On Aug. 27, 2018, the U.S. Securities and Exchange Commission announced settlements with a U.S.-based registered investment adviser, several of its affiliates and two of its executives for alleged misconduct involving quantitative investment models that contained numerous errors.

These settlements, especially when placed in the context of other recent enforcement efforts related to quantitative and systematic trading strategies, make it clear that the SEC staff will utilize its anti-fraud powers to sanction investment advisers employing systematic or quantitative investment strategies that do not design and administer supervisory programs specifically designed to effectively address the risks inherent in algorithmic and similar investment techniques or that do not have accurate, current disclosures on those investment programs. The Aug. 27 settlements also reinforce a broader trend in holding senior personnel of investment advisers personally liable for their roles in causing an adviser’s violations.

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On July 18, 2018, the U.S. Securities and Exchange Commission approved amendments to Regulation ATS and Rule 3a1-1 under the Securities Exchange Act of 1934, as amended. The Amendments impose extensive new transparency requirements on alternative trading systems (“ATSs”) that effect transactions in NMS Stocks. With the increase in regulatory burdens associated with operating an NMS Stock ATS and the new requirement to disclose potentially sensitive business information, the competitive landscape among NMS Stock ATSs could be extremely altered. Click here to read more.

On July 11, 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert focusing on the most common deficiencies relating to best execution found by the SEC staff in recent examinations of investment advisers. The Risk Alert provides a snapshot of OCIE’s expectations regarding a fund manager’s best execution policies and procedures.

Click here to read more about how OCIE’s recent Risk Alert will affect private fund managers.

In an interview with Private Funds Management, partners Marc Elovitz and Joseph Smith discuss regulator views on conflicts of interest and how to best deal with these issues as the fund formation climate becomes more complex. Marc and Joe also share their insights on how conflicts of interests are viewed by the SEC within the private equity space and how they are best dealt with in the industry.

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The Securities and Exchange Commission (“SEC”) continues to actively enforce Rule 21F-17 under the Securities Exchange Act of 1934, which provides that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.” In its most recent actions, the SEC charged companies with violating Rule 21F-17 by including language in severance agreements that specifically prohibited former employees from communicating disparaging information about the company to the SEC and that prohibited former employees from voluntarily communicating with or contacting any governmental agency in connection with a complaint or investigation.

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As we move deeper into another election season, investment advisers should consider refreshing their efforts to comply effectively with the Securities and Exchange Commission’s rule on their political contributions — known as the pay-to-play rule. Although it’s more than five years old, Rule 206(4)-5 has not been easily integrated into many advisers’ compliance programs. If your firm allows its covered persons to make political contributions, there is not one simple step to avoid triggering Rule 206(4)-5. A carefully designed program of training, pre-approval and quarterly certifications can help reduce the risk.

Click here to read this article, in which SRZ partner Marc E. Elovitz shares 10 tips for compliance that can make the process more effective.

On April 7, 2016, the Securities and Exchange Commission approved the Financial Industry Regulatory Authority’s proposed amendments to NASD rule 1032 (Categories of Representative Registration). These amendments will require FINRA members to register associated persons who are primarily responsible for the design, development or significant modification of “algorithmic trading strategies” (or for the day-to-day supervision or direction of such activities) as “Securities Traders.”

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The Securities and Exchange Commission issued a release on Dec. 11, 2015 proposing a new rule that would establish new limitations on the use of derivatives by registered investment companies and business development companies under the Investment Company Act of 1940. Proposed Rule 18f-4 would also regulate other trading practices of such funds, including short sales of securities, that are deemed to involve the issuance of “senior securities.” Hedge funds and other private investment funds would not be subject to the rule.

Click here to read this article, in which SRZ partners Kenneth S. Gerstein and John J. Mahon and special counsel Pamela Poland Chen and associate Karen Spiegel review the requirements of the proposed rule, which is intended to provide a clearer regulatory framework applicable to the use of derivatives by regulated funds.

The SEC’s recent release proposing the adoption of new Rule 18f-4 under the Investment Company Act of 1940 is the culmination of years of focus on the concept of hidden leverage. Indeed, the SEC’s Concept Releases date back to 2011. The SEC is particularly concerned about funds where the risks of leverage may not be apparent and is of the opinion that derivatives-related exposures should be viewed as leverage. The SEC’s initial proposal might not be ideally suited to meeting the agency’s stated aims and could have a number of unintended consequences.

Click here to read this article, in which SRZ partner John J. Mahon talks to The Hedge Fund Journal about eight implications of the SEC’s recent proposal.

The Enforcement Division of the U.S. Securities and Exchange Commission (“SEC”) continued its “Rule 105 initiative” this year, culminating in settlements with six firms that total more than $2.5 million in monetary sanctions, in addition to other sanctions. These cases highlight important components of the SEC’s approach to Rule 105 enforcement. Fund managers should review their policies with regard to Rule 105, stress test the actual procedures that support those policies, and redouble their surveillance and education efforts to ensure compliance.

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