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CCS’s Dalkin Reports on Private Fund Compliance Forum 

Jocelyn Dalkin of Cipperman Compliance Services recently attended the Private Fund Compliance Forum in New York.  Sponsored by Private Equity International, the forum brings together legal and compliance professionals from the biggest firms to discuss investment management regulatory issues.  Keynote speaker David Sorkin (KKR) advised compli-pros to continuously monitor regulatory and business changes to adapt compliance programs in real-time.  A panel of compliance experts from several large PE firms discussed how to allocate compliance responsibilities both internally and externally.  Other panels considered SEC exams, regulatory priorities, and how to address conflicts of interest.  Feel free to contact Jocelyn if you want more information.

Link to Summary

 

Thompson Hine and Cipperman Podcast Identifies Top Regulatory Issues

Cassandra Borchers, a partner at Thompson Hine, and Todd Cipperman recently sat down to discuss the 10 most significant regulatory trends for the investment management industry.  In their podcast, Todd and Cassandra discuss an investment adviser’s fiduciary responsibilities, including Regulation Best Interest and wrap programs, senior executive liability, service provider accountability, compliance programs, whistleblowers, and cybersecurity.  Their conversation is based on Cipperman’s upcoming book that delves deeper into these Top 10 investment management regulatory trends.  Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 7 offices, has received numerous awards for innovation, service and expertise.  Cipperman Compliance Services leads the investment management industry in providing outsourced compliance services.

http://links.thompsonhine.mkt4194.com/servlet/MailView?ms=MTk2NTMzMzYS1&r=MzM3NjQ5NjczODE0S0&j=MTI2MTgzMzMzNQS2&mt=1&rt=0

The Friday List: 10 Things You Need to Know About Regulation Best Interest

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.

A few weeks ago, the SEC proposed Regulation Best Interest, which requires a broker to act in the best interest of each retail customer at the time the recommendation is made, notwithstanding the broker’s own financial interests.  The SEC has been pondering a broker fiduciary rule for many years but lost the regulatory race to the Department of Labor, which promulgated its own rule.  Now that the 5th Circuit has vacated the DoL Rule and the SEC has proposed its own rule, the current state of the law is unclear.  Regardless, we have read the release and offer our list of the 10 things you need to know about proposed Regulation Best Interest.

10 Things You Need to Know About Regulation Best Interest

  1. Reasonable basis.  A broker must have a reasonable basis that the recommendation is in the best interest of the client.
  2. Applies to retail customers.  A retail customer is defined as a person who uses the recommendation primarily for personal, family, or household purposes.
  3. “Recommendation” remains the same.  The proposal does not seek to change the definition of “recommendation,” preferring to defer to the current FINRA interpretations.
  4. No definition of “best interest”.  In 400+ pages, the SEC never defines the term “best interest” when proposing Regulation Best Interest.
  5. More than suitability, less than fiduciary.  Regulation Best Interest combines elements of the current suitability standard (e.g. suitable at time of transaction) with a few fiduciary-like elements (e.g. disclosure).
  6. Fails to harmonize RIA and BD standards.  Advocates of a uniform fiduciary standard want a single standard so that consumers are not confused by the differing standards of care applicable to advisers vs. brokers.  This proposal fails to ensure a “uniform” standard.
  7. Disclosure of conflicts of interest.  The most significant new requirement is that brokers must disclose (or mitigate) conflicts of interest.
  8. Must consider series of transactions.  Expanding traditional suitability, a broker must also consider the series of recommended transactions.
  9. Product neutrality not required.  Brokers can make more money on recommended products, including proprietary products, so long as the conflict is properly disclosed and mitigated.
  10. Regulation Best Interest is not law.  Comments are due on this controversial proposal by August 7, 2018.  Thereafter, we expect much debate and re-drafting before any final rule is adopted.

The Friday List: 10 Things to Know about the DoL Fiduciary Rule

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.

