The U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”) released its 2024 examination priorities on October 16, 2023 (the “2024 Priorities”), launching a new release schedule to align with the fiscal year. As in the 2023 examination priorities (the “2023 Priorities”), private fund advisers received special focus, with broad topic areas spanning both the existing Staff sweeps on custody, marketing and artificial intelligence, as well as renewed scrutiny of valuations and investment processes. Despite its release causing much fanfare, there was surprisingly little overlap between the 2024 Priorities and the newly adopted Private Fund Adviser Rules; the focus on fees and expense allocation carried over from the Private Fund Adviser Rules, and the Division picks up a theme from its adopting release by taking a shot at limited partnership advisory committees (“LPACs”) and compliance with private fund governance procedures.Continue Reading SEC Staff Play the Hits: 2024 Exam Priorities Focus on Private Funds, Marketing and Crypto
On October 8, 2023, California’s Governor Gavin Newsom signed into law Senate Bill 54 (the “VC Diversity Law”) requiring “venture capital companies” with business ties to California to file annual reports detailing (1) specified demographic data for the founding teams of all portfolio companies invested in during the prior year and (2) the aggregate amounts of investments made by the venture capital company during the prior year and investments in specified categories of portfolio companies. Demographic data must be obtained through voluntary surveys sent to each founding team member of a portfolio company that receives funding from the venture capital company. The data, in anonymized form, will be publicly available – and searchable and downloadable – on the California Civil Rights Department’s website. The VC Diversity Law is stunning both in its scope and its plain objective to impose State-level requirements that go beyond Federal requirements. And this at a time when the Securities and Exchange Commission has exponentially increased those Federal requirements.Continue Reading California Adds To Private Fund Adviser Woes; Adopts New Diversity Reporting for Venture Capital Funds
On September 25, 2023, the Securities and Exchange Commission announced settled cease-and-desist charges against GTT Communications, Inc. (“GTT”), a formerly publicly-traded multinational telecommunications and internet service provider company. The SEC charged GTT with failing to disclose material information regarding unsupported accounting adjustments, which caused the company’s statements to be misleading with respect to its cost of revenue.Continue Reading SEC No-Penalty Settlement Signals Heightened Focus on Self-Reporting and Cooperation
At the September 21, 2023 Conference of the Global Investigations Review, Principal Associate Deputy Attorney General Marshall Miller announced actions by the Department of Justice (“DOJ”) to further incentivize companies engaged in M&A to prioritize compliance. Miller affirmed that “acquiring companies should be rewarded—rather than penalized—when they engage in careful pre-acquisition diligence and post-acquisition integration to detect and remediate misconduct at the acquired company’s business.” He noted that in practice, “… [Main Justice’s] Criminal Division has declined to take enforcement action against companies that have promptly and voluntarily self-disclosed misconduct uncovered in the mergers and acquisitions context and then remediated and cooperated with the Justice Department in prosecuting culpable individuals,” and that the DOJ “will be looking to apply that same approach Department-wide.”Continue Reading DOJ Announces Additional Guidance on Voluntary Self-Disclosure in M&A Context
On September 1, 2023, U.S. District Judge Pamela K. Chen of the Eastern District of New York granted a judgment of acquittal in the latest FIFA bribery prosecution, holding that the federal honest services statute, 18 U.S.C. § 1346, does not cover foreign commercial bribery in light of recent Supreme Court precedent.Continue Reading U.S. District Court Tosses FIFA Bribery Convictions, Finding Honest Services Statute Does Not Reach Foreign Commercial Bribery
On September 6th, the SEC Division of Examinations (the “Division”) published a risk alert with more detail on how it selects investment advisers for examinations and its process for determining the specific risk areas and issues to address in examination. It noted that it leverages technology to conduct bulk data collection and analysis at both an industry and adviser level, as well as utilizing disclosure documents such as Form ADV and Form PF. The risk alert is the second this year to address examination practices; a March 2023 risk alert provided an examination road map for new advisers and detailed a number of observations from recent exams. Releases for the recently proposed and adopted amendments to Form ADV and Form PF, as well as the much anticipated final Private Fund Rules, have also noted the anticipated use of such disclosures and rules in examination and enforcement. While some industry watchers have observed that the staff’s focus on rulemaking has slowed examination and enforcement activity, the staff have achieved a spate of recent settlements in connection with their sweeps on Marketing Rule compliance and Custody Rule violations. This latest risk alert signals that advisers should expect continued scrutiny in these areas and additional sweep exams shortly after the compliance dates for new Private Fund Rules. Advisers should take into account the recent enforcement cases and Division publications as they review their policies and procedures, disclosures, compliance controls and practices relating to the Marketing Rule and these other high priority areas for the SEC.Continue Reading SEC Risk Alert on Examinations: Who Gets Examined and Scope of Exams
Faced with the new challenges of a changing market, developing digital platforms and the consequential rise of new online commerce practice, the European Union (“EU”) has strengthened its current legislation on consumer protection.Continue Reading Italian Transposition of the Omnibus Directive: the Reform in Pills
On August 23, 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules under the Investment Advisers Act of 1940 (the “Advisers Act”) that will significantly impact private fund advisers (the “Final Rules”). Although the Final Rules abandoned most of the headline prohibitions in the SEC’s original proposal (the “Proposed Rules”) from February 10, 2022 (discussed in our Alert Memo here) — which created shock waves through the industry for its proscriptive requirements and tone — the Final Rules still contain onerous and market practice-changing requirements. The Final Rules do not prohibit indemnification for negligence or ban the standard practice of accounting for taxes in clawback requirements, as the Proposed Rules threatened. But they do impose substantial new and detailed quarterly reporting requirements, two prohibitions and many new disclosure requirements for side letters and expense allocations, and restrict certain other activities, which the SEC explicitly warned that Exam and Enforcement Staff will be closely reviewing. With a few limited exceptions, all registered advisers (“RIAs”) will have their hands full implementing new and modified reporting, and RIAs, exempt reporting advisers (“ERAs”) and other advisers exempt from registration must develop processes — and make difficult judgments — about providing preferential treatment to selected investors and engaging in the targeted activities.Continue Reading Fund Rules Dampened, Not Defanged: SEC’s final private fund rules drop proposed bans on certain activities, but still have bite.
On July 26, 2023, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) adopted rules to enhance and standardize disclosure requirements related to cybersecurity incident reporting and cybersecurity risk management, strategy, and governance.Continue Reading New SEC Disclosure Rules for Cybersecurity Incidents and Governance and Key Takeaways
On July 26, 2023, the U.S. Department of Justice’s National Security Division, the U.S. Department of Commerce’s Bureau of Industry and Security, and the U.S. Department of the Treasury’s Office of Foreign Assets Control jointly issued a compliance note summarizing voluntary self-disclosure policies applicable to U.S. sanctions, export controls, and other national security laws.
The note underscores the U.S. government’s focus on investigating and prosecuting violations of sanctions and export controls laws. While based largely on existing guidance and authorities, the note highlights the role of private-industry “gatekeepers” in sanctions and export control compliance, and U.S. authorities’ increasing emphasis on disclosures in conjunction with potential enforcement.
Please click here to read the full alert memorandum.