Articles Tagged with Investment Advisers

Published on:

Earlier this month, the SEC announced the creation of its Office of Risk and Strategy  to operate within its Office of Compliance Inspections and Examinations (OCIE).  The new office will consolidate and streamline OCIE’s risk assessment, market surveillance, and quantitative analysis teams and provide operational risk management and organizational strategy for OCIE.

Headed by Peter B. Driscoll, a former E&Y auditor with law and CPA degrees, the Office of Risk and Strategy will lead the OCIE’s risk-based and data-driven National Examination Program.  Mr. Driscoll emphasized at the Investment Adviser Association’s annual compliance conference in Washington that private equity funds and private fund advisors would “continue to be a big focus” for the exam unit as well this year.  While this is no surprise, Driscoll also added that the focus on hedge funds will zero in on such areas as portfolio management, trading and back-office operations.  This may suggest a broader, deeper and more focused scrutiny on hedge funds than just the trading offenses we are familiar with from national headlines.

The SEC has been busy: it has visited at least 25% of ‘never-before-examined’ advisers, numbering over 700, which surpasses the SEC’s own goal.  There is no reason to expect the SEC’s enthusiasm to decline in this area in 2016.  If you are a hedge fund manager that has never been examined before, you may get a knock on your door this year.

Published on:

At the end of this month, the annual updating amendments for investment advisers’ Form ADV will be due. The following are some of the 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.

This summary consists of the following segments: (i) List of Annual Compliance Deadlines; (ii) 2016 Enforcement Priorities In The Alternative Space; (iii) New Developments; and (iv) Continuing Compliance Areas.

See the deadlines below and in red

CONTINUE READING…

 

Published on:

In commemorating the 75th anniversary of the Investment Company Act and Investment Advisers Act, David Grim discussed his views about the past, present and future of the investment management industry.  He selected four topics which in his opinion best illustrate the adaptability which the authors gave the 1940 laws governing the asset management industry.

Those topics are: (1) the role of exchange-traded funds (ETFs), (2) the role of private fund advisers, (3) the role of disclosure and reporting in our regulatory framework, and (4) the role of the board in fund oversight.

He called disclosure one of the critical pieces of the 40 Acts, and noted that the amount of information available to investors about funds and advisers through publicly available forms, prospectuses and offering documents has increased exponentially since 1940.  Specifically regarding private funds, he noted that the vast number of newly registered advisers after the passage of Dodd-Frank have resulted in a new era of transparency that has been beneficial to both investors and private fund advisers, in addition to the SEC.  The public availability of aggregated information has shed light on persistent questions and some misconceptions about the private fund industry. Investors have also benefitted by being able to make more informed choices when investing.

The full remarks are available here.

Published on:

(This article was published in the first February 2016 issue of “The Review of Securities and Commodities Regulation” and is reprinted here with permission.)

The last half of 2015 has been characterized by a lot of debate and press attention on the role of the Chief Compliance Officer (“CCO”) at investment advisers. It has attracted attention within the highest levels at the SEC as reflected in a series of public statements and speeches, including the public disagreement of two Commissioners on whether or not there is a new trend targeting CCOs. While this debate has been unusual, it has led to a healthy and productive discussion about the CCO’s role. Below, we will discuss in turn: (a) recent statements over the past six months by SEC leaders about CCOs and whether or not there is a new trend targeting them, (b) what qualities are essential to an effective CCO and whether or not the job should be outsourced, and (c) how an effective compliance leader can prevent and detect any problems and be truly effective in preparing the firm for SEC examinations.

CONTINUE READING… 

Published on:

On January 11, the Office of Compliance Inspections and Examinations (OCIE) of the SEC announced its 2016 Examination Priorities (“Priorities”). To promote compliance, prevent fraud and identify market risk, OCIE examines investment advisers, investment companies, broker-dealers, municipal advisors, transfer agents, clearing agencies, and other regulated entities. In 2016, OCIE will continue to rely on the SEC’s sophisticated data analytics tools to identify potential illegal activity.

