On June 8th, the SEC Division of Examinations (the “Division”) published a risk alert expanding the areas of focus for its ongoing examination sweep of compliance with Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”). The Division announced its initial focus areas in a September 2022 risk alert, covering (1) policies and procedures, (2) substantiation, (3) performance advertising and (4) books and records. It has not yet released any observations from the sweep, nor has there been guidance on the Marketing Rule’s requirements from the Division of Investment Management. This risk alert’s addition of the “general prohibitions” to the sweep’s focus areas could signal the staff’s intent to issue deficiencies for violations of the broad and undefined “fair and balanced” and “materially misleading” standards. The risk alert also adds, as expected, endorsements and testimonials to the areas of focus, which is likely an unwelcome addition for advisers having difficult negotiations with placement agents over those requirements.
Continue Reading SEC Expands the Scope of Its Marketing Rule Examination Sweep – But Still No GuidanceSEC Guidance
The First Shoe Drops—SEC Adopts the Initial Amendments to Form PF
On May 3, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers (“RIAs”) to private funds. The amendments are part of the SEC’s effort to bolster the Financial Stability Oversight Counsel’s (“FSOC’s”) ability to monitor systemic risk, but will also allow the SEC’s Divisions of Examinations and Enforcement to more quickly and specifically identify RIAs and issues for examination and investigation. Coupled with the SEC’s increasing use of artificial intelligence and other data-mining techniques, the amendments will provide a trove of information in areas of focus for SEC staff.
Continue Reading The First Shoe Drops—SEC Adopts the Initial Amendments to Form PFSEC Continues to Shine Light on Cyber and Data Security: Proposes Amendments to Regulation S-P
By Robin M. Bergen, James R. Burns, Ben Rosenblum & Joe Wakeford on
On March 15, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued proposed amendments (the “Proposal”) to Regulation S-P, which governs the treatment of nonpublic personal information about consumers by broker-dealers, registered investment advisers, registered investment companies, and transfer agents. The Proposal would broaden the existing “safeguards” and “disposal” rules under Regulation S-P, and would require the entities to adopt “incident response programs.”
Continue Reading SEC Continues to Shine Light on Cyber and Data Security: Proposes Amendments to Regulation S-PSEC Risk Alert Identifies Key Compliance Issues for New (and Not New) Registered Advisers
By Robin M. Bergen, Amber V. Phillips & Lyric Gupta on
Posted in Compliance, SEC Guidance
On March 27th, the SEC Division of Examinations (the “Division”) published a risk alert affirming its long-standing interest in conducting reasonably prompt examinations of newly registered advisers. The risk alert provides an examination ‘how to’ guide for new advisers, describing the materials those advisers should expect to provide to staff in an examination. Advisers should expect exam staff to focus on (i) proper identification and mitigation of conflicts of interest; (2) adequacy of client disclosures; and (3) effectiveness of compliance programs.
Continue Reading SEC Risk Alert Identifies Key Compliance Issues for New (and Not New) Registered AdvisersDOJ and SEC Charge Healthcare Executive With Insider Trading Through a Rule 10b5-1 Trading Plan, Marking DOJ’s First Such Indictment
By Matthew C. Solomon, Adam Fleisher, Tom Bednar & Sarah Choi on
On March 1, 2023, the U.S. Department of Justice and the Securities and Exchange Commission announced insider trading charges against Terren Peizer, the CEO and Chairman of a California-based healthcare services company called Ontrak, Inc. (the “Company”) for allegedly selling Company securities while in possession of material, non-public information (“MNPI”) that one of the Company’s major customers was likely to cancel its contract.
Continue Reading DOJ and SEC Charge Healthcare Executive With Insider Trading Through a Rule 10b5-1 Trading Plan, Marking DOJ’s First Such IndictmentSecond Circuit Decision Limits the Ability to Prosecute Instances of Trading on Confidential Government Information
By Leslie N. Silverman, Victor L. Hou, Adam Fleisher, Robin M. Bergen, Jared Gerber, Tom Bednar & Michael Cinnamon on
On December 29, 2022, in a closely-watched insider trading case, the Second Circuit decided United States v. Blaszczak (“Blaszczak II”).[1] The Supreme Court in January 2021 had vacated and remanded the Second Circuit’s prior decision in light of Kelly v. United States (also known as the “Bridgegate” decision). On remand, a divided panel of the Second Circuit found that trading on the basis of certain confidential government information related to pending regulation does not give rise to violations of the criminal wire fraud and securities fraud statutes.
Continue Reading Second Circuit Decision Limits the Ability to Prosecute Instances of Trading on Confidential Government InformationAccelerated Pace and Increased Regulatory Expectations in Enforcement and Compliance Investigations
The following post was originally included as part of our recently published memorandum “Selected Issues for Boards of Directors in 2023”.
The Securities and Exchange Commission (SEC) and Department of Justice (DOJ) ramped up their enforcement efforts in 2022, often in highly coordinated actions, including with other regulatory agencies such as the Commodity…
U.S. SEC Enforcement 2022 Year in Review
By Matthew C. Solomon, Robin M. Bergen, Tom Bednar, Alex Janghorbani, Meghan A. Leibold & Nora J. Vallerini on
The U.S. Securities and Exchange Commission recently announced the Division of Enforcement’s results for fiscal year 2022, the first full year for the Division under the leadership of both Chair Gary Gensler and Director of Enforcement Gurbir Grewal.
Results were up from the year before, with a record $4.2 billion in civil penalties reflecting the…
New Requirements for Outsourcing by Advisers: Proposed SEC Rule Brings More Obligations and Scrutiny
On October 26, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed a new rule under the Investment Advisers Act of 1940 (“Advisers Act”) imposing due diligence, recordkeeping and reporting obligations on registered investment advisers (“RIAs”) who outsource certain key “covered functions” of the adviser’s business to third parties, including affiliates. The Proposal represents another step toward more substantive regulation of RIAs by the SEC under Chairman Gensler, and will impose real costs and operational risk on RIAs.
Continue Reading New Requirements for Outsourcing by Advisers: Proposed SEC Rule Brings More Obligations and Scrutiny
SEC Charges Company Executives with Insider Trading for Allegedly Setting Up 10b5-1 Trading Plan While in Possession of MNPI
By Matthew C. Solomon, Tom Bednar & Sarah Choi on
On September 21, 2022, the Securities and Exchange Commission announced settled insider trading charges against the CEO and the former President and Chief Technology Officer of Cheetah Mobile Inc. (the “Company”), a China-based mobile internet company. The executives allegedly possessed material nonpublic information (“MNPI”) when they set up a trading plan under Rule 10b5-1 of the Securities Exchange Act.
Continue Reading SEC Charges Company Executives with Insider Trading for Allegedly Setting Up 10b5-1 Trading Plan While in Possession of MNPI