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Communiques

The latest compliance news from SEC3 and CCO3.

More SEC Settlements - This Time Form PF Filing Deficiencies

June 04, 2018

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through 2016). Eleven of them became registered around the same time or after the initial Form PF filing deadline. One of the other two, although initially registered in 2008, never filed Form PF. The last, a firm initially registered in 1981, appears to have made only the initial filing.

These filings - important to the agency for monitoring industry trends, identifying risks, informing rulemaking, and targeting investigations - make for low-hanging fruit and a relatively easy violation to identify when syncing registrants Form PF filings with their private fund reporting on Schedule D, Section 7.B.(1) of Form ADV Part 1A. All 13 matters resulted in settlements with identical penalties of $75,000 regardless of the number of years missed or other varying fact patterns. For each, violations were cited under Advisers Act Rule 204(b)-1, reporting by investment advisers to private funds.

 

Two Recent Enforcement Actions Against Private Fund Advisers

May 15, 2018

The industry should not misinterpret the SEC’s 2018 National Exam Program Priorities as a shift away from private fund advisers. As discussed during the SEC’s recent National Compliance Outreach Seminar for Investment Companies and Investment Advisers held on April 12, 2018, it is clear that private fund advisers have been “normalized” within the SEC‘s overall priorities with 37% of advisers managing at least one private fund. This is further supported by the broader, cross-section of private fund investors including 25% pensions, 11% individuals and 10% non-profits . For various reasons, including the broad authority private fund advisers (or their affiliates) have over the day-to-day operations of a private fund, expense allocation, revenue streams and valuation will always be focus areas during any routine examination of a private fund adviser.

When an asset manager’s secret sauce leaves a bad taste with investors in terms of poor performance, significant redemptions can follow. Below are two recent examples where the private fund adviser’s subsequent actions burnt their kitchens down. Last week, the SEC issued press releases involving serious misconduct by two private fund advisers including a failure to supervise settlement with the CFO of one of the advisers.

Visium Asset Management

Sham quotes, insider trading abuses and the CCO was not named

On May 8th the SEC announced that Visium Asset Management, a hedge fund advisory firm, agreed to settle charges related to mispricing assets and insider trading. Separately, the firm’s CFO agreed to settle charges that he failed to supervise the portfolio managers involved when, according to the SEC, there were a number of red flags that should have alerted the CFO to the asset mispricing.

The SEC claims two portfolio managers at the firm inflated the value of securities held by its hedge funds, resulting in $3.15 million in excess fees earned by the adviser. The SEC’s settlement with the CFO claims the CFO failed to supervise the portfolio managers as a result of not recognizing certain red flags including an excessive number of valuation over-rides that, more often than not, resulted in higher asset prices. The order involving the firm, found that certain portfolio managers traded in securities based on material non-public information gleaned from insiders working as paid consultants to the firm.

It is unclear exactly why the CCO was not named. We do know the SEC noted that Visium’s policies and procedures were:

“…reasonably designed to prevent the misuse, of material, nonpublic information by the firm and persons associated with it. Visium’s written policies and procedures concerning prevention of the misuse of material, nonpublic information were contained in its compliance manuals in effect at the relevant time. The policies prohibited employees from trading on any material, nonpublic information they obtained in the course of their employment, and listed types of information that could constitute material, nonpublic information. The policies also instructed employees to alert the Chief Compliance Officer (“CCO”) if there was a possibility information they obtained was material, nonpublic information, or if they had any questions about whether information they obtained was material, nonpublic information. Each employee was required to review Visium’s insider trading policies and procedures and to sign an acknowledgement that, among other things, he or she was prohibited from trading on the basis of material, nonpublic information. The procedures also addressed the use of outside consultants. Specifically, a “Checklist Resolving Issues Concerning Insider Trading” recommended, among other things, that employees should (a) ensure all agreements with third-party research consultants contain an insider trading prohibition disclosure, and (b) remind consultants that Visium should not be a recipient of actual or potential material, nonpublic information.”

