Jan. 24, 2019

What a Recent SEC Opinion on a FINRA Disciplinary Action Says About CCO and CEO Liability (Part One of Two)

The SEC recently issued an opinion upholding a FINRA disciplinary action that found that the chief compliance officer (CCO) of a broker-dealer failed to establish a reasonable supervisory system for the review of electronic correspondence; reasonably review electronic correspondence; and report a relationship with a statutorily disqualified person. This first article in our two-part series analyzes FINRA’s disciplinary action against the CCO and explores what the SEC’s opinion says about personal liability for CCOs and CEOs, among other things. The second article will examine the key takeaways from this case, including implications for personal liability for fund manager CCOs and CEOs. For other cases involving CCO liability, see “Absence of Harm No Defense Against Conflicts of Interest: SEC Issues Lifetime Bar From Compliance Work to CCO” (Sep. 13, 2018); “SEC Settlement Highlights Circumstances in Which Hedge Fund Managers Must Disclose Conflicts of Interest” (Apr. 23, 2015); and “SEC Charges Two Houston-Based Advisory Firms, Including a Hedge Fund Manager, With Principal Transaction, Custody Rule, Compliance Rule and Code of Ethics Violations” (Jan. 30, 2014).

Compliance Corner Q1–2019: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

A new year has begun, and for most hedge fund managers that means the deadline to file the annual updating amendment to Form ADV – a key disclosure document required from SEC-registered investment advisers – is fast-approaching. This seventh installment of the Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anne Wallace, director and consultant, respectively, at ACA Compliance Group, provides tips for fund managers to ensure a smooth process for completing the annual updating amendments to their Forms ADV; highlights upcoming filing deadlines and reporting requirements of which fund managers should be aware during the first quarter; provides a regulatory update to managers investing in digital assets; discusses certain consideration for advisers that engage in quantitative investment strategies; and analyzes the effect of the U.S. government shutdown on SEC-registered investment advisers. See our two-part series on the October 1, 2017, SEC revisions to Form ADV: “Managed Account Disclosure, Umbrella Registration and Outsourced CCOs” (Nov. 3, 2016); and “Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management” (Nov. 17, 2016).

Trends in the Use of Subscription Credit Facilities: Advantages for PE Investors and Sponsors Have Led to Adoption by Some Hedge Funds and Credit Funds (Part One of Two)

A recent webinar presented by the Hedge Fund Law Report examined key considerations and prevailing trends in the use of subscription credit facilities by private fund managers. The program was moderated by Rorie A. Norton, Editor at the Hedge Fund Law Report, and featured Thomas Draper, partner at Foley Hoag, and Michael C. Mascia, partner at Cadwalader. This article, the first in a two-part series, covers the portions of the program that addressed the logistical and economic benefits fueling the rise in popularity of subscription credit facilities; investor concerns about the facility and how the market has responded; and recent efforts by other types of private funds to adopt the facility. The second article will highlight considerations when structuring the facility and negotiating with lenders, as well as important provisions to address in fund partnership agreements and side letters to facilitate a fund’s adoption of a facility. For additional commentary from Draper, see “New Foley Hoag Partner Discusses Trends in the Use of Capital Call Facilities Across the Private Funds Industry” (Nov. 1, 2018).

U.S. District Court Rules That Digital Tokens in Initial Coin Offerings May Not Constitute Securities

At the SEC’s request, the U.S. District Court for the Southern District of California (Court) recently issued a temporary restraining order stopping an allegedly fraudulent initial coin offering (ICO). The SEC complaint alleged that, to give legitimacy to the ICO, the defendants created a bogus self-regulatory agency modeled on the SEC; falsely claimed that the offering was approved by the SEC and exempt from registration; and engaged in other misleading conduct. Following a hearing, the Court recently denied the SEC’s motion for a preliminary injunction. This article analyzes the Court’s order denying the motion. For more on SEC enforcement efforts in the digital currency space, see “SEC Enforcement Division Annual Report Emphasizes Continuing Focus on Retail Investors, Individual Accountability, Cyber Misconduct and Digital Assets” (Dec. 6, 2018); “Unregistered Crypto Fund Hit With Multiple Securities Laws Violations by SEC” (Oct. 18, 2018); and “SEC Cyber Unit Files Charges Against Allegedly Fraudulent ICO” (Jan. 11, 2018).

FINRA Report Highlights Common Broker-Dealer Compliance Shortcomings

Broker-dealer examinations are an essential tool used by FINRA to accomplish its mission of protecting investors and promoting market integrity. FINRA recently issued a report detailing the compliance issues that it commonly encounters in its examinations of its members. In an effort to assist broker-dealer firms in strengthening their compliance programs and supervisory controls, the report identifies the issues that FINRA believes have the most frequent and significant impact on investors and markets. It also highlights effective compliance practices that firms have adopted. This article highlights the key findings of the report. See “FINRA Outlines Its Regulatory and Examination Priorities for 2018” (Feb. 8, 2018). See also our three-part series on the duty to supervise: “Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers” (Sep. 6, 2018); “Conduct Proper Trade and Electronic Communications Surveillance” (Sep. 13, 2018); and “Respond to Red Flags; Implement Reasonable Policies and Procedures; and Conduct Adequate Training” (Sep. 20, 2018).

FCA Executive Director Emphasizes Need for Fund Managers to Promote Diversity

Diversity is increasingly being recognized as commercially imperative for firms, including fund managers, according to Christopher Woolard, Executive Director of Strategy and Competition at the U.K. Financial Conduct Authority (FCA). In a recent speech, Woolard focused on the need for fund managers and other regulated entities to focus on diversity. He also explained that the FCA extrapolates its assessment of a firm’s culture from that firm’s approach to diversity and inclusion. In addition, the way a firm handles misconduct such as sexual harassment is potentially just as relevant to the regulator as is the firm’s handling of insider trading or other misconduct. Woolard’s speech provides valuable insight to fund managers about the FCA’s expectations regarding diversity and sends a clear message to the industry: “non-financial misconduct is misconduct, plain and simple.” This article summarizes the key points from his remarks. See our four-part series on diversity: “Why Equal Representation Within Fund Managers Is Essential” (Oct. 4, 2018); “Ways Fund Managers Can Promote Diversity and Inclusion” (Oct. 11, 2018); “What Implicit Biases Are and Whether Interventions Are Effective” (Oct. 18, 2018); and “How Constrained Decision Making, Along With Legal and Compliance Leadership, Can Help Reduce Fund Manager Bias” (Nov. 1, 2018).

Former Co-Chief of the SEC’s Asset Management Unit Joins Dechert’s Washington, D.C., Office

Anthony S. Kelly, former Co‑Chief of the Enforcement Division’s Asset Management Unit at the SEC, has joined Dechert as a partner in Washington, D.C. Drawing on his experience at the SEC, Kelly will focus his practice on investigations and securities litigation, with an emphasis on matters concerning the asset management industry. For statements by Kelly while he was at the SEC, see “How Investment Managers Can Advertise Sub-Adviser Performance Without Violating SEC Rules” (Dec. 1, 2016); “SEC Settlements Highlight Need for Managers to Verify Performance Claims of Others Prior to Use” (Sep. 22, 2016); “Proper Disclosure of Fee and Expense Allocations Is Crucial for Managers to Avoid SEC Enforcement Action” (Sep. 1, 2016); and “SEC Division Heads Enumerate Enforcement Priorities, Including Conflicts of Interest, Valuation, Performance Advertising and CCO Liability (Part Two of Two)” (May 5, 2016).