Articles Posted in Industry News

In July 2020, the Securities and Exchange Commission issued supplemental guidance relating to the duties of investment advisers with respect to proxy voting. This follows guidance issued in 2019, which we have discussed before. The prior guidance was issued in connection with amended rules finalized at the same time which dealt with proxy solicitations under the federal securities laws. Those amendments were designed to grant companies that issue stock to obtain advisory firms’ recommendations on proxy issues in advance of the proxy submission deadline. As a result, the issuer has time to submit additional materials as part of the proxy solicitation.

As a result of the new rules, proxy voting services will be forced to share their voting recommendations with the issuers of the securities at or prior to the providing the recommendations to their institutional clients, and if issuers submit additional information in response, must also disclose such information to the clients. The proxy advisers must also disclose any conflicts of interest that might exist that could reasonably be expected to influence their recommendations.

The effective date of the amended rule is 60 days after publication. Proxy advisory firms must comply with the amendments by December 1, 2021. The supplemental guidance became effective on September 3, 2020. Continue reading ›

Earlier this week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert in which it discussed ongoing deficiencies identified during compliance examinations of investment advisers that advise private funds. This risk alert follows on the heels of other SEC activity relating to private fund advisers, including enforcement referrals, deficiency letters, and informal guidance.

The deficiencies discussed in the risk alert fall into three broad categories: disclosures relating to fees; disclosures relating to conflicts of interests; and sufficiency of a firm’s policies relating to nonpublic material information and its internal enforcement of such policies. The purpose of this risk alert was to provide guidance to private fund advisers regarding steps they should take to improve their compliance policies and program, while simultaneously advising investors in private funds of the types of issues to be aware of when dealing with private fund advisers. Many investors in private funds are pensions or other qualified retirement plans, charities and endowments, and families who have family offices.

This blog post focuses on the portion of the risk alert relating to fees and expenses. Continue reading ›

Earlier this month the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued two related risk alerts on the subjects of Form CRS and Regulation Best Interest (Reg BI). The purpose of the risk alerts was to provide investment advisers and broker-dealers information regarding the anticipated scope and content of the examinations OCIE will conduct following the compliance date for Regulation Best Interest, and the filing deadline for Form ADV, Part 3. In this post, we summarize the risk alert relating to Reg BI.

The initial broker-dealer examinations will focus on whether firms have established policies and procedures reasonably designed to comply with Regulation Best Interest’s for distinct obligations: the duty to disclose; the duty of care; the duty to avoid or disclose conflict of interest; and the duty to adopt compliance procedures. In addition to assessing whether a registrant has adopted policies and procedures reasonably designed to comply with Regulation BI, the examinations will also assess the operational effectiveness of those procedures.

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As the saying goes, “a rising tide lifts all boats.” This expression is commonly used in the investment world to mean that in bull markets, all portfolios tend to rise, no matter how poorly constructed. However, when the market changes directions sharply, as it has over the last thirteen trading days, poorly constructed portfolios sink more precipitously than the overall market.

The stock market has never before plunged by 18% off of its all-time high over such a short time frame. The main driver of the decline had been, prior to this week, concern over the impact that the spreading Coronavirus will have on the US economy. On Monday, March 9, however, news of an oil trade war caused a further, more precipitous decline. But the 18% decline in the market in the last few trading days represents the broad equity markets. Investors whose portfolios are overconcentrated in individual stocks or market sectors are experiencing even worse declines. To continue the boat metaphor, some portfolios will be sunk or will crash against the rocks. Continue reading ›

The ability of the Securities and Exchange Commission (SEC) to prosecute enforcement actions selectively through its own administrative proceedings is under constitutional attack in cases pending in the Fifth and Ninth Federal Judicial Circuits. The Ninth Circuit case was brought by Raymond Lucia, the same former investment adviser who succeeded in a constitutional challenge to the method of appointment of the SEC’s Administrative Law Judges (ALJs) in 2018. In that case, Lucia v. SEC, the U.S. Supreme Court held that these ALJs were “Inferior Officers” for purposes of the Constitution’s Appointments Clause, meaning that they must be appointed by either the President or the SEC itself. Prior to the decision in that case, ALJs were hired pursuant to the regular civil service process applicable to federal employees. In response to the Supreme Court’s ruling, the SEC ratified the appointment of its existing ALJs.

