Today, we offer our “Friday List,” an occasional feature
summarizing a topic significant to investment management professionals
interested in regulatory issues. Our
Friday Lists are an expanded “Our Take” on a particular subject, offering our
unique (and sometimes controversial) perspective on an industry topic.
Every year, the SEC publishes a handful of enforcement cases
alleging that an investment adviser violated the advertising and marketing
rules by misusing hypothetical backtested performance (HBP). In our experience with exams, the SEC nearly
always cites deficiencies when firms use HBP in marketing. Although there is no rule specifically
prohibiting the use of HBP, our position is that firms should never use
HBP. To support our view, we have
highlighted below 10 of the most common HBP failings and cite to specific SEC actions
(click on links). As a side note, most institutional
investors with whom we work look very critically at HBP because they also
understand the limitations.
10 Common Problems with Hypothetical Backtested Performance
Once the SEC identifies possible wrongdoing, don’t compound the problem by further misleading clients during the remediation process. It is possible that this firm could have avoided the $400,000 in fines had it not lied to clients about its past practices.
SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert
citing transfer agents for deficient safeguards and lost securityholder
procedures. Reporting on 75 transfer
agent examinations over three years, OCIE observed misappropriation of
shareholder funds and theft of physical certificates, inadequate account
reconciliation processes, commingling of funds, and failures to secure physical
access. OCIE also observed failures to
adequately search for lost securityholders including neglecting to send written
notices. OCIE recommends heightened
policies and procedures, fund segregation, frequent reconciliations, locked vaults,
video cameras, periodic audits, and controls around lost property. OCIE published the Risk Alert “in order to
encourage TAs to review and strengthen their applicable policies, procedures,
and controls related to their paying agent operations.”
This is the regulatory warning shot for transfer agents. Expect sweeps and enforcement actions to follow. This Risk Alert also puts registered funds and their Boards and CCOs on notice that they should consider oversight procedures.
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.