Notwithstanding recent media reports asserting that the number of insider trading actions brought by the SEC has dropped, the SEC continues to pursue actions against investment advisers for failures to maintain robust policies and procedures on the handling of material nonpublic information. In this article, partners Marc Elovitz, Anna Maleva-Otto, Craig Warkol, special counsel Kelly Koscuiszka and former Schulte lawyers Brian Daly, Edward Sadtler and Cathy Weist discuss this and other compliance updates relevant to private fund managers.

The European Commission has recently published proposals to amend MiFID II[1]. Although the proposed reforms are largely superficial, the following will be of interest to managers with offices or affiliates in the United Kingdom or European Union: (i) proposed changes to disclosure obligations with regards to costs and charges of the investment services; and (ii) proposals to carve out fixed income research and research on SME issuers from the research unbundling rules. Managers that trade commodity derivatives on EU markets will welcome the proposed measures to relax some of the aspects of the MiFID position limit rules.

This article appeared in the August 2020 edition of SRZ’s Private Funds Regulatory Update. To read the full Update, click here.

[1] See Proposal for a Directive of the European Parliament and of the Council (July 24, 2020), available here, and Proposal for a Commission Delegated Directive (July 24, 2020), available here.

SEC Continues to Focus on MNPI-Related Deficiencies

The SEC continues to pursue actions against investment advisers for failures to maintain robust policies and procedures on the handling of material non–public information.

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CFTC Focus on Insider Trading Continues

On Aug. 3, 2020, the Commodity Futures Trading Commission settled an enforcement action with two New York Mercantile Exchange employees (and with NYMEX itself on a vicarious liability theory) for disclosing confidential information about futures trading activity to a third-party broker.

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Valuation Issues Continue to Be an SEC Priority

On Aug. 11, 2020, the SEC announced charges against the former chief executive officer of Direct Lending Investments LLC, an investment adviser, for violating the antifraud provisions of the federal securities laws.

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Expense-Related Issues Continue to Trigger SEC Enforcement Actions

On Aug. 7, 2020, the SEC sanctioned Rialto Capital Management for failing to properly disclose and allocate certain costs and expenses.

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CFTC Institutes Its First Anti-Money Laundering Rule Enforcement Action

On Aug. 10, 2020, a CFTC-registered futures commission merchant agreed to a settlement with the CFTC resolving allegations that it violated CFTC Rule 42.2 by administering a deficient anti-money laundering compliance program and failing to detect and report suspicious (and illegal) activity.

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SEC Revises Proxy Voting Guidance

On July 22, 2020, the SEC granted proxy advisory firms certain exemptions under the federal proxy rules, conditioned on — among other things — a requirement for proxy advisory firms to provide their recommendations to the subject public companies.

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Kentucky Supreme Court Dismisses Action Against Hedge Fund Managers; Case Then Revived by the Kentucky Attorney General

The Kentucky Supreme Court dismissed a $50-billion lawsuit against three hedge fund managers and their principals, holding that the plaintiffs — individual beneficiaries of Kentucky Retirement System defined-benefit plans — lacked standing.

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CCPA Regulations Finalized and Effective

On Aug. 14, 2020, the California Attorney General announced final regulations for the California Consumer Privacy Act (which largely mirror those proposed in June 2020 and which we discussed in an earlier alert) had received administrative approval and would become effective immediately.

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Applicability of the SEC’s Political Contributions Rule to Contributions to the Biden-Harris Campaign

On Aug. 11, 2020, Joe Biden announced that he had selected California Senator Kamala Harris to be the Democratic Party’s nominee for vice president of the United States. Many managers are considering whether there is any impact in allowing their employees to contribute to the campaign.

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EU Privacy — EDPB Publishes FAQs on Transfers of Personal Data From the EU

Following a recent decision of the Court of Justice of the European Union (ECJ) in Data Protection Commissioner v. Facebook Ireland Ltd and Maximillian Schrem (known as Schrem II), the European Data Protection Board has published Frequently Asked Questions on this decision.

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Proposed Amendments to MiFID II Published

The European Commission has recently published proposals to amend MiFID II.

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ESMA Comments on EU Fund Platforms

ESMA has published a letter addressed to the European Commission and highlighting a number of areas in which the regulation of EU funds could be improved in the context of the ongoing review of the Alternative Investment Fund Managers Directive (known as AIFMD II).

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As we discussed in an earlier alert,[1] on July 22, 2020, the SEC granted proxy advisory firms certain exemptions under the federal proxy rules, conditioned on — among other things — a requirement for proxy advisory firms to provide their recommendations to the subject public companies and then to provide their clients an “efficient and timely means”[2] of staying informed of any written responses received from those public companies. The SEC also revised its 2019 proxy voting guidance[3] for investment advisers to address this additional source of information on a contested proxy situation. The supplemental guidance keys in on a situation where a proxy advisory firm’s electronic system “pre-populates” a client’s votes and automatically submits those votes in advance of the deadline; in particular, whether that kind of arrangement satisfies an adviser’s fiduciary duty in general, and in situations where there has been a public company response to the initial proxy advisory firm’s recommendation.

