On May 18, 2020, financial regulators in Austria, Belgium, France, Greece, Italy and Spain lifted their short-selling bans. However, managers should be cognizant of the fact that the lower initial threshold of 0.1% for reporting net short positions in EU-listed shares, which was announced in March 2020 by ESMA as a temporary emergency measure, remains in effect.

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

This communication is issued by Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising. ©2020 Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP.

All rights reserved. SCHULTE ROTH & ZABEL is the registered trademark of Schulte Roth & Zabel LLP.

The U.K. Financial Conduct Authority has updated its statement and guidance on key workers and responsibilities of senior managers in light of the recent easing of the lockdown measures announced by the U.K. government. Managers considering reopening their London offices should take account of this guidance, including the indicative list of the types of roles considered to provide essential services.

All managers with U.K. operations should review their internal procedures for managing market abuse risks in view of the recent FCA guidance on market conduct and discipline in the context of COVID-19.

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

This communication is issued by Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising. ©2020 Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP.

All rights reserved. SCHULTE ROTH & ZABEL is the registered trademark of Schulte Roth & Zabel LLP.

On April 17, 2020, the SEC settled charges[1] against a registered investment adviser for distributing allegedly misleading advertising materials. From 2014 through early 2015, while marketing for a private fund, the manager utilized marketing materials that contained a track record of its principals’ investment decisions while employed by a prior firm. This track record included an investment in a private fund managed by a third party (where the principals had rights to veto certain investments for the first three years of the term), which was described as an early-stage “direct” oil and gas drilling interest.

The SEC found that the distribution of these materials violated Section 206(4) of the Advisers Act and Rule 206(4)-1, specifically noting that (i) the inclusion of the prior firm’s fund in the track record significantly increased performance, (ii) the distributed materials omitted key information about that particular investment’s third-party managed fund structure and (iii) investments in private funds managed by third parties were not consistent with the stated investment program of the private fund being marketed (i.e., “[d]irect investments in oil and gas leases and wells”). In addition, the SEC found that the registered investment adviser violated Advisers Act Rule 206(4)-7 because it did not comply with the firm’s policy prohibiting the use of false or misleading marketing materials, “including misleading depictions of investment performance . . .” The SEC imposed a censure and civil monetary penalties of $1 million.

This enforcement action should remind managers to review track records of investment performance, especially from employees’ prior firms, for accuracy, both with respect to the performance numbers themselves and the categorization of investments. Compliance should carefully consider what prior performance should, and should not be, included in a presentation (and what disclosures are necessary to make a presentation not misleading). In addition, managers should consider reviewing their policies and procedures relating to the calculation of performance and preparation of marketing materials.

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

[1] See Order Instituting Administrative and Cease-and-Desist Proceedings, available here.

This communication is issued by Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising. ©2020 Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP.

All rights reserved. SCHULTE ROTH & ZABEL is the registered trademark of Schulte Roth & Zabel LLP.

SEC Charges Manager with MNPI-Related Compliance Failures

On May 26, 2020, the SEC issued an order against a large private equity sponsor for failing “to implement and enforce” compliance policies sufficient “to prevent the misuse of potentially material nonpublic information” obtained by holding a seat on a portfolio company’s board and being party to a loan agreement with that portfolio company.

› Read more

SEC Charges Private Fund Manager with Advertising Rule Violations and Compliance Failures

On April 17, 2020, the SEC settled charges against a registered investment adviser for distributing allegedly misleading advertising materials. From 2014 through early 2015, while marketing for a private fund, the manager utilized marketing materials that contained a track record of its principals’ investment decisions while employed by a prior firm. This track record included an investment in a private fund managed by a third party (where the principals had rights to veto certain investments for the first three years of the term), which was described as an early-stage “direct” oil and gas drilling interest.

› Read more

SEC Charges Audit Partners with Misconduct

On May 18, 2020, the SEC settled charges against three partners of an international accounting firm for improperly sharing answers to questions contained in internal training examinations required by the accounting firm and for subsequent wrongdoing in the context of the firm’s investigation into their actions (including deleting incriminating text messages following a document preservation notice and making misrepresentations to the investigators).

› Read more

CFTC Issues Guidance on Enforcement Penalties

On May 20, 2020, the CFTC Division of Enforcement recently issued a memorandum from James McDonald, its Director, that outlined various factors that the Division of Enforcement staff “will consider in recommending an appropriate civil monetary penalty to the Commission in an enforcement action, whether administrative or injunctive.” This memo represents the first published guidance of this kind since penalty guidelines were first published in 1994, and comes in the context of active and muscular CFTC enforcement activity.

› Read more

CFTC Proposes Relief for Non-US Managers

On May 28, 2020, the Commodity Futures Trading Commission proposed amendments to CFTC Rule 3.10(c)(3), which currently provides a registration exemption for non-U.S. commodity pool operators managing qualifying non-U.S. funds with non-U.S. investors. Rule 3.10(c)(3), however, is applied on an “all-or-nothing” basis, meaning that a non-U.S. fund manager can only rely on it if every commodity pool that it operates satisfies each element of the rule.

