Sep. 13, 2018

The SEC Is Calling: What CCOs Should Expect During Initial Communications With OCIE Examiners (Part One of Two)

SEC examiners begin many routine examinations of private fund managers with lengthy calls with the adviser’s chief compliance officer (CCO). In part designed to help the SEC obtain the greatest return on the investment of its limited resources, these calls provide SEC examiners with an opportunity to learn more about the relevant adviser’s business and compliance program earlier in the exam process. This two-part series examines the format and substance of these initial calls and provides guidance on how CCOs can prepare for these interactions with the examiners. This first article discusses the ways in which the SEC initiates the examination process and provides insight into the form and substance of these introductory calls between the examiners and the CCO, including who participates in them on behalf of each of the SEC and the adviser. The second article will examine how the SEC is using these calls to meet multiple objectives; outline the topics that are generally discussed during them; and explore how a CCO can prepare accordingly, including what documents and information he or she should review in advance and what materials should be on hand during these calls. See “Effects of Expanding SEC Investment Adviser Examinations” (Mar. 24, 2016); and 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).

New Sidley Partner Lilya Tessler Discusses FinTech and Blockchain

As the New York head of Sidley Austin’s financial technology (FinTech) and blockchain group, new partner Lilya Tessler will focus her practice on representing digital asset trading platforms, blockchain technology companies, broker-dealers, financial services firms and cryptocurrency funds. She also advises technology companies on blockchain token offerings, including initial coin offerings, and counsels financial institutions and digital asset exchanges on day-to-day securities issues, private placement agent requirements, custody rule requirements, cross-border regulatory issues, money services business registration requirements, as well as FINRA and SEC regulatory inquiries. In addition, Tessler works with transactional lawyers on structuring deals involving financial services and technology companies, digital asset exchanges and blockchain token offerings. In connection with her move to Sidley, the Hedge Fund Law Report recently interviewed Tessler about blockchain and FinTech. This article summarizes her thoughts on regulation in this space; women practicing in this area; the impact of blockchain technology on private funds; and the benefits of having an accounting and business background. For additional commentary from Sidley partners, see “Developing a 2018 Compliance Budget: How Investment Advisers Can Make the Most of Limited Resources” (Dec. 21, 2017); and “Hedge Fund Legal Personnel May Fall Under U.K. Senior Managers Regime” (Feb. 4, 2016).

What Fund Managers Need to Know About Recent Developments to the New Anti-Sexual Harassment Policy and Training Requirements in New York City and New York State

Earlier this year, New York City (NYC) and New York State (NYS) each enacted laws that impose new anti-sexual harassment requirements on private employers based in New York. Among other things, these laws require covered employers to display an anti-sexual harassment poster, distribute a related information sheet, implement anti-sexual harassment policies and provide training on those policies. Both NYC and NYS have recently released materials to assist covered employers in complying with the new requirements and meeting upcoming deadlines. This article provides an overview of the anti-sexual harassment materials now available and discusses how New York-based fund managers can use them to comply with the laws’ requirements. For more information on the NYC and NYS requirements, see our two-part series: “Key Elements of New York’s New Anti-Sexual Harassment Policy and Training Requirements” (Jun. 14, 2018); and “Ways Fund Managers Can Comply With New York’s New Anti-Sexual Harassment Policy and Training Requirements” (Jun. 21, 2018). See also “HFLR Program Looks at Recent Developments and Trends in Employment Law Relevant to Fund Managers” (Jul. 26, 2018).

How to Avoid Five Common Duty to Supervise Traps: Conduct Proper Trade and Electronic Communications Surveillance (Part Two of Three)

The essence of a duty to supervise violation is that the broker-dealer or investment adviser was not sufficiently monitoring its employees to ensure that they were not violating any of its policies and procedures or any securities laws. Pursuing failure to supervise claims therefore enables the SEC to attack an adviser’s or a broker-dealer’s lax or inadequate compliance program. In addition, failure to supervise charges are attractive to the SEC because they only require proof of negligence. An examination of a sampling of recent SEC enforcement actions alleging failures to supervise revealed similar mistakes made by the relevant broker-dealers or investment advisers. With the circumstances of these enforcement actions as the backdrop, the second and third articles in this three-part series discuss five common duty to supervise traps. This second article analyzes failure to conduct adequate trade surveillance and communications surveillance. The third article will explore failure to respond properly to red flags; implement reasonable policies and procedures; and properly train supervisors, traders and salespeople. The first article in the series reviewed the duty to supervise for both broker-dealers and investment advisers and summarized the duty to supervise violations in these enforcement actions. See “Five Steps That CCOs Can Take to Avoid Supervisory Liability, and Other Hedge Fund Manager CCO Best Practices” (Mar. 27, 2015).

Absence of Harm No Defense Against Conflicts of Interest: SEC Issues Lifetime Bar From Compliance Work to CCO

Many recent SEC enforcement actions involving conflicts of interest have concerned relatively arcane matters, including disclosures regarding share class selection; fee and expense practices; and acceleration of private equity monitoring fees. In contrast, a recent settlement order against the principal and chief compliance officer (CCO) of a private equity adviser involved simple self-dealing. The SEC alleged that the CCO arranged for a fund managed by the adviser to make a loan to one of the fund’s struggling portfolio companies on the condition that the portfolio company repurchase the CCO’s interest in one of the businesses owned by that portfolio company. The CCO failed to clear the transaction with the fund’s limited partnership advisory committee, resulting in penalties, a temporary bar from association with any investment adviser and a lifetime bar from acting in a compliance capacity. This case and the penalties imposed remind CCOs of the importance of disclosing conflicts of interest. This article details the facts and circumstances of the matter; analyzes the terms of the settlement; and presents insight from a former SEC Trial Counsel regarding the SEC-imposed bar on the CCO’s ability to act in a compliance capacity. See “SEC Signals Aggressive Stance on Individual Responsibility, Including Potential CCO Liability, in FY 2017 Annual Report” (Dec. 14, 2017).

ACA Panel Reviews Rules Related to Aggregation of Publicly Traded Securities, Best Execution, Soft Dollars, Portfolio Holding Liquidity and Gifts (Part Two of Two)

A recent ACA Compliance Group (ACA) program provided a detailed overview of the provisions of the Investment Company Act of 1940 and related rules that govern trading by registered investment companies. The program featured Erik Olsen and Vicki Hulick, ACA director and senior principal consultant, respectively. This article, the second in a two-part series, covers the portions of the program that addressed the aggregation of publicly traded securities; best execution; soft dollars; portfolio holding liquidity; and gifts and entertainment. The first article addressed transactions with affiliates. For additional commentary from ACA, see “What Robo-Advisers Can Expect From SEC Examinations” (Jun. 21, 2018); and “Developing a 2018 Compliance Budget: How Investment Advisers Can Make the Most of Limited Resources” (Dec. 21, 2017).