Articles Tagged with Compliance

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Pillsbury hosted a panel event for 100 Women in Hedge Funds on July 28 discussing conflicts of interests hedge fund managers face in managing multiple account types, such as funds, institutional separate accounts and sub-advised mutual funds.  Kristin Snyder, Associate Regional Director for Examinations, San Francisco Regional Office of the Securities and Exchange Commission, emphasized that while the SEC does not expect advisers to have conflict-free business models, clear disclosure and effective mitigation of material conflicts are essential fiduciary duties of an adviser.  Other panelists and representatives of hedge fund managers (Frank Martin, President, Standard Pacific Capital, LLC) and institutional investors (Michelle Young, Managing Director, Ohana Advisors), provided insights into identifying, assessing, mitigating, and managing those conflicts.  Sarah Good, Partner and Co-Leader of Pillsbury’s Securities Litigation and Enforcement practice group, discussed case studies illustrating the SEC’s approach to manager conflicts.  Ildiko Duckor, Partner and co-head of Pillsbury’s Investment Funds and Investment Management group, moderated the panel and offered tips and comments on practical solutions to account conflicts.

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Chair Mary Jo White’s opening remarks on July 15 kicking off the annual broker-dealer compliance outreach program drew a parallel between the goals and work of the SEC and those of compliance professionals. Ms. White acknowledged the challenges and hardship that compliance professionals face, the critical importance of their role to investors and the integrity of the markets. Her acknowledgment comes after the upset that compliance professionals experienced when BlackRock’s CCO was found personally liable and slapped with a civil penalty. (See our previous post regarding BlackRock’s censure and its compliance officer’s personal liability.) Ms. White’s assurance that “it is not our intention to use our enforcement program to target compliance professionals” was hedged by her statement that “we must, of course, take enforcement action against compliance professionals if we see significant misconduct or failures by them.”

Ms. White named the following examination priorities: fee structures; suitability; order routing conflicts; recidivist representatives; microcap activity; excessive trading; transfer agent activity; and issues of importance to retail investors and investors saving for retirement.

Read more of Chair Mary Jo White’s opening remarks at the Compliance Outreach Program for Broker-Dealers HERE.

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Pillsbury partners, Ildiko Duckor and Sarah Good, will participate in the 100 Women in Hedge Funds sponsored event titled “HOT topics in Compliance: Conflicts of Interests in Account Management and more” on July 28, 2015.

In quest for assets and investors, hedge fund managers continue to diversify their client base. When they are successful, they may end up with a broad spectrum of accounts: managed accounts, 40 Act registered funds and proprietary accounts in addition to hedge funds. With variety comes complication – from a compliance perspective.

Are your side-by-side account management procedures up to par?

Join us in a panel discussion with experts from the SEC, Legal/Compliance, and Managers/Investors highlighting just what you need to know about the following compliance hot button topics:

  • Conflicts of interests in the center of the SEC’s focus – arising from trade allocations, expense allocations, related party transactions, side letters and proprietary account biases
  • Best practices you should have in place now
  • Investors’ main concerns during negotiations with the managers and what you need to know about their due diligence expectations

For more information, visit 100 Women in Hedge Funds.

Date & Time
7/28/2015
6:00 pm PT

Location
Pillsbury’s San Francisco office
Four Embarcadero Center
22nd Floor
San Francisco, CA 94111

Event Contact
Jessica Slater

Speakers

Ildiko Duckor
Sarah A. Good
Kristin Synder, Securities and Exchange Commission
Frank Martin, Standard Pacific Capital, LLC
Michelle Young, Ohana Advisors

