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Join us for the Philadelphia Compliance Roundtable, featuring keynote speaker Shane Cox, Regulatory Counsel, Division of Examinations (Private Funds Unit), US Securities and Exchange Commission.
Following keynote remarks, two panels on regulatory hot topics—including participants from Morgan Lewis, SEI, Yuter Compliance Consulting, and the Investment Adviser Association—will discuss the state of the regulatory environment and practical guidance concerning the SEC’s new rules for private fund advisers, marketing rule implementation, and other regulatory hot topic issues.
After the panels, we will break into a roundtable format to facilitate discussions with your compliance peers nationwide.
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- Examination Risk Alert: The SEC’s Division of Exams published a Risk Alert providing additional information regarding EXAMs’ risk-based approach for both selecting investment advisers to examine and in determining the scope of risk areas to examine. The Risk Alert includes Typical Initial Information Examiners Request of Investment Advisers as a resource attachment.
- Acting Division of Exams’ Co-Directors: The SEC named Natasha Vij Greiner and Keith E. Cassidy as Interim Acting Co-Directors of the Division of Exams, while Director Richard Best is on extended medical leave.
- BD AML Risk Alert: The SEC’s Division of Exams issued a Risk Alert highlighting various deficiencies in the money laundering programs of certain broker-dealers. The Risk Alert highlights the Exam Staff’s observations regarding the following inadequacies in AML programs:
- Independent testing and training requirements
- Customer identification program, and
- Adequate policies and procedures.
The SEC settled with an investment adviser for $18 million for undisclosed conflicts of interest involving a cash sweep program operated by its affiliated custodian and its receipt of revenue sharing payments from third-party custodians.
Lesson Learned: “Investment advisers have a fundamental duty to disclose conflicts between their own financial interests and those of their clients,” said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.
The SEC settled with five investment advisers for more than $500,000 in combined penalties for failing to comply with custody rule requirements. The firms failed to do one or more of the following:
- Have audits performed
- Deliver audited financials to investors in a timely manner
- Ensure a qualified custodian maintained client assets
- Promptly file amended Forms ADV to reflect they had received audited financial statements, and/or
- Did not properly describe the status of its financial statement audits for multiple years when filing its Form ADV.
Lesson Learned: “The Custody Rule and the associated Form ADV reporting obligations are core to investor protection,” said Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “We will continue to ensure that private fund advisers meet their obligations to secure client assets.”
The SEC settled with an investment adviser for $25 million for misstatements regarding its ESG investment process and its failure to maintain a mutual fund AML program. The SEC order finds that the firm made materially misleading statements regarding its controls for incorporating ESG factors into research and investment recommendations for ESG integrated strategies offered to mutual funds and separately managed accounts.
Lesson Learned: “Whether advertising how they incorporate ESG factors into investment recommendations or making any other representation that is material to investors, investment advisers must ensure that their actions conform to their words,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force.
The SEC settled with a large investment adviser for $35 million in penalties and reimbursed clients approximately $40 million for allegedly overcharging over 10,000 accounts more than $26.8 million in advisory fees. While the firm reduced certain clients’ fees, the billing systems were not updated to reflect the reduced rates and the adviser failed to adopt reasonable policies and procedures designed to ensure appropriate billing.
Lesson Learned: “Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection,” said Gurbir S. Grewal, Director of the SEC’s Enforcement Division. “Investment advisers must adopt and implement policies and procedures to ensure that they honor their agreements with all of their clients, including legacy clients of predecessor firms.”
The SEC announced charges against a visiting Brazilian-based attorney at a global law firm for trading, based on material, nonpublic information concerning a client of the law firm.
Lesson Learned: “As alleged in our complaint, [the attorney] violated his duties to the law firm and its clients when he abused his position to enrich himself,” said Nicholas P. Grippo, Regional Director of the Philadelphia Regional Office. “Lawyers often have access to sensitive and confidential information about their law firms’ public company clients. When lawyers abuse that access, as [the attorney] allegedly did here, we will promptly take action to hold them accountable. In this case, thanks to the quick work of the SEC’s staff, we were able to act within months of Costa’s alleged insider trading to ensure that he will be held accountable.”
1. The SEC settled with nine investment advisers over alleged violations of the marketing rule, and books and records requirements, as a result of their use of hypothetical performance returns on their public websites, and their failure to adopt reasonable policies and procedures.
The actions were sourced from an SEC sweep exercise conducted virtually in which the SEC Staff trolled the internet to locate potential violators and followed up with targeted request lists.
Lesson Learned: Don’t put hypothetical performance on the internet. The marketing rule requires that an adviser establish policies and procedures to ensure that the audience for its hypothetical performance is sophisticated. What the rule doesn’t say is that as a result of that requirement, hypothetical performance on websites and social media is prohibited.
2. The SEC settled with a FinTech registered investment adviser, in its first action under the amended marketing rule for more than $1 million, for allegedly advertising misleading hypothetical performance projections in its marketing materials.
