General in targeting members of the financial services community. Although not affecting the substance of the Act, a recent decision by the New York Court of Appeals imposed an important new limitation on how the Act can be wielded by the NY AG by holding that New York’s three-year statute of limitations applies to civil enforcement actions brought under the Act. In a guest article, Schulte Roth & Zabel partner Harry S. Davis provides background on the Act, its notable uses and the likely consequences that the ruling will have on the financial services community. For additional insight from Davis, see “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment” (Feb. 17, 2010). For more on the Act, see “Newly Appointed Chief of New York’s Investor Protection Bureau Describes Its Enforcement of the Martin Act and How Managers Can Avoid Prosecution” (Oct. 20, 2016); and “New York Court of Appeals Holds That the Martin Act, New York’s ‘Blue Sky’ Law, Does Not Preempt Common Law Claims for Breach of Fiduciary Duty and Gross Negligence” (Jan. 12, 2012).

Former SEC Senior Counsel Offers Her Current Perspective on the SEC and the Private Funds Industry

Stacey Song recently rejoined Fried Frank’s corporate department as a partner. Based in the firm’s New York office, she will focus on investment advisers, private funds and broker-dealers. Song previously served as a Senior Counsel in the Private Funds Branch of the Division of Investment Management at the SEC where she was the primary expert on legal matters relating to private funds and provided interpretive guidance to other divisions and offices within the SEC, as well as to various industry participants. In connection with her return to Fried Frank, the Hedge Fund Law Report recently interviewed Song about several topics important to private fund managers. This article provides Song’s thoughts on the perspective she gained on the private funds industry and the SEC; collaboration between the industry and Commission staff; and the current regulatory landscape. For additional insight from Fried Frank attorneys, see “Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe” (Mar. 9, 2017); and “How Does the Amended Custody Rule Change the Balance of Power Between Hedge Fund Managers and Accountants?” (Jan. 27, 2010).

Women in Derivatives Event Features Address by CFTC Chair Giancarlo and Panel Discussion on the Intersection of Technology and Regulation

A recent program presented by Women in Derivatives featured opening remarks by CFTC Chairman J. Christopher Giancarlo that focused on the CFTC’s use of market data to gauge the impact of algorithmic trading on market stability, as well as a panel discussion that discussed cutting edge business and regulatory issues concerning blockchain technology, cryptocurrencies and artificial intelligence. Petal Walker, special counsel at WilmerHale, moderated the panel, which featured Chris Brummer, professor at Georgetown Law; Isabelle S. Corbett, senior counsel and director of regulatory affairs at software firm R3; Amy Davine Kim, global policy director and general counsel at Chamber of Digital Commerce; and Sigrid Seibold, principal at KPMG US. This article summarizes the key takeaways from Giancarlo’s remarks, his responses to audience questions and the panelists’ insights. For more from Giancarlo, see “As Cryptocurrencies Advance, CFTC Commissioner Encourages Formation of an SRO to Oversee Customer Protection” (May 31, 2018); and Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators, According to CFTC Chair” (Feb. 8, 2018).

HFLR Program Provides Overview of Five Financing Options Available to Private Funds (Part Two of Two)

As some private fund managers have looked to finance illiquid and esoteric assets, lenders have developed financing structures that go beyond the more traditional forms of prime broker (PB) financing and secured loans. A recent webinar presented by the Hedge Fund Law Report provided an overview of the following types of financing arrangements used by private funds: total return swap (TRS) financing, structured repurchase agreements (repos), PB financing, special purpose vehicle (SPV) financing and subscription credit facilities. The program was moderated by Kara Bingham, Associate Editor of the Hedge Fund Law Report, and featured Fabien Carruzzo, partner at Kramer Levin; Matthew K. Kerfoot, partner at Dechert; and Jeff Johnston, managing director at Wells Fargo Securities, LLC. This article, the second in a two-part series, provides an in-depth discussion of structured repos, SPV financing and subscription credit facilities. The first article explored basic principles of financing arrangements and provided an overview of PB financing and TRS financing. For more on structured repos and SPV financing, see “Three Asset-Based Financing Options for Private Funds: Total Return Swaps, Structured Repos and SPV Financing (Part Two of Two)” (Apr. 12, 2018). See also our three-part series on understanding subscription credit facilities: “Popularity and Usage Soar Despite Concerns” (Mar. 1, 2018); “Principal Advantages and Key Points to Negotiate” (Mar. 8, 2018); and “Key Concerns Raised by Investors and the SEC” (Mar. 15, 2018).

Manager Accused of “Cooking the Books” Facing Civil and Criminal Fraud Charges From SEC and DOJ

Valuation remains a critical fault line for fund managers and the subject of unrelenting regulatory scrutiny. The SEC recently filed a civil complaint against a hedge fund manager and three of its principals, alleging that, as the performance of the manager’s funds faltered, the defendants used inflated marks from a friendly broker and unauthorized valuation mechanisms to increase the value of the bonds in the funds’ portfolios. On the same day, the DOJ unsealed an indictment charging the three individual defendants with four counts of securities fraud, wire fraud and conspiracy to commit those offenses. This article details the civil and criminal charges and the circumstances giving rise to them. See “Three Approaches to Valuing Fund Assets and How Auditors Review Those Valuations” (May 11, 2017).

McDermott Will & Emery Expands Private Equity Practice With Addition to New York Office

Rami Turayhi has joined McDermott Will & Emery as a partner in the firm’s corporate and transactional practice group in the New York office. He will focus on fund formation, with an emphasis on the formation of private equity funds, and will work closely with the firm’s growing corporate practice in New York. See “Anatomy of a Private Equity Fund Startup” (Jun. 22, 2017). For commentary from other McDermott attorneys, see “HFLR Cryptocurrency Webinar Examines Regulatory Developments, ICOs, Cryptocurrency Sweep, Custody and Other Compliance Issues” (May 3, 2018); and “Lessons for Hedge Fund Managers From the Government’s Failed Prosecution of Alleged Insider Trading Under Wire and Securities Fraud Laws” (Jul. 21, 2016).