• |

    Sep. 12, 2024

Crafting Effective Mobile Device Policies to Satisfy Regulatory Expectations

Government authorities expect companies to have appropriate controls over communications sent through text and messaging apps. In recent years, U.S. regulators have imposed billions of dollars in penalties on financial services firms for failing to maintain records of electronic communications in accordance with the federal securities laws. Even organizations that are not subject to specific record retention requirements may find themselves at a disadvantage if they cannot produce relevant employee communications in connection with a government investigation, noted James G. Tillen, a member of Miller & Chevalier, in a Practising Law Institute program on compliance expectations for mobile devices. This article synthesizes insights offered by Tillen and Leah Moushey, counsel at the firm, regarding government expectations around companies’ management of mobile device communications and how companies can craft and implement effective mobile device policies. See “Messaging Apps Come Under Increasing Regulatory Scrutiny” (Aug. 31, 2023).

Can You Trust the Data? A Cautionary Tale for the Compliance Department

A settlement between the SEC and a former investment adviser is a cautionary tale for fund managers that may not realize that common practices within the industry create opportunities for malfeasance when the data used in investor communications is insufficiently scrutinized. On May 29, 2024, the SEC released an order accusing a former registered investment advisor and its co‑founder of making “materially false and misleading statements to investors” about its flagship fund and two feeder funds and failing to disclose a conflict of interest regarding a competing fund. This article examines the issues raised by the enforcement action and offers insights from Igor Rozenblit, managing partner of Iron Road Partners, on how to avoid the inadvertent or deliberate release of materially misleading information. A common problem, Rozenblit said, is that the compliance department of any given fund manager will review investor communications to ensure their veracity and flag anything that seems exaggerated or untrue. But owing to many factors, including a possible lack of resources or specific expertise, “compliance departments rarely check the data,” he observed. For additional commentary from Rozenblit, see “SEC Penalizes Adviser for Failing to Preserve Off-Channel Communications” (Aug. 29, 2024); as well as our two-part series: “Implications of Recent Insider Trading and MNPI Cases for Hedge Fund Managers” (Jan. 27, 2022); and “Conflicts From Managing Multiple Funds and Other Current Challenges to Effective Compliance at Hedge Funds” (Feb. 3, 2022).

ESMA’s Final Greenwashing Report Aims to Enhance Supervision

In May 2023, the European Securities and Markets Authority (ESMA), the European Banking Authority and the European Insurance and Occupational Pensions Authority issued a report presenting a high-level understanding of greenwashing and discussing the risks it poses. ESMA recently issued a Final Report on Greenwashing (Report) focused on the role of supervision by the relevant E.U. Member States’ national competent authorities (NCAs) in mitigating those risks and how such supervision can be enhanced. The Report, which is based on ESMA’s survey of 29 NCAs, discusses supervision of investment management firms, investment service providers, issuers and benchmark administrators. It also addresses supervisory considerations applicable to all four sectors. This article focuses on the portions of the Report most relevant to fund managers. See our two-part coverage of the International Organization of Securities Commissions’ environmental, social and governance consultation report: “Risk of Greenwashing and Regulatory Approaches” (Aug. 5, 2021); and “Investor Education, Impediments and Recommendations” (Aug. 19, 2021).

SEC Enforcement Director Grewal Emphasizes Benefits of Cooperation

In remarks to the Securities Enforcement Forum West 2024, Gurbir S. Grewal, Director of the SEC Division of Enforcement (Division), stressed the benefits of meaningful cooperation with the Division and discussed five principles of effective cooperation: self-policing, self-reporting, remediation, cooperation and collaboration. Although the speech did not break significant new ground, it reconfirms the Division’s approach to cooperation and the potential benefits available to targets of SEC investigations. Grewal spoke in his official capacity as Enforcement Director but stressed that his remarks did not necessarily reflect the views of the SEC, its Commissioners or its staff. This article discusses the key takeaways from the speech. See “Speeches Outline the Ethos, Direction and Priorities of the SEC’s Division of Enforcement Under Gurbir Grewal” (Jan. 13, 2022).

SEC Penalizes Advisers That Shared Trading Profits With Activist Short Report Publisher

Short selling remains in the SEC’s crosshairs. New Rule 13f‑2 will require institutional investment managers to report certain short position data. Additionally, the SEC has brought multiple enforcement proceedings for violations of Rule 105, which prohibits a short seller from purchasing, within a specified period, the subject shares in a public offering by the issuer. It has also used its anti-fraud powers to pursue abusive practices, including so‑called “short and distort” schemes. The SEC recently took aim at a private fund adviser and exempt reporting adviser that allegedly worked with an activist short publisher, shorted the securities targeted in the publisher’s bearish reports and then shared trading profits with the publisher. The SEC, however, did not claim the advisers had engaged in any manipulative or improper trading. Instead, it charged them with misrepresenting their short-selling strategy in their fund’s private placement memorandum. This article details the facts underlying the enforcement proceeding and the settlement’s terms, with commentary from Stephen L. Cohen, partner at Sidley Austin, which represented the advisers in the proceeding. See “SEC Charges Recidivist Adviser in Abusive Short-Selling Scheme” (Mar. 14, 2024); and “First Circuit Upholds SEC Injunction Against Short‑Selling Priest” (Jun. 8, 2023).

Financial Services Litigator Stacie Hartman Joins Morgan Lewis in Chicago

Morgan Lewis has expanded its Chicago office with the addition of partner Stacie Hartman, a veteran financial services litigator. Hartman represents clients in regulatory and other government investigations, as well as complex litigation focusing on financial markets and the financial services industry. She will also be taking on a leadership position in the firm’s multidisciplinary derivatives and commodities practice. For commentary from other Morgan Lewis partners, see “Update on SEC Rulemaking, Examinations and Private Fund Rules” (Aug. 1, 2024); “Application of the New Private Fund Adviser Rules to Offshore Advisers” (Jan. 18, 2024); and “Morgan Lewis Attorneys Discuss Private Fund Trends, Including ESG Investing” (Jun. 22, 2023).

Most-Read Articles