Category Archives: Compliance

Compliance, Enforcement, Regulatory, Standard of Care

How NSCP CCO Framework Could Have Altered FINRA Charges

March 1, 2022 Clifford E. Kirsch, Editor Leave a comment

Every year, FINRA brings hundreds of cases, many alleging that firms have inadequate policies and procedures. In the overwhelming majority of those cases, the Chief Compliance Officer (CCO), who FINRA considers to be “a primary advisor to the member on its overall compliance scheme and the particularized rules, policies and procedures that the member adopts,” is not charged. With regard to Anti-Money Laundering (AML) cases, AML compliance officers (AMLCOs) are also infrequently charged. Questions that always follow such cases include the following: When are violations “firm issues” and when should the compliance officer get charged?

Despite the relatively small percentage of cases brought against compliance officers, they are (unsurprisingly) concerned about being in the cross hairs of regulators, and being subject to personal liability. Compliance officers are usually the firm’s central point of communications with regulators, responsible for responding to regulatory inquiries, producing documents, and answering questions. In many investigations, they must provide on-the-record testimony, even if the case does not directly involve their core functions.

Due to these concerns, on January 10, 2022, the National Society of Compliance Professionals (NSCP) proposed a “Firm and CCO Liability Framework” (NSCP Framework) to “provide guidance to regulators, chief compliance officers (CCOs), and firms regarding perceived or actual CCO liability.” The NSCP Framework developed nine questions to be “considered by regulators where a compliance failure may have occurred,” to evaluate CCO liability.

SEC Proposes New Rules for Private Fund Advisers

February 28, 2022 Richard Chen Leave a comment

The SEC recently proposed new rules that would impose additional practice and disclosure requirements on private fund advisers which, if adopted in their current form, could collectively have severe consequences for such advisers. Among other things, the proposed rules would require SEC-registered advisers to:

provide quarterly reporting to fund investors including detailed and standardized disclosures about fund expenses and performance; and
obtain and deliver audited financial statements for each advised private fund annually and upon liquidation.

Importantly, the proposed rules would prohibit all private fund advisers (including exempt reporting advisers) from:

entering into side letter arrangements granting preferential redemption rights or certain portfolio information rights if such rights would have a material adverse effect on fund investors;
requiring reimbursement from investors for the adviser’s breach of its fiduciary duties including situations involving simple negligence;
Charging private funds for certain fees and expenses;
deducting taxes owed from any clawback they must provide to investors; and
Borrowing funds or securities from a fund or receiving an extension of credit from a fund.

Very importantly, the proposed rules do not have a grandfathering provision, and, therefore, if the rules are adopted as proposed, advisers would need to assess whether existing private fund documents must be amended, which can be challenging given that the adviser and fund investors negotiated fund terms based on circumstances prior to the existence of the new requirements.

SEC Considers Changes to Accredited Investor Definition

February 24, 2022 Richard Chen Leave a comment

Those looking to launch hedge, private equity, venture, or real estate funds in the near future should take notice that the SEC intends to consider, in April 2022, changes to the definition of the “accredited investor” definition found in Regulation D under the Securities Act of 1933, which allows many private fund sponsors to offer their securities without having to register them with the SEC when they limit sales of securities to accredited investors.

While the SEC has not indicated whether it intends to restrict the definition to reduce the pool of investors that qualify as “accredited investors,” it should be noted that several rule proposals recently published by the SEC are designed to enhance investor protection and promote increased disclosure when it comes to investments in private funds.

Changing the accredited investor definition will invariably impact private fund capital raising, and therefore existing and prospective fund sponsors should take notice.

Marketing Rule Compliance Checklist for investment advisers

February 19, 2022 Clifford E. Kirsch, Editor Leave a comment

To facilitate compliance with amendments to Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940, we developed a Compliance Checklist. The date for compliance is November 4, 2022 – by which time registered investment advisers must adopt and implement new policies and procedures, and build the operational and supervisory systems necessary for compliance.

The Marketing Rule modernizes the regulatory regime governing investment adviser marketing practices and revises standards that investment advisers have been operating under for decades.
Compliance with the Marketing Rule will require significant changes to investment advisers’ marketing practices, including use of testimonials, endorsements, or third party ratings and investment advisers’ use of performance information.
The Compliance Checklist is intended to serve as a helpful guide for legal and compliance personnel responsible for developing compliant policies, procedures, and systems that account for these sweeping changes.

You can access it here.

Compliance, Regulatory, Standard of Care