Sponsors
Pillsbury
100 Women in Hedge Funds

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The Division of Investment Management (the “Division”) of the Securities and Exchange Commission issued a cybersecurity guidance identifying cybersecurity of registered investment companies (“funds”) and registered investment advisers (“advisers”) as an important issue. Recognizing the rapidly changing nature of cyber threats and consequently, the necessity for funds and advisers to protect sensitive information including information of fund investors and advisory clients, the Division is suggesting a number of measures that funds and advisers may wish to consider in addressing the issue. To mitigate cybersecurity risk, the Division suggests that funds and advisers: 1) conduct a periodic assessment of their technology system and security controls and processes to identify potential cybersecurity threats and vulnerabilities, 2) create a strategy that is designed to prevent, detect and respond to cybersecurity threats, and 3) implement the strategy through written policies and procedures, training of officers and employees, and investor and client education. In addition, the Division also suggests that funds and advisers may wish to consider reviewing their operations and compliance programs whether they have measures in place that mitigate their exposure to cybersecurity risk, as well as assessing whether protective cybersecurity measures are in place at service providers that they rely on in carrying out their business operations.

A full version of the cybersecurity guidance is available HERE.

Please call an Investment Funds and Investment Management attorney with your inquiries regarding your firm’s cybersecurity risks and compliance procedures that address them.

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On April 20, 2015, the Securities and Exchange Commission (“SEC”) issued an order against an investment advisory firm and its former chief compliance officer, for violating Sections 206(2) and 206(4) and rule 206(4)-7 of the Investment Advisers Act and rule 38a-1 of the Investment Company Act. The SEC charged BlackRock Advisors LLC with breaching its fiduciary duty by failing to disclose a conflict of interest involving the outside business activity of one of its top-performing portfolio managers, Daniel J. Rice III. BlackRock agreed to be censured and to settle the charges by paying a $12 million penalty and engaging an independent compliance consultant to conduct an internal review.

During his tenure as an energy sector portfolio manager at BlackRock, Rice founded an oil and gas exploration and production company, formed a joint venture with a public company held in his managed funds, and acquired a second public company also held in BlackRock portfolios. BlackRock learned of Rice’s outside business activity, but allowed him to continue his involvement. The SEC found that BlackRock failed to report the conflicts of interest to the board of directors of the affected registered funds or advisory clients and failed to monitor and reassess Rice’s outside business activity after discovering the conflicts of interest. The SEC also censured BlackRock for failing to maintain and implement internal policies regarding the outside activities of employees. While Blackrock’s policies required employees to report potential conflicts and to seek pre-approval before serving on a board of directors, the firm failed to outline how employees’ outside activities would be assessed for conflicts purposes or to identify the individuals responsible for assessing outside activities.

Additionally, the SEC found BlackRock’s former chief compliance officer personally liable for causing the failure by BlackRock funds to report material compliance matters—namely Rice’s violation of BlackRock’s private investment policy—to their board of directors. The ex-officer agreed to pay a $60,000 civil penalty to settle the charge.

If you have question concerning your firm’s internal policies on the outside business activities of employees, please reach out to your Pillsbury attorney contact.

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The Securities and Exchange Commission (“SEC”) issued a cease-and-desist order on February 19, 2015 against SEC-registered Logical Wealth Management, Inc. and owner, Daniel J. Gopen, (together, “Respondents”).  The list of violations the SEC found the Respondents committed is extensive and includes improper registration, compliance, and recordkeeping. The SEC found the Respondents exaggerated their assets under management in order to register with the SEC, falsely reported their place of business as Wyoming, a state in which advisers are not regulated, and did not have compliance policies and procedures in place or books and records available to the SEC.  The SEC has ordered the Respondents to cease and desist, revoked Logical Wealth’s registration, barred Mr. Gopen from any advisory activity and imposed a $25,000 civil penalty.

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The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) recently released its annual examination priorities.  In 2015, OCIE will focus on three primary “themes” involving broker-dealers, investment advisers and transfer agents:

  1. Retail Investors – OCIE will look at important matters for retail investors and investors preparing for retirement including whether the products, advice, services and information being offered to them is consistent with current laws, rules and regulations;
  2. Market-Wide Risks – this is a broad theme which focuses on structural risks and trends involving whole industries or multiple firms; and
  3. Data Analytics – OCIE continues to increase its ability to analyze large amounts of data to identify registrants that may be conducting illegal activity.

