We are seeing a renewed SEC interest in how firms use soft dollar credits. Although the facts of this case date back several years, this action may portend future regulatory and enforcement initiatives.
Didn’t know that name-dropping could result in securities fraud? Any misstatement arguably relied upon by investors could give rise to Section 17(a)(2) charges of offering securities by means of an untrue statement of a material fact.
Form ADV, Item 18.B. specifically requires investment advisers to “disclose any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.” Item 18.C. also requires the disclosure of any bankruptcy petition during the prior 10 years. As investment advisers struggle financially, compli-pros should assess whether the firm needs to enhance its financial condition disclosure.
We have observed OCIE staff specifically ask about compliance resources and spending during examinations. Based on various research studies and our own empirical experience, firms should benchmark to spend at least 5% of revenue on compliance resources including personnel and technology. Of course, the actual spending should vary depending on the complexity and size of the business.
A private equity firm, the firm’s CEO, and its CFO/CCO were each censured and fined for overcharging the fund, engaging in improper insider loans, and violating the custody rule. According to the SEC, the CFO/CCO failed to properly allocate management fee offsets for certain deemed contributions, thereby overcharging the fund by about $1.4 Million. The CFO/CCO also arranged improper loans between the fund and the management company and overcharged for organizational expenses. The SEC also charges the firm with failing to deliver audited financial statements within the required 120-day period, in part because one of its auditors withdrew from the engagement. The SEC faults the CEO for failing to properly supervise the CFO/CCO as required by Section 203(e)(6) of the Advisers Act. The SEC alleges violations of the Advisers Act’s antifraud rule (206(4)-8) and the compliance rule (206(4)-7).
Senior leaders will not escape accountability by claiming reliance on subordinates. Also, private equity firms can’t use the funds they manage as their firm piggy banks. They need to implement policies and procedures about the withdrawal and use of funds.
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.
As we approach the summer months, the spring 2019 conference
season draws to a close. CCS
professionals attended most of the major industry conferences and compared
notes. As we talked, we saw some major
themes from all of the conferences. We
thought our clients and friends might benefit from our meta-observations.
10 Things We Learned During the Spring 2019 Investment
is afraid of a cyber-breach. Every
conference we attended included sessions about cyber threats and cybersecurity
equity is trying to rationalize operations.
Now that PE has become part of the institutional investing landscape, GPs
are searching for ways to build scale.
officers don’t have the resources to get everything done. Boards, investors, and the regulators continue
to put more work on the CCO’s desk, but senior management doesn’t always meet
the increased workload with more resources.
is the future. Many firms are racing to
replace all aspects of middle and back office operations with technology
solutions that enhance and replace human resources.
wants ESG. The term “ESG” was likely
used by more people at more conferences than any other term.
knows exactly how non-transparent ETFs will affect the product lineup. Some say they’re a fad. Some say they’re a complement to existing
products. Some say they don’t make
sense. Some say they will replace all
other forms of ETFs.
hot new asset classes include private credit, cryptocurrency, and cannabis. Private credit leads with the most products,
but people are really excited about cryptocurrency.
industry is consolidating. Almost everybody
predicts massive industry consolidation as the bigs absorb the smalls, and
private equity provides the liquidity.
knows where the fiduciary rule is going.
Even the SEC has been less than clear about its next step especially
with the DoL and the states jumping in (again).
SEC is in good hands. We saw many speeches
by many SEC leaders. Despite the political
chaos in Washington, the SEC continues to operate with a steady hand through a
dedicated staff. They provided insight
on priorities and rulemaking and explained their rationale on enforcement decisions.
This case should be read by any potential client/investor enticed by a too-good-to-be-true investment pitch. It is unfortunate when legitimate investment managers have to compete for business against wrongdoers who outright lie about their performance.