The SEC Staff found that the Adviser’s advertisements, directed at retail investors and available on its website, were misleading (lacked material information and “painted a misleading picture of certain of its strategies”), and that the Adviser failed to adopt and implement policies and procedures regarding hypothetical performance that are required under the rule.
Lesson Learned: When “offering and marketing complex strategies, investment advisers must ensure the accuracy of disclosures made to existing and prospective investors. The Commission amended the marketing rule to allow for the use of hypothetical performance metrics but only if advisers comply with requirements reasonably designed to prevent fraud,” said Osman Nawaz, Chief of Enforcement’s Complex Financial Instruments Unit. “[The Adviser’s] advertisements and disclosures painted a misleading picture of certain of its strategies for investors. This action serves as a warning for all advisers to ensure compliance.”
1. The SEC settled for $289 million with 11 additional broker-dealer registrants over charges of widespread recordkeeping failures, as part of a series of off-channel communication cases in which the registrants were found to have not properly maintained electronic communications.
Lesson Learned: “Compliance with the books and records requirements of the federal securities laws is essential to investor protection and well-functioning markets. To date, the Commission has brought 30 enforcement actions and ordered over $1.5 billion in penalties to drive this foundational message home. And while some broker-dealers and investment advisers have heeded this message, self-reported violations, or improved internal policies and procedures, today’s actions remind us that many still have not,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “So here are three takeaways for those firms who haven’t yet done so: self-report, cooperate and remediate. If you adopt that playbook, you’ll have a better outcome than if you wait for us to come calling.”
2. The SEC settled with 10 registrants, broker-dealers (certain with dual or affiliated investment advisers), for combined penalties of $79 million for failing to maintain electronic communications.
Lesson Learned: The SEC continues to bring these books and records cases and is noting that reward is being given for self-reporters.
The SEC settled with a private equity fund manager for more than $1.6 million for the following:
- Violating its fiduciary duty with respect to acceleration of portfolio company monitoring fees
- For transferring a private fund asset from funds nearing the end of their term to a new fund, and
- For loaning money from one private fund to another private fund advised by an affiliate.
Lesson Learned: “This case highlights our continued focus on holding private fund advisers responsible when they fail to act in their clients’ best interests, including with respect to continuation funds,” said Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit. “Among other breaches, [the fund manager] failed to disclose its conflicts of interest when it transferred a client’s asset to a new fund.”
The SEC charged a firm that provided advisory services to a former Russian official via private funds created for the client for failing to register as an investment adviser.
Lesson Learned: Be careful to ensure that exemptions to registration exist in the structuring of an investment advisory firm.
The SEC settled for $6.5 million in penalties and more than $14 million in disgorgement with a private equity firm focused on alternative real estate for failing to adequately disclose real estate brokerage fees paid to an affiliated real estate brokerage firm.
Lesson Learned: “Funds, including those that invest in alternative asset classes, must ensure that their offering materials contain clear, accurate, and adequate disclosures,” said Osman Nawaz, Chief of the SEC’s Enforcement Division’s Complex Financial Instruments Unit. “In particular, information related to payments made to affiliates, and the potential conflicts of interest embedded in such arrangements, is critical to investors’ decisions.”
1. The SEC settled with an investment firm for $375,000 for using an employee release that violated the SEC’s whistleblower protection rule. The firm required employees to sign a release, attesting that they had not filed a complaint against the firm with any federal agency, which the SEC alleged impeded potential whistleblowers from reporting complaints to the SEC.
2. The SEC also settled with an investment adviser that agreed to pay $10 million for requiring employees to sign agreements prohibiting disclosure of confidential corporate information to third parties, without an exception for potential SEC whistleblowers, and by requiring departing employees to sign releases affirming that they have not filed any complaints with any government agency in order for the employees receive deferred compensation.
Lesson Learned: “It is critical that employees are able to communicate with SEC staff about potential violations of the federal securities laws without compromising their financial interests or the confidentiality protections of the SEC’s whistleblower program,” said Eric Werner, Regional Director of the SEC’s Fort Worth Office.
The SEC issued a release addressing Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers, and proposed new rules that would require broker-dealers and investment advisers to take certain steps to evaluate Predictive Data Analytics technologies (e.g., artificial intelligence) for potential conflicts of interest and eliminate or neutralize any such conflicts, as well as reasonably designed policies and procedures and detailed recordkeeping of firms’ compliance with the proposed new rules.
The SEC reopened the comment period for its proposal, Safeguarding Advisory Client Assets, which proposed a new rule under the Investment Advisers Act of 1940 that would redesignate and amend the current custody rule. In light of the adoption of the private fund adviser audit rule, which generally requires a registered investment adviser to obtain an annual financial statement audit of each private fund it advises in accordance with the audit provision of the current custody rule, reopening the comment period will allow interested persons additional time to assess the proposed amendments to the current custody rule’s audit provision in light of the private fund adviser audit rule.
