On July 12, 2017, newly appointed SEC Chairman Jay Clayton delivered a speech at the non-partisan Economic Club of New York wherein he set forth several high-level guiding principles for the agency. In general, these remarks focused on (i) ensuring protections for retail investors, (ii) positioning the SEC as a regulator which is able to evolve on pace with industry, and (iii) taking a more measured and effects-focused approach to rulemaking. In addition, Chair Clayton stated that he opposed any wholesale changes to the SEC’s fundamental regulatory approach.
Proskauer partners Jeff Neuburger, Robert Leonard, Josh Newville and Jonathan Richman recently invited hedge fund executives to discuss the complex regulatory and compliance issues raised by the use of alternative data. Jeff, Robert and Josh also contributed an article to the Hedge Fund Law Report on Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping.
Fund managers have been capitalizing on methods to refine and analyze big data to assist investment decisions. What types of alternative data are being used to gain new insights? Sources include: e-commerce receipts and credit-card transaction data; sensors from internet-connected machines or smart devices; and online data collected via “screen scraping” (or “web scraping” or “spidering”).
Yet alternative data does not come without risks. For example, data collected as a result of web scraping may be considered material nonpublic information (MNPI). If that data were collected in a manner considered deceptive, then trading on that information might implicate the anti-fraud provisions of the securities laws. Circumventing security protocols or disguising a scraper’s identity on a site (where required), among other behaviors, could be viewed as misrepresentations or “deceptive devices” under Section 10(b) of the Securities Exchange Act.d
Hedge fund managers and other financial services firms using information in this new environment should therefore understand the legal risks and fashion appropriate policies and procedures (both internal and with respect to vendor diligence). We have made the materials from Proskauer’s presentations available here, outlining the complex regulatory, compliance and contractual issues raised by the data aggregation, web scraping and other data science methods. These topics include:
- Types of Data Aggregators
- Web Scraping and Other Data Collection Methods
- Securities Law Concerns, Including Deceptive Conduct and MNPI
- Best Practices for Due Diligence and Internal Processes
- Compliance with Other Federal Laws and Regulations
For private fund managers, the valuation of privately-held securities has been subject to heightened regulatory scrutiny. As the IPO on-ramp for private “unicorn” investments has lengthened, fund managers may hold illiquid investments for longer-than-expected time periods—and valuation-related risks increase as the time lengthens between purchase and exit. This is the second of two blog posts regarding valuation issues; part one addressed regulatory and litigation concerns regarding valuation of traded securities. This post addresses valuation of private equity portfolio companies. Continue Reading
The SEC has been active in pursuing several insider trading cases this year on both the large and the small-scale, some of which involved trades that yielded profits as small as $40,000-$60,000. Why does the enforcement division spend resources on these smaller cases? And how will the SEC continue to investigate new leads through data analysis?
According to recent news reports, the DOJ and the SEC are investigating the possible improper use of third-party broker quotes by hedge fund managers to value illiquid debt securities in their portfolios. Prosecutors are reportedly focused on possible instances where fund managers allegedly solicited predetermined or improper quotes from brokers, and used those estimates to inflate their own valuations of thinly-traded mortgage bonds.
In addition, the co-head of the SEC’s Asset Management Unit recently highlighted that unit’s focus on valuation, particularly where registered advisers failed to follow their own internal procedures when valuing illiquid positions. The SEC’s focus is further demonstrated by a recent action against a fund manager for improperly valuing municipal bonds inconsistently with GAAP.
We are reaching out to our investment firm clients to advise them of an email “spear phishing” scam that has targeted investment firms recently, attempting to lure their personnel into inadvertently revealing their email account credentials to criminal fraudsters, and making wire transfers to the criminal’s account instead of the intended account.
There has been a significant uptick in this scam against investment firms. We recommend that our clients advise their personnel who are involved with wire transfers to:
- Examine “reply to” email addresses carefully to verify that the email came from the exact email address of the person who purportedly sent it
- Beware of emails that appear to be from someone the recipient knows, that link to a log-in page where the recipient is required to enter his or her username and password in order to access something
- Beware of emails that change wire transfer instructions from what they had been in the past or anything abnormal about the wire transfer authorization process
- Prior to initiating any wire transfer, confirm instructions by telephone with an authorized representative of the recipient
Firms are also advised to consider the legitimate emails that their personnel receive regularly that request passwords or authorize wire transfers, and to configure their email filters to block mimicked versions of those emails that are not from the email address that they should be from.
We are pleased to announce that Proskauer has released Regulation of Investment Advisers by the U.S. Securities and Exchange Commission, by Robert E. Plaze, who recently joined Proskauer as a partner. Bob previously served as Deputy Director of the Division of Investment Management of the SEC. This publication, which draws on Bob’s nearly 30 years of service with the SEC, is the definitive outline summarizing SEC regulatory issues for Investment Advisers.
Regulation of Investment Advisers is regularly updated and covers extensive ground in key areas for fund managers. It synthesizes regulation of advisers by the SEC, identifies legal and regulatory precedents, and provides hyperlinks to the underlying authorities. We hope that you will find it to be a helpful resource.