Nov. 9, 2023

Recent SEC Whistleblower Cases Focus on Repressive Language in Employment‑Related Agreements

In a matter of weeks, the SEC announced settlements of three enforcement actions involving alleged violations of Rule 21F‑17(a) under the Securities Exchange Act of 1934, which provides, “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” The SEC’s focus in the enforcement actions was on language in employment-related agreements that could deter employees from reporting possible violations. This article summarizes the three cases and then shares insights on their significance from Allison Kernisky, Holland & Knight litigation partner and co-editor of the firm’s SECond Opinions blog on SEC enforcement matters, as well as steps fund managers should take to avoid similar SEC scrutiny. See “SEC and CFTC Received Record Number of Whistleblower Tips and Made a Record Award in 2022” (Feb. 2, 2023).

SEC Penalizes Nine Advisers for Marketing Rule Violations in Ongoing Sweep

The compliance date for the SEC’s revised Advertising Rule (Marketing Rule or Rule) – Rule 206(4)‑1 under the Investment Advisers Act of 1940 – was November 4, 2022. In September 2022, the SEC’s Division of Examinations issued a risk alert announcing an examination sweep focused on investment advisers’ compliance with the Rule, including provisions pertaining to policies and procedures; substantiation of claims; books and records; and performance advertising. That sweep, which is ongoing, has resulted in multiple enforcement referrals. A year later, the SEC resolved administrative proceedings against nine advisers for alleged violations of the Marketing Rule’s requirements for policies and procedures pertaining to presentation of hypothetical performance and associated recordkeeping requirements. This article discusses the relevant provisions of the Rule, the alleged violations and the terms of the settlements. See “Second Marketing Rule Risk Alert Provides Little Substantive Guidance” (Aug. 3, 2023); and “Marketing Rule Risk Alert Forecasts Coming Exams” (Oct. 20, 2022).

Key Investor Concerns About Private Fund Rules: Preferential Redemptions and Quarterly Statements

On August 23, 2023, the SEC adopted final rules for private fund advisers (Rules). A recent program by the Investment Management Due Diligence Association (IMDDA) examined the impact of the Rules on institutional investors, focusing on the provisions pertaining to quarterly fee, expense and performance reports for investors, restrictions on preferential treatment and adviser-led secondaries. Kelly DePonte, managing director at Probitas Partners and a member of the IMDDA’s advisory board, moderated the discussion, which featured Merryn Rosewall, principal at Gen II Fund Services, LLC; Daniel Strachman, co-founder of the IMDDA and managing partner of A&C Advisors LLC; and Robert H. Sutton, partner at Proskauer. This article distills their insights. See our two-part coverage of the Rules: “Overview and Key Changes From the Proposal” (Sep. 28, 2023); and “Key Compliance Challenges and Next Steps” (Oct. 12, 2023).

Corporate Enforcement Policy Revisions:  A More Amenable DOJ Looks to Negotiate (Part One of Two)

Announcing the DOJ’s Revised Corporate Enforcement Policy (CEP) during a speech at Georgetown University, then-Assistant Attorney General Kenneth Polite, Jr. called on corporations to be “our allies in the fight against crime.” Via incentives in the revised policy, the DOJ invites not only corporate do-gooders of sorts – those that voluntarily self-report, cooperate and remediate – but also more serious sinners (recidivists) to try and make a deal. “Criminal recidivism alone will not always mean a plea,” Polite said in the speech. In fact, guilty pleas generally will not be required when there has been disclosure, cooperation and remediation – unless there are multiple or “particularly egregious aggravating circumstances,” Polite added. His statements seem an interesting shift coming just months after Deputy Attorney General Lisa Monaco warned so-called “frequent flyers” that the DOJ “will not shy away from bringing charges or requiring guilty pleas where facts and circumstances require.” That was an approach that may not exactly have triggered a rash of self-reports. In this first article in a two-part series, we look at the changes to the CEP and the possible effect on self-reporting, as well as how those revisions fit in with DOJ initiatives. In the second article, we will take a closer look at aggravating factors, immediate self-disclosure and extraordinary cooperation, and discuss whether nondisclosure is still an option. See “Deputy AG Announces Changes to DOJ Corporate Criminal Enforcement Policies, Stressing Individual Accountability” (Nov. 10, 2022).

SEC Sanctions Adviser That Used Unaffiliated Brokers to Trade Illiquid Securities Between Funds

Advisers that seek to effect trades between the funds they manage swim in rough waters, especially when hard-to-value securities are involved. They get even more turbulent when one of the funds is a registered investment company. The recent SEC enforcement proceeding involving an investment adviser and its founder illustrates the risks faced by advisers that need to sell thinly traded securities to rebalance a portfolio but do not wish to give up the investment. The respondents allegedly effected trades among the hedge and mutual funds they managed by selling a bond to a broker from one fund with the understanding that another fund would soon repurchase the bond, all of which was done at a price set by the founder, rather than the market, the SEC asserted. This article details the trading that gave rise to the proceeding and the terms of the settlement order. See “SEC Imposes Substantial Sanctions for Cross Trades & Principal Transactions, Despite Self-Reporting, Cooperation & Remediation” (Apr. 13, 2023).