• |

    Oct. 26, 2023

Four Electronic Communication and Recordkeeping Traps for Hedge Fund Managers to Avoid

The communication landscape for broker-dealers and investment advisers is rapidly evolving with the widespread use of text messaging and the proliferation of messaging platforms. Firms must figure out optimal ways to balance those evolving communication methods while complying with regulatory requirements, especially as to recordkeeping. Notably, recent enforcement actions by the SEC and the CFTC have targeted broker-dealers and investment advisors that failed to navigate this landscape successfully. In a press release announcing a recent group of cases, the SEC’s Director of the Enforcement Division, Gurbir S. Grewal stated, “Compliance with the books and records requirements of the federal securities laws is essential to investor protection and well-functioning markets.” He further noted that the Commission has brought “30 enforcement actions and ordered over $1.5 billion in penalties to drive this . . . message home. And while some broker-dealers and investment advisers have heeded this message, self-reported violations, or improved internal policies and procedures . . . many still have not.” This article summarizes the relevant laws in this area, provides an overview of recent enforcement actions and identifies four traps from those actions that firms should try to avoid, with commentary from Philip Moustakis, partner at Seward & Kissel. See “Messaging Apps Come Under Increasing Regulatory Scrutiny” (Aug. 31, 2023); and “SEC Remains Focused on Off-Channel Communications” (May 11, 2023).

Improving Compliance Programs With Gap Analysis and Risk Assessments

The need for an adviser to have an effective compliance program cannot be overstated. In many SEC-settled enforcement proceedings, the only violation alleged is the adviser’s failure to comply with Rule 204(4)‑7 under the Investment Advisers Act of 1940, known as the “Compliance Rule.” To assist advisers in navigating their obligations under that rule, a recent ACA Group program addressed the fundamental elements of compliance programs; use of gap analysis and risk assessments to create an effective program; testing and documentation; and qualifications of CCOs and compliance staff. It featured Jaqueline Hummel and Myles Blechner, directors at ACA Group. This article synthesizes their insights. See our three-part series on tailoring a compliance program: “Why Fund Managers Should Customize” (Jul. 16, 2020); “What Fund Managers Should Consider” (Jul. 23, 2020); and “When Fund Managers Should Review and Update” (Jul. 30, 2020).

Tips for Working With Cyber Insurance Carriers Following a Ransomware Event

Ransomware demands are a costly problem for businesses of all sizes and only becoming costlier. Although a good cyber insurance policy often can cover the costs associated with such cyberattacks, every policy is different concerning what is covered and what is not, with a lot of gray area in between. As ransomware demands rise, insurers are only getting tougher on what they will cover. Knowing how to navigate the insurance process can mean the difference between having a claim covered or denied. During a panel at the IAPP Global Privacy Summit 2023, insurance counsel, a broker and an insurer shared an overview of coverage options and limitations, and offered advice on navigating the application process, providing notice, handling third-party vendors’ incidents, selecting counsel and dealing with privilege issues. See “Cyber Insurance Litigation Trends Amid Rising Ransomware Attacks” (Apr. 7, 2022).

SEC Cites Adviser, Whose Founder and CCO Had Died, for Multiple Compliance Failures

The SEC expects investment advisers to be prepared for the death or sudden departure of key personnel. The SEC’s settled enforcement action against a dually registered investment adviser and broker-dealer is a reminder of the importance of appropriate succession planning. The firm’s founder and CCO passed away in 2019, which coincided with an SEC examination of the adviser. The firm allegedly had failed to plan for the loss or incapacity of key individuals and lacked reasonably designed policies and procedures, particularly regarding its advisory business. The firm, which used an outsourced CCO following the founder’s death, allegedly failed to remedy many of those deficiencies by the time of a subsequent examination in 2021. This article details the SEC’s allegations and the multiple compliance deficiencies that gave rise to the enforcement proceeding. See our three-part succession planning series: “Why Fund Managers Must Review Their Positions on Succession Planning and CCO Outsourcing” (Jun. 7, 2018); “What Fund Managers Should Consider When Hiring and Onboarding CCOs; Determining CCO Governance Structures; and Evaluating Risks of CCO Turnover” (Jun. 14, 2018); and “A Succession-Planning Roadmap for Fund Managers” (Jun. 21, 2018).

Reg BI Risk Alert Focuses on Deficient Policies and Procedures

Retail investors have been a consistent SEC examination priority. Following the compliance date for Regulation Best Interest (Reg BI), the SEC’s Division of Examinations (Division) began examining for compliance with the new regulation. The Division’s risk alert (Risk Alert) on staff observations from broker-dealer examinations shows the Division continues to find deficiencies in firms’ implementation of Reg BI, especially in regard to implementation of appropriate policies and procedures. Although the Risk Alert and Reg BI concern only broker-dealers and their standard of conduct, the Risk Alert is an important reminder that the SEC considers proper policies and procedures to be a central pillar of compliance in general. This article discusses the key lessons from the Risk Alert. See “Private Funds Top the SEC’s 2022 Exam Priorities” (Jun. 9, 2022); and “SEC Committee Statement Details Shortcomings in Form CRS Compliance” (Feb. 10, 2022).

Former Hedge Fund GC/CCO Joins Lowenstein Sandler’s Investment Management Group

Jonathan A. Danziger, former GC and CCO at Glenview Capital Management, has joined Lowenstein Sandler’s investment management group as a partner. Based in Lowenstein’s New York City office, Danziger advises investment management clients on the formation and structuring of private funds and management companies; regulatory and compliance matters; and shareholder engagement and activist campaigns. For insights from other Lowenstein attorneys, see “Use of Alternative Data Continues to Grow, Says New Survey” (Mar. 2, 2023); and “Proposed Private Fund Rules: Overview of the Proposal and the Importance of Industry Comments” (Mar. 17, 2022).

Most-Read Articles