In the last three weeks, the Division of Enforcement of the U.S. Securities and Exchange Commission has filed several complaints and resolved a number of open enforcement actions involving investment advisers. At first glance, these actions, standing by themselves, may not seem especially relevant to well-established advisers to private funds; however, there are a number of lessons in this group of actions that should be considered by legal and compliance officers of private fund managers.
Recent Enforcement Actions
The SEC has recently instituted formal enforcement actions against a number of investment advisers. These actions include the following:
- Filing a complaint1 against an investment adviser and its principal alleging that they earned over $600,000 "in ill-gotten gains" by allocating profitable trades to a proprietary account and allocating unprofitable trades to client accounts (i.e., "cherry picking").
- Charging2 a trader at a Canadian asset management firm for allegedly front-running large trades he placed for his employer's advisory clients.
- Charging3 two investment advisers and several individuals with fraud, alleging that they caused private funds under their control "to engage in conflicted transactions that resulted in significant financial benefits to themselves without adequate disclosure or consent" and "made false and misleading statements to investors" about the existence and review of certain material conflicts.
- Charging4 two Israeli residents with defrauding U.S. retail investors through online, allegedly fraudulent offers and sales of binary options.
The SEC also won a judgment5 against a Swedish national who purportedly raised millions of dollars from "over 2,000 retail investors located in nearly every state in the United States, as well as in over 45 countries around the world" through a website claiming (falsely) that the investment was run by award-winning economists and had no risk of loss.
Six Lessons for Private Fund Managers
Each of these actions allege activity that, if proven, would constitute violations of the federal securities laws. In that sense, these actions may appear be of limited utility to a manager that operates within the law. However, this collection of actions - along with other actions by the SEC over the past two years - provides, directionally, several lessons that are of particular importance for private fund managers:
|First:||SEC Enforcement is
ready, willing and able to litigate claims against investment
advisers. This collection of actions (which includes one judgment)
shows that the SEC will take contested matters to trial and can
secure favorable verdicts.
|Second:||SEC Enforcement uses a
range of investigative techniques to provide the factual support
for enforcement actions. Quantitative, statistical and economic
analysis of market data and trading records, for example, is
frequently employed by specialized units such as the Market Abuse
Unit's Analysis and Detection Center and the Division of
Economic and Risk Analysis.
|Third:||The SEC is prepared to
assert claims against non-U.S. defendants and for non-U.S. activity
that affects the United States. These cases show that the SEC
Enforcement staff will bring these actions in coordination with
international regulators, but also can unilaterally pursue
|Fourth:||These cases show that
the SEC regularly cooperates with other regulators and enforcement
authorities (both U.S. and international), continuing a trend in
coordinating enforcement actions across regulatory regimes.
remains a key part of the SEC Enforcement playbook. These actions
demonstrate that SEC Enforcement will recommend charges against
individuals alongside legal entities and, where the individuals are
not directly charged, to describe or name those individuals
contributing to the deficiency or violation.
|Sixth:||In these actions, the
SEC did not (or, perhaps did not have any need to) pursue novel
theories of liability. The actions charged in these matters involve
traditional misrepresentations, abuses of advisers' fiduciary
positions and violations of law.
While these cases do not imply a single course of action, they do collectively suggest that compliance officers should scope their 2021 annual compliance review in light of the full range of recent enforcement actions involving investment advisers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.