September 20, 2021

Volume XI, Number 263

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September 20, 2021

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September 17, 2021

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Increased Regulatory Scrutiny of Private Funds

President Biden has signaled a shift to a more assertive SEC Enforcement program with the nomination, and expected confirmation, of Gary Gensler as the next Chair of the SEC.  Mr. Gensler previously served as the Chairman of the CFTC from 2009 to 2014, where he established a reputation as a forceful regulator. This reputation suggests that we should expect a significant increase in enforcement actions against private fund managers.

Under former Chairman Clayton, private fund advisers benefited indirectly from the SEC’s focus on ”Main Street” investors.  More of the SEC’s limited resources were devoted to addressing retail fraud, leaving fewer resources available to focus on private funds.  As former Enforcement Director Stephanie Avakian explained recently, the SEC relied more heavily on exams by OCIE (recently renamed the “Division of Examinations”)  – through deficiency notices and remediation, rather than enforcement actions – to address perceived private fund compliance violations.  Whether the SEC returns to the more assertive “broken windows” approach to regulation under prior administrations remains to be seen.

In any event, the SEC’s approach will almost certainly change under the new administration.  We expect that Chairman Gensler will place a far greater emphasis on policing “Wall Street,” which today has grown to encompass private funds. As a result, we expect more enforcement actions involving the types of conduct identified in the OCIE Private Funds Risk Alert from this past June: conflicts of interest; fees and expenses; MNPI; advisers’ codes of ethics; and related policies and procedures.

We also believe that a number of recent market developments are ripe for increased regulatory scrutiny.  Within the past few years, we have seen substantial market innovation and growth in several sectors including SPACs, ETFs (including more exotic forms of ETFs, like leveraged-ETFs), private equity generally, and private credit specifically.  At the same time, digital assets have proliferated and attracted extraordinary amounts of capital; the value of Bitcoin alone has reached several all-time highs in 2021.  Finally, the market has experienced significant volatility, first with the pandemic, and more recently with stocks like GameStop and AMC Theaters fueled by social media.  Regulators and market intermediaries like Robinhood have struggled to respond to some of these new challenges.  Any one of these market developments standing alone would likely garner increased attention from regulators.  Collectively, they virtually ensure a more robust regulatory enforcement regime.

© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 83
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About this Author

Robert G Leonard, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Robert G. Leonard is a Partner in the Hedge Funds Group. For more than 25 years Rob has been structuring, organizing and representing hedge funds, funds of funds and other private investment funds (both domestic and offshore) and investment advisers.

212-969-3355
Robert Plaze, Investment Manager Attorney, Regulatory and Compliance
Partner

Robert E. Plaze is a partner and a member of the Investment Management team. He advises investment advisers and investment companies on an array of matters, with a particular focus on regulatory and compliance matters arising under the federal securities laws.

Bob previously served as Deputy Director of the Division of Investment Management of the U.S. Securities and Exchange Commission. During his nearly 30 years of service with the Commission, he was responsible for policy development and management of many of the key regulatory initiatives during that period affecting investment...

202-416-6692
Michael R. Suppappola, Proskauer Rose, fund formation lawyer, capital raising process attorney, Finance,
Partner

Michael Suppappola is a partner in the Corporate Department and a member of the Private Investment Funds Group. His practice focuses on representing alternative asset managers on a broad range of activities, with a particular emphasis on the representation of private investment funds, funds of funds and investment advisers. Mike counsels U.S. and non-U.S. sponsors on all aspects of the fund formation and capital raising process, including the drafting of offering documents, general partner and management company structuring and day-to-day operational issues, and advises...

617-526-9821
Samuel Waldon, Proskauer Law Firm, Washington DC, Corporate Law and Litigation Attorney
Partner

Sam Waldon is a partner in the Litigation Department and a member of the Securities Litigation, White Collar Defense & Investigations and Asset Management Litigation Groups.

Sam’s practice focuses on securities litigation, enforcement and regulatory matters. He represents corporations and financial institutions, and their officers, directors and employees, in investigations, exams, internal investigations and litigation. Sam has in-depth experience in a broad range of Securities and Exchange Commission (SEC) enforcement matters, including...

202-416-6858
Anthony M. Drenzek, Special regulatory Counsel, Proskauer Rose, Attorney, Finance Policy Lawyer
Special Regulatory Counsel

Tony is special regulatory counsel in the Corporate Department and a member of the Private Funds Group and the Private Equity & Hedge Fund Litigation team. His practice focuses on advising U.S. and offshore private fund managers on all aspects of federal, state and SRO organizational and operational compliance, with a specific emphasis on the Investment Advisers Act of 1940.

Tony assists U.S. and offshore private fund clients in registering with the SEC as investment advisers, or reporting as exempt reporting advisers, and complying with...

617.526.9655
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