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    Jul. 11, 2019

How Fund Managers Can Prepare for the Latest SEC Cyber Sweeps

The SEC’s Office of Compliance Inspections and Examinations has announced two new sets of cyber sweeps. This time around, the regulator’s standards have risen, the inquiries will be more rigorous and the examiners are bringing more technical expertise. By now, the SEC expects that fund managers have invested resources, technology or human capital to align their programs with SEC expectations. To assist fund managers with responding effectively, this article reviews the current and past cyber sweeps and provides advice on how to prepare for a cyber-focused examination. See our three-part series on how fund managers should structure their cybersecurity programs: “Background and Best Practices” (Mar. 22, 2018); “CISO Hiring, Governance Structures and the Role of the CCO” (Apr. 5, 2018); and “Stakeholder Communication, Outsourcing, Co-Sourcing and Managing Third Parties” (Apr. 12, 2018).

Implications for Investment Managers of the New E.U. Investment Firm Prudential Regime

The European Parliament recently voted in its plenary session to adopt the text agreed by the European Commission, the European Parliament and the Council of the E.U. on a new legislative package revising the prudential framework for E.U. investment firms. Investment managers based in the E.U. will need to consider this new legislative package given its implications for not only the level of regulatory capital that those managers would be required to hold, but also for the restrictions on the ways in which those managers could pay their employees and the remuneration disclosures they would be required to make. In a guest article, Leonard Ng and Chris Poon, partner and senior associate, respectively, at Sidley Austin, explore the implications of the legislative overhaul of the prudential framework for E.U. investment firms, particularly with respect to E.U. investment managers. For coverage of the proposed overhaul of the prudential framework, see “What Are the Implications for Investment Managers of the Revised Prudential Framework for E.U. Investment Firms?” (Mar. 22, 2018). For additional insight from Ng, see our two-part series “A Fund Manager’s Guide to the Initial Margin Rules for Uncleared Swaps”: Part One (Sep. 27, 2018); and Part Two (Oct. 4, 2018).

NFA Sanctions CPO and Principal for Performance Advertising Violations

The SEC has focused on investment advisers’ misuse of performance information in marketing materials for quite some time. For example, the SEC previously settled charges with a robo‑adviser that failed to maintain documentation supporting the claimed returns in its marketing materials and included in those materials false or misleading information on its returns. See “SEC Settles First Two Enforcement Actions Against Robo-Advisers” (Feb. 14, 2019). The SEC, however, is not the only regulator with an interest in deceptive performance advertising. The NFA recently announced a decision by the Hearing Panel (Panel), which found that a registered commodity pool operator (CPO) and its principal and associated person used misleading and deceptive promotional material that included unsubstantiated positive performance information and presented hypothetical information as if it were actual performance. The Panel also found that the CPO failed to prepare and distribute required monthly account statements. This article examines the promotional material-related violations in the enforcement action and highlights the key takeaways from the decision for CPOs according to a former CFTC attorney. For more on advertising, see “How Investment Advisers Can Mitigate Common Advertising Risks” (Jul. 19, 2018); and our three-part advertising compliance series: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

Recent SEC Action Shows That Even Undervaluing Fund Assets Can Draw Significant Penalties

Valuation of illiquid assets is one of the most perilous aspects of fund management and a perennial subject of SEC scrutiny. The SEC routinely penalizes managers that improperly overvalue their funds’ assets in order to boost their performance and the associated fees that they collect. In an unusual twist, the SEC recently took action against an investment adviser and one of its principals for deficient policies and procedures that allegedly resulted in the undervaluation of many of the bonds in a fund’s portfolio. This article analyzes the alleged compliance deficiencies and the terms of the settlement order. The settlement highlights the importance of having finely tuned valuation policies and procedures, as well as the risk of enforcement action for violating those procedures, even in the absence of an allegation of harm to investors. See our two-part primer on compliance issues for credit strategies: “Key Credit Concepts and Risks in Credit Investing” (Apr. 4, 2019); and “Additional Risks in Credit Investing” (Apr. 11, 2019).

Establishing and Marketing Private Funds in the E.U. Under AIFMD: Jurisdiction; AIFs and AIFMs; Private Placements; and Reverse Solicitation (Part Two of Two)

A recent Carne Group program provided an overview of establishing and marketing private funds in the E.U. under the Alternative Investment Fund Managers Directive (AIFMD), a regime that U.S. managers adhere to in order to freely market across the E.U. The program featured Ajay Pathak and Glynn Barwick, partner and counsel, respectively, at Goodwin Procter; Edwin Chan, senior vice president at Northern Trust; and Aymeric Lechartier, managing director at Carne Group. This article, the second in a two-part series, compares Ireland and Luxembourg as private fund venues; outlines the costs and logistics of establishing an E.U. fund; addresses whether to hire a third-party E.U. fund manager; and reviews the current state of private placements and “reverse solicitation” in the E.U. The first article evaluated the key provisions of AIFMD. See “Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe” (Mar. 9, 2017).

John D. Reiss Is Newest Member of DLA Piper’s Finance Practice

DLA Piper’s New York office has expanded with the addition of John D. Reiss to the firm’s finance practice as a partner. Reiss advises fund managers on all aspects of private fund formation and the establishment of managed accounts, as well as regulatory and compliance matters; management company structuring; and general governance issues. For insights from other DLA Piper attorneys, see “SEC Urges Advisers Relying Upon Unibanco No-Action Letters to Submit Certain Documentation” (Apr. 20, 2017); and “DLA Piper Compliance Survey Offers Perspectives to Hedge Fund Managers on CCO Liability and Compliance Program Benchmarks” (May 26, 2016).

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