Dec. 7, 2023

SEC Risk Alert Provides Clarity on Exam Selection Process for Advisers

The SEC Division of Examinations (Division) recently issued a risk alert (Risk Alert) outlining its examination selection process for registered investment advisers. Those advisers represent a diverse group that includes small firms and global asset managers and serve diverse clientele, participate in a broad scope of activities and oversee a wide range of assets under management. The number of SEC-registered investment advisers has grown in recent years, and the Division examines approximately 15 percent of them each year, employing a risk-based approach for selecting both the advisers to examine and risk areas for examination. This article summarizes the Risk Alert, including how the Division selects advisers to examine, focus areas to concentrate on and documents to request, with insights from Benjamin Kozinn, partner in the investment management practice at Schulte Roth & Zabel LLP; and Valerie Ruppel, practice lead at Bovill and former SEC examiner. A checklist of initial documents typically requested by the Division is also included. See “Key Compliance Issues for Advisers and Funds Arising From the SEC’s 2022 Exam Priorities (Part One of Two)” (Jan. 19, 2023).

SEC Commissioner Uyeda and Enforcement Director Grewal Discuss Compliance Challenges and CCO Liability

In recent remarks, SEC Commissioner Mark T. Uyeda and Gurbir S. Grewal, Director of the SEC Division of Enforcement (Division), offered their perspectives on various issues facing compliance professionals. Uyeda focused on the compliance burdens caused by the SEC’s recent aggressive rulemaking agenda and the unclear standards for holding individual CCOs accountable for compliance violations. Grewal discussed the Division’s work to engender public trust in the securities markets; the need for a “proactive culture of compliance”; the benefits of self-reporting, cooperation and remediation; and how the Division approaches CCO liability. As is customary, Uyeda and Grewal noted the views they expressed are their own and do not necessarily reflect the views of the SEC, any other Commissioner or its staff. This article synthesizes their remarks. See “Discussing 2022 Enforcement Results, SEC Enforcement Director Stresses Trust-Building Measures” (Jan. 5, 2023).

CFTC Proposes Significant Disclosure Requirements for CPOs and CTAs Relying on Regulation 4.7 Exemption

Part 4 of the regulations under the Commodity Exchange Act (Part 4) sets forth the compliance obligations of commodity pool operators (CPOs) and commodity trading advisors (CTAs). Regulation 4.7 exempts CPOs with pool participants that are “qualified eligible persons” (QEPs), and CTAs that advise QEPs, from certain Part 4 requirements. The CFTC recently proposed new rules that, if adopted, would impose significant new disclosure requirements for CPOs and CTAs that wish to rely on Regulation 4.7; increase the financial qualification thresholds for certain QEPs; and codify certain exemptive letter relief the CFTC routinely provides to Regulation 4.7 fund of funds pools. Comments on the proposed rules are due by December 11, 2023. This article parses the proposed rules, with commentary from Matthew Kulkin, partner at WilmerHale and former Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight. See “CFTC Adopts Final Rule Revisions on CPO and CTA Exemptions and Exclusions From Compliance Obligations” (Mar. 5, 2020); and “K&L Gates Program Examines Recent CFTC Developments Affecting CPOs and CTAs” (Feb. 27, 2020).

FINRA Sanctions Brokerage Representative for Unreported and Unauthorized Outside Activities and Trading

Employees’ outside business activities (OBAs) and personal trading can create multiple regulatory and compliance issues for advisers, including conflicts of interest and insider trading risk. A FINRA enforcement proceeding against a registered representative of an SEC-registered investment adviser and broker-dealer asserts that he violated FINRA rules requiring disclosure of OBAs and private securities transactions. The broker-dealer, which discovered and investigated his activities, was not a party to the proceeding and was not charged with any rule violations in connection with the matter. Although the settlement involved a registered representative of a brokerage firm, it is an important reminder that investment advisers must carefully monitor their employees’ outside business and trading activities; have appropriate policies and procedures to govern those activities; and follow up on any issues they identify. This article recounts the underlying allegations in the proceeding, the broker-dealer’s actions in response to the representative’s activities and the terms of the settlement. See “A Look at FINRA’s 2023 Report on Examinations and Risk Monitoring” (Mar. 16, 2023); and “Navigating the SEC’s Interpretation Regarding an Investment Adviser’s Standard of Conduct: Three Tools to Systematically Monitor Conflicts of Interest (Part Three of Three)” (Nov. 7, 2019).

Corporate Enforcement Policy Revisions: Parsing the Policy for the Path to a Declination (Part Two of Two)

Just months after senior DOJ officials were warning repeat offenders about the consequences they face for corporate wrongdoing and following a years-long focus on individual accountability for white-collar crime, the DOJ took what some might consider a surprising turn. In January 2023, the DOJ revised its Corporate Enforcement Policy (CEP) to encourage both recidivists and corporations in general to step forward and disclose their misdeeds. But with the threshold for making a deal, particularly for getting a declination, set ever higher, some might wonder whether self-reporting – and all of the consequences such an act triggers – ultimately will be worth the effort. It makes sense that, with a specter of individual accountability looming or a potential guilty plea for corporate repeat offenders in the offing, mostly innocuous misdeeds might be self-reported. With seemingly greater incentives newly in place, will firms rush to self-disclose more serious offenses now? In this second article in our two-part series on the Revised Corporate Enforcement Policy, we take a closer look at how firms can qualify for a declination under the new policy, whether self-reporting is likely to yield an attractive return on investment for an offending firm and whether nondisclosure might still be a viable option. The first article focused on the overall changes to the CEP, the shift in the DOJ’s approach to recidivists and the likely impact of the revisions on the volume of self-disclosures. For more from the DOJ, see “DOJ Report Details Its Approach to Law Enforcement Involving Digital Assets” (Dec. 8, 2022).

Reed Smith Adds New Investment Funds Partner to Singapore Office

Han Ming Ho has joined Reed Smith as a partner in its Singapore office. With a diverse practice across the full scope of investment funds, his clients include a wide range of leading fund sponsors and managers, as well as investment banks, financial institutions, family offices, venture capitalists, institutional investors and other organizations across various sectors. For insights from other Reed Smith attorneys, see “FCA Fines U.K. Affiliate of U.S. Manager That Replaced Successful Traders With Algorithms” (Feb. 17, 2022).