January 2016

SEC to flex enforcement muscles, a primer on investor qualification, and more in this edition of Fund Forum

3 min

There was much that happened in 2015 that provides guidance to funds and investors in 2016. For example, in this issue we discuss the anticipated SEC commencement of presence examinations for hedge funds and analyze four Letters of Acceptance, Waiver and Consent issued by FINRA. We also provide a primer on Investor Qualification and clarify key terms important to a fund’s fundraising efforts. Finally, we briefly review the Martin Shkreli case.

The Coming SEC Sweep in Hedge Funds

In 2014, the SEC formed the "Private Funds Unit" (PFU), a multi-disciplinary task force designed to specifically address matters that had surfaced during their initial round of "presence examinations" for private funds, which commenced in 2012. Since that time, much has happened. Examinations revealed material weaknesses and deficiencies among private equity firms in the areas of valuation, performance reporting, disclosure to limited partners and conflicts of interest. The staff of the SEC has commenced enforcement actions against a number of private equity firms and indicated that the industry can expect additional enforcement actions related to the above issues. Now the SEC has announced a separate sweep for hedge funds.

We believe that recent actions regarding private equity offer some clear guidance to the nature of this newly announced sweep. Click here to read more.

Investor Qualification: A Primer

Investor qualification is an integral component of managing an investment fund. The type and character of each investor affect, among other things, (i) whether an investor qualifies to invest, (ii) whether the fund would be required to register with the Securities and Exchange Commission (SEC), and (iii) the fee that can be charged. The terms "accredited investor," "qualified purchaser," and "qualified client" are each defined in separate statutes or regulations and are important for different reasons.

Click here to continue reading why these terms are relevant to a manager's fund-raising efforts and its ability to collect fees from its investors.

Ex-Hedge Fund Manager Indicted on Securities Fraud Charges

Martin Shkreli was arrested and indicted in December on securities fraud charges involving improper practices between his former hedge fund and Retrophin, a pharmaceutical company he founded. Shkreli, a pharmaceutical executive and hedge fund manager, earned the ire of AIDS activists, politicians, and the public at large when he acquired the rights to and subsequently raised the price of a drug that treats a parasitic condition known as toxoplasmosis.

This case highlights an area of focus for regulators – conflicts of interest. Click here to read more about the case.

FINRA's Year-End Guidance 2015

As the curtain fell on 2015, FINRA issued four Letters of Acceptance, Waiver and Consent (AWCs) providing guidance – and in many cases, pointed internal supervisory control reminders – in a broad range of broker-dealer activities: theft from senior citizen customers (Senior Citizen Matter); selling billions of unregistered microcap shares (Microcap Securities Matter); filing inaccurate blue sheets with the SEC and FINRA (Blue Sheet Matter); and, unsuitable mutual fund transactions (Mutual Fund Suitability Matter).

Not only do these AWCs provide a litany of proper internal controls, but, in the Microcap Securities Matter, they emphasize that personal accountability is important to FINRA, and, in the Mutual Fund Suitability Matter, that self-disclosure may result in a lower fine.

Continue reading to find out what FINRA has to say on these issues.

Upcoming Event:

Save the Date: Private Equity Webinar - Emerging Deal Structures for Private Equity Companies

Thursday, February 4, 2016

Details coming soon!

Read the November 2015 and December 2015 issues of Venable's Fund Forum.