A Compilation Of Enforcement And Non-Enforcement Actions - 31 August 2015

NON-ENFORCEMENT

Form PF — What Purpose?

SEC registered investment advisers with at least $150 million of assets under management in private funds are required to periodically file Form PF with the SEC. The Dodd-Frank Act of 2010 directed the SEC to adopt rules requiring advisers of private funds to, among other things, file a report on the types of funds managed and who are the third party service providers. The rationale behind the requirement was to provide the Financial Stability Oversight Council (FSOC) sufficient information about such funds in order to assess systematic risk. In response to this directive, the SEC adopted Form PF.

The information collected by the SEC from the Form PFs as filed not only assists the FSOC but also the SEC.

According to a recent annual report by the SEC's Division of Investment Management (dated August 13, 2015) regarding the information collected from the filed Form PFs, the SEC uses such information to:

Assist in the SEC's examination and enforcement programs regarding registered advisers to private funds Help formulate the SEC's risk monitoring activities Inform regulatory initiatives Help assist other federal and international regulatory agencies in regulation of private fund advisers. Most noteworthy, with respect to preparation of examinations of a private fund adviser, the SEC uses the data filed by the adviser on Form PF to arrive at a more complete understanding of the adviser's business and investment strategy. The staff also looks for inconsistencies in data provided in Form PF with findings while conducting the actual examination, such as in the adviser's pitch books, private fund offering documents, reports to fund investors, and the adviser's disclosure brochure. After noting any inconsistencies, the staff is likely to make further inquiries with the adviser to determine the basis, if any, for the inconsistencies found.

Based on the SEC's use of such information, it makes sense for registered investment advisers who are required to file the Form PF to first, before hitting the "send" button, make sure that the information to be reported does not contradict what the adviser otherwise reports to investors and/or the SEC.

Do SEC Enforcement Orders Need Further Clarification?

In a recent public statement, SEC Commissioner, Luis A. Aguilar, argues that the SEC needs to make a greater effort in providing clarity and transparency in the orders it issues with respect to enforcement actions.

According to the Commissioner, the purpose of such orders is to not only publicize an enforcement action but also to send a clear message to others about what is acceptable and not acceptable behavior. In order to send a clear message, it is important that the SEC's enforcement order be clear and as complete as possible to explain the requirements of the law or regulation that was violated and how the violator's activities violated the law. An example given by the Commissioner is the recent enforcement actions taken by the SEC against chief compliance officers. Because the larger audience of chief compliance officers and their employers are taking note of such actions, it is imperative for the SEC to be as clear as possible in issuing such orders to define what the SEC and the law expects from chief compliance officers.

The Commissioner, in his statement, acknowledges that oftentimes the staff negotiates with the respondent about the language used in the enforcement order. However, the staff's desire to resolve the matter should not take a backseat to the needed clarity within the order to most accurately describe the activity that resulted in the violation of the law and the penalties levied.

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