SEC Releases 2015 Examination Priorities

On January 13, 2015, the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (the “SEC”) released its 2015 examination priorities.  The SEC identified three thematic issues:  (i) matters relating to retail investors and investors saving for retirement, (ii) issues related to market-wide risks and (iii) analysis of data to identify and examine registrants that may be engaged in illegal activity.

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Second Circuit Affirms Tippee Liability

On December 10, 2014, the Second Circuit Court of Appeals rendered a decision[1] regarding an insider trading case that affirmed the elements to prove tippee liability.  The Second Circuit was reviewing a district court’s conviction of Todd Newman, a portfolio manager at Diamondback Capital Management, LLC, and Anthony Chiasson, a portfolio manager at Level Global Investors, L.P., of insider trading based on tippee liability.  The Second Circuit found that the jury instruction given by the district court was erroneous because the jury instruction failed to state that the government must prove beyond a reasonable that the tipeee knew that an insider disclosed confidential information and that such insider did so in exchange for a personal benefit.

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Staying Above The Political Fray – The RIA Political Contribution Rule

It is entirely understandable if after the recent hotly contested “mid-term” elections the general public would like to put political campaigns behind them– at least for the few months before the hype around the 2016 U.S. Presidential elections kicks into gear.  For many folks in the U.S. financial services industry, however, political campaigns have to be kept in mind all year round, every year.  This is thanks, foremost, to the U.S. Securities and Exchange Commission’s “pay-to-play” rules promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”).  The so-called “pay-to-play” rules can be found in Advisers Act Rule 206(4)-5 (the “Political Contribution Rules”) (which can be found on page 194 of this PDF).  The Political Contribution Rule was first proposed in 2009, in the wake of the scintillating tales arising out of the unquestioned abuse of position by certain politicians at the pension plans for New York, California, Illinois and New Mexico, to name a few.  The Political Contribution Rule was adopted in 2010 (and went effective in 2011) and has found its place into the compliance programs of RIAs across the US.

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Compliance Officers’ Liability

Andrew Ceresney, the Director of the Division of Enforcement of the SEC, assured compliance officers that compliance officers would not be exposed to liability when compliance officers engage and remediate problems at investment management firms in a speech given in May 2014.  Mr. Ceresney reiterated that compliance personnel do not become supervisors solely because they provide advice to, or consult with, business line personnel.[1]  However, he clarified that the SEC will bring legal action against compliance officers, typically when the “SEC believes that legal or compliance personnel have affirmatively participated in the misconduct, when they have helped mislead regulators or when they have clear responsibility to implement compliance programs and wholly failed to carry out that responsibility.”  Mr. Ceresney then pointed out a case in which the SEC did bring legal action against a compliance officer.

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Cherry-Picking & Soft Dollars

In a decision issued on August 5, 2014 in an administrative proceeding (the “Decision”), J.S. Oliver Capital Management, L.P. and Ian O. Mausner were found to have willfully violated the antifraud provisions of the Securities Act of 1933, Securities Exchange Act of 1934 (the “Exchange Act”), and the Investment Advisers Act of 1940 by “cherry-picking” trades for favored clients to the detriment of other unfavored clients and willfully misusing “soft dollars.”  J.S. Oliver Capital Management, L.P. (“Adviser”) was a registered investment adviser, and Mausner was the Adviser’s chief executive officer, portfolio manager and ultimate decision maker.[1] In the Decision, Brenda P. Murphy, Chief Administrative Law Judge[2], ordered that the Adviser and Mausner pay civil monetary penalties of $14,975,000 and $3,040,000, respectively.  Judge Murphy also revoked the Adviser’s registration as an investment adviser and permanently barred Mausner from association with an investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization.

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Current Trends and Risks in the Private Equity Industry

In a speech last month, Andrew Bowden, Director of the Office of Compliance Inspections and Examinations (“OCIE”) at the U.S. Securities and Exchange Commission (the “SEC”), generated some controversy within the private equity industry.  (A weblink to a copy of the speech can be found here.)  Continued discussion of the remarks has some private equity fund managers playing defense answering questions from their investors.

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