Feb. 15, 2018

Best Practices for Fund Managers When Investigating and Documenting Employee Discipline (Part Two of Three)

Before an adviser can discipline an employee for misconduct, it must first determine whether, and to what extent, discipline is warranted. During any investigation, special attention must be paid to gather evidence that can later support a disciplinary action for wrongdoing uncovered during that investigation, and the disciplinary process must be rooted in legitimate fact-finding. In fairness to the target, there must be an actual investigation, and any discipline imposed must be based on facts rather than hearsay. This second article in our three-part series on employee discipline addresses techniques advisers can use to gather evidence that can effectively be used to support a disciplinary action, including the thorny issue of protecting privilege while building a record. The first article discussed the value of setting expectations for discipline in advance and how advisers can impose discipline consistently in the face of inconsistent local employment laws. The third article will identify steps an adviser can take to promote institutional due process when disciplining an employee. See “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations” (Feb. 23, 2013).

SEC Halts Registration of Cryptocurrency Mutual Funds, Calling for Dialogue Regarding Valuation, Liquidity, Custody, Arbitrage and Manipulation Risk

Dalia Blass, Director of the SEC Division of Investment Management, has issued a staff letter to the Securities Industry and Financial Markets Association and the Investment Company Institute outlining her Division’s concerns about funds that invest in cryptocurrencies. The letter focuses on registered funds that desire to invest in cryptocurrencies and indicates that, for the time being, the SEC will not register funds that “intend to invest substantially in cryptocurrency and related products.” It also sheds light on the SEC’s general view of this evolving asset class, which may inform its perspective on private fund investments involving cryptocurrencies. This article summarizes the letter and its key takeaways for managers considering launching cryptocurrency funds, as well as any industry participant contemplating investing in cryptocurrencies. For more on investment in cryptocurrencies, see “Opportunities and Challenges Posed by Three Asset Classes on the Frontier of Alternative Investing: Blockchain, Cannabis and Litigation Finance” (Dec. 14, 2017). See also our three-part series on blockchain and the private funds industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).

Settlements With Three Major Banks and Five Individual Enforcement Actions Follow CFTC Anti-Spoofing Initiative

The CFTC’s Spoofing Task Force has been aggressive in combating spoofing – placing orders that a trader has no intention of filling in order to move the price of a futures contract in a desired direction – as well as other forms of market manipulation. It recently announced eight separate actions involving spoofing and other manipulation. The CFTC entered into settlement orders with three major banks: Deutsche Bank AG and Deutsche Bank Securities Inc.; UBS AG; and HSBC Securities (USA) Inc. The regulator also commenced five civil enforcement actions against individual traders and a software developer. This article examines the details and terms of the bank settlements, as well as the complaints filed by the CFTC against the individuals. For more on spoofing, see “Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing” (Oct. 12, 2017); “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017); and “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

Portfolio Manager Accuses Former Employer and Supervisor of Retaliation for Reporting Sexual Harassment

Distressed debt specialist Sara Tirschwell recently filed a five-count civil complaint against TCW Group Inc. (TCW Group), TCW LLC (TCW), TCW Group’s CEO and Jess Ravich in the New York State Supreme Court, New York County. Tirschwell claims that Ravich, her former boss, coerced her into a sexual relationship while she was developing a distressed debt fund for TCW and that TCW fired her in retaliation for reporting his alleged misconduct. She seeks more than $30 million in damages. This article analyzes the allegations in the complaint. See “How Investment Managers Can Prevent and Manage Claims of Harassment in the Age of #MeToo” (Dec. 14, 2017).

SEC Chair Outlines Approach to Dodd-Frank Rulemaking and Expectations for Fund “Gatekeepers”

Following the election of President Trump, many in the asset management industry speculated that his administration would usher in an era of reduced regulations. Early executive orders signed by the President, such as the “Core Principles for Regulating the United States Financial System,” further fueled hope among the most optimistic that not only would regulation of the industry ease, but perhaps even the Dodd-Frank Act itself could be repealed. See “How the Trump Administration’s Core Principles for Financial Regulation May Benefit the U.S. Funds Industry (Part One of Two)” (Feb. 16, 2017). A recent speech by SEC Chair Jay Clayton should dispel any lingering hopes that the Dodd-Frank Act will be entirely repealed, however. In his remarks, Clayton provided his perspectives on how the Commission should finish remaining rulemaking mandates under the Dodd-Frank Act. In addition, Clayton outlined his expectations for the standards of market professionals, particularly when dealing with new products or new forms of old ones. For coverage of other speeches by Clayton, see “Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds” (Sep. 14, 2017); “SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017); and “SEC Chair’s Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era” (Jul. 13, 2017).

Former FINRA Associate General Counsel Moves to Willkie Farr

Brant Brown, a former associate general counsel at FINRA, has returned to private practice, joining Willkie Farr & Gallagher’s regulatory practice in Washington, D.C. Brown advises clients – ranging from self-regulatory organizations to broker-dealers – on the impact of regulations on their businesses and on their regulatory compliance obligations. For coverage of a recent high-profile addition to the firm, see “Willkie Expands Its New York Asset Management Group” (Jul. 13, 2017). For insight from another Willkie attorney, see “Barbash, Breslow and Rozenblit Discuss Hedge Fund Allocations, Restructurings and Advisory Boards” (Apr. 7, 2016).