Sep. 30, 2021

Compliance Training: Who Conducts the Training and Five Traps to Avoid When Providing Training (Part Two of Two)

“A robust training program reflects a fund manager’s compliance culture and reduces its overall compliance risk,” said Victoria Hogan, president of NorthPoint Compliance and former SEC examiner. “Aside from that looking good during an SEC examination, firms should want staff to understand their compliance policies and procedures to reduce the risk of deficiencies and violations.” In short, simply complying with Rule 206(4)‑7 of the Investment Advisers Act of 1940 by adopting and implementing a compliance program is not enough – managers should also ensure their employees are properly trained on those policies and procedures. This second article in a two-part series discusses who conducts compliance training and identifies five traps to avoid when providing training. The first article explained the SEC’s expectations as to compliance training and provided three traps to avoid in terms of the substance of a fund manager’s training. See “Leveraging Policies and Culture: A Recipe for Success” (Jun. 3, 2021).

Former SEC Enforcement Director Discusses Her New Role and Changes to SEC Enforcement Approach (Part One of Two)

Stephanie Avakian served as Co‑Director of the SEC’s Division of Enforcement (Enforcement) from 2017 until August 2020, when Steven Peikin stepped down and she assumed full command of that Division. Under her leadership, Enforcement and the SEC brought more than 3,000 enforcement actions, obtained more than $17 billion in financial remedies, returned approximately $3.6 billion to harmed investors and paid approximately $595 million in whistleblower awards, according to the press release announcing her departure. In addition, under her guidance, Enforcement and its 1,400 attorneys brought actions involving material nonpublic information; fraudulent or unregistered initial coin offerings; and complex market manipulation. Avakian has rejoined WilmerHale as chair of its securities and financial services department, and the Hedge Fund Law Report recently spoke to her in connection with her move. In this first article in our two-part series, she delves into her role at the SEC, her new position and various ways Enforcement’s approach changed during her tenure. In the second article, Avakian will explore key risks faced by fund managers, Enforcement’s priorities and ways fund managers can avoid facing SEC enforcement action. For coverage of Avakian while she was at the SEC, see “Despite Headwinds, Enforcement Remains Strong” (Sep. 27, 2018); and our two-part series: “SEC Officials Flesh Out Cybersecurity Enforcement and Examination Priorities” (May 11, 2017); and “SEC Officials Discuss Cybersecurity Examination Priorities and Provide Guidance on When to Disclose Cyber Events” (May 18, 2017).

Fund Managers Must Ensure Adequate Security Measures Under Safeguards Rule or Risk SEC Enforcement Action

Cloud-based solutions can offer fund managers significant scalability, flexibility and remote accessibility. Nevertheless, advisers that move some or all of their information technology to the cloud remain subject to the same regulatory requirements applicable to traditional operations. To drive home that point, the SEC recently settled enforcement proceedings against three sets of advisory and brokerage firms in connection with breaches of their representatives’ cloud-based email systems that resulted in exposure of the personally identifiable information of thousands of clients. Each settlement order – which charges the respondents with violating the so-called “Safeguards Rule” under Regulation S‑P – focuses on the fact that none of the compromised email accounts was using multi-factor authentication at the time the account was hacked. This article details the events leading up to the enforcement actions, the alleged violations and the terms of the settlements, with key takeaways for fund managers from Jason Elmer, founder and CEO of Drawbridge Partners, and Elizabeth P. Gray, partner at Willkie Farr & Gallagher. See “FINRA Report Outlines Growing Adoption of Cloud Computing By Securities Industry and Associated Regulatory Concerns” (Sep. 23, 2021); and our two-part series “The Challenges and Benefits of Multi-Factor Authentication in the Financial Sector”: Part One (Nov. 2, 2017); and Part Two (Nov. 9, 2017).

SEC Sanctions Unregistered Fund Adviser for Regulation SHO Violations

One of the SEC’s core missions is to ensure fair, orderly and efficient markets. The SEC recently took aim at a fund adviser, along with one of its principals and one of its traders, for causing short sale and registration violations associated with a fund’s purchases and resales of securities from issuers. The SEC charged that a fund managed by the adviser told its executing brokers that certain sales of securities that the fund had contracted to acquire from issuers were “long” sales, even though the fund was not yet deemed to own those securities under Regulation SHO under the Securities Exchange Act of 1934. The brokers, in turn, violated Regulation SHO by improperly marking those sales as long. In addition, certain “equity line” agreements between the fund and issuers caused the fund to act as an unregistered dealer. This article analyzes the facts and circumstances that gave rise to the enforcement proceeding and the terms of the resolution, with added insights from H. Gregory Baker, partner at Patterson Belknap Webb & Tyler. See “SEC Settlement Suggests that Hedge Fund Managers Have Responsibility for Counterparties’ Reporting Obligations” (Jul. 23, 2015).

Tokenization on the Blockchain: Applicability to Private Debt and the Technology’s Future Outlook

Despite its evolution over the years, the private funds industry remains rife with inefficiencies and barriers to entry for the vast majority of investors. A potential way to break through that morass is to tokenize certain tangible assets on the blockchain. Proponents of the technology tout the streamlined operations, oversight and compliance benefits offered by the blockchain, as well as how fractionalizing those tokens can open the industry to a larger swath of accredited investors. A recent white paper (Paper) co‑authored by the Chartered Alternative Investment Analyst (CAIA) Association, BNP Paribus Asset Management (BNPP AM) and Liquefy, a licensed financial technology platform, explored some of those concepts. In addition, CAIA hosted a complementary webinar moderated by Jo Murphy, managing director at CAIA, which featured Emmanuelle Pecenicic, digital transformation manager at BNPP AM; Adrian Lai, CEO at Liquefy; and Jack Wu, director at CAIA. This article posits ways the private debt sectors can benefit from tokenization, as well as projections of the future of blockchain technology in the alternative investments industry. For coverage of the portions of the Paper that explore tokenization’s benefits to the hedge funds industry, see “Unique Challenges and Benefits and Its Use by Hedge Funds” (May 27, 2021). For coverage of other CAIA programs, see “How Hard Is Brexit Expected to Impact Alternative Fund Managers?” (Dec. 13, 2018); and “How to Prepare for the Technological Revolution’s Transformation of the Hedge Fund Industry” (Apr. 5, 2018).