Asset Management Intelligence Publishes Article by Ira Kustin on SEC’s 2015 Enforcement Actions Against Private Fund Advisers

Akin Gump investment management partner Ira Kustin has written the article “Enforcement Actions by the SEC – Cases from 2015 Provide Guidance for Private Fund Advisers” published by Asset Management Intelligence, which examines the number of enforcement cases brought to hedge funds last year.

Kustin writes that the SEC’s actions in 2015 highlighted several themes of importance to managers of private investment funds. The article discusses a subset relating to them, including disclosure requirements in fund offering and governing documents, the duties of a registered investments adviser’s chief compliance officer and cybersecurity requirements.

With regard to disclosures, Kustin notes that many enforcement cases last year “included those where advisers to private funds were found to have had inadequate disclosures in their funds’ offering materials and governing documents relating to fees and expenses.” He referenced one case in which an adviser “was deemed by the SEC to have breached its fiduciary duty.” In another, the SEC found that an advisor broke the law “by charging to its clients, without proper disclosure, the cost of the Adviser’s registration with the SEC, the expense of complying with Advisers Act requirements and legal expenses in connection with an examination by the SEC.”

Kustin then talked about enforcement actions relating to chief compliance officers, noting that one SEC commissioner said last year he has generally not seen the commission “bring enforcement actions against CCOs who take their jobs seriously and do their jobs competently, diligently, and in good faith to protect investors.” That same commissioner, Kustin wrote, “noted that most cases brought by the SEC against private fund CCOs were in connection with CCOs who wear ‘more than one hat’ in connection with their employer (for example, a CCO who is also a portfolio manager).”

Finally, Kustin discussed SEC guidance pertaining to compliance obligations, which states that funds and advisers should “take into account these obligations when assessing their ability to prevent, detect and respond to cyber-attacks. Funds and advisers could also mitigate exposure to any compliance risk associated with cyber threats through compliance policies and procedures that are reasonably designed to prevent violations of the federal securities laws.” Last fall, Kustin writes, the SEC fined an adviser it found “did not have written policies and procedures reasonably designed to protect customer records and information (resulting in the disclosure of personally identifiable information of 100,000 individuals) and ordered the adviser to take certain remedial action.”

Kustin concluded by outlining some previously announced SEC priorities for 2016. They include “(1) a continued focus on cybersecurity, (2) fees and expenses and (3) controls and disclosure associated with side-by-side management of accounts with performance-based vs. asset-based compensation.” He said these are suggestions for areas that may “require an even greater degree of attention for registered advisers, their principals and their compliance staff.”