Cybersecurity breaches and threats are pervasive concerns for any entity storing valuable data or managing large sums of money: private investment funds are no exception. Recently three private equity firms suffered breaches that compromised their email accounts and wire transfers, resulting in $1.3 million in losses. We have seen the SEC follow through on its 2019 priority of examining investment advisers about their cyber-security measures, as well as inquiring if they have suffered from a cyber-security breach. We expect that trend to continue. Fund sponsors should be aware of (1) the key cyber threats they face, (2) the consequences of a breach, and (3) the statutory and regulatory framework governing cybersecurity. Fortunately, there are precautionary measures that fund sponsors can implement to help prevent a breach and to mitigate the scope and damage from a breach if one were to occur. We will elaborate on both the steps to take to guard against a breach and how to effectively respond to a breach in a forthcoming post.
U.S. Supreme Court Denies Bid to Review Dismissal of Challenge to Pay-To-Play Rule
On January 13, 2020, the United States Supreme Court denied certiorari to an appeal of a June 2019 order from the United States Court of Appeals for the D.C. Circuit that dismissed an action seeking to invalidate certain under the First Amendment, among other arguments. This denial leaves in place a ruling in favor of the U.S. Securities and Exchange Commission’s (SEC) authority to prohibit pay-to-play practices in the investment management industry.
Pay-to-Play – SEC Expands Scope of Rule to CABs
The SEC’s pay-to-play rule has given advisers reason to worry about potential foot faults since its adoption. As we have noted in prior posts, the rule is filled with landmines and is therefore difficult to navigate. As was evident from the SEC’s announcement of a series of settlements of alleged pay-to-play violations in early 2017, even a small contribution without any intent to influence an election or an official can run afoul of the rule and put two years of fees and carry at risk.
Last week, the SEC issued an order that will expand the scope of the pay-to-play rule. The SEC approved a FINRA proposal to extend the self-regulatory organization’s Rules 2030 and 4580 (its pay-to-play and associated recordkeeping rules) to a recently established category of FINRA-registered firms known as capital acquisition brokers, or CABs.
OCIE By the Numbers and the Use of Big Data
On 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.
Private Fund Advisers Must Pay Close Attention to Nuances under Pay-to-Play Restrictions in Light of Upcoming Elections Nationwide
As 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
Webcast: The New Regulatory Landscape for Financial Institutions
Is your organization equipped to stay on top of regulator demands? Join Proskauer’s Tim Mungovan, co-head of the Private Equity & Hedge Fund Litigation Group, and Marsh’s FINPRO U.S. Chief Innovation Officer Machua Millett on June 15 at 2:00 p.m. ET for a webinar on the new regulatory landscape for