On Thursday November 7, the Securities and Exchange Commission produced an online compliance outreach program for registered investment adviser and investment companies. Here are a few notes and points that caught my attention. There were lots of video production issues and sound issues throughout the program.
It kicked off with a welcome from Chair Gensler, broadcasting from his home office. (I assume he is planning to exit the Commission with the change in administration.) He was introduced by Vanessa Horton, National Associate Director, SEC, Division of Examinations.
That was followed by Marshall Gandy, National Associate Director, Division of Examinations introducing Keith Cassidy, Acting Director, SEC, Division of Examinations. He was joined by Natasha Vij Greiner, Director, SEC, Division of Investment Management and Sam Waldon, Acting Deputy Director and Chief Counsel, SEC, Division of Enforcement, for the SEC Directors Panel.
The discussion started off about the three division talking about how they collaborate. Mr. Cassidy stated that the target for examinations is 3,000 a year. They highlighted the training of examiners for compliance with the marketing rule.
The next panel was Information Security & Operational Resiliency
Speakers:
- Alexis Hall, Acting National Associate Director, SEC, Division of Examinations, Technology Controls Program (Moderator)
- David Joire, Senior Special Counsel, SEC, Division of Investment Management, Chief Counsel’s Office
- Mike Khalil, Senior Counsel, SEC, Division of Investment Management
- Salvatore Montemarano, Senior Specialized Examiner, SEC, Division of Examinations, Technology Control Program
- Nikolay Vydashenko, Assistant Director, SEC, Division of Enforcement, Fort Worth Regional Office
- Cheryl Zabala, Chief Compliance Officer, Pretium Partners, LLC
Regulation SP amendments were adopted earlier this year. The compliance date is in 2025. It was highlighted in the examination priorities.
Phishing strategies are the biggest threat to firms. An employee doing the wrong thing is more likely than a skilled hacker busting through your firewalls.
Artificial Intelligence is an upcoming risk. There are no clear rules yet.
Companies need to conduct regular cybersecurity threat assessment.
Off channel communications. Would a single rogue employee trigger an enforcement action? It’s a black and white rule. There are no de minimis waiver. There does not need to be an intent of fraud. Nikolay points out that in the enforcement actions it has been pervasive use of off-channel communications and a violation of a firm’s policy. Push back from the panel is that the perception is that there is zero tolerance policy. Separate firm devices and personal devices is expensive.
Panel III: Private Fund Adviser Topics
The private fund panel, after lunch, lacked any sound. You could see the techs on screen trying to pull up the settings. The entire beginning of the panel was lost. Sadly, this was the panel I was most interested in.
- Jennifer Duggins, Assistant Director and Co-Head of the Private Funds Unit, SEC, Division of Examinations, New York Regional Office (Moderator)
- Shane Cox, Regulatory Counsel, SEC, Division of Examinations, Private Funds Unit, Philadelphia Regional Office
- Lee A. Greenwood, Assistant Regional Director, SEC, Division of Enforcement, Asset Management Unit, New York Regional Office
- Adele Kittredge Murray, Private Funds Attorney Fellow, SEC, Division of Investment Management, New York Regional Office
- Michael Neus, Chief Administrative Officer, Brevan Howard US Investment
IRR calculations net and gross both need to address use of a credit line. Hypothetical performance concerns were highlighted. The first prong is have policies and procedures on who gets hypothetical performance. Substantiation. Fund manager needs to retain back up for the performance figures in a PPM or slide deck. Mike, the industry representative, pointed out that the marketing rule often conflicts with what institutional investors want for data.
Adele highlighted new amendments to Form PF that require additional reporting requirements for Large Hedge Funds. The trigger events are substantial loss like issues at the fund: large margin calls, large redemption requests. You’ve got 72 hours to make the filing. For Private Equity the additional reporting are for secondary offerings and some other events.
Valuation is always a regulatory focus for private funds. Private credit was identified as a new risk.
Enforcement threw bombs at MNPI and highlighted some recent insider trading cases.
Fees and expenses disclosures, are they enough? Is there is enough for a reasonable investor to make an informed decision.
The panel focused on the use of the word “may”. Don’t use “may” if it’s something you do all the time.