This year, private fund advisers should pay attention to the following OCIE Priorities:

  • Side-by-side management of performance-based and asset-based fee accounts: controls and disclosure related to fees and expenses
  • Cybersecurity: testing and assessments of firms’ implementation of procedures and controls
  • High frequency trading: excessive or inappropriate trading
  • Liquidity controls: potentially illiquid fixed income securities – focus on controls over market risk management, valuation, liquidity management, trading activities
  • Marketing / Advertisements: new, complex, and high risk products, including potential breaches of fiduciary obligations
  • Compliance controls: focus on repeat offenders and those with disciplined employees

Highlights for other market participants:

  • Never-Before-Examined Investment Advisers and Investment Companies: focused, risk-based examinations will continue
  • Broker-Dealers

    :

    • Marketing / Advertisements: new, complex, and high risk products and related sales practices, including potential suitability issues
    • Fee selection / Reverse Churning: multiple fee arrangements – recommendations of account types, including suitability, fees charged, services provided, and disclosures
    • Market Manipulation: pump and dump; OTC quotes; excessive trading
    • Cybersecurity: testing and assessments of firms’ implementation of procedures and controls
    • Anti-Money Laundering: missed SARs filings; adequacy of independent testing; terrorist financing risks
    • Registered representatives in branch offices – focus on inappropriate trading
    • Retirement Accounts: suitability, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices
  • Public Pension Advisers: pay to play, gifts and entertainment
  • Mutual Funds and ETFs: liquidity controls – potentially illiquid fixed income securities
  • Immigrant Investor Program: Regulation D and other private placement compliance

For additional details, visit the SEC’s Examination Priorities for 2016. Please call an Investment Funds and Investment Management Attorney to discuss your firm’s risk areas.

Published on:

The Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released a “Risk Alert” on November 9, 2015, the purpose of which is to raise awareness of compliance issues observed in connection with the examination of registered investment advisers and investment companies that outsource their Chief Compliance Officers (“CCO”) to unaffiliated third parties.

We encourage our registered investment adviser clients, including hedge fund and private equity managers, that have outsourced their firm’s CCO function to compliance service providers or other third parties to carefully review the following SEC risk alert summary and review their outsourcing arrangement in view of the SEC’s observations.

Outsourced CCO Initiative

The OCIE staff (the “staff”) conducted 20 examinations as part of an Outsourced CCO Initiative to evaluate the effectiveness of compliance programs and outsourced CCOs by considering a number of factors such as:

  • Whether the CCOs appropriately identified, mitigated, and managed compliance risk;
  • Whether the compliance program was designed to reasonably prevent, detect and remedy violations of federal securities laws;
  • Whether there was open communication between those with compliance responsibilities and service providers;
  • Whether the CCOs have authority to influence compliance policies and procedures of the registrants and had sufficient resources to carry out their responsibilities; and
  • Whether compliance was an important part of the registrants’ culture.

Observations of successfully outsourced CCOs

The staff observed compliance strength in outsourced CCOs with the following characteristics:

  • Regular and often in-person communication between the CCOs and registrants;
  • Strong relationships between the CCOs and registrants;
  • Registrants’ support of the CCOs;
  • CCOs having independent access to documents and information; and
  • CCOs having knowledge of the registrants’ business and regulatory requirements.

Observations of unsuccessfully outsourced CCOs

The staff observed compliance weakness in outsourced CCOs with the following characteristics:

  • CCOs providing compliance manuals based on templates not tailored to the registrants’ businesses and containing inappropriate policies and procedures;
  • CCOs visiting registrants’ offices infrequently, conducting limited annual reviews of documents or insufficient evaluation and assessment of training pertaining to compliance matters;
  • CCOs not performing critical control testing procedures and lacking documentation to evidence testing of control procedures;
  • Critical areas of the registrants’ operations were not identified by CCOs resulting in certain compliance policies and procedures not being adopted, including those necessary to address conflicts of interest;
  • CCOs using generic checklists to gather pertinent information regarding the registrants;
  • Registrants providing incorrect or inconsistent information to the CCOs about firm business practices;
  • Lack of follow-up by CCOs with registrants to resolve discrepancies; and
  • CCOs having limited authority within the registrants’ organizations to improve adherence to compliance policies and procedures and implement necessary changes in disclosure practices, such as fees, expenses and other areas of client interest.

Conclusion

The staff reminds registrants that CCOs, whether direct employees, contractors or consultants, must have sufficient knowledge and authority to fulfill their role. In addition, each registrant is responsible for the adoption and implementation of its compliance program and accountable for any deficiencies.