Retail Investors – Advisers to retail investors and investors saving for retirement will be scrutinized by the SEC in 2015. The OCIE will assess fee selection where the adviser offers a variety of fee arrangements as well as reverse churning. Further, where advisers recommend moving retirement assets from employer-sponsored plans into other investments or accounts, OCIE will examine whether the sales practices used were improper or misleading. OCIE will also be reviewing the suitability of complex or structured products and higher yield securities and how well representatives in branch offices are being supervised by the home office.  The SEC may have an interesting opportunity to demonstrate whether it is serious in going after those who target seniors.

On February 5, 2015, SEC Commissioner Luis A. Aguilar and Investor Advocate, Rick A. Fleming, gave speeches at The American Retirement Initiative Winter Summit about advocating for investors saving for retirement and protecting elderly investors from financial exploitation.

Under the umbrella theme of “retail investors,” the OCIE will be assessing alternative investment companies and the focus of the exams will be (i) liquidity, leverage and valuation; (ii) the way the funds are marketed; and (iii) the internal controls, staffing, funding and empowerment of boards, compliance and back-offices. Mutual funds with material exposure to interest rate increases will be reviewed by OCIE to ensure they have the appropriate compliance policies and procedures and trading and investment controls in place to prevent their disclosures from being misleading and to be sure their investment and liquidity profiles are consistent with the fund’s disclosures.

Assessing Market-Wide Risks – The OCIE will focus in 2015 on structural risks and trends that involve whole industries or multiple firms. In collaboration with the Division of Trading and Markets and the Division of Investment Management, the OCIE will monitor the largest asset managers and broker-dealers. Through a risk-based approach, the OCIE will conduct annual examinations of all clearing agencies that have been designated systemically important. Furthering the OCIE’s 2014 efforts to examine the cybersecurity preparedness of registrants, 2015 will see a continuation of the initiative and an expansion of the initiative to include transfer agents. OCIE will also be looking into whether firms are giving priority to trading venues due to credits or payments for order flow, thus violating their best execution duties.

Data Analytics – The OCIE has made strides in developing data analytics that it can use to identify and examine firms and other registrants that may be engaged in fraudulent or illegal activity. The examination initiatives the OCIE will be using data analytics to examine include recidivists, microcap fraud, excessive trading and anti-money laundering.

Other Initiatives – Along with the primary themes discussed above, the SEC will continue to examine never-before examined investment advisers and newly registered municipal advisers. Advisers to private equity funds can expect to have their fees and expenses examined as a result of OCIE’s observed high rates of deficiencies. In addition to examining proxy advisory service firms, OCIE will also look at investment advisers’ compliance with their fiduciary duty to vote proxies on their investors’ behalf.

Advisers and broker-dealers should always be prepared for an SEC examination and ensure all written policies and procedures are in place and regularly audited for efficacy and compliance. Should you be subject to an examination, any deficiencies noted by the SEC should be addressed and rectified in a timely manner.

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Annual Compliance Obligations—What You Need To Know

As the new year is upon us, there are some important annual compliance obligations Investment Advisers either registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”) and Commodity Pool Operators (“CPOs”) or Commodity Trading Advisors (“CTAs”) registered with the Commodity Futures Trading Commission (the “CFTC”) should be aware of.

See upcoming deadlines below and in red throughout this document.

The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers, CPOs and CTAs (collectively, “Managers”).  The summary is not intended to be a comprehensive review of an Investment Adviser’s securities, tax, partnership, corporate or other annual requirements, nor an exhaustive list of all of the obligations of an Investment Adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law.  Although many of the obligations set forth below apply only to SEC-registered Investment Advisers, state-registered Investment Advisers may be subject to similar and/or additional obligations depending on the state in which they are registered.  State-registered Investment Advisers should contact us for additional information regarding their specific obligations under state law.

