A jury awarded a terminated General Counsel $2.9 Million in compensatory damages and $5 Million in punitive damages for wrongful termination due to his whistleblower activities. In a key ruling, the Court (USDC for Northern District of California) ruled not to exclude evidence provided by the GC that his former employer claimed was privileged under California professional rules. The Court held that federal law preempted the more stringent state law and that federal common law governing privilege applied to his Sarbanes-Oxley Act whistleblower retaliation claim. The GC had raised Foreign Corrupt Practices Act compliance concerns.
OUR TAKE: While we sympathize with the plaintiff in this case, the broader policy of piercing lawyer-client privilege may result in limiting the role of in-house counsel. Because the court can discard privilege, senior management and outside counsel may be less likely to include in-house lawyers in more sensitive matters.
“I’m so glad I live in a world where there are Octobers.” (L.M. Montgomery, Anne of Green Gables)
Welcome to the October 2016 BOTW. Who doesn’t love October: changing leaves, pumpkin-spiced lattes, football? The regulatory world is also experiencing its own transitions. SIFMA addresses the consequences of financial regulation, Dechert offers advice on private equity compliance, and K&L Gates explains auditor independence. For those with an interest, check out BBD’s piece on mutual fund accounting and Thompson Hine’s overview of the new liquidity risk management rules.
The Intended and Unintended Consequences for End Users of Post-Crisis Financial Regulation (SIFMA)
The SEC’s Office of Compliance Inspections and Examinations has launched a “Supervision Initiative” to examine supervision practices of investment advisers that employ previously-disciplined advisers or brokers. OCIE will focus on a firm’s compliance practices including its policies and procedures for hiring, reporting, oversight, and complaint handling. The staff will also review disclosures, conflicts of interest, and marketing materials. The Supervision Initiative cites a recent study concluding that reps with a disciplinary history are 5 times more likely to engage in misconduct (See http://cipperman.com/2016/03/04/academic-study-reports-widespread-financial-adviser-misconduct/.)
OUR TAKE: The SEC wants to discourage firms from hiring disciplined advisers and brokers. This sweep puts the burden on such hiring firms to prove that they can prevent future violations.
The SEC fined two wrap program sponsors $600,000 and $300,000, respectively, for failing to adequately disclose trading away commissions. The SEC acknowledges that both firms did disclose that program sub-advisers could use non-program brokers to obtain best execution and that these trading away commissions would increase client costs. However, the SEC faults the respondents for failing to analyze or detail these costs because they were embedded in securities prices when reported to clients. The SEC asserts that the wrap sponsors violated the compliance rule (206(4)-7) by failing to implement policies and procedures necessary to ensure suitability and informed client consent. The SEC said it will continue to assess wrap programs and “whether advisers are fulfilling fiduciary and contractual obligations to clients and properly managing such aspects as disclosures, conflicts of interest, best execution, and trading away from the sponsor broker-dealer.”
OUR TAKE: The SEC continues its assault on wrap programs, criticizing disclosures, brokerage commissions and investment selections. We are not sure any amount of disclosure will pass muster, but wrap sponsors should consider a regulatory reexamination of their programs.
Welcome to the July 2016 “Best of the Web.” A good place to start this month’s BOTW is the treasure trove of presentations from K&L Gates’s annual conference. Private equity firms should read RSM’s explanation of GIPS (it’s an acronym, not a snack food). We also like Morgan Lewis’s outline of the regulatory environment for digital investment advisers and Stradley’s dissertation on hedge fund risks. As Carl Sagan (from my beloved Cornell) said, “Those at too great a distance may, I am well are, mistake ignorance for perspective.”
The SEC has adopted changes to Form ADV to require reporting of information about separately managed accounts similar to information already reported on Form PF for private funds. The new Form ADV applies to any Form filed after October 17, 2017. The new Form will require all advisers to report the percentage of separately managed account assets (i.e. managed assets not in private funds) invested in 12 asset categories. The Form will require such percentages at year-end for advisers with less than $10 Billion AUM and at mid-year for advisers with more than $10 Billion AUM. The Form also requires the reporting of borrowings and derivatives in notional amount categories. The new Form ADV also includes several other significant changes including: (i) identifying each custodian holding at least 10% of separate account assets; (ii) listing all social media pages; (iii) naming the firm that employs an outside Chief Compliance Officer, and (iv) requiring more information about wrap fee programs. The new Form ADV also codifies current guidance about umbrella registration for private fund advisers. Additionally, the SEC amends the books and records rule (204-2) to require retention of certain performance-related information.
OUR TAKE: Much like Form PF, the first ADV with the new separate account information will require a great deal of additional time and work to determine how to calculate and allocate the assets and notional amounts. Once a firm determines a methodology, future years should become easier. The other changes (e.g. umbrella registration, social media pages, technical amendments) modernize a Form that had become somewhat outdated.