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Outgoing SEC Chair Reflects on the Agency’s Enforcement Program and Advocates for Increased Authority

On November 18, 2016, outgoing SEC Chair Mary Jo White delivered a speech at New York University School of Law entitled “A New Model for SEC Enforcement: Producing Bold and Unrelenting Results.”  Chair White’s remarks covered a broad range of enforcement initiatives and outcomes from her tenure as SEC Chair.  This post summarizes the aspects of Chair White’s remarks most relevant to private fund sponsors.

Private Fund Disclosures, Expenses, and Conflicts of Interests

Chair White noted that over the past three years, the SEC has brought a total of 11 enforcement actions against private equity advisers, addressing various alleged improper activities including undisclosed fees and expenses, impermissible shifting and misallocation of expenses, and failures to adequately disclose conflicts of interests to clients. Chair White cited several press reports noting that the private equity industry has enhanced disclosures in fund governance documents.  This industry shift in response to the SEC’s enforcement activities should mitigate not only regulatory risk but also litigation risk with limited partners.

Whistleblowers

Chair White noted that the SEC recently surpassed the $100 million mark for awards to whistleblowers. Meanwhile, tips in fiscal year 2016 surpassed 4,200, rising over 40% from 2012, the first fiscal year the whistleblower program was in place.  By touting the amount of the awards, Chair White was not merely celebrating the success of the program, she seemed to be advertising for prospective whistleblowers to come forward.

A Call for an Increased Focus on Executive Liability

Chair White also called for an expansion of the SEC’s white collar enforcement authority and an increase in the deterrent penalties available to the agency. After Chair White noted the agency’s increased focus on charging individual respondents in enforcement actions, she suggested consideration of a recently-enacted regulatory framework in the United Kingdom known as the “Senior Manager Regime” which would hold an entity’s senior executives accountable for certain corporate transgressions.  This regime enables U.K. authorities to hold senior executives accountable for offenses that occur in areas of the executives’ responsibilities, even if the executives are not involved in the misconduct, do not know about it, and do not directly supervise any of the offending employees.  Advisers to private equity funds should pay close attention to this initiative because of their comparatively leaner management structure, particularly with respect to the control over and management of the underlying funds.

Admissions of Culpability

Chair White highlighted her initiative to extract admissions of accountability in the context of settling enforcement investigations or proceedings. Pursuant to this mandate, the SEC has obtained admissions from 77 defendants and respondents – 30 individuals and 47 entities.  Chair White also noted that the SEC does not accept “no admit, no deny” settlements where a defendant has been found guilty or admitted relevant facts in a proceeding involving other criminal or civil authorities.

Investigating to Litigate

Chair White also highlighted the SEC staff’s mandate of “investigating to litigate.” The purpose of this charge, according to Chair White, is to assemble a “trial-ready record [of admissible and persuasive evidence] that can be used to prevail at trial or to secure a strong settlement.”  This strategy permits the SEC to demonstrate both its intent and ability to pursue an enforcement proceeding, and share that evidence with defense counsel pursuant to a reverse proffer agreement, which is a useful tool in obtaining favorable settlements from investigation targets.  Perhaps as a warning to the industry, Chair White noted that the SEC has not lost a jury trial in federal district court in two-and-a-half years.

Increased Civil Penalties and Access to E-Mails

Chair White concluded her remarks by calling on Congress to increase the amount of civil penalties the SEC is able to obtain in enforcement proceedings. Finally, Chair White was highly critical of a pending bill to revise the Electronic Communications Privacy Act, which would require a criminal warrant to obtain the content of a subscriber’s e-mails from an internet service provider.  As a civil enforcement agency, the SEC can subpoena information, but it does not have the ability to obtain criminal search warrants.  The proposed statute would eliminate the SEC’s ability to obtain certain email content via subpoena.

What Next?

While obviously valedictory, the question is does any of it matter? President-elect Trump has suggested that he wants to dismantle the Dodd-Frank Act.  What that means, precisely, and whether it will happen, are open questions.  Of course, it would take an act of Congress to repeal Dodd-Frank.

On that note, Representative Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee, has introduced the Financial CHOICE Act of 2016 which, as drafted, would exempt advisers to private equity funds from investment adviser registration. As reported in the Wall Street Journal, Rep. Hensarling described President-elect Trump’s general view on Dodd-Frank as “music to my ears,” and stated that he had spoken with President-elect Trump’s team about Financial CHOICE Act in the past: “I think they like the thrust of the legislation and many major components of it.”

While it remains to be seen whether the SEC will continue its aggressive enforcement program following the change of the presidential administration and the appointment of a new SEC chair, Chair White’s legacy is likely to continue to shape the agency’s policies and ideology at least in the near term. Accordingly, private fund sponsors should expect the SEC staff to continue to follow the mandates that Chair White has championed unless and until a new Chair signals a definitive change in direction.

© 2019 Proskauer Rose LLP.

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About this Author

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
Timothy W. Mungovan, Litigation Attorney, Proskauer Law Firm
Partner

Timothy Mungovan is a Partner in the Litigation Department, co-head of the Private Investment Funds Disputes practice and a member of the Private Investment Funds Group. Tim has an international practice in complex commercial litigation, advising public and private companies in a variety of areas, including securities, corporate governance, fiduciary obligations, investment management and financial services, fraud and trade secrets.

In addition to his regular commercial litigation practice, Tim focuses on disputes involving private investment funds including hedge, private equity and venture capital funds and other limited partnerships. He has advised funds, fund sponsors, investment advisers, managers, principals, feeder funds, institutional and individual investors in various disputes, including control contests, partnership disputes, restructurings, removal of a general partner and claims of fraud. He is widely recognized for litigating hedge fund fraud and representing investors in redemption disputes.

617-526-9412, 212-969-3201
Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer
Partner

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset...

212-969-3336
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723