Last Monday (May 22), the Department of Labor issued guidance on the implementation of the long-debated Fiduciary Rule.  Most significantly, the DoL did not further delay the basic concept that financial institutions and advisers must apply a best interest standard to advice for IRAs and other retirement accounts.  However, the DoL did back off of some of some of the compliance requirements for the rest of this year and plans to collect more information.  Below is a list of the 10 things you need to know right now about the DoL Fiduciary Rule.

 

10 Things to Know about the DoL Fiduciary Rule

 

  1. Applies to IRAs: The DoL Fiduciary Rule applies to investment advice concerning IRAs, ERISA plans, and plans covered by Section 4975 of the Tax Code.
  2. Best Interest standard starts June 9: Beginning June 9, financial institutions and advisers to covered plans must provide advice in the retirement investor’s “best interest,” which includes a duty of prudence and loyalty.
  3. BIC exemption compliance starts January 1: The extensive compliance requirements of the Best Interest Contract (BIC) exemption, which would apply to non-level fee products, are not required until January 1, 2018.
  4. DoL expects changes by January 1: During the Transition Period (June 9-January 1), the DoL will collect additional information from the industry to determine how compliance practices such as the use of mutual fund “clean shares” should re-shape the Rule.
  5. Proprietary products with commissions permitted: During the Transition Period, firms can recommend proprietary products with commissions so long as they satisfy the best interest standard.
  6. Need policies and procedures: The DoL expects firms to adopt policies and procedures necessary to ensure compliance with the best interest standard.
  7. Robo-advisers can rely on BIC exemption: Robo advisers may rely on the BIC Exemption during the Transition Period to ensure compliance with the Rule.
  8. Investment advice narrowly defined: Investment advice, for purposes of the Rule, does not include plan information or general financial, investment and retirement information.
  9. Can rely on written representations from intermediaries: The Rule does not apply if an independent fiduciary provides written representations (including negative consent) that the fiduciary is a bank, insurance company, BD, RIA, or independent fiduciary managing at least $50 Million.
  10. DoL will focus on compliance over enforcement: The DoL says it will prioritize compliance over enforcement during the Transition Period so long as firms work diligently and in good faith to comply with the Rule.

The Friday List: 10 Factors for Hiring a Compliance Consulting Firm

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.

Many investment managers and boards struggle with the factors to consider when retaining a compliance consulting firm.  They mistakenly assume that all compliance firms are the same.  However, much like hiring any other professional service that seems inscrutable, compliance services firms can be analyzed by specific and objective characteristics.  Below, we offer some guidance on how to evaluate a compliance consultant.   Also, we offer a form of RFP for retaining a compliance consulting firm.

10 Factors for Hiring a Compliance Consulting Firm

  1. Size:  The sheer size of the firm makes a difference.  A firm with more than 10 consultants will offer more knowledge, experience, depth, and services than a firm of 1-5 people.
  2. Employee Experience:  Is the firm hiring senior professionals or newbies?  Do they focus on former regulators or experienced business people?  Is there a hiring philosophy that you can rely on, or are you just hiring the person in front of you rather than the firm?  Employee turnover is a fact of life, so make sure you hire a firm that will offer consistency notwithstanding a particular employee.
  3. Services:  Some firms offer holistic, ongoing services that may include providing a chief compliance officer.  Some firms only provide mock audits.  Inquire what the firm provides most of its clients.  Also, ask about the testing program.  How much time does the firm spend on testing activities?  What does the report look like?  Does the firm conduct interviews, review documents, engage in forensic testing, and sampling?
  4. Clients:  Does the firm provide services to your industry?  The investment management industry includes mutual fund managers, private equity firms, institutional money managers, family offices, and fintech companies.  Does the compliance consultant have the relevant experience?  How many clients does the firm serve?
  5. SEC Exam Experience:  Don’t assume that every compliance consultant has actually managed an SEC exam.  Also, ask about results.  Most reputable firms will not guarantee a perfect exam, but an experienced firm should be able to describe how it improved possible outcomes.
  6. Service Model:  Compliance consulting is a professional service.  Does the firm offer just one person or a team (which softens the impact of turnover)?  Will they engage proactively without you calling first?  Will they charge for every interaction (like a law firm)?  How often will they come on-site?
  7. Client Turnover:  This can be a red flag if a firm has experienced significant client turnover.  It is always a good idea to ask to speak to a former client as well as a longstanding client.
  8. Ownership: Is the firm employee-owned or part of a large organization?  Is there up-the-ladder accountability?  Does the firm have other businesses (fund administration, accounting, brokerage) that could divert attention?
  9. Tenure: Firms that have been in business more than 5 or 10 years have a demonstrated track record that shows success and continuity.  New consultants may be figuring out their business model, filling time between jobs, or auditioning for a job at your firm.
  10. Insurance Coverage:  Shockingly, many compliance consultants do not carry E&O or professional liability coverage.  We recommend a minimum of $1 Million in coverage.