Finally, the staff emphasizes that all registrants, and especially those that use outsourced CCOs, may find the issues identified in the Risk Alert useful to evaluate whether (i) their business and compliance risks have been appropriately identified (ii) policies and procedures are tailored to the specific risks their businesses encounter and (iii) their respective CCOs have the necessary power to effectively perform their responsibilities. Registrants and their funds are advised to review their business practices regularly to determine whether the practices are consistent with compliance obligations under Rule 206(4)-7 under the Investment Advisers Act of 1940 and Rule 38a-1 under the Investment Company Act of 1940.

Please contact the Investment Funds and Investment Management Group if you would like to discuss the SEC alert or need help reviewing your outsourcing arrangement.

Published on:

The regulatory environment for SEC-registered advisers has become more complex as the result of a more aggressive and interconnected Securities and Exchange Commission (SEC). The connecting hub within the SEC is the Office of Compliance Inspection and Examination (OCIE), which serves as the “eyes and ears” of the SEC. The OCIE often is the first line of contact between an investment adviser and a potential referral to the SEC Enforcement Division’s Asset Management Unit (AMU), which is devoted exclusively to investigations involving investment advisers, investment companies, hedge funds and private equity funds.

The OCIE’s three main areas of focus for their 2015 exam priorities are (i) protecting retail investors, (ii) issues related to market-wide risks, and (iii) data analysis as a tool to identify registrants engaging in illegal activity.

Overlapping with the OCIE’s frontline examination role is the Compliance Program Initiative, which began in 2013 by sanctioning three investment advisers for ignoring problems within their compliance programs. The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems. As such, any issues raised in a deficiency letter resulting from an examination are ripe for follow-up as the starting point of a subsequent examination. In the current regulatory environment—where violations of compliance policies and procedures can serve as the basis of enforcement actions—investment advisers and their compliance professionals need to pay close attention to the implementation, follow-through and updating of every aspect of their compliance program.

READ MORE…

Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

Published on:

By

On November 3, 2015, the Securities and Exchange Commission (SEC) announced that Fenway Partners, LLC (Fenway Partners), a private equity fund adviser, agreed to pay more than $10 million to settle charges that it failed to disclose conflicts of interest to a fund client and omitted material facts to investors.

SEC Findings

Fenway Partner’s current and former principals as well as the chief financial officer did not:

  • Disclose to Fenway Capital Partners Fund III, L.P. (the Fund) or its investors that Fenway Partners caused certain portfolio companies of the Fund to cancel management services agreements—subject to management fee offsets—between Fenway Partners and portfolio companies.
  • Disclose to the Fund or its investors the creation of the affiliated entity Fenway Consulting Partners, LLC (Fenway Consulting).
  • Disclose to the Fund or its investors that Fenway Consulting received $5.74 million for providing services to portfolio companies similar to those previously provided by Fenway Partners and often using the same employees—without a management fee offset against the fees paid to Fenway Partners.
  • Disclose in its capital call notice to investors in connection with a portfolio company investment that $1 million of the $4 million total capital call would be used to pay Fenway Consulting fees.
  • Disclose to the advisory board or the investors the conflict of interest concerning cash incentive plan payments to current and former Fenway Partner principals.
  • Disclose, as related party transactions, in the financial statements provided to investors, those payments received by Fenway Consulting for its services to portfolio companies.

The press release is available HERE.

A full copy of the SEC order is available HERE.

Published on:

By

This is a reminder that the 2016 IARD account renewal obligation for investment advisers (including exempt reporting advisers) starts this November. An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 16, 2015 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 18, 2015 – Deadline for full payment of Preliminary Renewal Statements. In order for the payment to be posted to its IARD Renewal account by the December 18 deadline, an investment adviser should submit its preliminary renewal fee to FINRA through the IARD system by December 14, 2015.

December 29, 2015 – January 2, 2016 – IARD system shut down. The system is generally unavailable during this period.

January 4, 2016 – Final Renewal Statements are available for printing. Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 15, 2016 – Deadline for full payment of Final Renewal Statements.

For more information about the 2016 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

Please contact us if you have questions.

Published on:

The SEC, again, makes it clear:  all aspects of fee, expense and other arrangements must be disclosed accurately and in detail before commitments are accepted.

