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    Jan. 30, 2020

Former CFTC Chairman J. Christopher Giancarlo Discusses Accomplishments, Relationships With Other Regulators and the CFTC’s Approach to Rulemaking (Part One of Two)

J. Christopher Giancarlo was sworn in as a CFTC Commissioner on June 16, 2014, and later served as Chair until the end of his five-year term in July 2019. As Chair, he oversaw regulation of the futures, options and swaps derivatives markets, focusing on regulatory guidance for emerging technologies, such as blockchain and cryptocurrencies. For example, Giancarlo oversaw the first bitcoin futures products entering the marketplace and applied a “do-no-harm” regulatory approach toward blockchain technology. As of January 13, 2020, Giancarlo joined Willkie Farr & Gallagher as senior counsel in New York, and the Hedge Fund Law Report recently spoke to him in connection with that new position. In this first article in our two‑part series, Giancarlo discusses his post‑CFTC plans; his accomplishments at the CFTC; the relationship between the CFTC and the SEC; harmonization with the SEC and foreign regulators; and the CFTC’s approach to rulemaking. The second article will cover Giancarlo’s views on technology, including cryptocurrency and blockchain; the launch of LabCFTC and Project KISS; and the release of the CFTC’s enforcement manual. For coverage of Giancarlo while he was at the CFTC, see “CFTC Chair Calls for Reset on Cross-Border Swaps Regulation” (Nov. 29, 2018); “Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators” (Feb. 8, 2018); and “Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform” (Nov. 9, 2017).

Fund Managers Must Evaluate Their Claims Policies to Avoid Breaching Fiduciary Duty

In mid‑2019, the SEC released an Interpretation Regarding Standard of Conduct for Investment Advisers (Interpretation) that, among other things, specified that an investment adviser’s fiduciary duty applies to the entire adviser-client relationship. One aspect of that relationship that is sometimes overlooked is advice concerning clients’ claims against issuers of securities and other culpable parties (Claims). Those Claims, which are in essence putative assets within the client’s portfolio, often allege violations of the antifraud provisions of federal securities laws. In a guest article, Scott Pomfret, founder of Regulatory Counsel LLC, analyzes Claims in the context of the Interpretation and the SEC’s Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers and offers recommendations to investment advisers for examining their policies and procedures concerning Claims to avoid potential violations of the adviser’s fiduciary duty to ensure clients are pursuing – or at least aware of – opportunities to convert a putative asset into a tangible one. For more on navigating the Interpretation, see our three-part series: “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).

SEC Chair Reviews Efforts to Modernize Regulatory Framework (Part One of Two)

SEC Chair Jay Clayton recently discussed the SEC’s actions over the preceding year, including its “organic and transparent” approach to agenda setting; progress with respect to the SEC’s Fall 2018 Regulatory Flexibility (Reg Flex) Agenda and a preview of the recently released Fall 2019 Reg Flex Agenda; and the agency’s use of modernization as an effective policy-making lens. This two-part series provides the highlights from Clayton’s speech. This article explores Clayton’s discussion of the SEC’s rulemaking agenda and summarizes the items on the Fall 2019 Reg Flex short-term and long-term agendas of particular interest to private fund managers. The second article will outline the SEC’s engagement agenda with a particular focus on market monitoring; discuss how the SEC’s mission, market realities, statutory constructs and other factors inform its efforts; and examine the relationship between the SEC’s scope of authority, actions and independence. For coverage of other speeches by Clayton, see “SEC Chair Defends Regulation Best Interest and Investment Adviser Fiduciary Duty” (Sep. 19, 2019); and “Observations on Culture at Fund Managers and the SEC” (Jun. 28, 2018).

FINRA Exam Findings Report Covers Four Aspects of Its Supervisory Activities

In each of the past two years, FINRA has issued a report highlighting the shortcomings it identified in its examinations of broker-dealers and recommending effective practices to ensure compliance with applicable regulations. FINRA recently released its third annual examination findings report, which covers four broad categories of its supervisory activities: sales practices and supervision; firm operations, including cybersecurity, business continuity plans and best execution; market integrity; and financial management. This article summarizes FINRA’s key findings. For coverage of FINRA’s 2018 exam findings report, see “FINRA Report Highlights Common Broker-Dealer Compliance Shortcomings” (Jan. 24, 2019).

Fund Managers May Be Liable for Incorrect Fee Calculations, Regardless of Intent

Private fund managers’ handling of fees and expenses, as well as valuation practices, have been a top priority in SEC exams over recent years. Inadvertently using an incorrect formula to calculate management fees, or inputting inaccurate variables into that formula, can result in overpayments to the general partner and violations of the Investment Advisers Act of 1940 (Advisers Act), regardless of a manager’s knowledge or intent. See “ACA 2019 Hedge Fund Survey Examines SEC Exam Experience, Codes of Ethics, Electronic Communications and Expense Allocations (Part One of Two)” (Aug. 8, 2019). The SEC recently initiated enforcement proceedings against a manager for miscalculating the management fee it charged its private equity fund, emphasizing that scienter was not a necessary element of the relevant provisions of the Advisers Act. This article analyzes the SEC cease-and-desist order and provides relevant takeaways for hedge fund managers, who have also been targeted by the SEC for improper fee calculations. For coverage of similar SEC actions, see “Recent SEC Settlement Reminds Fund Managers to Strictly Adhere to Disclosed Fee and Expense Calculation Methodologies and Fully Disclose Conflicts of Interest” (Nov. 16, 2017); and “Adhering to Disclosed Fee and Valuation Methodologies Is Crucial for Hedge Fund Managers to Avert Enforcement Action” (Jan. 28, 2016).

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