Director Ceresney Stresses Importance of Compliance
On November 4, 2015, Andrew Ceresney, Director of the Division of Enforcement for the SEC delivered the keynote address to the 2015 National Conference of the National Society of Compliance Professionals. Director Ceresney addressed Enforcement's perspective on compliance officers and how the SEC approaches enforcement cases touching compliance personnel. His remarks focused on three topics: (i) recent cases emphasizing the importance that compliance personnel receive the resources, cooperation and business transparency necessary to do their job; (ii) Rule 206(4)-7 promulgated under the Investment Advisers Act of 1940, which establishes certain requirements for SEC-registered investment advisers; and (iii) instances in which the SEC has charged chief compliance officers (CCOs) in an enforcement action.
In discussing these topics, Director Ceresney stated that the SEC will aggressively pursue business personnel and firms that mislead, deceive, or obstruct the CCO or the compliance function. In terms of Rule 206(4)-7, he asserted his belief that the rule, which was adopted in 2003, was intended to empower CCOs within their organizations. Finally, with regard to CCO liability, Director Ceresney identified three categories when the SEC brings actions against CCOs: (i) the CCO is affirmatively involved in the misconduct that is unrelated to their compliance function; (ii) the CCO engaged in efforts to obstruct or mislead Commission staff; and (iii) the CCO exhibits a wholesale failure to carry out his or her responsibilities.
Campaign 2016: Tax Proposals of Interest to Funds and Investors
We are now well into the 2016 presidential campaign, and candidates on both sides of the aisle have released their tax proposals. Some of these would change how carried interest, interest income, and capital gains income are taxed, and others would impose new taxes on stock transactions and financial institutions.
On the Republican side, Jeb Bush would tax carried interest as ordinary income and tax plain vanilla interest as capital gain. Donald Trump would also tax carried interest as ordinary income. John Kasich would reduce the top capital gains rate to 15%, and Marco Rubio would entirely eliminate taxes on capital gains and dividends. Several other candidates have plans that would reduce all income tax to rates lower than current capital gains tax.
On the Democratic side, Hillary Clinton would tax capital gains from assets held for 2 years or less at a rate of 43.4%; this rate would decrease incrementally to 23.8% for assets held for more than 6 years. She would also tax carried interest as ordinary income and impose a "risk fee" on certain financial institutions. Bernie Sanders would tax capital gains income at the same rate as ordinary income, increase the net investment income surtax to 10%, impose a 0.5% tax on stock trades, and impose a "speculation fee" of 0.03% on financial institutions that engage in certain risky behaviors. Martin O'Malley has indicated that he would also like to increase capital gains tax rates.
SEC's Risk and Examinations Office Publishes First Private Fund Statistics Report
The SEC's Division of Investment Management's Risk and Examinations Office (the REO) issued a report (the Report) on private fund statistics for the fourth quarter of 2014 on October 16, 2015. The Report is the REO's first attempt to collect and present this information to the public. The Report reflects information collected through Form PF and Form ADV filings. Only SEC-registered advisors with at least $150 million of private fund assets must submit Form PF. All other SEC-registered advisors and certain state-registered advisors must provide certain disclosures on Form ADV. The data presented in the Report reflects the submissions of over 24,000 funds and more than 2,600 advisors.
Figures describing the assets of the funds analyzed by the Report suggest that a few large funds dominate the market, significantly outsizing the many smaller players. Country exposure in the funds analyzed by the Report show a significant concentration in North America, at almost $4 trillion, while the second largest region – Europe – had slightly more than $1 trillion in exposure. The industry with the highest concentration of exposure was oil and gas extraction, with approximately 7.5%, followed by electric power generation, transmission, and distribution at 3.7%. Proposed changes to Form ADV and related rules would affect the way that the data that forms the basis of the report is collected, as well as the parameters of the information to be disclosed.
SEC Chair Identifies Risks to Asset Management Industry at Managed Fund Association Outlook 2015 Conference
On October 16, 2015, Mary Jo White, Chair of the United States Securities and Exchange Commission (SEC), delivered the keynote address at the Managed Fund Association Outlook 2015 Conference. Chair White marked the fifth anniversary of the Dodd-Frank Act and identified two broad areas of risk: firm-specific risks and broader risks potentially affecting the asset management industry and the financial system. She identified two sets of industry-wide risks: (i) risk arising from services provided to investors and the activities of financial market participants, and (ii) operational risks arising from inadequate or failed processes or systems.
She also highlighted risks within firms and identified specific examples, including: (i) marketing material missing key disclosures regarding performance numbers and benchmark comparisons, (ii) inadequate disclosure of conflicts, and (iii) the misallocation of fees and expenses. Chair White credited the SEC's oversight and exam program with identifying practices and information necessary for an investor to make an informed investment decision and underscored that investment advisers to funds must disclose "materials facts" to clients. To access Chair White's remarks, click here.
FinCEN Issues Proposed Rule Requiring Investment Advisers to Establish Anti-Money Laundering Programs
On August 25, 2015, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking (NPRM) prescribing anti-money laundering (AML) program requirements for investment advisers required to be registered with the U.S. Securities and Exchange Commission (SEC). FinCEN, a bureau of the U.S. Treasury, administers regulations under the Bank Secrecy Act (BSA) requiring financial institutions to implement AML policies and procedures, keep records, and file reports on certain financial transactions.
Continue reading for a brief summary of the NPRM, which proposes three key regulatory changes: (1) including investment advisers within the scope of regulated entities, (2) requiring investment advisers to establish AML programs, and (3) requiring investment advisers to report suspicious activity to the U.S. government.
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