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    Jan. 10, 2019

Why, When and How Fund Managers Should Self-Report Violations to the SEC (Part One of Two)

Self-reporting securities violations to the SEC may benefit fund managers – at least in some circumstances. If a fund manager comes clean to the SEC about any violations it has committed, thoroughly investigates those violations internally, fully cooperates with any external investigation and takes appropriate remedial steps to prevent similar violations in the future, it may reduce any penalties imposed on it – and perhaps avoid penalties entirely. Self-reporting, however, can also have negative consequences. The resulting governmental investigation into the reported violations may be costly and reveal additional misconduct, as well as generate significant negative press. This two-part series explores why fund managers should self-report violations to the SEC, when they should do so and how they should self-report. This first article discusses the SEC’s Cooperation Program; the pros and cons of self-reporting violations to the SEC; and the factors fund managers should consider when deciding whether to self-report. The second article will address the timing and logistics of self-reporting; ways managers can put themselves in the best position possible when self-reporting; and things managers should do if they ultimately decide not to self-report violations. For a recent example of an enforcement action in which an investment adviser self-reported violations, see “SEC Sanctions Investment Adviser and Principals for Using Fund Assets to Help an Affiliate and for Using Improper Valuation Adjustments to Boost Returns” (Nov. 8, 2018).

Fund Managers Should Prepare for Further Disruption to the Industry or Risk Being Left Behind

As private fund managers continue to face headwinds on multiple fronts, one thing remains clear: disruption will continue. Notwithstanding these challenges, enormous opportunities are available to those willing to adapt their business plans accordingly. These points came across in a recent interview the Hedge Fund Law Report conducted with Anthony Cowell, partner and head of alternative investments at KPMG in the Cayman Islands. Cowell discussed key disruptors that fund managers should be prepared to embrace, including the digitization of the alternative investment industry and the ways in which millennials are reshaping the industry. Cowell will chair the Cayman Alternative Investment Summit, taking place February 6-8, 2019, where these topics and others will be explored in more detail. For more information about the symposium, click here. To register for the conference, click here, using HFLR’s promotional code available in this article for a 15-percent discount. For additional insight from Cowell, see “Private Fund Advisers and Service Providers Must Evolve Their Businesses to Keep Pace With Innovations in Technology or Risk Becoming Obsolete” (Jan. 18, 2018).

Luxembourg Positions Itself As a Calm in the Brexit Storm (Part One of Two)

In a recent seminar, the Association of the Luxembourg Fund Industry (ALFI) offered a detailed overview of the Luxembourg funds industry, Brexit, regulatory developments and fund distribution. Hosted by ALFI chairman Denise Voss, the program featured panel discussions with representatives from financial services, asset management, legal and accounting firms. This article, the first in a two-part series, covers the portions of the seminar that discussed the current condition of the Luxembourg funds industry and the status and implications of Brexit. The second article will examine the panelists’ views on E.U. regulatory developments concerning, among other things, substance requirements and delegation, as well as the E.U. retail distribution environment. For more from ALFI, see “Luxembourg Remains a Significant Point of Entry for Non-E.U. Managers to Raise Capital in the E.U.” (May 17, 2018).

HFLR Program Explores Current SEC Examination Practices and Issues (Part Two of Two)

SEC-registered investment advisers are urged to prepare for SEC examinations well in advance of being notified that they are the subjects of those examinations. This was one of the key takeaways from a Hedge Fund Law Report webinar discussing how examiners from the SEC’s Office of Compliance Inspections and Examinations are currently approaching examinations of private fund managers. Moderated by Kara Bingham, Senior Editor at the Hedge Fund Law Report, the program featured Andrew M. Calamari, partner at Finn Dixon & Herling and former Director of the SEC’s New York Regional Office; Patricia A. Poglinco, partner at Seward & Kissel; and Joel A. Wattenbarger, partner at Ropes & Gray. This second article in our two-part series explores the portions of the program that discussed how the SEC approaches the examination of six substantive areas of an adviser’s business, whether the SEC continues to adhere to a “broken windows” approach to enforcement and practical guidance for how fund managers can remain prepared for an SEC exam. The first article highlighted the current SEC examination climate; the types of examinations conducted by the SEC; and the lifecycle of an exam, including practical advice on how advisers can manage the production of documents to SEC examiners. See our two-part series on steps advisers can take to minimize the risk that a routine SEC examination ends with a referral to enforcement: “Five Key Priorities for OCIE” (Jan. 4, 2018); and “Examination Process, Interview Preparation and Remediation Considerations” (Jan. 18, 2018).

Improper Expense Allocations and Careless Valuation Practices Result in Nearly $4 Million in Fines and Disgorgement for BDC Adviser

Expense allocation and valuation practices of private fund managers remain hot-button issues for the SEC because they directly affect fund investors. In a recent settlement, the SEC claimed that a registered investment adviser that served as adviser to two business development companies (BDCs) improperly allocated rent, employee salaries and other overhead expenses to those companies and overvalued certain of their assets, all as a result of deficient policies and procedures. Although the settlement concerns a BDC adviser, it serves as a valuable lesson for private fund advisers, which must also adopt and implement clear expense allocation and valuation policies and practices and adhere to them scrupulously. This article analyzes the order. See “OCIE Risk Alert Warns of Six Most Frequent Fee and Expense Compliance Issues” (May 3, 2018).

What Remedies and Relief Can Fund Managers Expect in SEC Enforcement Actions?

Steven Peikin, Co-Director of the SEC Division of Enforcement (Division), recently delivered a speech outlining the various remedies recommended by the Division, including undertakings, industry bars, penalties and disgorgement. Peikin’s remarks offer fund managers valuable insight into the SEC’s thought process behind various penalties and remedies, along with the circumstances under which the regulator may seek each form of relief. This article summarizes the key points of Peikin’s speech most relevant to fund managers. For more from SEC officials, see “Despite Headwinds, Enforcement Remains Strong, Notes Co-Director of SEC Enforcement Division” (Sep. 27, 2018); “SEC Chair Offers Observations on Culture at Fund Managers and the SEC” (Jun. 28, 2018); and “The Power of ‘No’: SEC Commissioner Peirce on Enforcement As Last Resort” (Jun. 21, 2018).

Adam Gale to Co-Lead BakerHostetler’s New Investment Funds Team

BakerHostetler has launched an investment funds team with Adam Gale as its co-leader. Gale counsels U.S. and international hedge funds; private equity funds; real estate funds; venture capital funds; and funds of funds on their formation, structuring and operation. In addition, he represents institutional investors on regulatory and compliance matters, as well as broker-dealers on a variety of market regulations. Gale has also advised on initial coin offerings and formed a number of startup cryptocurrency funds. For additional commentary from Gale, see “How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated With the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?” (Mar. 7, 2013).

Experienced In-House Exchange Lawyer Joins Perkins Coie in New York

Kari Larsen has joined Perkins Coie’s New York office as partner in the firm’s investment management practice, as well as in its blockchain technology and digital currency industry group. Larsen began her career at the CFTC’s Division of Enforcement before moving into the private sector, where she held various in-house positions, including serving as general counsel at several exchange companies. In addition, she has substantial blockchain and digital currency regulatory and transactional expertise. For coverage of another recent hire at the firm, see “Perkins Coie Expands Investment Management Practice With Addition of Former SEC Branch Chief” (Dec. 13, 2018).

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