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.

Private Fund Disclosures, Expenses, and Conflicts of Interests

Chair White noted that over the past three years, the SEC has brought a total of 11 enforcement actions against private equity advisers, addressing various alleged improper activities including undisclosed fees and expenses, impermissible shifting and misallocation of expenses, and failures to adequately disclose conflicts of interests to clients. Chair White cited several press reports noting that the private equity industry has enhanced disclosures in fund governance documents.  This industry shift in response to the SEC’s enforcement activities should mitigate not only regulatory risk but also litigation risk with limited partners.

Whistleblowers

Chair White noted that the SEC recently surpassed the $100 million mark for awards to whistleblowers. Meanwhile, tips in fiscal year 2016 surpassed 4,200, rising over 40% from 2012, the first fiscal year the whistleblower program was in place.  By touting the amount of the awards, Chair White was not merely celebrating the success of the program, she seemed to be advertising for prospective whistleblowers to come forward.

A Call for an Increased Focus on Executive Liability

Chair White also called for an expansion of the SEC’s white collar enforcement authority and an increase in the deterrent penalties available to the agency. After Chair White noted the agency’s increased focus on charging individual respondents in enforcement actions, she suggested consideration of a recently-enacted regulatory framework in the United Kingdom known as the “Senior Manager Regime” which would hold an entity’s senior executives accountable for certain corporate transgressions.  This regime enables U.K. authorities to hold senior executives accountable for offenses that occur in areas of the executives’ responsibilities, even if the executives are not involved in the misconduct, do not know about it, and do not directly supervise any of the offending employees.  Advisers to private equity funds should pay close attention to this initiative because of their comparatively leaner management structure, particularly with respect to the control over and management of the underlying funds.

Admissions of Culpability

Chair White highlighted her initiative to extract admissions of accountability in the context of settling enforcement investigations or proceedings. Pursuant to this mandate, the SEC has obtained admissions from 77 defendants and respondents – 30 individuals and 47 entities.  Chair White also noted that the SEC does not accept “no admit, no deny” settlements where a defendant has been found guilty or admitted relevant facts in a proceeding involving other criminal or civil authorities.

Investigating to Litigate

Chair White also highlighted the SEC staff’s mandate of “investigating to litigate.” The purpose of this charge, according to Chair White, is to assemble a “trial-ready record [of admissible and persuasive evidence] that can be used to prevail at trial or to secure a strong settlement.”  This strategy permits the SEC to demonstrate both its intent and ability to pursue an enforcement proceeding, and share that evidence with defense counsel pursuant to a reverse proffer agreement, which is a useful tool in obtaining favorable settlements from investigation targets.  Perhaps as a warning to the industry, Chair White noted that the SEC has not lost a jury trial in federal district court in two-and-a-half years.

Increased Civil Penalties and Access to E-Mails

Chair White concluded her remarks by calling on Congress to increase the amount of civil penalties the SEC is able to obtain in enforcement proceedings. Finally, Chair White was highly critical of a pending bill to revise the Electronic Communications Privacy Act, which would require a criminal warrant to obtain the content of a subscriber’s e-mails from an internet service provider.  As a civil enforcement agency, the SEC can subpoena information, but it does not have the ability to obtain criminal search warrants, as we previously discussed in the New York Law Journal.  The proposed statute would eliminate the SEC’s ability to obtain certain email content via subpoena.

What Next?

While obviously valedictory, the question is does any of it matter? President-elect Trump has suggested that he wants to dismantle the Dodd-Frank Act.  What that means, precisely, and whether it will happen, are open questions.  Of course, it would take an act of Congress to repeal Dodd-Frank.

On that note, Representative Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee, has introduced the Financial CHOICE Act of 2016 which, as drafted, would exempt advisers to private equity funds from investment adviser registration. As reported in the Wall Street Journal, Rep. Hensarling described President-elect Trump’s general view on Dodd-Frank as “music to my ears,” and stated that he had spoken with President-elect Trump’s team about Financial CHOICE Act in the past: “I think they like the thrust of the legislation and many major components of it.”

