The Capital Commitment

Proskauer on Private Fund Litigation

2021 SEC Enforcement Results – Takeaways for Fund Managers

On November 18, 2021, the SEC’s Division of Enforcement announced its Enforcement Results for Fiscal Year 2021, and there are a few key takeaways for fund managers.

  • In spite of the continued headwinds posed by the global COVID-19 pandemic, the Commission brought 697 enforcement actions in FY 2021. The Commission also filed 434 new enforcement actions, representing a seven percent increase over the prior year. Seventy percent of these new or “standalone” actions involved at least one individual defendant or respondent.
  • Investment advisor and investment company cases accounted for 120 standalone actions in the past year (28% of total new cases, up from 21% in FY 2020).
  • Insider trading cases accounted for 28 standalone, two fewer than FY 2020.
  • The SEC also obtained judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties, which represented a respective 33 percent decrease and 33 percent increase over amounts ordered during the prior fiscal year in these categories.
  • The Commission awarded a record amount of whistleblower awards in FY 2021, awarding a total of $564 million to 108 whistleblowers. The whistleblower program also surpassed $1 billion in awards over the life of the program.

The Commission also highlighted its actions against individuals and gatekeepers and cases involving crypto, financial fraud and issuer disclosures, investment professionals, market integrity, insider trading and market manipulation, FCPA matters, public finance abuse, and securities offerings.

Enforcement Actions Filed in Fiscal Years 2016 to 2021

  FY 2021 FY 2020 FY 2019 FY 2018 FY 2017 FY 2016
Standalone Enforcement Actions (Civil and Admin. Proceedings) 434 405 526 490 446 548
Follow-On Admin. Proceedings 143 180 210 210 196 195
Delinquent Filings 120 130 126 121 112 125
Total Actions 697 715 862 821 754 868
Disgorgement and Penalties Ordered (in billions) $3.80 $4.68 $4.35 $3.95 $3.79 $4.08

Under former Chairman Clayton, private fund advisers benefited indirectly from the SEC’s focus on “Main Street” investors.  More of the SEC’s limited resources were devoted to addressing retail fraud, leaving fewer resources available to focus on private funds.  As former Enforcement Director Stephanie Avakian explained recently, the SEC relied more heavily on exams by OCIE (now the “Division of Examinations”) – through deficiency notices and remediation, rather than enforcement actions – to address perceived private fund compliance violations.

For much of 2021, the SEC has been in transition as new staff was appointed.  Over the coming year, we expect that Chairman Gensler and Enforcement Director Grewal will place a far greater emphasis on policing “Wall Street,” which today has grown to encompass private funds.  Now that the pieces are in place, we expect to see an increase in enforcement involving private fund managers.

SEC Chair Gensler Signals SEC Policies for Private Funds

On November 10, 2021, SEC Chair Gensler gave an important speech identifying his regulatory priorities for private funds. Registered advisers should take note of the areas of concern Chair Gensler identified as we approach the new year.

Read the full client alert here.

New in the World of SPACs: Arks, Sharks and SPARCs

Special purpose acquisition companies (SPACs) have been one of the success stories of recent years. They have attracted huge volumes of investment as professional and retail parties invest through an initial public offering (IPO) in a ‘cash shell’ company with a mandate to find a suitable unlisted acquisition target. The company then typically merges (often by a reverse takeover) with its target in a de-SPAC transaction, creating a new listed business.

In this article for Financier Worldwide Magazine, Margaret A. Dale and Dorothy Murray discuss the rapid growth of SPACs and the increased scrutiny from regulators and investors.

Looking Ahead: Top Litigation and Regulatory Risks for Fund Managers Right Now (Webinar)

The regulatory and litigation risks for private funds are greater than at any time since the financial crisis in 2008. From the continued proliferation of digital assets and cryptocurrencies, to the unprecedented activity in SPACs (many of which are merging with PE-backed portfolio companies), to the increased focus on ESG under the Biden Administration, new developments will continue to present an enormous challenge for the private fund industry.

On Wednesday, October 6th, Proskauer hosted a webinar that looked ahead to the top three regulatory and litigation risks for private funds for the coming year, and offered ways to assess your own risks and steps to take to mitigate your risk Recording: Looking Ahead: Top Litigation and Regulatory Risks for Fund Managers Right Now

The webinar is now available on-demand. Please reach out to Proskauer Events for a link to the recording.

