I spent Wednesday in New York at the Private Fund Compliance Forum. These are my notes from this session.

Keynote interview

Featured Keynote Speaker: Marc P. Berger, Director, New York Regional Office, U.S. Securities and Exchange Commission
Interviewer: Isobel Markham

Mr. Berger’s comments are his own and not necessarily those of the Securities and Exchange Commission.

Mr. Berger came from the enforcement side. When he took over the office, he attended some exams to see how the examination process worked.

The SEC exam program has a focus on retail and cyber. Retail investors represent $29 trillion of investments in the securities markets and are more likely to be subject to fraud and abuse. The SEC put together a Retail Strategy Task Force.

He views cyber as hacking and crypto. The ICO market has taken off from $100 million to $10 billion in the last two years. Not every ICO is fraudulent. But there are some. And they have all the different frauds in securities. And some ICOs are securities and not complying with the securities laws.

Cybersecurity continues to be a focus of exams. The SEC expects cybersecurity to be appropriate for the size of the firm.

With the focus on retail investors, the SEC continues to devote a serious amount of resources to private funds. Private funds have a not significant percentage of investments in private funds.

In addition to the regional offices, OCIE has a central Private Funds Unit. Currently, the New York office is conducting fewer private fund exams. He indicate some preference for the expertise of the Private Funds Unit.

What are some of the risk factors that may give a higher chance of being examined?

  • Unexamined. Never before examined and newly registered
  • Tips, complaints and referrals

What are the themes for private fund exams?

  • Undisclosed or mischaracterized conflicts
  • Fees and expenses
  • Allocation of investment opportunities
  • Allocation of co-investment opportunities
  • Inaccurate regulatory filings
  • LPAC issues – failure to create and failure to use as required

Size of a firm plays a role in the scope of an exam. The examiners also focus on the size of document request and the volume of the documents to be submitted. If you, the CCO, thinks that is ging be a big dump of documents, reach out to the examiners to see if the scope can be narrowed.

Deficiencies are most often when a fund manager puts their interests ahead of the fund investors. He cited the example of Corinthian. (See: Pilfering? a Private Equity Fund ). MIsallocation of expenses are often a problem that ends up in deficiencies.

Accelerated fees continue to be a problem. It’s gotten better, but examiners are still seeing subpar disclosures.

When can a reporting violation escalate to an enforcement action from a deficiency? Egregious actions and repeated lapses are more likely to lead to enforcement.

He tried to bring some comfort round CCO liability. In Thaddeus North opinion, the SEC provided some insight to the SEC views on when CCOs should be charged. (See: https://www.sec.gov/litigation/opinions/2018/34-84500.pdf) Good faith actions by CCOs after thoughtful review should not result in CCO liability. The SEC does not want to Monday Morning Quarterback CCO decisions. He cited the classic three examples of CCO liability.

  • CCO is involved in the fraud
  • CCO is covering up the fraud
  • CCO is completely failing to perform the compliance function

Often when a CCO is charged, the CCO is also wearing another hat at the firm such as CFO.

What area if securities fraud should CCO give some extra thought to over the next year? The need to protect material non-public information and market-moving information.

The SEC does look at whether the CCO has appropriate resources. He cited a case where the CCO was iced out of key decisions. The approach was to discuss the issue with senior management and to not just put it in a deficiency letter. The concern was that a bad letter would just result in the CCO being knocked down even further or fired, which would exacerbate the problem.

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