Panel IV: Marketing Rule
Speakers
- Karen Stevenson, SEC, Senior Program Adviser, Division of Examinations, National Exam Program Office (Moderator)
- Melissa Harke, Senior Special Counsel, SEC, Division of Examinations, Office of Chief Counsel
- Scott Jameson, Senior Counsel, SEC, Division of Investment Management
- Brianna Ripa, Assistant Director, SEC, Division of Enforcement, Asset Management Unit
- Karyn Vincent, Senior Head-Global Industry Standards and GIPS Executive Director, CFA Institute
Always looking for more insight. Dipped the toes into the water as to whether something is an advertisement. Is it an “offer for advisory services” is the standard. Of course, even if it’s not an advertisement, a communication is still subject to the anti-fraud provisions of Section 206.
Material focused on a particular investor is an advertisement if you just pull a stock piece of collateral and slap the investor’s name on the cover.
What is “performance” as opposed to “portfolio attributes”?
DOE ran a sweep on hypothetical performance marketing. The assumption is that is it likely to be deceptive. It can’t be used in broad marketing. So websites are generally bad placed to have hypothetical performance.
Testimonial and endorsements (which one is for clients and which is for non-clients?) require disclosures. There has to be written agreements and oversight.
They spoke about the “Official Wealth Management Partner of”… case. They didn’t provide much justification that this was an endorsement. They pointed out that the firm has other testimonial that weren’t from actual clients.
Panel V: Registered Investment Advisers
- Ryan Hinson, Regulatory Counsel, SEC, Division of Examinations, Los Angeles Regional Office (Moderator)
- Aaron DeAngelis, Examination Manager, SEC, Division of Examinations, Philadelphia Regional Office
- Colin Forbes, Assistant Director, SEC, Division of Enforcement, Boston Regional Office
- Anna Sandor, Senior Counsel, SEC, Division of Investment Management
- Jim D’Sidocky, General Counsel & CCO, Sanders Capital, LLC
They pointed out the SEC guidance on the 2019 fiduciary standards of investment advisers: https://www.sec.gov/files/rules/interp/2019/ia-5248.pdf
They also pointed out the guidance on compensation disclosure: https://www.sec.gov/investment/faq-disclosure-conflicts-investment-adviser-compensation
Panel VI: Hot Topics Lightning Round
- Steven Levine, Senior Special Counsel, SEC, Division of Examinations, Chicago Regional Office (Moderator)
- Nadia Brannon, Branch Chief of Crypto Asset Specialized Exams, SEC, Division of Examinations, Technology Controls Program
- Matt Cook, Senior Counsel, SEC, Division of Investment Management
- Virginia Rosado Desilets, Assistant Director, SEC, Division of Enforcement
- Roberto Grasso, Branch Chief, SEC, Division of Examinations, Office of Risk & Strategy, Office of Risk Analysis & Surveillance, Branch of Surveillance and Reporting
- Maurya Keating, Associate Regional Director, SEC, Division of Examinations, New York Regional Office
- Sirimal Mukerjee, Senior Special Counsel, SEC, Division of Investment Management
- Lindsay Topolosky, Regulatory Counsel, SEC, Division of Examinations, National Exam Program Office
AI: If you claim to be using AI in your marketing and disclosure it should be accurate. “Do what you say you do.” No AI washing. There is a rulemaking out there.
The SEC has taken some swings at “internet advisers” and their exemption. There is a revised rule. Basically, the website really needs to work. Vaporware gets you shut down by the SEC.
T+1 Settlement rule as it applies to Investment Advisers.
Pre-IPO offerings. There has been a lot of boiler room operations pushing that they have pre-IPO offering access. The problem is often blowing through the Investment Company exemptions.
FinCEN AML Rule. (Why I stayed to the end.) New AML requirement. January 1, 2026 is the compliance deadline. But get ahead of it. Banks and mutual funds have been subject to this for years. As part of the final rule, the SEC has examination authority. It will start popping up in SEC exams. It applies to “Exempt Reporting Advisers”.
Five obligations: 1 written AML program. 2. Reporting obligations. 3 record keeping requirements. 4. Special information sharing procedures 5. Special standards of diligence for foreign banking affiliations.
What should be in the written AML program?
- Establish internal policies, procedures and controls
- Independent testing of the program
- Designate an officer in charge
- Training of firm employees
- Implementation of ongoing diligence
It should be risk-based addressing the client risks.
SAR filings is not a clear concept on when to file.
