On June 4, we posted a summary of SEC Enforcement Co-Director Steven Peikin observations during his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute. Co-Director Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process. Although Co-Director Peikin’s suggestions should serve as helpful guides to defense counsel, we believe a few of the observations bear further consideration.
During his recent keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute, SEC Enforcement Co-Director Steven Peikin imparted a few suggested “do’s and don’ts” for effective communication with the SEC during the Wells process—typically the last opportunity to address potential charges prior to the authorization of a SEC enforcement proceeding.
Potential disputes involving unicorns have been a hot topic for the last several years. We predicted that would continue this year in in our webinar and related blog post: The Top Ten Regulatory and Litigation Risks for Private Funds in 2018. In April, the Regional Director of the SEC’s San Francisco office, Jina Choi, confirmed this in her comments during a San Francisco Federal Bar Association panel. Specifically, Ms. Choi discussed the SEC’s actions against Zenefits, Credit Karma, and Theranos, and reiterated the SEC’s continued commitment to monitoring suspected investor fraud in privately-held companies. Ms. Choi also highlighted the settlement remedies in Zenefits and Theranos, including specifically that both settlement agreements required the company and individual officers at the company to pay penalties.
We expect to see the SEC continue to focus on unicorns in future investigations and proceedings. Private companies should prepare for increased scrutiny of their investor disclosures, particularly those related to and affecting the company’s valuation. In addition, they should ensure their disclosures comply with Rule 701(e) of the Securities Act when granting stock options to employees, as the SEC noted in the Credit Karma settlement. Finally, SEC actions may spark parallel private actions by investors against the company.
A recent settled SEC order, In re Arlington Capital Management, Inc. and Joseph F. LoPresti, highlights the potential benefits of voluntarily taking steps to remediate conduct or practices that could run afoul of the SEC’s rules and standards. If done correctly, voluntary remediation can result in meaningful reductions in the sanctions sought by the SEC. But if done incorrectly, remediation can result in wasted time and money – and possibly make matters worse. This post will explore the elements of an effective voluntary remediation plan, as shown by the remediation in Arlington, as well as some of the potential pitfalls of ineffective remediation.
Last week, former CFTC Chairman Gary Gensler explained in remarks at M.I.T. that he believes the second and third most widely used virtual currencies—Ether and Ripple—may have been issued and traded in violation of securities regulations. This comes on the heels of a crackdown on cryptocurrency-related securities by the SEC, which is particularly focused on initial coin offerings (ICOs). For fund managers, we believe the increased regulatory pressure will be felt in some expected, and some not-so-expected, ways. Continue Reading
As a sign that the SEC is continuing to actively pursue private equity fund advisers, on April 24, 2018, the SEC announced a settlement with private equity fund adviser WCAS Management Corporation (WCAS) related to allegations of undisclosed conflicts of interest. The specific conflicts resulted from an allegedly undisclosed contractual arrangement whereby a portion of fees received by a group purchasing organization (GPO) for services it provided to WCAS funds’ portfolio companies would be paid to WCAS. In settlement of the allegations, WCAS agreed to disgorgement of $688,819.78 and a civil monetary penalty of $90,000, as well as a cease and desist and censure.
On April 12, 2018, the SEC’s Office of Compliance Inspections and Examinations issued a risk alert listing the most common compliance issues concerning fees and expenses charged by SEC-registered investment advisers. Advisers should review their practices, policies and procedures to ensure compliance with their advisory agreements and representations to clients in light of the fee and expense issues noted in the risk alert.
Here are the top six:
- Fee-Billing Based on Incorrect Account Valuations.
- Billing Fees in Advance or with Improper Frequency.
- Applying Incorrect Fee Rates.
- Omitting Rebates and Applying Discounts Incorrectly.
- Disclosure Issues Involving Advisory Fees.
- Adviser Expense Misallocations.
For additional guidance, please read our full client alert on this topic.