Top 5 Regulatory Alerts – February 2017

Here are our Top 5 Regulatory Alerts for February 2017, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – February 2017

  1. SEC PUBLISHES LIST OF MOST CITED EXAM DEFICIENCIES (2/9/17)
  2. SEC ISSUES ROBO GUIDANCE ON DISCLOSURES, SUITABILITY, AND COMPLIANCE (2/24/17)
  3. SEC CHAIRMAN ATTACKS “ACCREDITED INVESTOR” CONCEPT (2/28/17)
  4. SEC CHARGES CCO WITH AML FAILURES (2/1/17)
  5. GENERAL COUNSEL AWARDED $7.9 MILLION FOR WRONGFUL WHISTLEBLOWER TERMINATION (2/13/17)

 

Most Read – February 2017

  1. SEC PUBLISHES LIST OF MOST CITED EXAM DEFICIENCIES (2/9/17)
  2. SEC CHAIRMAN ATTACKS “ACCREDITED INVESTOR” CONCEPT (2/28/17)
  3. SEC CHARGES CCO WITH AML FAILURES (2/1/17)
  4. INVESTMENT CONSULTANT LIED ABOUT CODE OF ETHICS COMPLIANCE (2/10/17)
  5. SEC STAFF ALLOWS MORE FLEXIBLE FUND-OF-FUNDS STRUCTURES (2/7/17)

Top 5 Regulatory Alerts – January 2017

Here are our Top 5 Regulatory Alerts for January 2017, ranked by significance.  We have also included the Top 5 most read Alerts (other than Best of the Web and Top 5).

 

Top 5 Regulatory Alerts – January 2017

  1. SEC STAFF PUBLISHES 2017 EXAM PRIORITIES (1/13/17)
  2. FINRA ANNOUNCES 2017 EXAM PRIORITIES (1/6/17)
  3. LARGE WRAP SPONSOR PAYS $18.3 MILLION FOR COMPLIANCE PROBLEMS IN BUSINESS SOLD 8 YEARS AGO (1/30/17)
  4. SEC FINES 10 FIRMS FOR VIOLATING ANTI-PAY-TO-PLAY RULE (1/18/17)
  5. EXECUTING BROKER TO PAY $22.6 MILLION FOR MISREPRESENTING ORDER FILLING PROCESS (1/24/17)

 

Most Read – January 2017

  1. SEC STAFF PUBLISHES 2017 EXAM PRIORITIES (1/13/17)
  2. SEC FINES 10 FIRMS FOR VIOLATING ANTI-PAY-TO-PLAY RULE (1/18/17)
  3. LARGE ADVISER FINED $13 MILLION FOR PREDECESSORS’ COMPLIANCE BREAKDOWNS (1/17/17)
  4. ADVISER FACES CRIMINAL PROSECUTION FOR CHERRY-PICKING (1/26/16)
  5. LARGE ASSET MANAGER PAYS $340,000 FINE BECAUSE SEPARATION AGREEMENTS VIOLATED WHISTLEBLOWER RULE (1/19/17)

General Counsel Awarded $7.9 Million for Wrongful Whistleblower Termination

 

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.

Jury Verdict

WADLER v. BIO-RAD LABORATORIES, INC.