However, the SEC does state that Visium 1--had inadequate measures in place to enforce its policies and to ensure the Checklist was followed, and 2--took inadequate steps to monitor employees’ communications with consultants.

While we do not have enough information concerning the CCO’s role in this case and Visium’s supervisory structure, every CCO should carefully examine their own firm’s supervisory structure and ensure that it is explicit in all compliance areas. CCOs are not required to be supervisors. CCOs should consider ensuring knowledgeable persons are clearly defined as supervisors and those supervisors understand their obligations.

Premium Point Investments

Conspired broker-quotes

On May 9th the SEC announced that it has charged investment adviser Premium Point Investments with fraudulently inflating the value of its private funds by hundreds of millions of dollars. The SEC also charged the CEO/CIO, a former partner/PM, and a former trader.

According to the SEC complaint, Premium Point was operating two schemes to inflate valuations. The more recent scheme, which ran from at least September 2015 through March 2016, during a period of poor performance and requests from large investors to redeem, involved a secret deal where, in exchange for sending trades to a broker-dealer, the adviser received inflated broker quotes from the broker-dealer for certain mortgage-backed securities which the SEC alleges were used to inflate the value of holdings, exaggerating returns. The longer running scheme involved Premium Point’s undisclosed policy of using “imputed” mid-point prices of securities even when actual mid-point prices were available and since 2015 included the “fixed” broker-quote to calculate the “imputed” values. The SEC also took exception to the fact that Premium Point mislead a prospect in 2011 who said they would not invest if Premium Point used “imputed” mid-points to value securities. Based on representations by Premium Point that imputed values would not be used, the prospect invested, and Premium Point used “imputed” mid-points.

The SEC’s complaint charges the defendants with fraud and/or aiding and abetting fraud, and seeks permanent injunctions, return of allegedly ill-gotten gains with interest, and civil penalties. No person in the complaint was identified as a compliance professional.

All advisers should interpret the National Exam Program’s annual priority list as “additional” focus areas. Private fund advisers are often viewed by examiners as having a business model where potential “higher-risk” activities may exist. The SEC typically will focus on those higher risk areas when examining private fund advisers and want to ensure adequate policies and procedures are in place.


Kristin Snyder, Co-National Associate Director, OCIE National Exam Program (San Francisco Regional Office), “Panel I: Insights from SEC Leadership Regarding Program Priorities” [replay Part 1, time index 1:40], National Compliance Outreach Seminar for Investment Companies and Investment Advisers (Washington, D.C.), April 12, 2018.

 

2018 - Are you ready for your next SEC exam?

March 19, 2018

The pool of registered investment advisers that will be subject to an SEC exam in 2018 is at the highest level seen in years. The SEC projects it will examine 15% of the RIA population. A 40% uptick in IA exams makes it even more paramount that you be ever-prepared should your firm get the call.

Being prepared for an SEC exam makes all the difference in the direction an exam could take; especially with the SEC’s risk-based approach. The SEC takes a risk-based approach to almost all exams. Given this, firms have a bit more control in whether or not an exam can be closed quicker.

We are seeing that registrants have more control now than in the past with respect to controlling an exam.

This Wednesday, March 21, 2018, Janaya Moscony will team up with Mark Dowdell, Assistant Director, Philadelphia Regional Office and Shelley Sims, General Counsel/CCO, FIS Group Inc., in kicking off the 20th Annual IA Compliance Conference.

The panel will be sharing insights into what to do before examiners arrive to ensure you are ready for an exam. You can expect to hear the SEC’s “Top 10” focus areas, the items being sought in current document requests letters and the tried and true exam prep techniques that have served your peers who have been through a recent exam well.

Janaya will discuss SEC3’s Exam Tips for firms to consider when dealing with an SEC exam in today’s regulatory environment.

