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Morgan Lewis

SEC enforcement trends for private fund managers



Speaker Key:

JW Jedd H. Wider

CL Christine M. Lombardo

EP Eric L. Perelman

CL: Thanks, Jedd, and good afternoon, everyone. Thanks for joining us. Just to go through a quick agenda of the topics we’re going to cover, first we’re going to talk about some SEC developments and examination trends that we’ve seen come out of the SEC over the last year.

Then, we’re going to talk through some notable enforcement cases and trends. And on that, there are a number of themes that we’re going to cover. We’re not going to talk about specific cases by name necessarily, and we’re not going to get into every case that came out, but rather talk about some of the conceptual themes and trends at a high level.

What I’ll note is that everyone who is participating in this call will receive, after the call, an email with a link to a white paper that we have authored, which is a more fulsome summary of the trends and themes we’re seeing, and specific cases that we felt were notable throughout the year. It’s a fairly large document that gets into a lot of detail about each of the cases and the trends, and I think it will be a helpful resource for everyone, following the presentation.

We’re going to begin by briefly touching on the 2018 regulatory priorities that the SEC’s examination Staff issues, and then proceed to discuss some hot topics that we think are areas that fund managers and advisers generally should be focused on in the coming year.

So, with that, let’s talk about some developments.

A significant development in 2017 was that the SEC and the various divisions of the SEC had significant turnover in senior personnel. We now have five commissioners. We have not had five commissioners at the SEC for quite a long time.

Jay Clayton was sworn in in May 2017 as the new chair of the Commission. For those who don’t know, Chair Clayton came out of private practice into the role of SEC Chair. He is not a life-long regulator, and many in the industry are curious to see whether his experience as a private practitioner will impact the way that policies come out of the Commission under his leadership.

In addition to Chair Clayton, in January 2018, the final two commissioners joined the Commission. So now we have a full, five-person Commission.

The impact of having a less-than-full Commission was essentially that a lot of policy and rulemaking sort of stalled, because there were only two commissioners and no chair. Now that we have a full Commission, I’m interested to see whether any additional rule-making comes out.

I recently heard a speech by Mr Clayton, and one thing that he noted in his remarks was that he felt there was no reason why one advisory relationship should essentially be regulated by multiple regulators. That was an interesting comment that he made. I’m curious to see how that plays out, and whether one of his key topics for his term will be to try and simplify or consolidate regulation, which I know is a topic that many in the industry are focused on and have been for some time.

In addition to the Commissioners, as I mentioned, there were significant changes among the leadership of the various divisions. We now have two new co-directors of enforcement. We now have a new chief litigation counsel. We have new unit chiefs. There are new regional directors in Atlanta, Chicago, Fort Worth, New York and Philadelphia, and new directors in the Divisions of Corporate Finance, Investment Management, Trading and Markets and OCIE.

So that’s pretty significant, and of course that came about largely because of the change in administration. We’re also seeing an active examination program.

So just a note on what we’re seeing as a result of the change in administration. Other than the significant personnel turnover at the senior positions, I have had a lot of conversations with clients about whether or not certain aspects of regulation were going to go away completely – which would pose an employment problem for lawyers like me! Thankfully I’m still employed, but regulation is still here. We have seen a number of pronouncements come out of the Commission in the form of informal guidance, some of which has been pretty aggressive and had a significant impact on various aspects of the industry, even under the new administration.

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