Lucia’s new challenge, and a similar challenge brought by accountant Michelle Cochran, are pending in the Ninth and Fifth Circuits, respectively. In those cases, the plaintiffs continue to challenge the constitutionality of the SEC administrative enforcement process. Among other things, the plaintiffs argue that the procedures in place preventing the removal of the ALJs are unconstitutional and that the administrative proceedings deprive respondents of the Seventh Amendment’s guarantee of trial by jury.

Lucia is represented by the New Civil Liberties Alliance, a nonprofit organization that, according to its website, “views the administrative state as an especially serious threat to constitutional freedoms.” It assists litigants in challenging what it considers to be unconstitutional administrative processes.

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Following SEC guidance regarding investment advisers’ proxy voting obligations issued in August of this year, and rule changes proposed by the SEC consistent with that guidance a few weeks later, investor organizations, including the Council of Institutional Investors (CII), and Institutional Shareholder Services (ISS), have taken actions to challenge the guidance and he rule proposals.

In August, the SEC voted 3 to 2 to issue the new guidance and to include potential rule amendments in its regulatory agenda. In general terms, the SEC’s interpretations are designed to make all proxy voting recommendations by a proxy adviser a “solicitation” under the federal proxy rules and subject to the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9.

In a letter to the SEC in October, CII questioned the wisdom of the guidance and urged the SEC not to adopt proposed rule changes over concerns that both the guidance and the rules would weaken corporate oversight by investors and make it more difficult to replace or oppose existing management.  CII claimed that both the guidance and the proposed rulemaking would increase costs, add regulatory burdens, increase litigation, and otherwise make it more expensive and difficult for investors to retain the benefits offered by proxy advisory firms.  CII said in its letter that the guidance and proposed rule changes not driven by investor protection because there is no “call from the investment community” or regulatory intervention on the issue of proxy voting.  Rather, CII contends that SEC made the announcement and proposals because of pressure from issuers who believe that proxy advisors are too often influential in successful corporate voting campaigns.  The letter indicated that CII’s position was supported by the Comptroller for New York City and the CEO of the California Public Employee’s Retirement System, among other major institutional investors.

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Recent developments within two of the three branches of the federal government portend significant potential changes in the SEC’s ability to obtain disgorgement of ill-gotten gains in civil actions brought by its enforcement arm. Early in November, the U.S. Supreme Court decided to hear an appeal of a Ninth Circuit case, SEC v. Liu, involving the issue of whether the SEC has statutory authority to obtain disgorgement at all. Then, not three weeks later, the U.S. House of Representatives responded by passing H.R. 4344, a bill explicitly codifying the SEC’s authority to obtain disgorgement. While the ultimate decision of the high court remains months away, and the House’s action has no legal significance until a companion bill in the Senate is acted upon and the two bills are passed by both chambers, these developments are of great significance to securities litigators and SEC-watchers alike.

Disgorgement has long been a powerful arrow in the SEC’s enforcement quiver, allowing it to obtain, on behalf of aggrieved investors, reimbursement of ill-gotten gains. However, despite it having obtained billions of dollars in disgorgement in civil actions over the last few decades, no statute explicitly confers the SEC with authority to seek this remedy. Rather, lacking any express authority, federal judges have implied it in scores of decisions dating back to the 1970s. Now, that entire foundation has come into question, prompted first by the Supreme Court’s 2017 decision in Kokesh v. SEC, and now by the high court’s acceptance of the Liu appeal.

