Mar. 11, 2021

Making the Most of a Contractual Advice‑of‑Counsel Defense

When a situation arises in which an investment manager’s conduct or decision making could be subject to question – including in litigation or a regulatory investigation – the investment manager may seek outside advice from legal counsel, accountants and other professionals. In addition to the obvious benefits of that advice when determining the appropriate course of action, an investment manager also may wish to put itself in a position to take advantage of a provision routinely found in various fund documents that provides for exculpation or other limitation of liability for the manager (and sometimes others) if it consults with and acts pursuant to the advice of those outside professionals. Such a provision, however, will provide a defense to liability only when all applicable contractual and legal requirements are met; compliance with the requirements is documented and disclosed; and the defense is timely asserted. In a guest article, Anne E. Beaumont, partner at Friedman Kaplan Seiler & Adelman, highlights typical requirements of so-called “advice-of-counsel” provisions, as well as other legal requirements that frequently apply, and suggests measures for investment managers to consider to obtain maximum possible protection from a contractual advice-of-counsel defense. For additional insights from Beaumont, see “How Advisers Can Prepare for OCIE Exams on the Transition From LIBOR” (Jul. 9, 2020); “Key Considerations for Private Fund Investors Navigating the Coronavirus Crisis” (Apr. 23, 2020); and “Does the Digital Realty Decision Represent a Sea Change for Whistleblowers or Merely More of the Same?” (Mar. 15, 2018).

How CCOs Can Avoid Personal Liability for Organizations’ Compliance Failures

As the role of CCO becomes more essential at hedge fund managers, CCOs may draw unwelcome regulatory scrutiny and, in certain cases, face personal liability for their organizations’ compliance failures. Despite the SEC’s best efforts to clarify the contexts in which that liability can exist, uncertainty still remains. In light of that, it can be helpful to survey the agency’s enforcement efforts involving CCOs across the landscape to develop a clearer picture of when fund manager CCOs could experience personal liability. That topic was addressed at a recent seminar hosted by the Society of Corporate Compliance & Ethics featuring Jones Day attorneys David A. Applebaum and Arielle S. Tobin, as well as Michael Henry, senior compliance counsel at Boston Energy Trading and Marketing. This article reviews key takeaways from the panel, including regulators’ perspectives on CCO liability; recent enforcement actions in which CCOs were held personally liable; the facts and circumstances that gave rise to personal liability; and best practices for CCOs to avoid liability. See “NYC Bar Report on CCO Liability Calls for More Regulatory Guidance, Transparency and Cooperation” (Mar. 5, 2020).

Troutman Pepper Attorneys Examine SEC Enforcement Trends

A recent Troutman Pepper seminar reviewed the current SEC enforcement environment focusing on pandemic-related concerns; the Dodd-Frank whistleblower program; notable enforcement actions concerning advisory committees; performance advertising and marketing; fees and expenses; conflicts of interest; insider trading and digital assets; and the evolution of the law pertaining to disgorgement. The program featured Troutman Pepper partners Jay A. Dubow, Gregory J. Nowak and Ghillaine A. Reid, along with associate Ausra Ragauskaite. This article distills their insights. For coverage of another recent Troutman Pepper program, see “A Refresher on Custody and What to Expect on Surprise Custody Exams” (Feb. 18, 2021).

SEC Fines and Bars CCO From the Funds Industry for Compliance Failures and Deceiving Examiners

The SEC recently settled enforcement proceedings against a fund manager and its CCO for failing to implement written policies and procedures the firm adopted to address deficiencies in its supervisory system that were detected during a FINRA investigation. The CCO subsequently altered documents provided to the SEC during an examination to give the misleading appearance that the compliance procedures had been followed. The SEC is generally reluctant to deter qualified people from taking on the role of CCO, and it is unusual for CCOs to be charged personally for compliance failures. Nonetheless, the enforcement action against the CCO shows that the SEC is willing to hold CCOs personally liable when appropriate, while also offering a broader lesson for private funds and their CCOs. This article summarizes the SEC’s cease-and-desist order and its key takeaways, while also providing insights from attorneys about the most relevant aspects of the order for fund managers. For coverage of another SEC action against a fund CCO, see “Absence of Harm No Defense Against Conflicts of Interest: SEC Issues Lifetime Bar From Compliance Work to CCO” (Sep. 13, 2018).

FINRA Annual Report Highlights Exam Findings and Risk Monitoring Results

FINRA recently released its fourth annual examination findings report (Report), which now also covers the matters it used to address in a separate Risk Monitoring and Examination Program Priorities Letter. As in prior iterations, the Report covers four broad categories of its supervisory activities: firm operations; communications and sales; market integrity; and financial management. For each topic, the Report summarizes the relevant FINRA rules and rules under the Securities Exchange Act of 1934, and it lists related considerations, relevant examination findings and associated effective practices. This article outlines FINRA’s principal findings and recommendations. For coverage of prior FINRA reports, see “FINRA Outlines Its 2020 Risk Monitoring and Exam Priorities” (Mar. 12, 2020); “FINRA Exam Findings Report Covers Four Aspects of Its Supervisory Activities” (Jan. 30, 2020); and “FINRA Report Highlights Common Broker-Dealer Compliance Shortcomings” (Jan. 24, 2019).