Oct. 7, 2021

Former SEC Enforcement Director Discusses Fund Manager Risks and Enforcement’s Priorities (Part Two of Two)

Stephanie Avakian spent four years as Co‑Director and Director of the SEC Division of Enforcement (Enforcement), navigating the Division through various difficulties, including staffing issues, numerous challenges to market integrity and the recent coronavirus pandemic. Despite those challenges, she and her Co‑Director Steven Peikin were able to increase Enforcement’s efficiency and effectiveness in pursuing thousands of actions. Avakian has rejoined WilmerHale as chair of its securities and financial services department, and the Hedge Fund Law Report recently spoke to Avakian in connection with her move. In this second article in our two-part series, Avakian sets forth her thoughts on key risks faced by fund managers, Enforcement’s priorities and ways fund managers can avoid facing SEC enforcement action. The first article examined her role at the SEC, her new position and various ways Enforcement’s approach changed during her tenure. For commentary from other WilmerHale partners, see “FINRA Issues Notice on Best Execution Duties and Payment for Order Flow” (Jul. 29, 2021); and “CFTC Accuses Swaps Trader of Price Manipulation, Deceptive Conduct and Making False Statements” (Jun. 10, 2021).

SEC Cybersecurity Disclosure Enforcement Heats Up: Recent Developments (Part One of Two)

With an ongoing investigative sweep and a series of enforcement actions announced in the past few months, the SEC appears to be highly focused on cybersecurity disclosure enforcement during the early stages of the new administration. Fund managers should take steps now to ensure disclosure controls are in place and operating effectively. In this first article in a two-part guest series, King & Spalding attorneys William F. Johnson, Matthew B. Hanson, Joseph L. Zales and Charles C. Cain review the applicable SEC regulations and guidance, along with the growing body of enforcement actions. The second article will explore ongoing investigations and provide practical guidance for fund managers about those disclosure controls. See “SEC Exam and Enforcement Priorities: Cybersecurity, Business Continuity and Conflicts of Interest (Part One of Two)” (Jul. 22, 2021).

Advisers Must Appropriately Supervise, Follow Up on Red Flags and Address SEC-Identified Deficiencies to Avert Enforcement Action

The SEC recently issued an order against an investment adviser and its founder and CEO, citing a host of compliance failures arising out of the respondents’ alleged failure to supervise an investment adviser representative who defrauded firm clients. The SEC’s allegations, if proven, would show a near complete failure by the respondents to comply with fundamental compliance obligations, including the duties to supervise representatives; adopt and implement reasonable compliance policies and procedures; follow up on red flags; address deficiencies cited by the SEC; and supervise the individuals to whom compliance duties are delegated. This article details the facts and circumstances leading up to the proceeding, as well as the SEC’s specific allegations. See our three-part series on the duty to supervise: “Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers” (Sep. 6, 2018); “Conduct Proper Trade and Electronic Communications Surveillance” (Sep. 13, 2018); and “Respond to Red Flags; Implement Reasonable Policies and Procedures; and Conduct Adequate Training” (Sep. 20, 2018).

SEC Compliance and Enforcement Expectations for Private Funds Under Chair Gensler

The tenor and tone of the SEC under Chair Gary Gensler is still taking shape, which has left much of the private funds industry on tenterhooks as to what the future holds. To fill that knowledge gap, industry experts and former SEC staff members are leaning on their past experience to forecast how and what the SEC will focus on in future examinations and enforcement actions. In that vein, Dechert recently hosted a panel to discuss what the private funds industry can expect from the SEC under Gensler. The discussion was moderated by Dechert partner Catherine Botticelli and featured Bruce Karpati, partner and global CCO at KKR; Scott Weisman, managing director and global CCO at Bain Capital; and Guy F. Talarico, founder and CEO of Alaric Compliance. This article highlights the key takeaways from the webinar, including the likelihood of increased compliance enforcement cases under Gensler; the ramifications of the new task force that was formed to focus on environmental, social and governance issues; practical tips for dealing with the SEC; and key areas of focus as to special purpose acquisition companies and cybersecurity. See “Anticipating SEC and CFTC Enforcement Priorities Under the Biden Administration” (Mar. 18, 2021); and “The SEC Under the Biden Administration: Ten Areas to Watch” (Jan. 21, 2021).

IOSCO Issues Final Guidance on AI and Machine Learning

The Board of the International Organization of Securities Commissions (IOSCO) recently released its final report (Final Report) on the use of artificial intelligence (AI) and machine learning by market intermediaries and asset managers. This article discusses the key provisions of the Final Report, the input IOSCO received in response to its consultation and how the final guidance measures differ from those proposed last year, along with analysis from Avi Gesser, partner at Debevoise & Plimpton; and Lex Sokolin, global financial technology co-head of ConsenSys. For further insights from Gesser on the subject, see “The Current State and Future of AI Regulation” (May 14, 2020). For additional commentary from Sokolin, see our three-part series on AI for fund managers: “How to Use It to Streamline Operations” (Sep. 5, 2019); “Government Guidance, Service-Provider Negotiations and Risks of Bias” (Sep. 12, 2019); and “Automating the Legal Department and Maintaining Privacy” (Sep. 19, 2019).