Dec. 19, 2019

The Custody Rule: Robert Plaze Discusses the Rule’s History and Possible Amendments (Part One of Two)

Robert Plaze, partner at Proskauer, was a member of the SEC’s Division of Investment Management for nearly 30 years, rising to Deputy Director before leaving the agency in 2012. In addition to being instrumental in the creation of the regulatory regime for investment advisers, Plaze played a critical role in the development of the 2003 and 2009 amendments to Rule 206(4)‑2 under the Investment Advisers Act of 1940, the so-called “Custody Rule.” Thus, it is fitting that Plaze recently authored an outline covering the Custody Rule’s history; key requirements; critical definitions; operation; special circumstances; and Form ADV. The Hedge Fund Law Report recently spoke to Plaze in connection with the release of that outline. This first article in our two‑part series explores the history of the Custody Rule, including the 2003 and 2009 amendments, as well as Plaze’s view on possible future amendments to the rule. The second article will outline the challenges of complying with the Custody Rule; common custody violations, including inadvertent custody and lack of auditor independence; and Plaze’s tips for complying with the rule. For additional insights from Plaze, see “Commissioner Gallagher’s Dissent in SEC Enforcement Action Against Hedge Fund Manager Misses the Mark” (Jul. 30, 2015).

What the SEC’s Proposed Amendments to the Cash Solicitation Rule Mean for Private Fund Advisers

The SEC recently proposed to modernize two marketing rules under the Investment Advisers Act of 1940 that apply to registered investment advisers: Rule 206(4)‑1 (the advertising rule) and Rule 206(4)‑3 (the Cash Solicitation Rule). Among other changes, if the proposed amendments to the Cash Solicitation Rule (the Proposed Solicitation Rule) are adopted, non-cash compensation would also be covered by the rule. In a guest article, Fried Frank partner Stacey Song analyzes the SEC’s proposed changes to the Cash Solicitation Rule, including the Proposed Solicitation Rule’s application to solicitation of private fund investors; how those changes might affect private fund advisers if the SEC adopts them; and certain considerations and requests for comment applicable to private fund advisers that are included in the SEC’s proposing release. For a look at one element of the proposed changes to the advertising rule, see “SEC Proposes Expanding Permissible Performance Advertising Practices With Favorable Treatment for Private Fund Managers” (Dec. 5, 2019). For additional commentary from Song, see “Lessons on Adviser Marketing From Recent Examinations and Enforcement Proceedings” (Mar. 28, 2019); and our two-part series analyzing the SEC’s risk alert on electronic messaging: “A Review of Best Practices” (Feb. 7, 2019); and “Four Key Steps Advisers Should Take” (Feb. 14, 2019).

SEC Enforcement Action Takes Aim at Adviser’s Wells Submission

The SEC recently filed a civil complaint (Complaint) against a dually registered investment adviser and broker-dealer in the U.S. District Court for the District of Massachusetts, alleging that the firm had engaged in principal transactions with clients without providing the appropriate pre-trading disclosures and obtaining the requisite consent; made materially misleading disclosures about its mutual fund share class selection practices, including its conflicts of interest; and failed to adopt policies and procedures reasonably designed to prevent those violations. Although the charges are similar to those in countless other enforcement actions arising out of undisclosed conflicts of interest, the action is notable because the SEC took very public aim at the adviser’s Wells submission, which, among other deficiencies, allegedly “failed to acknowledge the wrongfulness of its conduct.” Thus, the action could have implications for how advisers advocate for themselves in the Wells process. This article details the allegations set forth in the Complaint and the Complaint’s invocation of the adviser’s Wells submission, with insight on the possible implications from a former SEC official. See our three-part series on the Wells process: “Origin and Key Elements” (Jun. 13, 2019); “SEC Enforcement Staff Views of the Process” (Jun. 20, 2019); and “The Pre‑Wells Process Versus the Post‑Wells Process” (Jun. 27, 2019).

Present and Former SEC Attorneys and Defense Counsel Discuss Cyber Disclosure and Enforcement

At the recent Securities Enforcement Forum 2019, a panel that included several present and former SEC attorneys and defense counsel discussed the SEC’s Cyber Unit; the available guidance on cybersecurity disclosures; the challenges involved in deciding when to disclose a cyber incident, with lessons from recent enforcement actions; and the additional challenges that arise when multiple agencies are involved. This article reviews the key takeaways from the panel to give fund managers insight into the SEC’s cybersecurity priorities and expectations. Dixie Johnson, partner at King & Spalding, moderated the panel, which featured Robert A. Cohen, partner at Davis Polk & Wardwell and former Chief of the SEC’s Cyber Unit; Doug Davison, partner at Linklaters and former Counsel to former SEC Chair Arthur Levitt; Gerald Hodgkins, partner at Covington & Burling and former Associate Director of the SEC Division of Enforcement; and Carolyn M. Welshhans, Associate Director of the Division of Enforcement and acting Chief of its Cyber Unit. For coverage of another panel from the Securities Enforcement Forum 2019, see “Retail Investors, CAT Implementation, Enforcement Issues, Reg BI and SRO Oversight” (Dec. 12, 2019).

EY 2019 Survey Explores Growing Importance of Talent Management, Diversity and Inclusion; Use of Technology, Big Data and AI; and Cybersecurity (Part Two of Two)

EY recently published its 13th annual Global Alternative Fund Survey, which looks at broad trends in the alternative investment industry, including ever-shifting allocation preferences, growth prospects, talent management and the impact of technology. The survey juxtaposes the perspectives of hedge fund and private equity (PE) managers, on the one hand, with those of their investors, on the other. It also compares how hedge fund managers and PE managers address key issues. This two-part series presents EY’s key findings, along with additional commentary from one of the survey’s authors. This second article explores talent management; diversity and inclusion; use of technology, big data and artificial intelligence; cybersecurity; and potential industry disruptors. The first article highlighted allocation preferences; investor and manager business priorities; and asset growth, including non-traditional hedge fund products, separately managed accounts and responsible investing. See also our coverage of EY’s 2014 Survey; 2013 Survey; 2012 Survey; and 2011 Survey.

Former SEC, State and Banking Regulator Robert M. Kurucza Joins Seward & Kissel

Seward & Kissel announced that Robert M. Kurucza has joined the firm as a partner in the investment management group. Based in the firm’s Washington, D.C., office, Kurucza represents a diverse group of financial services companies, including asset management firms, mutual fund complexes, banks, trust companies, private wealth management firms and securities firms. For additional commentary from another Seward & Kissel attorney, see our three‑part series on navigating the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers: “What It Means to Be a Fiduciary” (Oct. 17, 2019); “Six Tools to Systematically Identify Conflicts of Interest” (Oct. 24, 2019); and “Three Tools to Systematically Monitor Conflicts of Interest” (Nov. 7, 2019).