The SEC adopted rules that will require registered public companies to accelerate disclosure to investors of material cybersecurity incidents and report annually on the management of cybersecurity risk.
The SEC adopted amendments to the Investment Company Act “Names Rule,” which addresses fund names that in the SEC Staff’s view are likely to mislead investors about a fund’s investments and risks. The amendments revise the current requirement for registered investment companies whose names suggest a focus in a particular type of investment to:
- Adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”)
- Require more funds to adopt an 80 percent investment policy, including funds with names suggesting a focus on investments with particular characteristics. for example, terms such as “growth,” “value,” or certain terms that reference a thematic investment focus, such as the incorporation of one or more Environmental, Social, or Governance factors.
The amendments will also include a new requirement that a fund review its portfolio assets’ treatment under its 80 percent investment policy, at least quarterly, and will include specific time frames – generally 90 days – for getting back into compliance if a fund departs from its 80 percent investment policy.
The SEC amended the money market rule and separately amended Form PF with respect to large liquidity fund advisers to address problems experienced by certain funds in connection with the COVID-19 pandemic.
The SEC adopted new rules and rule amendments to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers. The new rules and amendments will require SEC registered private fund advisers to provide investors with quarterly statements detailing certain information regarding fund fees, expenses, and performance and to obtain, and distribute to investors, an annual financial statement audit of each private fund it advises and, in connection with an adviser-led secondary transaction, a fairness opinion or valuation opinion.
The final rules will prohibit all private fund advisers from providing investors with preferential treatment regarding redemptions if such treatment would have a material impact and otherwise to provide appropriate disclosures regarding preferential terms.
The final rules will restrict activity that is contrary to the public interest and the protection of investors. Advisers generally will not be prohibited from engaging in certain restricted activities, so long as they provide appropriate specified disclosure and, in some cases, obtain investor consent.
The final rules will not permit an adviser to charge the private fund certain investigation costs where there is a sanction for a violation of the Investment Advisers Act of 1940 or its rules. To avoid requiring advisers and investors to renegotiate governing agreements for existing funds, the Commission adopted legacy status provisions applicable to certain of the restricted activities and preferential treatment provisions. Such legacy status will apply to those governing agreements entered into in writing prior to the compliance date and with respect to funds that have commenced operations as of the compliance date.
The reforms include amendments to the compliance rule under the Advisers Act, requiring all registered advisers, including those who do not advise private funds, to document in writing the required annual review of their compliance policies and procedures. Written documentation of the annual review will help the Commission to determine advisers’ compliance with the rules and identify potential compliance program weaknesses.
The Quarterly Statement Rule, Private Fund Audit Rule, Adviser-Led Secondaries Rule, Restricted Activities Rule, and Preferential Treatment Rule do not apply to investment advisers, with respect to securitized asset funds they advise.
For the Private Fund Audit Rule and the Quarterly Statement Rule, the compliance date will be March 14, 2025, 18 months after the date of publication in the Federal Register.
For the Adviser-Led Secondaries Rule, the Preferential Treatment Rule, and the Restricted Activities Rule, the compliance dates are:
- For advisers with $1.5 billion or more in private funds assets under management: September 14, 2024, 12 months after the date of publication in the Federal Register
- For advisers with less than $1.5 billion in private funds assets under management: March 14, 2025, 18 months after the date of publication in the Federal Register.
- Compliance with the amended Advisers Act compliance rule will be required: November 13, 2023, 60 days after publication in the Federal Register.
SEC Chair, Gary Gensler, testified before the Senate Banking Committee and defended his approach to regulation. Amid criticism over the pace of rule-making, he stressed the agency’s commitment to allowing adequate time for public input and economic analysis. Gensler also told senators that the agency is using artificial intelligence to surveil markets and assist with investigations.
- October 5: PCR Fall Roundtable
- October 10: 13G Monthly; 13H Quarterly
- October 16: Form PF Liquidity Quarterly
- November 10: 13G Monthly
- November 13: Compliance Date for Written Annual Compliance Program Reports
- November 14: 13F Quarterly
- November 29: Form PF Hedge Quarterly
- December 11: 13G Monthly; FINRA Preliminary Statement for Notice Filings Payments Due
Yuter Compliance Consulting provides advising and coaching services trusted by the industry’s chief compliance officers. Amy Yuter, Managing Principal of Yuter Compliance Consulting, founded the Investment Management Compliance Testing Survey and The Philadelphia Compliance Roundtable, and served as a Director of the National Society of Compliance Professionals.
Amy has over 30 years of industry, consultation, and SEC regulatory experience in overseeing investment advisers, investment companies, public companies, broker-dealers, and private funds.
Yuter Compliance Consulting partners with clients to provide personalized consultation and support to enhance compliance resources and improve compliance programs.
For more information, visit www.yutercompliance.com
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