List of annual compliance deadlines:

State registered advisers pay IARD fee November-December (of 2014)
Form 13F (for 12/31/14 quarter-end) February 17, 2015*
Form 13H annual filing February 17, 2015
Schedule 13G annual amendment February 17, 2015
Registered CTA Form PR (for December 31, 2014 year-end) February 17, 2015
TIC Form SLT January 23, 2015 (for December 2014)
TIC Form SHCA March 6, 2015
TIC B Forms Monthly report (December 2014) – by January 15, 2014Quarterly report (December 31, 2014) – by January 20, 2014
Affirm CPO exemption March 2, 2015
Registered Large CPO Form CPO-PQR December 31 quarter-end report March 2, 2015
Registered CPOs filing Form PF in lieu of Form CPO-PQR December 31 quarter-end report March 31, 2015
Registered Mid-Size and Small CPO Form CPO-PQR year-end report March 31, 2015
SEC registered advisers and ERAs pay IARD fee Before submission of Form ADV annual amendment by March 31, 2015
Annual ADV update March 31, 2015
Delivery of Brochure April 30, 2015
Delivery of audited financial statements (for December 31, 2014 year-end) April 30, 2015
California Finance Lender License annual report (for December 31, 2014 year- end) March 15, 2015
Form PF filers pay IARD fee Before submission of Form PF
Form PF for large liquidity fund advisers (for December 31, 2014 quarter end) January 15, 2015
Form PF for large hedge fund advisers (for December 31, 2014 quarter end) March 2, 2015
Form PF  for smaller private fund advisers and large private equity fund advisers (for December 31, 2014 fiscal year-end) April 30, 2015
FBAR Form FinCEN Report 114 (for persons meeting the filing threshold in 2014 and those persons whose filing due date for reporting was previously extended by Notices 2013-1, 2012-2, 2012-1, 2011-2 and 2011-1) June 30, 2015
FATCA information reports filing for 2014 by participating FFIs March 31, 2015
Form D annual amendment One year anniversary from last amendment filing.

* Reflects an extended due date under Exchange Act Rule 0-3.  If the due date of filing falls on a Saturday, Sunday or holiday, a report is considered timely filed if it is filed on the first business day following the due date.

CONTINUE READING…

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On September 22, 2014, the Securities and Exchange Commission (the “SEC”) charged private equity fund adviser, Lincolnshire Management, Inc. (“Lincolnshire”), with misallocating expenses shared between two portfolio companies. Lincolnshire integrated two portfolio companies that were each owned by a different Lincolnshire private equity fund. Lincolnshire owed a fiduciary duty to each fund and such fiduciary duty was breached when Lincolnshire would charge one portfolio company more than its fair share for expenses benefiting both portfolio companies.

Lincolnshire was aware of the complexity involved in sharing expenses and did have an expense allocation policy in place, though it was not in writing. The instances that resulted in a breach of Lincolnshire’s fiduciary duty were those in which the verbal expense allocation policy was not followed. The SEC also found, with respect to the integration of the portfolio companies, that Lincolnshire did not have sufficient written policies and procedures in place to prevent violations of the Investment Advisers Act of 1940 (“Adviser’s Act”). Lincolnshire agreed to a settlement with the SEC in excess of $2.3 million.

It is interesting to note that, while the SEC announced several months ago it had conducted presence exams and found many issues in private equity managers, Lincolnshire was not one of the companies subject to a presence exam. Private equity managers who have not had a presence exam should not assume they are unlikely to be examined outside of the presence exam protocol. This enforcement action reinforces the requirement that private equity fund advisers are required to have policies and procedures in place that are designed to prevent violations of the Adviser’s Act and other securities laws. More importantly, once in place, such policies and procedures must be monitored by the chief compliance officer and observed by all “covered persons.”

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The Financial Markets Association is hosting its annual Securities Compliance Seminar in Nashville, TN on April 23-25,2014.  This seminar is intensive training for intermediate as well as seasoned compliance specialists, internal auditors, attorneys, and regulators that focuses on current compliance topics, new rules or interpretations and regulatory developments, including a Dodd-Frank regulatory update.  The seminar gives attendees the opportunity to sharpen their skills through general and breakout sessions.  Satisfy CLE/CPE requirements.

Click HERE to view the complete program.

The brochure is also available on FMA’s website, www.fmaweb.org