While the SEC’s goal was “to assist investment advisers in assessing how to consider the additional information that may become more readily available to them as a result of these amendments,” the actual release did not provide much in the way of concrete suggestions and was more a warning to provide additional disclosures, recommending that advisers consider disclosing to clients (i) “the extent of that use and under what circumstances it uses automated voting”; and (ii) “how its policies and procedures address the use of automated voting in cases where it becomes aware before the submission deadline for proxies to be voted at the shareholder meeting that an issuer intends to file or has filed additional soliciting materials with the Commission regarding a matter to be voted upon.”

This article appeared in the August 2020 edition of SRZ’s Private Funds Regulatory Update. To read the full Update, click here.

[1] “SEC Issues Final Rule Regulating Proxy Voting Advice,” SRZ Alert, July 28, 2020, available here.

[2] See SEC Final Rule, Exemptions from the Proxy Rules for Proxy Voting Advice (July 22, 2020), page 104, available here.

[3] See SEC Guidance, Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers (July 22, 2020), available here. The broader 2019 “Proxy Guidance” that was amended is addressed in this SRZ Memorandum.

Following a recent decision of the Court of Justice of the European Union (ECJ) in Data Protection Commissioner v. Facebook Ireland Ltd and Maximillian Schrem (known as Schrem II), the European Data Protection Board has published Frequently Asked Questions[1] on this decision. In Schrem II, ECJ examined, among other things, the validity of the so-called Standard Contractual Clauses (“SCCs”) as a safe harbor for the transfers of personal data from the EU to the United States under the EU General Data Protection Regulation (“GDPR”). The decision clarifies that, while an EU controller of personal data (i.e., a person who determines the purpose and means of processing personal data) may rely on SCCs, the controller has an affirmative obligation to conduct an assessment prior to the transfer of data based on the SCCs and determine whether appropriate safeguards (including adequate protection under domestic law) can be ensured by the recipient of the data outside the EU. If the conclusion is that appropriate safeguards cannot be ensured, the EU controller must suspend or end the transfers of personal data.

The FAQs will be of interest to managers with U.K. or EU offices, or managers that receive personal data relating to U.K./EU individuals in the context of investments in European assets (e.g., consumer loan portfolios or private equity investments in U.K./EU companies).

This article appeared in the August 2020 edition of SRZ’s Private Funds Regulatory Update. To read the full Update, click here.

[1] See European Data Protection Board publishes FAQ document on CJEU judgment C-311/18 (Schrems II), available here.

On Aug. 10, 2020, a CFTC-registered futures commission merchant agreed to a settlement with the CFTC[1] resolving allegations that it violated CFTC Rule 42.2 by administering a deficient anti-money laundering compliance program and failing to detect and report suspicious (and illegal) activity. This action is relevant to private fund managers registered as commodity pool operators or commodity trading advisors because it may signal that the CFTC is taking a more aggressive enforcement approach for any AML-related violations within its purview.

While CPOs and CTAs are not subject to Rule 42.2 (although the CFTC has publicly warned that it may seek to impose specific anti-money laundering regulations on them[2]), they are subject to numerous AML and sanctions obligations. For example, CPOs and CTAs are:

• Liable for violations of the federal criminal money laundering statutes, including 18 U.S.C. §§ 1956 and 1957 (which make it a felony, among other things, to engage in financial transactions involving criminal proceeds in order to conceal their nature or source or to promote additional criminal acts);
• Required to comply with U.S. sanctions regulations and orders, which generally prohibit U.S. persons from engaging in transactions with sanctioned individuals and jurisdictions; and
• Subject to AML-related reporting obligations, including reporting certain transactions in excess of $10,000 and disclosing certain foreign accounts holding more than $10,000.

Finally, brokers and other counterparties often require representations about the robustness of a CPO’s or CTA’s AML program and sanctions compliance processes. 

Given the CFTC’s new AML enforcement focus, private fund managers that trade in commodity interests should confirm that they have sufficient AML policies and procedures in place. Fortunately, CPOs and CTAs that are also registered with the SEC as investment advisers may well find that they have already instituted AML programs that satisfy some or all of the CFTC’s and their counterparties’ expectations.

This article appeared in the August 2020 edition of SRZ’s Private Funds Regulatory Update. To read the full Update, click here.

[1] See CFTC Orders Interactive Brokers LLC to Pay More Than $12 Million for Anti-Money Laundering and Supervision Violations (Aug. 10, 2020) (“CFTC Release”), available here.

[2] See CFTC, Anti-Money Laundering (webpage), available here (providing, “In the future, it is possible that commodity pool operators (CPOs), commodity trading advisors (CTAs), swap dealers (SDs), major swap participants (MSPs) and other CFTC registrants may be required to comply with anti-money laundering regulations.”).