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Outgoing SEC Chair Reflects on the Agency’s Enforcement Program and Advocates for Increased Authority

SECOn November 18, 2016, outgoing SEC Chair Mary Jo White delivered a speech at New York University School of Law entitled “A New Model for SEC Enforcement: Producing Bold and Unrelenting Results.”  Chair White’s remarks covered a broad range of enforcement initiatives and outcomes from her tenure as SEC Chair.  This post summarizes the aspects of Chair White’s remarks most relevant to private fund sponsors.
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SEC Shake-Up: President-Elect Trump Expected to Make Key Appointments

In the wake of the election of Donald Trump as the 45th President of the United States, Mary Jo White has announced her intent to step down from her role as Chair of the Securities and Exchange Commission.  Chair White, the 31st and one of the longest-serving Chairs of the SEC, will be leaving her post at the end of the Obama administration in January.

The outcome of the election and Chair White’s announcemeSECnt are sure to kick off an avalanche of prognostication about her successor, the direction of the SEC, and the fate of some of the laws that govern the securities industry, most principally the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  There is already speculation that President-elect Trump will designate a Chair who is a proponent of smaller government and deregulation to steer the agency charged with overseeing the securities industry.

Beyond designating a Chair, however, President-elect Trump will be in a position to overhaul the makeup of the SEC during his administration.  Upon assuming office, President-elect Trump will be authorized to appoint three of the five SEC Commissioners, in addition to designating the next Chair – with a fourth Commissioner appointment as early as June of 2017.  This is particularly important in an agency that relies on Commissioner votes for each decision, order, rule or similar action.  However, despite his broad appointment powers, President-elect Trump will not be permitted to remove any of the remaining Commissioners, nor will he be permitted to “stack the deck” by appointing only Republicans to fill all of the open Commissioner seats.    Continue Reading

Whistleblower Alert – OCIE to Examine Registered Investment Advisers for Overbroad Confidentiality or Severance Agreements

SEC

The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently published a risk alert noting that the SEC exam staff intends to examine registrants’ compliance with the Dodd-Frank Act’s whistleblower provisions.  OCIE intends to examine registered advisers for compliance, in light of recent enforcement cases the SEC has filed based on violations of the Dodd-Frank whistleblower rules resulting from confidentiality or severance agreements.

Please see Proskauer’s client alert OCIE Staff to Examine Registered Advisers’ Policies and Agreements for Whistleblower Rule Compliance to read more about:

  • the type of documents that SEC examiners might request,
  • what the exam staff is looking for, and
  • what kinds of remedial actions are at stake.

For more information, please see our previous guidance:

OCIE By the Numbers and the Use of Big Data

SECOn October 17, 2016, Marc Wyatt, the Director of the SEC’s Office of Compliance, Inspection and Examinations, gave a keynote address to the National Society of Compliance Professionals titled: Inside the National Exam Program in 2016.  In addition to discussing his general perspective concerning the program, he provided some key statistics that help put OCIE’s exam program in context:

  • OCIE has examination responsibility for over 28,000 registrants, including more than 12,000 investment advisers, approximately 11,000 mutual funds and exchange-traded funds, and over 4,000 broker-dealers.
  • OCIE has a total staff of approximately 1000 individuals.
  • OCIE completed 2,400 total exams in FY 2016.
  • Typically, about 10% of OCIE exams are referred to Enforcement.
  • FINRA and the SEC have historically examined 50% of BDs each year.
  • OCIE has historically examined approximately 10% of registered investment advisers per year.
  • Over the past two years, over 2,000 new investment advisers have registered with the SEC.
  • OCIE has about 450 staff members focused on Investment Adviser/Investment Company (IA/IC) exams.
  • The Private Funds Unit within OCIE currently has four exam managers, and primarily targets the New York, Boston, Chicago and San Francisco areas, each region having a high concentration of registered investment advisers to private funds.
  • There are approximately 4500 private fund advisers registered with the SEC.
  • Jennifer Duggins, co-head of the Private Funds Unit, recently noted that this unit’s goal was to double the number of examiners assigned to the unit from its current staff of 12-14 to a target of 25-30 examiners.

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Fund Restructurings: How to Navigate a Conflict-Rich Environment

Look for more in this series to come.

Look for more of this series to come.

The number of private equity fund restructurings is likely to rise in the coming years.  The current economic expansion will inevitably come to an end (at 87 months and counting, this expansion is already the third longest post-WWII) making exits more challenging, just as the terms expire on funds raised during the “golden era” (2003-2007).  At the same time, some managers will seek to continue managing certain portfolio assets, by extending the terms of the funds and/or restructuring the funds to bring in new capital and provide liquidity to existing limited partners.

On a simplified basis, a restructuring often involves the manager forming a new fund (with a combination of new LPs and continuing or “rolling” LPs) and the new fund merging with or otherwise acquiring the remaining assets of the existing fund.  The influx of new cash from a secondary buyer creates liquidity for some existing LPs to cash out.  The purpose of the transaction structure is to give the manager additional time to maximize the value of the portfolio, while providing liquidity to those investors who prefer an immediate exit.

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SEC Announces Record Number of Investment Adviser Cases for FY 2016

SECThe Securities and Exchange Commission today announced its enforcement results for fiscal year 2016, reaching new highs in the number of actions filed and money ordered forfeited through disgorgement and penalties.  The SEC noted that it brought the most ever cases involving investment advisers or investment companies, including 8 enforcement actions related to private equity advisers, an area that has clearly been a priority for the Commission over the past year, and a record 21 cases under the Foreign Corrupt Practices Act, an area of increasing importance to the SEC.  Continue Reading

Private Fund Advisers Must Pay Close Attention to Nuances under Pay-to-Play Restrictions in Light of Upcoming Elections Nationwide

SECAs the elections approach nationwide, advisers to private investment funds with current or prospective state or local government entity investors should be mindful of political activities by their personnel which could raise concerns under existing pay-to-play regulations. While seemingly straightforward in application, the SEC’s pay-to-play regulations have the potential to present a number of complex questions for private fund investment advisers to pooled investment vehicles with existing, or prospective, state government or retirement plan investors.  Investment advisers need to be both versed in the SEC’s interpretation in various political activities, and vigilant in monitoring employees’ contributions.  Firms that neglect to implement necessary pay-to-play compliance measures may imperil valuable government plan relationships and risk significant reputational harm with other clients.

Guidance on these intricate issues can be found by reviewing the Proskauer client alert available here.

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