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In a recent administrative order, the Securities Division (the “Division”) of the South Carolina Office of the Attorney General has adopted a new exemption from investment adviser registration for private fund advisers. This move is significant as, until now, South Carolina was one of fewer than 10 states not providing some form of exemptive relief to private fund advisers. New private fund advisers seeking to set up operations in South Carolina may utilize the new exemption immediately. Additionally, existing private fund advisers currently registered with the Division may invoke the exemption and de-register so long as such advisers are in compliance with the exemption’s provisions and all other applicable law. As the southeastern United States has become an increasingly popular venue for private fund advisers in recent years, South Carolina’s new exemption should be well-received by the private capital industry.

As noted, most states exempt private fund advisers from registration obligations arising under those states’ “Blue Sky” investment advisory laws. Such obligations arise as a result of the fund manager (typically a separate legal entity serving as the fund’s General Partner or Managing Member) exercising control over and managing the fund’s securities portfolio. In other words, because the fund manager has discretionary authority to manage the fund’s investment portfolio, and receives compensation for this service (typically in the form of a management fee and a performance allocation), the fund manager generally satisfies the definition of an “investment adviser” under prevailing law.

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A number of state attorneys general have filed a lawsuit against the SEC, seeking to overturn the SEC’s recently adopted Regulation Best Interest or “Reg BI.” This not unexpected move comes in the wake of simmering discontent which has built up against Reg BI ever since its adoption on June 5th. In a nutshell, consumer advocate groups, state regulators and some high-ranking SEC officials all oppose Reg BI on the grounds that it doesn’t go far enough in imposing a more rigorous standard of conduct on broker-dealer firms. This lawsuit, filed in New York federal district court, ramps-up this disagreement considerably.

Reg BI, which this blog has discussed in some detail recently, is part of a comprehensive package of new rules and interpretations released by the SEC on June 5th. Specifically, the long-awaited Reg BI replaces the prevailing “suitability” standard of conduct applicable to broker-dealers and their registered representatives with a new “best interest obligation.” While under suitability, broker-dealers were only required to ensure that that their recommendations were “suitable” in light of a customer’s investment objectives and risk tolerance, the new best interest obligation requires that a broker-dealer always act in a customer’s “best interest.” Additionally, under Reg BI, the broker-dealer cannot place its interests ahead of a customer’s interests. Continue reading ›

As part of its June 5th landmark issuance of multiple final rules and interpretive releases dealing with broker and advisory standards-of-conduct—which included the long-awaited Regulation Best Interest (or “Reg BI”) for broker/dealers—the SEC also published a detailed interpretive release clarifying and interpreting an investment adviser’s fiduciary duty (the “Fiduciary Release”). While this blog has already provided an analysis of the high-level contours of the SEC’s entire package of rules and releases, we now write to give readers a closer look at the Fiduciary Release, which should be of particular interest to the advisory community.

The Fiduciary Release is the culmination of a regulatory process begun on April 18, 2018, with the SEC’s publication of a draft release on advisory fiduciary duties. The SEC also published draft releases of Reg BI and the Form CRS Relationship Summary (“Form CRS”)(a new disclosure document for advisers and brokers) on that date as well. However, we note at the outset that, unlike the final Reg BI and Form CRS rules—which will not be implemented until June 30, 2020—the Fiduciary Release is effective upon formal publication in the Federal Register. Since that formal publication has already occurred, the Fiduciary Release is now effective. Additionally, we note that the Fiduciary Release is legally applicable to not only SEC-registered investment advisers, but also to state-registered advisers and other investment advisers that are exempt from registration under the federal Advisers Act.

The SEC’s stated objective in issuing the Fiduciary Release is to “reaffirm” and “clarify” the longstanding fiduciary duty of an investment adviser as expressed in section 206 of the Advisers Act. Recognizing that this fiduciary standard has been developed over decades via case law in the form of judicial opinions as well as through SEC enforcement proceedings and no-action letters, the SEC notes that the Fiduciary Release is not intended to be the “exclusive resource” for articulating the fiduciary standard. Importantly, the Fiduciary Release does not explicitly declare any revisions to the advisory standard of conduct (as does Reg BI vis-à-vis broker/dealers).

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