Jan. 13, 2022

Personal Liability and Compliance Resourcing Are Top Concerns Among CCOs, Surveys Show

Being the CCO of a private fund manager is a tough job. Coworkers may view the CCO as the regulatory police, constantly telling them what they cannot do and imposing policies and procedures on them. Regulations are always changing and expanding, but senior management may refuse to provide the support and resources needed to ensure compliance with the evolving regulatory landscape. Add to those challenges the SEC’s focus on individuals in enforcement actions, and it is no wonder that many CCOs are increasingly concerned about being held personally liable for securities violations at their firms. To gauge the extent of those concerns, the National Society for Compliance Professionals (NSCP) surveyed its members on CCO liability, as well as CCO empowerment and resourcing. This article explores the results of those surveys, with commentary from Lisa Crossley, executive director and CEO of the NSCP. See “How CCOs Can Avoid Personal Liability for Organizations’ Compliance Failures” (Mar. 11, 2021).

Thirteen Questions an Adviser’s Principals Should Ask Compliance (Part One of Two)

Increasingly, regulators are pointing to C‑suite and senior-level personnel as gatekeepers and thus crucial to effective governance and controls at their firms. Senior-level personnel’s failure to effectively supervise the compliance function could have significant legal and reputational consequences for both individuals and their organizations. For example, in a recent enforcement action, the SEC alleged that the founder of a registered investment adviser, among other missteps, delegated responsibility for several annual compliance reviews to a compliance officer but did nothing to supervise those reviews, which was especially egregious in light of prior deficiency letters from SEC exam staff criticizing the adequacy of those reviews. In addition, the founder never asked the compliance officer if there were any issues. See “Advisers Must Appropriately Supervise, Follow Up on Red Flags and Address SEC-Identified Deficiencies to Avert Enforcement Action” (Oct. 7, 2021). The Hedge Fund Law Report recently spoke to Ken C. Joseph, managing director and head of the financial services compliance and regulation practice for the Americas at Kroll, about a list of suggested questions that every principal should use to start a conversation with the firm’s CCO. Before joining Kroll, Joseph served for more than 21 years at the SEC, including as one of the inaugural supervisors in the Division of Enforcement’s Asset Management Unit and as a Senior Officer in the Division of Examinations. This article, the first in a two-part series, presents the discussion on the relationship between firm principals and compliance; why the 13 questions were created and how they are meant to be used; and the SEC’s likely view of a firm that uses such questions. The second article will cover the conversation about the importance of each question. For further thoughts from Joseph, see our two-part series “Is the Advertising Rule Obsolete?”: Part One (Aug. 29. 2019); and Part Two (Sep. 5, 2019).

Navigating the Uncertain U.S. Tax Landscape

President Biden’s ambitious legislative agenda includes several revisions to the Internal Revenue Code designed to increase revenue and combat perceived abuses. Moreover, the coronavirus pandemic continues to upend the work environment, complicating employers’ traditional allocations of income and tax withholding practices. A recent Seward & Kissel program examined the proposed tax code changes included in the pending Build Back Better bill; implementation of state-level pass-through entity taxes designed to offset the $10,000 cap on the deductibility of state and local taxes; ways the remote work environment has affected employers’ tax practices; and the potential impact of the proposed expansion of the net investment income tax to all income not covered by the self-employment tax. The program featured Seward & Kissel partners Jon P. Brose, James C. Cofer and David R. Mulle. This article distills their insights. See “How Fund Managers Can Ensure They Have Effective Tax Disclosures in PPMs” (Jul. 22, 2021); and “Key Tax Issues Fund Managers Must Consider” (Jun. 10, 2021). For additional commentary from Cofer and Mulle, see “Structural and Operational Considerations for Hybrid Funds” (Jan. 14, 2021).

Failure to Disclose Commodity Pool Trading Limitations Results in CFTC and SEC Actions and $2.5‑Million Fine

Full and fair disclosure is at the heart of the U.S. securities laws. The CFTC and SEC recently severely penalized a commodity pool operator and one of its exchange-traded commodity futures funds for failing to disclose that the sole futures commission merchant through which the fund purchased futures contracts had greatly restricted the fund’s ability to trade futures contracts. Both regulators took issue with disclosures that indicated that the fund “could” be subject to trading restrictions when the fund was already, in fact, subject to material restrictions. This article discusses the circumstances leading to the enforcement actions and the terms of the CFTC and SEC settlement orders. See “CFTC Accuses Swaps Trader of Price Manipulation, Deceptive Conduct and Making False Statements” (Jun. 10, 2021); and our two-part review of recent CFTC activity: “Enforcement Actions” (Apr. 15, 2021); and “Regulatory Actions” (Apr. 29, 2021).

Speeches Outline the Ethos, Direction and Priorities of the SEC’s Division of Enforcement Under Gurbir Grewal

There have been plenty of opportunities to speculate about the potential approach and focus of the SEC’s Division of Enforcement (Enforcement) given that it has taken some time for the new Director, Gurbir S. Grewal, to take office. Grewal has now signaled the direction of Enforcement’s efforts in two recent speeches, which highlight the public’s flailing trust in the securities markets and outline certain steps Enforcement will be taking to enhance investors’ confidence. Grewal delivered a first speech in which he emphasized proactive compliance, cooperation with the SEC and the imposition of meaningful penalties as key paths toward boosting public trust. A week later, Grewal offered additional remarks reiterating the importance of restoring investor confidence and identifying corporate responsibility, gatekeeper accountability and appropriate remedies as focus areas for Enforcement’s efforts. This article summarizes the key takeaways from Grewal’s statements. For coverage of recent speeches from SEC Commissioners, see our two-part series: “Peirce and Roisman Argue Against Prescriptive ESG Disclosures” (Oct. 21, 2021); and “Gensler and Lee Advocate Further SEC Oversight of ESG Efforts” (Oct. 28, 2021).

Former In‑House Counsel and CCO Laura Schnaidt Joins Paul, Weiss

Laura Schnaidt, former in-house GC and CCO and founder of Women in Funds, has joined Paul, Weiss as counsel in the corporate department and a member of the firm’s private funds group. Her practice focuses on the formation and operation of a variety of private funds, including private equity, hedge, credit, hybrid, direct lending and real estate funds, as well as funds of funds, funds of one and separately managed accounts. She also regularly advises clients on compliance issues related to SEC regulations. For coverage of a program sponsored by Women in Funds, see our two-part series: “Fund Governance and Management, Valuation and Line of Credit Issues Arising Out of the Coronavirus Pandemic” (Jun. 4, 2020); and “Issues for Open‑End, Closed‑End and Registered Funds Due to the Coronavirus Pandemic” (Jun. 11, 2020).