Feb. 20, 2020

The Accredited Investor Definition: Key Takeaways for Private Fund Managers (Part Two of Two)

Accredited investors are assumed to be financially sophisticated enough to understand the risks inherent in investing in private offerings, such as hedge funds, and thus, to not need the same protections under the securities laws as “retail” or less sophisticated investors. The problem is that the definition of “accredited investor” is outdated and tied to income and wealth thresholds that arguably do not actually reflect financial acumen. To address some of those issues, the SEC recently published proposed changes to the definition of accredited investor (Proposal) and is accepting comments on those changes through mid‑March. This two-part series examines the proposed amendments to the accredited investor definition and their implications in the private-funds context. This second article discusses the key takeaways from the Proposal for private fund managers. The first article reviewed the key proposed amendments to this important definition and examined the views of the SEC commissioners on the Proposal. For more on the SEC’s efforts to update securities regulation, see our two-part series: “SEC Chair Reviews Efforts to Modernize Regulatory Framework”: Part One (Jan. 30, 2020); and Part Two (Feb. 6, 2020).

SEC and CFTC Impose Stiff Penalties on Adviser for Failing to Follow Disclosed Risk Management Policies

The SEC and the CFTC both recently announced enforcement actions and settlements, as well as civil suits, arising out of more than $500 million in losses suffered three years earlier by a mutual fund. The regulators jointly imposed various penalties on the fund’s adviser and its CEO. In addition, both regulators filed civil lawsuits against one of the adviser’s senior portfolio managers in federal court. This article explores the circumstances underlying the SEC and CFTC actions against the adviser and the CEO and distills the lessons that fund managers can learn from them. For another enforcement action involving a mutual fund manager, see “Transamerica Entities Fined $97.6 Million for Use of Faulty Quantitative Investment Models and Misleading Disclosures Regarding Quant Mutual Funds” (Oct. 4, 2018).

FCA and Bank of England Proposals Embrace Data‑Driven Regulation

The missions of the U.K. Financial Conduct Authority (FCA) and Bank of England (BoE) include maintaining monetary and financial stability; market integrity; competition; and consumer protection, according to a press release announcing the FCA’s new data strategy (Data Strategy), BoE’s discussion paper (Discussion Paper) on potential reforms to data collection and a report on phase 2 of a digital regulatory reporting (DRR) pilot program (DRR Report). The FCA’s data-driven approach to regulation allows it to anticipate harms before they crystallize; better understand the effect on consumers of changing business models; and regulate an increasing number of firms efficiently and effectively, noted Christopher Woolard, FCA Executive Director of Strategy and Competition, in the announcement. This article analyzes the key takeaways from the Data Strategy, Discussion Paper and DRR Report, all of which comprise part of a long-term plan to transform the way U.K. regulators implement regulations and collect data. Going forward, the FCA and BoE have committed to cooperate in the development of common data standards; consider the legal implications of embodying regulations in computer code; review the technical solutions needed to facilitate DRR; and continue to collaborate with industry. For coverage of other recent FCA initiatives, see “A Roadmap for Compliance With the U.K.’s Senior Managers and Certification Regime” (Sep. 12, 2019); and “FCA Issues Final Rules on Disclosure Concerning Use of Benchmarks and Guidance on Descriptions of Fund Objectives” (Jun. 6, 2019).

CFTC’s DSIO Issues Guidance for CCOs on Futures and Swap Dealer Annual Compliance Reports

CFTC Regulation 3.3 under the Commodity Exchange Act requires futures commission merchants, swap dealers and major swap participants (collectively, Registrants) to designate a qualified chief compliance officer (CCO), who must then prepare an annual compliance report (Report). The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) reviewed the Reports that CCOs submitted for the 2018 fiscal year and determined that it would be helpful to provide additional guidance to Registrants on the preparation of those Reports. Thus, the DSIO recently issued an advisory (Advisory) highlighting common deficiencies the staff identified in its review and providing recommendations for compliance with the requirements for the Reports. The Advisory does not address all aspects of the Report but “seeks to address those areas that present common and consistent challenges to a large proportion of Registrants.” This article highlights the key takeaways from the Advisory. For more on the Report requirements, see “CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants” (Apr. 9, 2015); and “CFTC Issues Guidance for Completing Annual CCO Reports of Swaps and Futures Firms” (Jan. 8, 2015).

SEC Commissioner Peirce Discusses Enforcement Efforts and Reforms

In a recent speech, SEC Commissioner Hester M. Peirce expressed the importance of looking beyond the efforts of the SEC’s Division of Enforcement (Enforcement Division) and exploring other ways the Commission can effectively regulate the private funds industry. Peirce’s remarks were made concurrently with the release by the Enforcement Division of its third Annual Report covering its accomplishments in fiscal year 2019. See “SEC Annual Report Details Robust Enforcement Efforts, With Continuing Focus on Retail Investors and Cyber Matters” (Jan. 9, 2020). This article summarizes Peirce’s stance toward enforcement as a form of private fund industry oversight and details some of the other reforms – such as modernizing the treatment of cryptocurrencies and the marketing rules – that she perceives as necessary for effective regulation. For more from Peirce, see our two-part series covering the Hedge Fund Law Report’s recent “fireside chat” with the Commissioner: “Fiduciary Duty, Accredited Investor Standard and CCO Liability” (Nov. 21, 2019); and “Rule Updates, Technological Change, Role of Enforcement and Hot-Button Issues” (Dec. 5, 2019).