The SEC recently announced a settlement with three investment advisor affiliates of The Blackstone Group (the Advisors) that were accused of breaching their fiduciary duty to funds they manage or managed, failing to make necessary disclosure to the funds’ investors and failing to adopt and implement policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and its rules. The charges leveled against the Advisors centered on conflicts of interest involving monitoring fees and legal fee discounts. At the time the alleged violations occurred, each of the Advisors was an SEC-registered investment advisor. Although the Advisors neither admitted nor denied the SEC’s findings, they made several changes to existing business practices, agreed to pay the SEC a $10 million penalty and agreed to remit to their funds fees and interest approximating $29 million in response to allegations of violations of Section 206(2) and Section 206(4) of the Investment Advisers Act and Rules 206(4)-8 and 206(4)-7 thereunder.

Accelerated Monitoring Fees

According to the SEC, the Advisors entered into monitoring agreements with each portfolio company owned by their funds and received, in addition to the annual management fees paid by their funds, monitoring fees from the portfolio companies. In accordance with the funds’ limited partnership agreements, fifty percent of the Advisors’ monitoring fees was used to offset the annual management fee otherwise payable by the funds. Under certain of the monitoring agreements, in the event of a private sale or initial public offering of a portfolio company, monitoring fees could be accelerated for the remaining years of the agreements’ terms (including extension periods), discounted to present value and paid in advance upon termination of the agreements. Notwithstanding that fifty percent of the accelerated monitoring fees inured to the benefit of the funds and their limited partners, the SEC found the arrangements problematic because the value of the funds’ assets was reduced by the net amount of the accelerated monitoring fee payments when the portfolio companies were sold or taken public, thereby reducing amounts available for distribution to the limited partners.

The SEC was particularly offended by the fact that, in certain instances, fees were accelerated beyond the period during which a fund owned the relevant portfolio company or beyond the period during which services were performed by the Advisors. In addition, the SEC alleged that, although the Advisors disclosed their ability to collect monitoring fees to the funds and the funds’ limited partners before capital was committed to the funds, the Advisors did not disclose the practice of accelerating monitoring fees prior to the time the Advisors received the accelerated fees. The SEC conceded, however, that monitoring fee acceleration was disclosed in distribution notices, quarterly management fee reports and, where there were public offerings of portfolio companies, in SEC filings on Form S-1. The SEC further acknowledged that the funds’ limited partner advisory committees could have objected to acceleration and arbitrated the matter, but never took such action. The problem, according to the SEC, is that, because of the conflict of interest, the Advisors could not effectively consent to the acceleration.

Disparate Discounts on Legal Fees

The Advisors also negotiated a single agreement with legal counsel pursuant to which legal counsel provided services to the funds and the Advisors.  According to the SEC, although the funds generated significantly more work than the Advisors, the Advisors received substantially greater discounts than the funds. In addition, the difference in the discounts was not disclosed to the funds, the funds’ advisory committees or limited partners. Again, because of the conflict, the Advisors could not consent effectively.

Takeaways

The findings made and penalties imposed by the SEC in the Blackstone matter highlight the SEC’s disdain of conflicts of interest between advisors and the private funds they manage. More importantly, the matter makes clear the SEC’s intention to go after even the most common business practices in private equity, if the SEC determines that aspects of those practices are not disclosed fully prior to the time capital commitments are accepted. Nothing is sacrosanct.

As was the case with Blackstone, a fund’s private placement memorandum typically discloses that the fund’s management entities and affiliates of those entities may receive fees to which the fund will not be entitled. It also customarily discloses actual and potential conflicts involving fund counsel. The SEC has made clear that those disclosures will not be sufficient if they do not describe all aspects of the relevant conflicts clearly, accurately and completely. Broad and generalized disclosures, even where sophisticated and experienced fund investors are able to discern the nature of the conflict, will not protect against violations of Sections 206(2) and 206(4) of the Investment Advisers Act and the rules promulgated under those sections of the Act. Further, disclosures made after investors’ capital commitments are accepted may not be sufficient.

This case also highlights the fact that the SEC will push back against attempts by an SEC-registered investment advisor to limit its fiduciary duty to the funds it advises. In addition, it appears that the SEC will apply Section 206(2) and Section 206(4) of the Investment Advisers Act broadly and with a big stick.

As is always the case, cooperation with the SEC in connection with an examination or investigation is critical. In addition, as is evidenced in the Blackstone matter, taking remedial action to eliminate or ameliorate conflicts can be very helpful to an advisor that is under SEC scrutiny and seeking to minimize exposure to punitive action.