Jul. 16, 2020

Tailoring a Compliance Program: Why Fund Managers Should Customize (Part One of Three)

Rule 206(4)‑7 under the Investment Advisers Act of 1940 (Advisers Act) – the so‑called “compliance rule” – requires investment advisers to, among other things, adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the SEC’s rules. In other words, fund managers must have compliance programs. Moreover, those compliance programs must be specifically tailored to a manager’s business, including its strategy, structure and specific practices. Failing to customize the compliance program, such as by simply adopting an off-the-shelf program or manual, can result in deficiency letters and enforcement actions from regulators, as well as lost allocations from investors. This three-part series delves into the logistics of tailoring a fund manager’s compliance program. This first article outlines the expectations of the SEC, DOJ and investors as to the customization of compliance programs, as well as the consequences of failing to tailor those programs. The second article will lay out what fund managers should consider when tailoring their programs, including the role of off-the-shelf programs. The third article will identify five triggers for a review – and possible update – of a manager’s compliance program. See our two-part series on why fund managers must adequately support CCOs and compliance programs: “Recent Failures Lead to SEC Enforcement Action” (May 9, 2019); and “Six Valuable Lessons From Recent Enforcement Actions” (May 16, 2019).

Supreme Court Scales Back SEC’s Disgorgement Remedy in Liu v. SEC

The U.S. Supreme Court (Court) recently issued a long-awaited decision in Liu v. SEC, which limits the SEC’s ability to collect disgorgement from defendants in enforcement actions. For many defendants, the decision will not be much help; the limitations the Court imposed did not curb the SEC’s general authority to seek disgorgement of the proceeds of defendants’ fraudulent schemes. For other defendants – including investment advisers – ordered to pay disgorgement for discrete instances of wrongdoing within the larger context of lawful business operations, however, Liu will likely prove to be a boon. In a guest article, David Slovick, partner at Barnes & Thornburg and former senior official in the SEC’s Enforcement Division, reviews the Kokesh decision that preceded the Liu case, as well as the lower courts’ decisions in Liu and the Court’s recent ruling. The article also analyzes the implications of the Liu decision for investment advisers. For additional discussion of disgorgement as a remedy, see “Disgorgement Action Reveals Dangers of Having an Unqualified CCO” (Apr. 16, 2020).

Present and Former SEC Leaders Discuss the SEC’s Approach to Exams and Enforcement During the Coronavirus Pandemic (Part One of Two)

GAIM Ops Digital recently sponsored a program presented by Promontory Financial Group (Promontory), which offered an inside look at how the SEC’s Office of Compliance Inspections and Examinations (OCIE) and its Division of Enforcement (Enforcement) are adapting and operating during the ongoing coronavirus pandemic. Jane Jarcho, senior adviser at Promontory and former Deputy Director of OCIE, moderated the discussion, which featured Kristin Snyder, Co‑Deputy Director of OCIE, Co‑National Associate Director of the Investment Adviser/Investment Company Examination Program and Associate Regional Director of the San Francisco Examination Program; C. Dabney O’Riordan, Co‑Chief of Enforcement’s Asset Management Unit; and Sarah Curran, director at Promontory who held a variety of positions in OCIE over a 14‑year span. This two-part series distills the panelists’ insights. This first article focuses on guidance for private fund advisers, areas of focus in exams and best practices for CCOs. The second article will outline enforcement initiatives and pandemic-related enforcement risks. GAIM Ops will present panels at its upcoming conference taking place in Cayman and online from September 29 – October 2, 2020, where the above topics and others will be explored in greater detail. For additional information about the program, click here. To register for the conference, click here, using the promotional code available in this article for a 10‑percent discount. For additional commentary from Jarcho, see our two-part interview: “The Relationship Between OCIE and Enforcement” (Mar. 28, 2019); and “OCIE’s National Exam Program and Annual Priorities” (Apr. 4. 2019).

Despite End of Share Class Selection Disclosure Initiative, SEC Continues Pursuit of Violators

For the past two years, the SEC’s Share Class Selection Disclosure Initiative (SCSD Initiative) offered advisers that self-reported the opportunity to resolve SEC charges by paying disgorgement and interest to affected clients – but without paying a financial penalty. The SCSD Initiative has ended, but the SEC’s focus on the conflicts advisers face when recommending mutual fund share classes to clients has not. In two recent settlements, the SEC imposed stiff fines on advisers that allegedly made inadequate disclosures to clients about their share class selection practices. This article highlights the alleged compliance and disclosure failures and the terms of the settlement orders. For a look at an enforcement action against an adviser that failed to self-report, see “SEC Settles With 16 Additional Advisers Under SCSD Initiative, Severely Penalizes One That Did Not Self‑Report” (Nov. 21, 2019).

Symposium Examines the State of the Cryptocurrency Market (Part Two of Two)

A recent seminar presented by the CoinAlts Fund Symposium provided a comprehensive overview of the state of the cryptocurrency industry and the hurdles that market participants must overcome. The program featured Lewis Chong, partner at Harneys; Bart Mallon, partner at Cole‑Frieman & Mallon; Cynthia M. Pedersen, director at Cohen & Company; Matt Perona, chief operating officer and chief financial officer at Polychain Capital; and Matthew Stover and Seth Altman, respectively CEO and director at MG Stover & Co. This second article in a two-part series distilling the insights from the symposium discusses offshore legal and regulatory considerations, as well as summarizes the current state of the cryptocurrency market. The first article examined U.S. taxation of cryptocurrency and proposed U.S. legislation. For more from Cole‑Frieman & Mallon and Cohen & Company, see “Unique Security Risks Posed by Cryptocurrency Investing: Steps Fund Managers Must Take to Protect Individuals With Access to Client Assets” (Jun. 28, 2018).

HFLR Editors Outline Top Current and Anticipated Industry Trends

Robin L. Barton and William V. de Cordova, Hedge Fund Law Report Associate Editor and Editor‑in‑Chief, respectively, recently recorded the Hedge Fund Law Report’s Summer 2020 Executive Briefing. In under twenty minutes, Barton and de Cordova outline the top concerns of the hedge fund industry over the past quarter, as well as the issues that are expected to be top-of-mind for hedge fund GCs and CCOs – as well as regulators – over the coming months. To view a recording of their discussion, click here. For an audio-only version of the briefing, click here.