› Read more

EU Short-Selling Restrictions

On May 18, 2020, financial regulators in Austria, Belgium, France, Greece, Italy and Spain lifted their short-selling bans. However, managers should be cognizant of the fact that the lower initial threshold of 0.1% for reporting net short positions in EU-listed shares, which was announced in March 2020 by ESMA as a temporary emergency measure, remains in effect.

› Read more

Reopening of London Offices

The U.K. Financial Conduct Authority has updated its statement and guidance on key workers and responsibilities of senior managers in light of the recent easing of the lockdown measures announced by the U.K. government. Managers considering reopening their London offices should take account of this guidance, including the indicative list of the types of roles considered to provide essential services.

› Read more

On May 28, 2020, the Commodity Futures Trading Commission proposed amendments to CFTC Rule 3.10(c)(3),[1] which currently provides a registration exemption for non-U.S. commodity pool operators managing qualifying non-U.S. funds with non-U.S. investors. Rule 3.10(c)(3), however, is currently applied on an “all-or-nothing” basis, meaning that a non-U.S. fund manager can only rely on it if every commodity pool that it operates satisfies each element of the rule. Under the proposed amendments, Rule 3.10(c)(3) would apply on a “pool-by-pool” basis, allowing a manager to use it for one or more eligible non-U.S. pools while relying on different exemptions for other pools.

The proposed amendments would also institute a safe harbor for unintended U.S. investments in a non-U.S. pool; provided, that the manager undertakes certain reasonable efforts (such as prominent disclosures, subscription requirements, diligence measures and solicitation controls) to minimize the possibility of U.S. persons being solicited for, or sold, participation units in an offshore pool. A manager relying on the amended Rule 3.10(c)(3) would be expected to maintain documentation adequate to demonstrate compliance with the safe harbor. The amendments would also make clear that Rule 3.10(c)(3) relief would be available, even if inception-stage investments were accepted from qualifying U.S.-based affiliates of the non-U.S. commodity pool operator (e.g., no statutory disqualifications, ongoing registration suspensions or bars, or trading bans).

The comment period for the proposed amendments will commence with their publication in the Federal Register.

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

[1] The draft that was approved by the CFTC (“Exemption from Registration for Certain Foreign Persons Acting as Commodity Pool Operators of Offshore Commodity Pools (May 28, 2020)”) is available here. The final amendments have not yet been published.

This communication is issued by Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising. ©2020 Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP.

All rights reserved. SCHULTE ROTH & ZABEL is the registered trademark of Schulte Roth & Zabel LLP.

On May 20, 2020, the CFTC Division of Enforcement recently issued a memorandum[1] from James McDonald, its Director, that outlined various factors that the Division of Enforcement staff “will consider in recommending an appropriate civil monetary penalty to the Commission in an enforcement action, whether administrative or injunctive.” This memo represents the first published guidance of this kind since penalty guidelines were first published in 1994, and comes in the context of active and muscular CFTC enforcement activity. The CFTC Chairman, Heath Tarbert, stated that the “new guidance reflects [his] strong commitment to transparency and to the CFTC’s enforcement mission.” In addition James McDonald, emphasized that “[t]ransparency in our procedures, and in particular how we think about penalties, promotes fairness and enhances respect for the rule of law.”

The memorandum identifies three primary considerations that the CFTC enforcement staff will consider in determining whether a penalty achieves the dual goals of specific and general deterrence:

• Gravity of the Violation. The nature and scope of the conduct, including the number of violations, harm to victims (including the number and type of victims), efforts to conceal the conduct and whether the conduct caused harm (or risked causing harm) to the market and market participants.
• Mitigating and Aggravating Circumstances. Mitigating factors include efforts to cure, return victim funds and enhance compliance programs. Aggravating conduct includes efforts to conceal the activity or obstruct an investigation. The CFTC will also consider whether the conduct was self-reported as well as the extent of cooperation with the CFTC’s investigation.
• Other Considerations. The CFTC will also consider the total mix of remedies and monetary relief imposed in an enforcement action in the context of potential parallel cases involving criminal authorities, other regulatory entities or self-regulatory organizations, as well as the conservation of CFTC resources, including timely settlement.

As recent enforcement actions show, the CFTC continues to seek more significant sanctions for violations of the Commodity Exchange Act and the rules thereunder, and continues to actively encourage and to act upon self-reported activity, tips and referrals from whistleblowers, commodities exchanges and other self-regulatory organizations.

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

[1] See “Civil Monetary Penalty Guidance,” available here.

This communication is issued by Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising. ©2020 Schulte Roth & Zabel LLP and Schulte Roth & Zabel International LLP.

All rights reserved. SCHULTE ROTH & ZABEL is the registered trademark of Schulte Roth & Zabel LLP.