Feb. 18, 2021

Former CFTC Enforcement Director Discusses New Role and CFTC Experience (Part One of Two)

Sullivan & Cromwell has recently bolstered its new securities and commodities investigation and enforcement practice. First, Steven Peikin, former Co‑Director of the SEC’s Division of Enforcement joined the firm’s New York office. See our two-part conversation with Peikin: “New Position and Experience at the SEC” (Jan. 14, 2021); and “Enforcement’s Annual Report and SEC Developments” (Jan. 21, 2021). Then, in January 2021, James McDonald, Peikin’s counterpart at the CFTC, joined the firm after three years as the Director of the Division of Enforcement, where he oversaw the CFTC’s enforcement program, including its investigations and litigations; market surveillance activity; and whistleblower office. The Hedge Fund Law Report recently spoke to McDonald in connection with his move. In this article, the first in a two‑part series, McDonald discusses his new position, his experience at the CFTC and the relationship between regulatory agencies. In the second article, McDonald will talk about the CFTC’s whistleblower program; trends and private funds; the new administration; and the impact of the coronavirus pandemic. For more on recent developments at the CFTC, see “New CFTC Rule Extends Bad Actor Bar to Exempt CPOs” (Oct. 8, 2020); and “CFTC Adopts Final Rule Revisions on CPO and CTA Exemptions and Exclusions From Compliance Obligations” (Mar. 5, 2020).

Risk Alert on Compliance: Limited Staffing, Marginalized CCOs and an Overall Lack of Resources at Fund Managers (Part One of Two)

The SEC’s Division of Examinations (Division) recently issued a risk alert on notable compliance issues its staff identified during examinations of private fund managers (Risk Alert). Among other issues, the Risk Alert details a lack of compliance resources; a dearth of autonomy and empowerment of CCOs; and a failure to adequately tailor and implement policies and procedures across an array of areas. Division Director Peter Driscoll emphasized the severity of those issues in contemporaneous remarks (Speech), which supplemented the Risk Alert by further explaining the Division’s stance on certain key issues. Taken together, the Risk Alert and Speech highlight the poor compliance practices widespread at private fund managers at a time when the SEC under newly appointed Chair Gary Gensler is likely to cast a more critical eye toward the funds industry. This first article in a two-part series analyzes the Division staff’s observations about the lack of resources, primitive information technology capabilities and marginalized CCOs at fund managers. The second article will detail the Risk Alert’s warnings about deficient annual reviews and ill-tailored policies, along with certain high-level takeaways to consider. See our two-part coverage of the Division’s prior risk alert on private funds: “Focus on Conflicts; Fees and Expenses; and MNPI” (Aug. 6, 2020); and “Key Takeaways for Managers” (Aug. 13, 2020).

A Refresher on Custody and What to Expect on Surprise Custody Exams

Safeguarding client assets is one of the pillars of an investment adviser’s fiduciary duty. One of the key protections afforded by Rule 206(4)‑2 under the Investment Advisers Act of 1940, commonly known as the “custody rule,” is the requirement for advisers with custody of client assets to have annual independent verifications of custody. A recent Troutman Pepper program provided a thorough review of the principal requirements of the custody rule, the mechanics of surprise custody examinations, the available exceptions to that requirement and common custody rule deficiencies. The program featured Gregory J. Nowak, partner at Troutman Pepper, and Barry Goodman, partner at Mazars USA. This article distills the principal lessons from the program. For discussion of coronavirus pandemic-related custody rule relief, see “ACA Briefing: Regulatory Responses to Coronavirus Pandemic and Best Practices for Business Continuity and Compliance” (Apr. 16, 2020).

ACA Program Reviews 2020 SEC Activity: Examination and Enforcement Trends (Part Two of Two)

The coronavirus pandemic has posed challenges to the operations of all organizations – and the SEC was no exception. In spite of those challenges, the SEC remained very productive, noted the speakers at the annual “Compliance Year in Review” presented by ACA Compliance Group (ACA). The discussion was led by Carlo di Florio, ACA partner and global chief services officer, and featured ACA directors Michael Abbriano and Michelina Cuccia, along with senior principal consultant Ian Rivera. This two-part series distills the key observations from the program. This article covers examination trends, priorities and initiatives; as well as notable enforcement activity. The first article delved into the unique challenges posed by the coronavirus pandemic, as well as the SEC’s issuance of proposed and final rules, guidance and risk alerts that affect private fund managers. For more from ACA, see “Advisers Must Prepare for the Upcoming Expansion of the E.U. and U.K. Prudential Regimes” (Nov. 12, 2020).

Navigating Sanctions Regimes: The E.U. and Hot Sanctions Arenas (Part Two of Two)

Certain countries, individuals and economic sectors can face economic sanctions – such as broad national embargoes or more targeted measures – in response to perceived criminal activity, corruption or human rights violations. Private fund managers should understand the U.S. and foreign sanctions regimes because if they accept investments from sanctioned persons or invest in sanctioned entities, they could be subject to penalties themselves. The Seward & Kissel 2020 Private Funds Forum featured a panel on navigating various sanctions regimes. The panelists included Bruce G. Paulsen, partner at Seward & Kissel; Stephen Gentle, partner at Simmons & Simmons; and Cherie Spinks, counsel at Simmons & Simmons. This article, the second in a two-part series, features the panelists’ discussion on the E.U. sanctions regime; recent developments in U.S. sanctions against Iran, Venezuela and China; and issues that sanctions regimes pose for investment managers. The first article examined the nature and extent of the U.S. and U.K. sanctions regimes. For coverage of another panel at the 2020 Private Funds Forum, see “Structural and Operational Considerations for Hybrid Funds” (Jan. 14, 2021).