On March 30, 2022, the Division of Examinations of the U.S. Securities and Exchange Commission (the “SEC”) announced its examination priorities for fiscal year 2022. The annual publication of the Division’s examination priorities is intended to align with the Division’s four pillars of promoting and improving compliance, preventing fraud, monitoring
California District Court Upholds SEC’s Novel “Shadow Trading” Theory
The SEC prevailed on a motion to dismiss a closely watched lawsuit alleging that a company employee had engaged in insider trading based on news about a not-yet-public corporate acquisition when he purchased securities of a third-party company that was not involved in the deal. The January 14, 2022 decision in SEC v. Panuwat (N.D. Cal.) marks the first time a court has considered the theory of “shadow trading,” which involves trading the securities of a public company that is not the direct subject of the material, nonpublic information (“MNPI”) at issue.
The Panuwat ruling does not appear to break new ground under the misappropriation theory of insider trading under the particular facts alleged. But the “shadow trading” theory warrants attention because it can have wide-ranging ramifications for traders, including hedge funds.
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
OCIE Issues Risk Alert on Common Deficiencies Observed in Adviser Compliance Programs
On November 19, 2020, the SEC’s Office of Compliance Inspections and Examinations published a risk alert providing an overview of notable compliance issues observed in registered investment advisers’ compliance programs. The alert will serve as a useful checklist for advisers seeking to identify weaknesses in their own compliance programs and
SEC Releases Risk Alert Identifying Common Private Equity and Hedge Fund Compliance Deficiencies
On June 23rd, the staff of the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations issued a new risk alert entitled “Observations from Examinations of Investment Advisers Managing Private Funds.” As discussed in the client alert below, the report highlights many practices which have been the subject
OCIE Publishes Cybersecurity and Resiliency Observations
On January 27, 2020, the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) published its Cybersecurity and Resiliency Observations. Cybersecurity and data protection for market participants have been key focuses of OCIE for several years. These observations provide useful insights into OCIE’s examination priorities in
SEC Staff Issues Risk Alert on the Six Most Frequent Fee and Expense Compliance Issues
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
U.S. House Bill Aims to Curtail SEC Staff’s Ability to Obtain Algorithmic Trading Source Code
On October 4, 2017, U.S. Representative Sean P. Duffy [R-WI-7] introduced U.S. House of Representatives Bill H.R.3948 entitled the “Protection of Source Code Act.”
If enacted, the Bill would amend the Securities Act, the Securities Exchange Act, the Investment Company Act and the Investment Advisers Act to prohibit the SEC staff from obtaining algorithmic trading source code without a subpoena. This would prevent the SEC staff from obtaining source code through OCIE exam requests or during the early stages of an investigation before the staff has obtained authority to issue subpoenas.
Best Practices for Fund Managers to Mitigate Big Data and Web Scraping Risks
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
SEC Staff Announces 2017 OCIE Examination Priorities
On January 12, 2017, the staff of the Office of Compliance Inspections and Examinations (OCIE) of the Securities and Exchange Commission (SEC) released its annual announcement on examination priorities in the coming calendar year. The 2017 examination priorities are organized around three thematic areas: (i) examining matters of importance to retail investors; (ii) focusing on risks specific to elderly and retiring investors; and (iii) assessing market-wide risks.