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    Dec. 2, 2021

Exams of Non‑U.S. Advisers: Practical Tips for Handling SEC Exams (Part Three of Three)

Being examined by the SEC is never fun, but it can be especially stressful to an entity that has never been examined by the regulator before and is unsure what to expect. The fact that the SEC’s Division of Examinations has made it a priority to examine advisers that have never been examined – or have not been examined in a while – coupled with its recent efforts to conduct more exams of non‑U.S. advisers, means that private fund advisers based in Europe, Asia or elsewhere should be prepared for a call from the SEC. This article, the third in a three-part series, provides practical tips for non‑U.S. advisers that may face an SEC exam for the first time. The first article examined the SEC’s authority to conduct examinations of non‑U.S. advisers and the recent trend of more exams of those advisers; the second article compared SEC exams of U.S. advisers to exams of non‑U.S. advisers and exams conducted by the SEC to those conducted by foreign regulators. See our two-part series “HFLR Program Explores Current SEC Examination Practices and Issues”: Part One (Dec. 20, 2018); and Part Two (Jan. 10, 2019).

What Fund Managers Should Know About the DOL’s Proposed Rule on ESG Factors and Proxy Voting

The U.S. Department of Labor (DOL) recently released a proposed rule (Proposal) that would amend the DOL’s investment duties regulation with respect to the consideration of environmental, social and governance (ESG) factors in the selection of investments for retirement plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). The Proposal would also amend the proxy voting rules under ERISA. The DOL requested comments on the Proposal that must be submitted on or before December 13, 2021. In a guest article, Beth J. Dickstein, partner at Sidley Austin, reviews the background of the Proposal; discusses the Proposal’s provisions as to ESG investing and proxy voting; and explores the Proposal’s possible impact on hedge and other private fund managers. For additional insights from Dickstein, see our three-part series on ERISA considerations for European hedge fund managers: “Liability and Incentive Fees” (Sep. 24, 2015); “Prohibited Transactions, Reporting and Side Letters” (Oct. 1, 2015); and “Indicia of Ownership and Bond Documentation” (Oct. 8, 2015).

SEC Focus on Private Fund Managers: Alternative Data and “Shadow Trading” (Part One of Two)

Although the SEC is focusing on many topics and issues, the private funds industry should not assume that it can fly under the Commission’s radar. In fact, Chair Gary Gensler recently gave a speech about private funds and the importance of hedge and private equity funds to the capital markets, remarking that it was time to “bring more sunshine and competition to the private funds space.” Thus, it is clear that the SEC will not only continue to scrutinize private fund manager practices but also propose new or enhanced rulemaking in this space. A recent session hosted by the Practising Law Institute discussed some of the key areas the SEC will be focusing on with respect to private fund managers. Moderated by Gibson Dunn partner Barry R. Goldsmith, the panel featured Marc E. Elovitz, partner at Schulte Roth; Ranah Esmaili, partner at Sidley Austin; Ken C. Joseph, managing director at Kroll, LLC; and Maurya C. Keating, Associate Regional Director of the SEC’s New York Regional Office. This first article in a two-part series summarizes the key points regarding recent enforcement actions targeting alternative data and so-called “shadow trading.” The second article will review SEC examination trends, priorities and deficiency letters. See “SEC Compliance and Enforcement Expectations for Private Funds Under Chair Gensler” (Oct. 7, 2021).

SEC Sanctions and Bars Adviser’s Principal and Three Employees for Fraudulent Valuation Practices

Valuation, which is inextricably linked with a fund’s performance and its adviser’s compensation, is a perennial focus of SEC examiners. The SEC recently threw the book at the founder, former owner and former CEO of an adviser, as well as several of the adviser’s employees who allegedly engaged in fraudulent valuation practices by improperly booking certain anticipated fee revenue and interest associated with the firm’s lending business. Notably, the SEC also took issue with the adviser’s waivers of management and performance fees, which it allegedly employed selectively to boost its funds’ returns. Those questionable practices had the effect of increasing the net asset values of the adviser’s funds and generating millions in unwarranted management and performance fees. This article describes the allegedly fraudulent bookkeeping practices and digests the terms of the multiple enforcement actions and settlements. See “Division of Examination’s 2021 Exam Priorities: Perennial Focus Areas for Private Fund Managers (Part Two of Two)” (Apr. 22, 2021); and “HFLR Program Explores Valuation of Illiquid Assets and Valuation Governance” (Jan. 28, 2021).

Fireside Chat With SEC Chair Gensler: Reporting; Voting and Proxies; Individual Accountability; and Market Structure Issues (Part Two of Two)

SEC Chair Gary Gensler recently participated in a “fireside chat” presented by the NYU School of Law Program on Corporate Compliance and Enforcement and the Institute for Corporate Governance and Finance. Current NYU law professor and former SEC Commissioner Robert J. Jackson, Jr. led the discussion with Gensler about various matters on the regulator’s agenda. This second article in a two-part series outlines their conversation about beneficial ownership reporting; shareholder voting and proxy firms; individual accountability; payment for order flow; Regulation Best Interest; short selling; and other market structure issues. The first article covered their discussion of disclosure rules on climate change risk, human capital, cybersecurity and political contributions. For analysis of a speech by Gensler, see “Two Sides of the Same Coin: SEC Commissioners Gensler and Lee Advocate Further SEC Oversight of ESG Efforts (Part Two of Two)” (Oct. 28, 2021).

Dentons Adds Former SEC Lawyer David Kornblau to New York Office

David Kornblau recently joined Dentons’ litigation and dispute resolution and white collar and government investigations practices in New York. Kornblau represents clients such as asset management firms, investment banks, public companies, stock exchanges, senior executives, portfolio managers and traders in sensitive and complex investigations, securities litigation and internal investigations. For additional commentary from Kornblau, see parts one and three of our three-part series on understanding the Wells process: “Origin and Key Elements” (Jun. 13, 2019); and “The Pre‑Wells Process Versus the Post‑Wells Process” (Jun. 27, 2019).

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