SEC3 friends wishing to attend can utilize the discount code SPEAKER300 and this will entitle you to a $300 discount when you register for the conference. As always, feel free to please reach out to us if you have questions on how to frame an exam and get the examiners in and out of your business as swiftly as possible.

 

Navigating the Changes to Form ADV

January 12, 2018

On August 25, 2016, the U.S. Securities and Exchange Commission adopted numerous substantive and technical amendments to Form ADV. While the adopting release required advisers to begin complying with the amendments as of October 1, 2017, most advisers will only be considering these changes in Q1 of 2018 as they prepare their annual ADV amendments. Some of the ADV disclosure changes are relatively simple, but others are trickier to assess.

The majority of advisers will generally need to expand their disclosure related, for example, to social media platforms used for firm business, the number of offices, and whether the firm engages an outsourced CCO. However, separate account managers will notice significantly more disclosure requirements of their separately managed accounts including information related to categories of investments, borrowings, derivative exposure, and custodians. In addition, private fund advisers should be aware that while the conditions set forth in the 2012 ABA No-Action Letter for assessing whether an adviser can use an umbrella registration have not changed, the disclosure required for relying advisers has been expanded.

There are several other clarifying and technical amendments to assess as you initiate your annual ADV update this year. As you go through the new Form ADV, feel free to reach out if you need assistance.

 

Overlooked Benefits of E&O/D&O

December 13, 2017

While asset managers should always be aware of the protections provided by their E&O/ D&O coverage, there are more reasons than ever to think about it now.

  • The SEC continues to push forward stressing individual accountability by taking action against individuals. In its 2017 fiscal report, the SEC’s Enforcement Division cites individual accountability as one of its core enforcement principles. Since Clayton took the helm as SEC Chairman, we have seen that the SEC continues to name individuals in most cases.
  • Investors will continue to take action against firms when they suspect they can recoup losses.
  • Most insurance companies are now offering a premium credit or reimbursement to firms conducting mock audits so it’s not completely “out-of-pocket”.
  • You can request a free assessment of your current policy to identify gaps where you may need additional coverage AND where you may be able to add the coverage with little to no additional premium.

While compliance is of course our forte, we view insurance as just one necessary control to help mitigate your risks.

 

SEC3 Newsletter

February 27, 2017

Commentary: How Compliance Officers & Firms Can Help Limit CCO Personal Liability

This article originally appeared on the Thomson Reuters Regulatory Intelligence subscription service for compliance and risk professionals and is reprinted with the permission of Thomson Reuters.

How Compliance Officers & Firms Can Help Limit CCO Personal Liability


This January, Janaya Moscony, president of SEC3, was interviewed by Julie DiMauro - Thomson Reuters.

Reuters Video


CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO.

Listeners will learn:

  • What terms and conditions should Chief Compliance Officers be aware of with respect to insurance policies and riders?
  • Are CCOs still covered once they leave a firm?
  • What factors may a board wish to consider in connection with approving or renewing a D&O/E&O insurance policy?
  • What are the protections/defenses in place for fund directors? Are CCOs afforded the same protections? Also, is outside counsel ever subject to potential liability?
  • Are Fund Directors ever found personally liable or are they covered by fund assets and/or D&O/E&O insurance policies?
  • What is the biggest misconception about cyber insurance?

Webinar Video

 

Wishing One-and-All a Happy, Healthy and Prosperous New Year

December 29, 2016

We hope each of you found some peace and tranquility in the company of loved ones this holiday season and want to wish one-and-all a happy, healthy and prosperous New Year.

As the lights dim on 2016, we naturally want to prophesy 2017. However, with so much friction, division and uncertainty in our world, most predictions would be at best – a good guess. As such, we will leave such predictions to others, whether it be geopolitical, country-specific or related to the financial services industry, and will enjoy tracking other’s soothsaying. Instead, at this time, we believe it is best to be guided by a strong moral compass, focus on what we know, learn about what we don’t know, remain vigilant to our surroundings and adjust as necessary.

