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    Jul. 19, 2018

Understanding the SEC’s National Exam Program: Recent Exam Trends and How Fund Managers Can Determine the Type of Exam OCIE Is Conducting (Part Two of Two)

Much has been written about the types of examinations – i.e., routine/risk-based, sweep and cause – that the SEC’s Office of Compliance Inspections and Examinations (OCIE) conducts of registered investment advisers. Surprisingly, however, most advisers that are the subject of an exam will not know at the outset what type of exam the SEC is conducting, and in some cases, the adviser will never know. OCIE examiners do not typically disclose this information voluntarily, and if asked, they may refuse to answer. There are hints, however, along the way that chief compliance officers and their counsel can use to make an educated guess into the type of exam OCIE is conducting. While not critical, knowing this information can provide perspective into how the exam may proceed. This second article in our two-part series analyzes 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. The first article discussed the steps that the SEC has taken in recent years to increase the number of advisers it examines each year and explored how OCIE’s risk-based strategy informs which advisers are selected for examination. See “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016). See also our three-part series “What Do Hedge Fund Managers Need to Know to Prepare for, Handle and Survive SEC Examinations?”: Part One (Feb. 3, 2011); Part Two (Feb. 10, 2011); and Part Three (Feb. 18, 2011).

Compliance Corner Q3-2018: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

The SEC has repeatedly demonstrated how seriously it takes an investment adviser’s obligation to make timely and accurate filings, as evidenced by the Commission’s filings-centric examination sweeps and subsequent enforcement actions. These actions by the SEC serve as a clear reminder that hedge fund managers should ensure they identify and complete all filings required of them and the private funds they control. This fifth installment of the Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anne Wallace, director and senior compliance analyst, respectively, at ACA Compliance Group, highlights upcoming filing deadlines of which fund managers should be aware during the third quarter and discusses certain filing obligations of fund managers, their private funds and how these obligations may diverge. Additionally, this article provides an overview of three technology-related topics: the use of technology to monitor personal trading, an update on cryptocurrency regulatory activity and tips for compliance with the E.U. General Data Protection Regulation. See our two-part series “What Are the GDPR’s Implications for Alternative Investment Managers?”: Part One (Apr. 26, 2018); and Part Two (May 10, 2018).

What Are the Implications of the Supreme Court’s Decision in Lucia v. SEC for Fund Managers?

The U.S. Supreme Court ruled in Lucia v. SEC that the SEC’s administrative law judges (ALJs) are “Officers of the United States” under the Appointments Clause of the U.S. Constitution and must therefore be appointed by either the President or the SEC. Because current ALJs were selected by SEC staff, they were not properly appointed, and thus their actions were invalid. As a result of this decision, the Court ordered the SEC to give Raymond J. Lucia a new administrative hearing. The status of other cases pending before ALJs, however, is less certain. In fact, in response to the decision, the SEC issued a 30‑day stay, halting these cases until it decides the appropriate course of action. The Lucia decision has implications beyond Lucia himself – and beyond the SEC. This article explains the background of the case, summarizes the Supreme Court’s decision and provides insight from two attorneys – including the one who successfully argued the Lucia case before the Supreme Court – on the short- and long-term ramifications for fund managers in general and those with pending enforcement actions. For other recent Supreme Court decisions, see “Does the Digital Realty Decision Represent a Sea Change for Whistleblowers or Merely More of the Same?” (Mar. 15, 2018); and “Implications for Fund Managers of the Supreme Court’s Ruling in Kokesh v. SEC” (Jun. 15, 2017).

Ropes & Gray Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment (Part One of Two)

Ropes & Gray recently hosted a program presenting the results of a survey of 100 credit fund managers that it conducted in cooperation with Debtwire. In addition to discussing the results of the survey, the webinar, featuring Ropes & Gray partners James R. Brown, Eva Ciko Carman, Alyson Brooke Gal and Jessica Taylor O’Mary, presented key takeaways from the Ropes & Gray Credit Funds Forum, which took place on May 16, 2018. This two-part series summarizes the report’s findings and the speakers’ insights. This first article discusses the types of credit strategies offered by the survey participants, challenges currently facing credit funds and the types of fund structures adopted by credit fund managers – including “season and sell” structures, treaty funds, business development companies and blockers – when engaging in a direct lending strategy. The second article will examine a variety of conflicts of interest that frequently arise for credit managers, the forms of leverage these managers are using, the types of issues that investors subject to the Employee Retirement Income Security Act of 1974 raise for credit managers and specific issues that arise for these managers when being examined by the SEC. See our three-part series on private funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016).

How Investment Advisers Can Mitigate Common Advertising Risks

A recent webinar hosted by Ascendant Compliance Management featured Adam DiPaolo, associate general counsel and senior consultant at Ascendant; Michael W. McGrath, partner at K&L Gates; and Antonella Puca, director at the CFA Institute. This article summarizes the portions of the program covering SEC rules and guidance applicable to investment adviser advertising, including performance advertising, backtesting, testimonials, social media and illustrative SEC enforcement proceedings. For additional commentary from K&L Gates and Ascendant, see our two-part coverage of a cybersecurity panel: “Overview of Laws and Threats Applicable to Investment Managers” (Apr. 23, 2015); and “Overview of Cybersecurity Risk Mitigation Frameworks and Techniques” (Apr. 30, 2015).

$16-Million Enforcement Action Against Merrill Lynch Demonstrates SEC’s Continued Pursuit of Misleading Broker Sales Talk and Excessive Markups in Mortgage-Backed Securities Trading

The SEC continues to scrutinize the questionable sales tactics used by personnel at broker-dealers in the trading of bonds, including residential mortgage-backed securities (RMBS). The recent SEC settlement order against Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch) is another reminder that fund managers must be wary of pricing information provided by their broker-dealers. Merrill Lynch sales personnel allegedly misrepresented the prices at which they had acquired, or were acquiring, RMBS and charged undisclosed excessive markups to customers. This article details Merrill Lynch’s alleged misconduct and the other salient provisions of the order. For a similar recent settlement involving sales of commercial mortgage-backed securities, see “SEC Settlement With Deutsche Bank for Alleged Fraudulent Bond Sales Practices Highlights Challenge for Fund Managers to Obtain Accurate Pricing” (May 10, 2018). For other actions involving improper sales talk in bond trading, see “SEC Complaints Against Former CMBS Traders Highlight Need for Fund Managers to Verify Broker Pricing for Thinly Traded Securities” (Jun. 1, 2017); “SEC Settlement With Ex-Goldman Head RMBS Trader Highlights Risk That Puffery May Become Misrepresentation When Trading Illiquid Securities” (Sep. 8, 2016); and “Pricing Information Provided by Brokers to Hedge Fund Managers for Thinly Traded Securities May Not Be Reliable” (Sep. 17, 2015).

Ogier Adds Oliver Quarmby to Guernsey Investment Funds and Private Equity Team

Oliver Quarmby has joined Ogier’s Guernsey investment funds and private equity team as a managing associate. Working in the firm’s London office, Quarmby advises various kinds of funds, including private equity funds, hedge funds and closed-end investment funds. For coverage of another recent hire by Ogier, see “Sophie Reguengo Joins Ogier in Jersey” (Feb. 1, 2018). For insight from other Ogier attorneys, see “Jersey Offers Range of Marketing and Distribution Options, Operational Support for Investment Funds” (Mar. 9, 2017); and “The Evolution of Offshore Investment Funds (Part One of Three): In Interview With Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Drafting of Offshore Fund Documents; NAV Adjustments; Clawbacks; Managed Accounts; and Payment-in-Kind Provisions” (Jul. 29, 2009).

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