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While it remains to be seen whether the SEC will continue its aggressive enforcement program following the change of the presidential administration and the appointment of a new SEC chair, Chair White’s legacy is likely to continue to shape the agency’s policies and ideology at least in the near term. Accordingly, private fund sponsors should expect the SEC staff to continue to follow the mandates that Chair White has championed unless and until a new Chair signals a definitive change in direction.

For additional discussion on this topic, please see our earlier post: SEC Shake-Up: President-Elect Trump Expected to Make Key Appointments.

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Photo of Timothy W. Mungovan Timothy W. Mungovan

Tim Mungovan is the Chair of Proskauer.  He is also the immediate past chair of the Firm’s Litigation Department and head of the Securities Litigation practice.

His practice is focused on securities, commercial litigation, governance, and bankruptcy-related matters. He has a national reputation…

Tim Mungovan is the Chair of Proskauer.  He is also the immediate past chair of the Firm’s Litigation Department and head of the Securities Litigation practice.

His practice is focused on securities, commercial litigation, governance, and bankruptcy-related matters. He has a national reputation for advising sponsors of private investment funds (hedge, private equity, private credit and venture capital) in a wide variety of matters, including litigation, governance, securities, fiduciary obligations, and regulatory enforcement.

Chambers USA describes Tim as “an extraordinary lawyer who is a fierce and very talented litigator. He is extremely knowledgeable, responsive and client-oriented.” Best Lawyers in America lauds Tim’s experience, integrity, work ethic, communications and courtroom skills. Tim has been listed in the “Top 100 Lawyers” in Massachusetts, and Benchmark Litigation has continually recognized Tim as a Litigation Star in Massachusetts.

Over the last six years, Tim has been the lead litigator representing the Financial Oversight and Management Board for Puerto Rico in the historic restructuring of Puerto Rico’s debts. The scale and complexity of this restructuring has resulted in one of the most active litigation dockets in the U.S. Almost every aspect of the litigation involved matters of first impression in part because the restructuring is governed by the Puerto Rico Oversight, Management, and Economic Stability Act, which was enacted for Puerto Rico in 2016.  The track record of success speaks for itself:  in the more than 150 lawsuits filed, Tim and the Proskauer team have prevailed in almost 95% of the cases.

Tim is recognized nationally for his experience in private fund litigation and disputes, having focused on the industry for more than 25 years.  As part of that focus, Tim created and is the lead editor of Proskauer’s blog on Private Equity litigation, The Capital Commitment.

Photo of Joshua M. Newville Joshua M. Newville

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and…

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and criminal investigations. In addition, Josh advises registered investment advisers and private fund managers on regulatory compliance, SEC exams, MNPI/insider trading and related risks.

Before joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry. His prior experience with the SEC provides a unique perspective to help asset managers manage risk and handle regulatory issues.

Photo of Michael R. Hackett Michael R. Hackett

Mike Hackett is a partner in the Litigation Department and Co-Head of the Asset Management Litigation practice. An experienced litigator and trial lawyer, Mike’s practice focuses on complex commercial litigation, with a particular emphasis on asset management, financial services, M&A, shareholder, and life…

Mike Hackett is a partner in the Litigation Department and Co-Head of the Asset Management Litigation practice. An experienced litigator and trial lawyer, Mike’s practice focuses on complex commercial litigation, with a particular emphasis on asset management, financial services, M&A, shareholder, and life sciences disputes.

A significant portion of Mike’s practice concerns disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as their sponsors, partners, investors, portfolio companies, and officers and directors. Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to disputes between limited partners and general partners, to representation of investment advisers in connection with regulatory examinations, investigations and enforcement matters. Mike routinely represents funds, fund sponsors, portfolio companies, and their officers and directors, including in significant post-closing M&A disputes.

Mike also litigates high-stakes commercial disputes in the life sciences and financial services areas, including for established pharmaceutical and biotechnology companies, emerging and innovative start-ups, asset managers, and other private capital investors, in areas such as M&A, breach of contract, indemnification, fraud, contested earnouts and royalties, securities and capital markets, and corporate governance.

Mike has been recognized by Chambers USA and was named a “Rising Star” by Massachusetts Super Lawyers.