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    Apr. 4, 2019

SEC Adopts Enhanced Order Routing Disclosures: Understanding Rule 606(a) and Rule 606(b)(3) Reports (Part Two of Three)

The SEC recently adopted amendments to Rule 606 of Regulation National Market System (NMS) under the Securities Exchange Act of 1934 to add a new disclosure requirement that requires broker-dealers to provide specific order routing disclosures for “not-held” orders and make targeted amendments to the publicly available disclosures that broker-dealers are already required to provide. These new disclosures will assist fund managers that trade NMS stocks to evaluate their broker-dealers’ order routing practices, quality of execution and potential conflicts of interest. Additionally, SEC examiners and institutional investors are likely to inquire into whether fund managers are incorporating this data into their best execution reviews. This second article in our three-part series discusses the specific disclosures that will be included in amended Rule 606(a) reports and new Rule 606(b)(3) reports. The first article provided background on the evolution of the equity market structure; existing Rule 606 disclosure requirements; the types of incentives that exchange and non-exchange markets provide to executing broker-dealers; and how the “pass-through” fees that some fund managers pay to their executing brokers differ from the “all-in” commission fee structure. The third article will discuss how fund managers should incorporate these new disclosures into their best execution reviews and transaction cost analyses. See “$42-Million Enforcement Action Against Merrill Lynch Reminds Fund Managers to Probe Where Broker-Dealers Are Routing Their Trades” (Aug. 2, 2018); and “Six Steps That Hedge Fund Managers Should Take to Protect Their Confidential Information When Using or Evaluating Dark Pools” (Oct. 18, 2012).

How Fund Managers Can Mitigate the Impact of Litigation on Their Transactions and Relationships

Litigation – which is expensive, diverts personnel and presents considerable reputational risk regardless of its result – can undermine an investment manager’s transactions and relationships. In addition, litigation rarely adds value or advances an investment manager’s objectives. The reality, however, is that disputes will arise in commercial transactions. Deal documents should provide for a process to resolve the disputes that do arise in a way that minimizes their impact on the economics and objectives of the transaction. Arbitration and mediation are the two best-known alternatives to litigation, although they are often conflated despite offering very different dispute resolution options, structures, processes and results. In a guest article, David C. Rose, partner at Pryor Cashman, discusses how fund managers can incorporate a multi-tiered dispute resolution process within their deal documents that requires parties to engage in mandatory mediation prior to submitting a dispute to litigation or arbitration, thereby mitigating the impact and risk of disputes among counterparties and salvaging or reviving valuable commercial transactions and relationships. See “Contractual Provisions That Matter in Litigation Between a Fund Manager and an Investor” (Oct. 2, 2014). For commentary from other Pryor Cashman attorneys, see “Ten Strategies for Preventing Disclosure of Confidential Hedge Fund Data Under State Sunshine Laws” (May 3, 2012).

Former OCIE Deputy Director Jane Jarcho Discusses OCIE’s National Exam Program and Annual Priorities (Part Two of Two)

After beginning her 28-year SEC career in the Enforcement Division in Chicago, Jane Jarcho spent the last ten years in the Office of Compliance Inspections and Examinations (OCIE) as Deputy Director. As National Associate Director of the Investment Adviser/Investment Company Examination Program, she oversaw the examinations of those registered entities. Jarcho also started and supervised the Private Funds Unit – OCIE’s first specialized, nationwide group – which focuses on examinations of hedge, private equity and real estate fund advisers. The Hedge Fund Law Report recently interviewed Jarcho in connection with her move to Promontory Financial Group. This two-part series presents her insights, and this second article discusses her thoughts on OCIE’s National Exam Program; the impact of technology and the hiring freeze on the program; OCIE’s annual exam priorities; and the private funds space. The first article covered Jarcho’s move to the private sector; examined her experience in the SEC’s Enforcement Division and OCIE, including her time in the original internet-focused enforcement unit and her role in developing national exam initiatives; and explored the relationship between the two divisions. For more on OCIE, see “Retail Investors Again Top OCIE Exam Priorities in 2019; Digital Assets Join List” (Jan. 31, 2019); and “Understanding the SEC’s National Exam Program: How OCIE Selects Advisers to Examine (Part One of Two)” (Jul. 12, 2018).

A Primer on Compliance Issues for Credit Strategies: Key Credit Concepts and Risks in Credit Investing (Part One of Two)

A recent ACA Compliance Group (ACA) webinar offered an overview of key compliance issues encountered by credit managers. The program featured Lynne M. Carreiro and Kimberly Simmons Versace, managing director and senior principal consultant, respectively, at ACA. This article, the first in a two-part series, summarizes the panelists’ insights on various credit and debt instruments, as well as some of the unique compliance issues faced by managers who invest in them. The second article will explore additional compliance issues faced by those managers. For additional commentary from ACA on compliance issues for credit managers, see “ACA Panel Examines Compliance Issues Faced by Credit Managers” (Nov. 15, 2018). See also “Credit Fund Specialist Discusses Trends in Fund Formation and the Credit Fund Space” (Aug. 23, 2018).

SEC Settles With 79 Investment Advisers Under Its Share Class Selection Disclosure Initiative

In February 2018, the SEC announced its Share Class Selection Disclosure Initiative (SCSD Initiative). The SCSD Initiative offered advisers that self-reported inadequate disclosures regarding selection of mutual fund share classes the opportunity to resolve SEC charges without paying financial penalties. Just one year later, the SEC announced settlements with 79 investment advisers, yielding restitution of more than $125 million to affected clients. This article details the terms of the settlements and an associated SEC order pursuant to which those advisers will avoid being disqualified from relying on certain exemptions from registration under the Securities Act of 1933. See “SEC Continues to Pursue Advisers That Provide Inadequate Disclosures About Mutual Fund Share Class Selection Practices and Other Conflicts of Interest” (Nov. 15, 2018).

Mintz Expands New York Office With Addition of Private Funds Lawyer

Loretta Shaw‑Lorello has joined Mintz’s New York office as a member of its corporate and securities practice. Shaw‑Lorello has a multifaceted private investment funds practice representing clients in the formation and operation of buyout funds, venture capital funds, real estate funds, distressed funds and credit opportunity funds, in addition to counseling fund sponsors on the formation and operation of investment manager and general partner entities. For commentary from Shaw‑Lorello, see “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non‑E.U. Fund Managers That Are Not Authorized Under the AIFMD” (Jul. 24, 2014).

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