Read more: Wishing One-and-All a Happy, Healthy and Prosperous New Year

 

Understanding How to Mitigate Liability and Navigate Insurance Options (Part II)

October 17, 2016

In June, we shared our thoughts around common insurance gaps and insurance riders that CCOs as well as managers should understand. One of the gaps we shared related to pre-claim defense costs. In August, a court ruled on behalf of an insurer in that they were not required to cover the insured for costs related to investigations prior to the Issuance of a Wells notice.

Read more: Understanding How to Mitigate Liability and Navigate Insurance Options (Part II)

 

Cybersecurity - What have we learned and what have we done?

August 17, 2016

Regulatory Landscape

In April 2015, the Securities and Exchange Commission ("SEC's") Division of Investment Management issued a guidance update, identifying cybersecurity as a critical issue. Several regulators are in fact focusing on cybersecurity. The SEC guidance update clarified the Staff's view that the following measures need to be undertaken by investment advisers:

Read more: Cybersecurity - What have we learned and what have we done?

 

Gatekeepers in SEC Crosshairs

August 04, 2016

Ever since the enforcement cases were announced as part of the SEC’s “Operation Broken Gate,” the SEC enforcement division has continued to ramp up scrutiny of gatekeepers including third-party service providers and directors who have been charged with the obligation to spot and prevent potential misconduct.

SEC Chairperson Mary Jo White addressed the importance of gatekeepers in her keynote address at the Mutual Fund Directors Forum 2016 Policy Conference, specifically highlighting the important role that fund directors serve.

Read more: Gatekeepers in SEC Crosshairs

 

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Newsletter

Get the latest compliance news and insights - delivered weekly. The SEC3 Communique covers all compliance topics. CCO3 focuses on CCO topics.
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Communiques

More SEC Settlements - This Time Form PF Filing Deficiencies

On June 1st, the SEC announced settlements with 13 RIAs who repeatedly failed to file Form PF reports. Most of these firms never filed over the review period (2012 through... read more »

Two Recent Enforcement Actions Against Private Fund Advisers

The industry should not misinterpret the SEC’s 2018 National Exam Program Priorities as a shift away from private fund advisers. As discussed during the SEC’s recent National Compliance Outreach Seminar... read more »

2018 - Are you ready for your next SEC exam?

The pool of registered investment advisers that will be subject to an SEC exam in 2018 is at the highest level seen in years. The SEC projects it will examine... read more »

Navigating the Changes to Form ADV

On August 25, 2016, the U.S. Securities and Exchange Commission adopted numerous substantive and technical amendments to Form ADV. While the adopting release required advisers to begin complying with the... read more »

Overlooked Benefits of E&O/D&O

While asset managers should always be aware of the protections provided by their E&O/ D&O coverage, there are more reasons than ever to think about it now. The SEC continues to... read more »

SEC3 Newsletter

Commentary: How Compliance Officers & Firms Can Help Limit CCO Personal Liability This article originally appeared on the Thomson Reuters Regulatory Intelligence subscription service for compliance and risk professionals and is... read more »

Events

Chief Compliance Officer Roundtable: Breakfast Briefing - June 14, 2018

When: June 14, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Webinar: 2018 SEC Exam Priorities & Recent Exam Highlights

Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. Tobin S. Cochran, Managing Member/President of Focus 1 Associates, LLC and...

Chief Compliance Officer Roundtable: Breakfast Briefing - February 7, 2018

When: February 7, 2018 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Schedule: 9:00-9:30am - Networking...

Upcoming Events - September & October 2017

Upcoming Events Don’t miss the opportunity to meet with us in person to discuss the topics that matter most to you. SEC3 is teaming up with industry experts in NYC to discuss...

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...

Chief Compliance Officer Roundtable: Breakfast Briefing

When: October 20, 2016 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Thomas Westle and Janaya...