Month: October 2015

What Does the Future Hold for the Regulation of Private Equity Funds?

The Chair of the Securities and Exchange Commission offered a sneak peak of upcoming regulations. Mary Jo White was speaking at the 75th Anniversary Celebration: Investment Company and Investment Advisers Acts and offered a few tidbits.

fortune tell secret crystal ball

Chair White spoke about the history of the Acts and offered a glimpse into the future:

Today, as many of you know, the Commission has an ambitious agenda to address evolving risks for funds and advisers, recently proposing enhanced data reporting by investment companies and advisers, and, just last week, proposing to require open-end funds to enhance funds’ liquidity risk management. As we speak, Commission staff is also developing recommendations that I hope to advance for the Commission’s consideration by the end of this year related to the use of derivatives by funds, including measures to appropriately limit the leverage these instruments may create, as well as enhancing risk management programs for such activities.

Beyond that, the staff is developing recommendations regarding transition planning for advisers, annual stress testing by large investment advisers and funds, a program of third party examinations for investment advisers and a uniform fiduciary duty for investment advisers and broker-dealers.

Talk about a full plate of critical initiatives.

The SEC wants to limit the use of derivatives by funds. It’s not clear whether that would applicable to all funds or focused on mutual funds.

Transition planning for advisers is a hot button. It’s certainly an issue for small retail advisers. It’s also a question for many private fund managers. It will be interesting to see what the SEC will propose.

Annual stress testing for large funds will be tricky. I wonder how the SEC will define “large.”

Third-party exams for investment advisers is back on the table. That will mean more costs to registered advisers having to pay for the service of being examined more regularly. I’m sure FINRA popped its head up when it saw that line in the speech.

Sources:

Fortune Telling
by Russ Allison Loar
CC BY SA

Compliance Bricks and Mortar for October 2

These are some of the compliance-related stories that recently caught my attention.

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The Curious Incident of the ‘Life Coach’ and the Press Release by Bruce Carton in Compliance Week

As I’ve observed before, the SEC loves to craft press release headlines that feature defendants’ interesting or high-profile jobs. For example, past SEC headline highlights include:

All of this makes it quite mystifying to me how the SEC’s case filed last week…[More]

Where I Think the Yates DOJ Memo Will Take Us by Roy Snell in SCCE’s Compliance & Ethics Blog

On one side of the room will be top leadership; on the other, the lead investigators. The DOJ may ask that the Board Chair be involved. At some point during the meeting, the DOJ will share their recent memo/policy that, paraphrased, states, “If you turn over internal investigations of individuals involved in the alleged wrongdoing, you will get more credit.” (“More credit” is a euphemism for, in some cases, millions of dollars in reduced penalties.) But beyond the discussion of credit, leadership will need to be prepared for a discussion of discipline.[More…]

Reflections on the Hitachi FCPA Enforcement Action by Thomas R. Fox in FCPA Compliance & Ethics

Perhaps the most interesting aspect of the Hitachi matter is that it involved bribery of a political party, the African National Congress (ANC). The SEC Press Release stated, “Hitachi sold a 25-percent stake in a South African subsidiary to a company serving as a front for the ANC. This arrangement gave the front company and the ANC the ability to share in the profits from any power station contracts that Hitachi secured. Hitachi was ultimately awarded two contracts to build power stations in South Africa and paid the ANC’s front company approximately $5 million in “dividends” based on profits derived from the contracts. Through a separate, undisclosed arrangement, Hitachi paid the front company an additional $1 million in “success fee”.”[More…]

The Volcker Rule as Structural Law by John C. Coates in the Harvard Law School Forum on Corporate Governance and Financial Regulation

Alongside these banking laws, another set of structural laws grew in importance in the 20th century: administrative law—the body of statutes and court doctrines channeling and controlling the use of delegated law-making power by government officials and agencies. To control and improve the functioning of agencies, Congress adopted a number of legal constraints, including the Administrative Procedures Act, which together with an assertive judiciary gives private actors the ability to challenge regulation in court. To this list, cost-benefit analysis (CBA) has been increasingly advanced—in advocacy, in Congress, and in court—as an additional tool for improving financial regulations, and holding financial regulatory agencies accountable to the public. [More…]

The Compliance Dangers of Cheerleaders and Nay-Sayers by Michael Volkov in Corruption, Crime & Compliance

Many senior executives are smart people –we all understand that. But too often senor executives embrace an interpersonal style of cheerleading. It allows them to appear to be on the “team” and prevent them from “rocking the boat.” Unfortunately, such an attitude prevents them from being a value add and problem solver for real management issues. [More…]

 

Failing the Family

Some Securities and Exchange Commission cases catch my attention because of their headlines or their focus on a real estate investments. The case against Lee Dana Weiss caught my attention because it was from my home town.

newton mass

The story is one of alleged self-dealing and failure to disclose conflicts. In a complaint filed in U.S. District Court for the District of Massachusetts, the SEC alleges that Family Endowment Partners LP and its owner, Lee Dana Weiss, of Newton, Massachusetts, urged their clients to invest more than $40 million in illiquid securities issued by several related companies without disclosing that Weiss had an financial interest in the investments.

 

This was not the first round of trouble for Mr. Weiss and Family Endowment. In April, they lost an arbitration and had to repay $48 million to clients. The firm had recommended a series of private investments in a company that owned a Polish tobacco company and patents on a cigarette filter that it claimed would revolutionize the tobacco industry. Not only was it a sketchy investment, but apparently Mr. Weiss had an undisclosed performance interest in the success of the company.

Browsing through the Form ADV, you can see that it is filled with subsidiaries and the multiple hats that Mr. Weiss was wearing.  Given all of the existing disclosures, it seems that it should have been easier to include the additional disclosures that would have helped his case.

Given that Mr. Weiss had an ownership interest, and not just an incentive payment, the principal transactions rule would apply requiring explicit consent by the advisory client.

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