In late 2018, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2019 examination priorities, which cover not only investment advisers and registered funds, but also broker-dealers and transfer agents. To help you digest and better understand these 2019 exam priorities, our Washington, DC-based Investment Management practice has prepared a legal update giving an overview of the exam priorities specific to investments advisers, a brief description of certain key SEC 2018 enforcement actions involving investment advisers as well as certain suggested practice points that advisers may want to consider in response to these priorities and enforcement actions (see link below for the full legal update).
It’s time for another
monthly periodic round-up of noteworthy SEC enforcement actions. Topics in this update: hypothetical and back-tested performance, cybersecurity/privacy, and private fund conflicts, and then a lightning round of other odds and ends.
There’s clearly no summer lull at the SEC Division of Enforcement’s Asset Management Unit—over the past two weeks, we’ve seen a deluge of more cases impacting investment advisers than we’ve seen afternoon thunderstorms (and here in DC, that’s saying something). In this post I’m going to briefly summarize some of the take-aways for these cases impacting the pay-to-play rule, the “testimonial rule,” and the custody rule.
Fund managers that are affiliated with U.S. banks, or that have historically courted U.S. banks (or their affiliates) as investors in their funds, are by now very familiar with the restrictions imposed by the “Volcker Rule” since its adoption in December 2013. A massive regulatory undertaking, the rule was adopted by five of the U.S. financial regulators (namely, the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, the SEC, and the CFTC) acting in concert, and resulted in sweeping changes to how U.S. banks and their affiliates make proprietary investments and how they interact with so-called “covered funds.” From the perspective of a ’40 Act practitioner, it was clear at the time, and has remained so ever since, that the group of august regulators did not, collectively, grasp some of the implications of the way the final regulation approached some issues involving covered funds–including the very way that term was defined.
After several years of Congressional logjam and the regulators addressing some of the more vexing issues in the Volcker Rule through FAQs, we now suddenly find ourselves moving forward with changes to the Volcker Rule on multiple fronts. Unfortunately–at least from this practitioner’s perspective as an investment management lawyer–most of the changes we’ve seen so far are targeted at the proprietary trading side of the rule, rather than the covered fund side. That said, there are still a few things on the covered fund side worth mentioning, especially for industry participants interested in making their voice heard by the regulators.
In April 2018, the SEC proposed an Interpretation Regarding Standard of Conduct for Investment Advisers. In that proposal, the SEC has proposed to interpret the duty of loyalty (which, combined with the duty of care, constitutes fiduciary duty) as requiring advisers to put client interests ahead of their own and make full and fair disclosure of all material facts of the relationship. More particularly, the SEC stated that advisers must seek to avoid conflicts of interest and make full and fair disclosure of material conflicts that could affect the relationship. If you stopped reading the release at this point, you might think this is a clear articulation of what the duty means and how we practice in the area of conflicts. Continue Reading A New Standard for Investment Adviser Fiduciary Duty?
As most of you have heard, on March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit issued an opinion vacating, in its entirety, the Department of Labor’s amendment to regulations defining “investment advice” for the purpose of determining who is a fiduciary (the “DOL Fiduciary Rule”) on the basis that the Department violated the Administrative Procedures Act and exceeded its regulatory authority. The Department had the right to request an en banc review of the decision by the full Fifth Circuit panel within 45 days of the date of the decision and to appeal the decision to the U.S. Supreme Court within 90 days after the date of the decision. The Department of Labor did not file the request for review or an appeal to the Supreme Court within such deadlines. On June 21, 2018, the Fifth Circuit issued the mandate implementing its decision to vacate the DOL Fiduciary Rule. Continue Reading The Department of Labor Fiduciary Rule: Lots of Work, Lots of Drama, Lots of Uncertainty
What is the GDPR?
Even if an investment adviser or its private funds have no presence in the European Union (EU), it may still need to be concerned about EU data protection laws, in particular the new European General Data Protection Regulation (EU) 2016/679 (the “GDPR”). The GDPR came into force on May 25, 2018, and replaced the prior data protection law, the EU Directive 95/46/EC. The GDPR introduces significant changes from the prior EU Directive, including new jurisdictional scope that makes the GDPR apply not only to businesses established in the EU but also to any non-EU businesses that offer goods or services to individuals within the EU or that monitor individuals in the EU. This means that investment advisers and funds with investors in the EU may potentially be subject to the GDPR, which is significant because of the other changes brought about by the GDPR, including a maximum fine for non-compliance of the higher of 4 percent of an enterprise’s worldwide turnover or €20 million per infringement, a 72-hour data breach notification requirement and new data subject rights (including the “right to be forgotten”). (For more information about these changes, please see our website page on the GDPR.)
The Omnibus Act signed in March by President Trump made many changes and technical corrections to existing tax laws, including corrections to the 2015 PATH Act that introduced the new concept of qualified foreign pension funds (QFPFs). QFPF status is beneficial in that it entitles a foreign pension to a complete exemption from the so-called FIRPTA rules, including withholding taxes that generally apply to REIT capital gain dividends attributable to sales of U.S. real estate. Because many U.S. real estate funds employ REIT structures, QFPF status is attractive for foreign pensions that invest in those funds. Continue Reading Changes to Qualified Pension Fund Rules Provide Answers, Questions
In the past 2 years, we have seen a clear uptick in desk exams by the SEC’s investment adviser examination staff. These “desk” exams consist of the staff sending a preliminary document request (the same as they would if they intended to arrive in person), reviewing the materials presented, and then typically sending additional requests. Sometimes requests from the staff can reach double digits depending upon what information is previously submitted. Following that production, and any subsequent follow-up phone calls, the staff typically issues a deficiency letter and the registrant responds.
There are pros and cons to this kind of exam. Continue Reading SEC Desk Exams: Up Close But Not Personal
The California Legislature is considering amendments to the California Financing Law (the “CFL”), which requires most non-bank commercial lenders active in California to be licensed by the State’s Department of Business Oversight. Senator Steve Glazer proposed new measures earlier this year that would require CFL lenders to provide standardized price disclosures to small-business borrowers (currently defined as loans of $500,000 or less). The bill would apply to both closed-end and open-end commercial loans, as well as purchases of accounts receivable. Although regulated banks are exempt, companies that have agreements with banks to fund such loans would not be exempt unless they qualify for their own exemption. The Senate already adopted the bill, and it is pending a floor vote by the Assembly following clearance by its Banking and Finance Committee on June 26, 2018.