Regulatory & Enforcement Update

“Our Take” LIVE

November 1, 2012

Recent Activity

• Marketing cases: backtesting• Pay-to-Play: Goldman case• Valuation• IAA Compliance practices survey• More enforcement activity• SEC asserting authority over private fund managers

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Marketing - Backtesting

• Hypothetical inflation rates and returns (In re Raymond Lucia)– Hypothetical inflation rates and returns– Negative effects of re-allocations

• Combining audited data and backtested data (In re D’Amato)– Mutual fund asset allocation program– Backtested data better than later audited data– Calling it “historical” data

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Marketing

• Past specific recommendations (In re Stock Markets Institute)– Investment newsletter– Failure to include rolled options trades

• Lying about correlation in underlying funds (SEC v. Marks)

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Pay-to-Play

• Working for campaign (In re Goldman Sachs)– $12 Million fine– Using firm resources during work hours– State Treasurer and Governor

• OCIE Risk Alert– Training– E-mail surveillance– Review potential employees and promotions– Requiring pre-clearance

• SEC delays solicitor implementation

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Valuation

• No write-down during 2008 (In re Bunzel)

• Failure to follow policies (SEC v. Yorkville)

• Misleading real estate valuation in PPMs requires rescission (SEC v. The Companies)

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Compliance Programs• IAA Survey

– 2/3 of CCOs have additional duties– Little use of automated systems– Weak testing of performance marketing– Most firms require pre-clearance of political contributions

• Centralization vs. business units (HSBC)– CCO says that business units had to much AML autonomy– Insufficient resources

• E-Mail review (Guggenheim Securities)– One e-mail per trader per day insufficient– Side deal with hedge fund

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Enforcement

• States brought 399 enforcement actions against RIAs in 2011– double 2010– More prison time in criminal actions

• NYS sues Investment Bank for issuing MBS with weak due diligence (New York v. J.P. Morgan Securities)– Cross-agency working group– Predecessor liability

• SEC basing actions on events occurring before registration (SEC v. Harbinger)

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Private Funds

• Presence Exams• Form PF: See Staff guidance• Investor Bulletin about hedge fund investing• Changing performance fees without investor consent (SEC v.

GEI Financial Services)• Failure to deliver financials (In re Gerasimowicz)• Stale PPM (Amish Helping Fund)• Failure to oversee outsourced due diligence (In re Calhoun)

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Other Developments

• Whistleblowers– First Whistleblower award – $50,000 up to $300,000– 8 tips per day

• CPO Registration – December 31, 2012 deadline– NFA offering help– ICI/Chamber case progressing

• JOBS Act: Due diligence rules

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Lessons

• Misleading marketing materials are easy enforcement cases

• Require pre-clearance of all political contributions• Review fair valuation procedures and implementation • Get some compliance help• Beware of the state attorney general• Get ready for presence exams of private fund

sponsors

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500 E. Swedesford Road, • Suite 104 • Wayne, PA 19087 • 610.687.5344 • www.cippermancs.com

Cipperman Compliance Services provides CCO and compliance outsourcing services to registered funds and money managers.

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