In the wake of increased hedge fund and private-equity fund registration as mandated by the Dodd-Frank Wall Street Reform Act, the Securities and Exchange Commission (SEC) recently released preliminary findings of an examination of the roughly 1,500 newly-registered funds. The two-year review focused on advisers who manage more than $100 million in assets and found that some were improperly showcasing their performance record by among other things presenting results of investments from prior years an SEC cherry-picking violation. Despite well-publicized charges of such violations in previous years, some advisers are still learning how to navigate SEC regulatory waters.
Ignoring Unfavorable Results
Earlier this year, the SEC charged a New York firm with selectively touting the past performance of one of their funds. They cherry-picked highlights but ignored less favorable recommendations and other data that would have made the facts more complete. At the time, Sanjay Wadhwa, senior associate director for enforcement in the SECs New York regional office stated: The securities laws require investment advisers to be honest and fully forthcoming in their advertising to give investors the full picture. [The respondent] and his firm are being held accountable for using social media and widely disseminated newsletters to cherry-pick information and make misleading claims about their success in an effort to attract more business.
Data Reporting Alerts the SEC
Besides selective disclosure of performance, some advisers altered the method for determining the value of securities in their funds in order to inflate returns, and this change was not always disclosed to investors. With the enhanced data reporting requirements now in effect, the SEC has basically been able to use the hedge funds or private-equity funds own data to flag violations. According to Andrew Bowden, head of the SEC’s Office of Compliance, Inspections and Examinations, the findings of the review of newer-registrants indicate that the advertising rules are not yet well absorbed by the newcomers: “If youve never been in this business, the rules on marketing and advertising are not intuitive,” Bowden conceded. His team expects to review approximately 400 of such newly registered advisers by the end of this year.
In the case of the New York adviser, the firm published its advertisements via a newsletter that had over 60,000 subscribers. The SEC had previously notified them that the newsletters could be considered advertisements under Rule 206(4)-1, which generally prohibits false or misleading advertisements by investment advisers, and cautioned that the newsletters constituted advertisements under Rule 482, which governs advertisements and has specific requirements for ads containing performance data. The respondent paid a $100,000 penalty, and the firm agreed to retain an independent compliance consultant for three years.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI