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Welcome to SCA’s client news brief. We highlight the latest regulatory news and information in the SEC investment adviser space in a brief, easy to read format. You can “go deeper” by linking to more detailed information. Please contact Cheryl Young at cyoung@secadvisors.com with any questions or comments. All feedback is welcome!
SCA Client News Brief
By Cheryl YoungDec 29, 2021

Smart Brevity™ count: 3 mins... 830 words

Welcome to SCA’s client news brief. We highlight the latest regulatory news and information in the SEC investment adviser space in a brief, easy to read format. You can “go deeper” by linking to more detailed information. Please contact Cheryl Young at cyoung@secadvisors.com with any questions or comments. All feedback is welcome!

1 big thing: PF managers in the SEC crosshairs

A pen on a post-it note, on top of a dartboard.

Why do we continue to talk about the SEC focus on private funds? Because SEC Chairman Gensler continues to talk about private funds.

Why it matters: New requirements may be coming based upon a recent speech highlighting the following SEC concerns:

  • Private fund fees and expenses are not coming down as expected as the asset class has grown.

  • Side letters that offer more transparency , preferential liquidation rights and other advantageous provisions create an uneven playing field.

  • Investors need more information in which to compare returns from private fund investments with other more liquid asset classes.

  • Fiduciary status of general partners may be waived by certain states. Gensler warns federal fiduciary status is not waived and will be enforced.

  • Form PF information should be enhanced.

What's next: Along with Form PF changes, the SEC staff is looking into whether certain side letters should be prohibited, how to make fees more transparent and whether to prohibit certain conflicts between advisers, GP’s and investors.

The bottom line: We see a laser focus on fee disclosures, valuations, and side letters in client SEC exams. PF managers should address all areas above in addition to those raised in the SEC private fund alert .

SEC looking hard at adviser fees

A bow tied around a stack of dollar bills.

What they're saying: A recent SEC alert on fee calculations discusses problems examiners are encountering when reviewing fee calculations. A few of these issues are:

  • inaccurate fee percentages used to calculate fees

  • tiered billing rates not calculated properly

  • incorrect valuations used as a basis for calculation of fees

  • not properly refunding prepaid fees

  • fee related disclosures not consistent with practice

  • inadequate policies and procedures covering fee calculations

The bottom line: Make sure you have robust internal controls for calculating fees and related fee disclosures . We see too many problems in this area during client reviews. With the current SEC enforcement position (see below), it may make sense to conduct an internal review of fees before the SEC does.

SEC chair warns “ if it walks like a duck and quacks like a duck - its a duck”

A duck on ice

What’s new: SEC Chair, Gary Gensler, spoke recently about his approach to enforcement. He is taking a swing at attorneys and other gatekeepers as well as advisers and brokers.

What he is saying:

  • He warns that going right up to edge of a rule to find some ambiguity may not be consistent with the spirit of the law. The SEC will look at the economic realities and not the labels.

  • Gatekeepers (attorneys, auditors, advisers, etc.) are reminded they have an obligation to uphold the law. He warns attorneys not to paper over the cracks. Remember the duck story.

  • The SEC may seek admissions of guilt for cases where it is deemed to be in the public interest.

  • He defends the controversial practice of “regulation by enforcement” as a way to change the behavior of a larger number of people.

  • Expect cases to be brought swiftly. This means less patience with delays in document production for routine exams.

Our Take: If you do something indirectly that you can’t do directly, watch out. There is a new sheriff in town.

McKinsey affiliate fined $18 million for inadequate insider trading policies

Illustration of Capitol Dome lifted up to show pile of money

Go deeper: The SEC recently ordered McKinsey affiliate, MIO, to pay $18 million for inadequate procedures. This amount is highly unusual. Looking deeper at the allegations, it starts to make sense.

  • MIO is a registered investment adviser that manages money for McKinsey partners and employees.

  • The SEC alleges MIO board members and investment committee (IC) members invested in issuers about which board and IC members had MNPI.

  • MIO policies and procedures around these issues had a carve out for Board and IC members. MIO did not contemplate how MNPI could be misused in this situation.

  • A McKinsey partner was charged with insider trading the week before this action was taken.

The bottom line: We understand this is an egregious case. Still, it might be a good idea to review the risk posed for misuse of MNPI by access persons with outside activities or relationships that put them at higher risk.

We hope you found this news brief helpful. Please let us know if there is a topic you would like for us to cover by contacting cyoung@secadvisors.com.

The information in this newsletter is for general guidance, only. It does not constitute the provision of legal or tax advice, or professional consulting of any kind.

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