Firms doing business outside the United States must create compliance infrastructure to prevent employees at any level from paying bribes. Violations of the FCPA carry severe civil and criminal penalties.
Welcome to the February 2019 edition of the Best of the Law
Firms. In this feature, we recommend
some of the best recent articles and analyses authored by top investment
management lawyers. These articles offer
a more comprehensive review of the issues that we address in our daily “Our
The best law firms cranked out some great articles during
the last several weeks, perhaps feeling a post-holiday burst of energy. Paul Hastings offers a great overview of the
esoteric world of Section 13 and Section 16 filings. Morgan Lewis addresses best execution issues
when recommending mutual fund share classes.
Dechert tries to discern the future of Brexit. There were also some great pieces on
co-investments from Pepper Hamilton, political and lobbying activities from
K&L Gates, and a CFTC survey from WilmerHale.
Broker-Dealers and advisers must abandon the dual-hat compliance model, the practice of naming a non-regulatory professional with multiple executive roles. Firms must retain a competent and dedicated Chief Compliance Officer either by hiring a full-time employee or by retaining the services of an industry-recognized outsourcing firm.
cancelled the adviser registration of a purported internet investment adviser
because the registrant failed to launch its website in the three years since registering.
The registrant filed as an RIA under
the internet adviser exception whereby an adviser without assets under
management is eligible to register if the adviser provides advice exclusively
through an interactive website. The
adviser registered in May 2015 and still has not launched its website due to personal
events and product complexity. The
registrant argued that the internet adviser exception allows a grace period for
development. The SEC concedes that an
internet adviser may be allowed some leeway beyond 120 days (the stated time
period for new advisers), but three years is “well over any reasonable grace
period.” Additionally, the SEC places
the burden on the adviser to demonstrate “substantial efforts and progress
toward developing an interactive website” in order for the Commission to
exercise discretion to allow registration beyond the initial 120-day
This decision states for the first time that internet advisers may get more than 120 days to launch so long as they can demonstrate significant progress. The SEC will grant a grace period, but three years is too long.
Although the SEC only has civil enforcement powers, it can (and will) bring in the Justice Department if you lie to SEC investigators. Better to take your civil medicine (fine or industry bar) than to wind up a guest of the state.
The change here is allowing broker-dealers to provide the information to intermediary financial advisers and putting the burden on the intermediaries to prevent use directly with their retail clients. Regardless, we recommend against using hypothetical backtested performance data because of SEC concerns as well as the significant regulatory and disclosure limitations.
This case has all the features of an advisory fraud: illiquid assets, conflicts of interest, an affiliated valuation agent, and individuals with questionable backgrounds. It is a cautionary tale for investors, compli-pros, and regulators about how far wrongdoers will go to pursue their illicit intents.
censured and barred from the industry the principal of a non-U.S.-based
investment manager for making false Form ADV statements. The SEC charges the firm with falsely claiming
(i) to have over $100 Million in assets under management, (ii) to have retained
a nationally recognized auditor and prime broker for its funds, and (iii) a
principal place of business in the United States, which was only a virtual office. The SEC alleges that the Form ADV statements
violated the antifraud rules of both the Securities Act and the Investment
Advisers Act. The SEC asserts
jurisdiction because the respondents used interstate electronic communications
to further the fraud. The SEC claims proper
venue because the defendants maintained a virtual office in New York.
Form ADV is a securities law filing that gives rise to antifraud liability for misstatements. The regulators will not overlook untruths as innocent marketing exaggerations. Hire a lawyer or compli-pro to help prepare an accurate Form.
At the very least, member firms should review their 529 Plan recommendations to see if they have exposure and then take action to remediate. Because of the broader implications of an enforcement action and individual liability, we recommend consulting counsel about whether to self-report.