Topics addressed:

  • SPACs
    • Diligence and conflicts disclosures
    • Novel regulations, novel forms and novel risks
  • ESG
    • EU and US regulatory motivations and developments
    • Takeaways from recent SEC exams and investigations relating to greenwashing
  • Digital Assets / Cryptocurrency / Decentralized Finance
    • Regulatory approach: shoot first, and regulate later?
    • Risk management for investors

SEC Is Exploring Reforms Regarding Private Fund Disclosure Of Conflicts Of Interest And Fees and Expenses

On September 14, 2021, U.S. Securities and Exchange Commission Chair Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs. During his testimony, he stated that the SEC is exploring “potential reforms” regarding investment funds and managers.  Chair Gensler explained that one of the potential reforms under consideration by the SEC was ways to enhance disclosures by private fund managers regarding conflicts of interest and allocation of fees and expenses. He stated that he believed the SEC could “enhance disclosures in this area, better enabling pensions and others investing in these private funds to get the information they need to make investment decisions” and that “[u]ltimately, every pension fund investing in these private funds would benefit if there were greater transparency and competition in this space.”

Although apparently driven by concerns relating to pension fund investors, Chair Gensler did not provide any details regarding the potential reforms under consideration. The SEC has brought a number of enforcement actions against fund managers in prior years alleging failure to disclose various conflicts of interest and inadequate fee/expense disclosure under general fiduciary principals. The SEC may now be considering more proscriptive disclosure requirements.

In House testimony given earlier this year, Gensler noted the significant growth in private funds and private fund assets over the past five years.  Given these changes, he had requested staff recommendations regarding potential enhanced reporting and disclosure through Form ADV, Form PF, or other possible reforms.

Bloomberg Law: Regulatory Oversight of Privacy, Cybersecurity & Private Investment Funds

Privacy and cybersecurity issues continue to garner significant attention in the U.S. and abroad. As private investment funds registered with the SEC and their portfolio companies see increased regulatory scrutiny relating to privacy and cybersecurity in the U.S., Proskauer’s Margaret Dale, Todd Ohlms, Jonathan Weiss, Kelly McMullon and Hena Vora write for Bloomberg Law as part of our ongoing litigation series about recent developments in the regulatory landscape.

Read the Bloomberg Law article here.

U.S. Federal Regulators Turn Up the Heat on Cryptocurrency Trading Platforms

With new types of digital assets and related business on the rise, federal authorities have been busy investigating.  Recently, the SEC, FinCEN and the CFTC have imposed some notable settlements involving cryptocurrency trading platforms for allegedly operating without appropriate approvals from financial regulatory authorities.  This may be the start of the next wave of government enforcement activities.   Continue Reading

MNPI Update – SEC Pursues “Shadow Trading” Insider Trading Case

The SEC recently charged a former employee of a biopharmaceutical company with insider trading in advance of an acquisition but with a unique twist: Trading the securities of a company unrelated to the merger. The employee, Matthew Panuwat, did not trade his own company’s or the acquiring company’s securities, but instead purchased stock options for shares of a competitor not involved in the acquisition, in the belief (as alleged by the SEC) that the competitor’s stock price would also benefit from the news. The SEC did not allege that Panuwat had any particular information received from the company whose stock he had traded, but that he had engaged in what has been referred to as “shadow trading” of a comparable company by misappropriating information from his employer.

Read the full client alert here.

Bloomberg Law: SPAC Procedural Issues & Risks

As a part of an ongoing litigation series in Bloomberg Law, Proskauer shifts focus to the rise of SPACs and associated risks. In this article, Mike Hackett, Timothy Mungovan, Todd Ohlms, Jonathan Weiss and David Heck discuss the issues and risks that are common to the SPAC process, as well as the specific inflection points where those risks might arise.

Read the full article now.

Bloomberg Law: White Collar Crime Investigation & the Biden Administration

As part of an ongoing series of articles that focus on the top regulatory and litigation risks for private funds in 2021, William C. Komaroff, Seetha Ramachandran and Joseph Hartunian write for Bloomberg Law on the return to civil and criminal collaboration in white collar investigations under the Biden Administration.

Read the full article here.


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