The New SEC & Asset Management Priorities VOLTAIRE ADVISORS 2 ND ANNUAL WORKSHOP ON FUND VALUATION NEW YORK, 25 TH APRIL 2017

Transcription

1 The New SEC & Asset Management Priorities VOLTAIRE ADVISORS 2 ND ANNUAL WORKSHOP ON FUND VALUATION NEW YORK, 25 TH APRIL 2017

2 2 God is not on the side of the big battalions, but on the side of the best shots. Voltaire

3 Agenda Welcome Ian Blance Voltaire Advisors Expert Discussion Fixed Income Benchmarks & Indices Panel Session Valuation of Alternative Assets Coffee Panel Session Fund Liquidity Risk Management Panel Session Evaluated Bond Pricing Keynote Norm Champ 1200 End of Briefing

4 Recent Valuation Topics SEC Sweep on Unicorn Pricing Issues with private equity fund audit independence Platinum Partners SEC order against PIMCO re: odd-lot pricing Saba Capital Management settlement Visium Asset Management criminal charges Premium Point difficulties? Consolidation in municipal bond pricing & index vendor markets Fund Liquidity Risk Management rules Trading liquidity & transparency in fixed income 4

5 Expert Discussion 5 Recent Developments in Fixed Income Benchmarks & Indices Mike Bruno, Head of Product Management, Rimes Technologies JR Rieger, Global Head of Fixed Income, S&P Dow Jones Indices

6 Valuation of Alternative Assets 6 Moderator Marine Cole, Editor, Private Equity International Keith Smith, Managing Director, Empire Valuation Consultants Mark McMahon, Managing Director, Alvarez & Marsal Andrew Proctor, Director, Financial Services Advisory, Houlihan Lokey

7 Discussion Topics 7 What are you seeing amongst your fund clients in terms of regulatory challenges on valuation? What are the main regulatory concerns in this field? Regulation of asset management might be expected to ease in the Clayton SEC, but best practice marches on. What is going on with in this area in alternative asset valuation? Audience Q&A

8 The New SEC & Asset Management Priorities VOLTAIRE ADVISORS 2 ND ANNUAL WORKSHOP ON FUND VALUATION NEW YORK, 25 TH APRIL 2017

9 Fund Liquidity Management 9 Moderator Ian Blance, Managing Director, Voltaire Advisors Jeanette Turner, Managing Director and General Counsel, Advise Technologies Dan Huscher, Director - Global Fixed Income Pricing Product Development, IHS Markit Karl Mackelburg, Head of Sovereign, Corporate Bond, and Money Market Evaluations, Thomson Reuters

10 Discussion Topics 10 Context of the new regulation - what are the SEC concerns (Third Avenue, etc.)? What are the challenges of defining and classifying asset liquidity? How do funds currently deal with liquidity risk - what is already in place? What is the interaction between liquidity and valuation? What are the reporting challenges in the new rules? Audience Q&A.

11 Evaluated Bond Pricing 11 Moderator Ian Blance, Managing Director, Voltaire Advisors Mark O Brien, Senior Vice President, Advantage Data Frank Dos Santos, Head of North America Business Strategy, Fixed Income Pricing Services, IHS Markit Tom Ryan, Head of Municipal Bond Evaluations, Thomson Reuters

12 Discussion Topics 12 What are you seeing amongst your clients in terms of regulatory challenges on valuation? Odd-lot bond pricing. Syndicated and private loan pricing. High yield and distressed debt pricing. Audience Q&A.

13 Voltaire Advisors Valuation of Alternative Assets for Investment Funds Forum April 25, Kirkland & Ellis LLP. All rights reserved.

14 Disclaimer: The views, opinions, statements, analysis and information contained in these materials are those of the individual presenters and do not necessarily reflect the views of Kirkland & Ellis LLP, or any of its past, present and future clients. These materials (1) do not constitute legal advice; (2) do not form the basis for the creation of an attorney/client relationship; and (3) should not be relied upon without seeking specific legal advice with respect to the particular facts and current state of the law applicable to any situation requiring legal advice. These materials may only be reproduced with the prior written consent of Kirkland & Ellis LLP. These materials are provided with the understanding that the individual presenters and Kirkland & Ellis LLP are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and accordingly, such persons and entities assume no liability whatsoever in connection with their use. Pursuant to applicable rules of professional conduct, this material may constitute Attorney Advertising. Prior results do not guarantee a similar outcome. The following presentation is based on a limited set of publicly available materials and documentation which has not been verified or assessed by Kirkland & Ellis LLP and as a result this presentation may not be wholly accurate or complete. Kirkland & Ellis LLP 601 Lexington Avenue New York, New York (212)

15 Overview 1. Introduction to Kirkland s Core Regulatory Team 2. An SEC in Transition 3. Recent Developments - Legislation / Rulemaking 4. Examination Trends 5. Enforcement Themes 15

16 1. INTRODUCTION TO KIRKLAND S CORE REGULATORY TEAM 16

17 Introduction Partner, Kirkland & Ellis, Investment Funds Group (Current) Teaching Investment Management Law at Harvard Law School in Fall 2017 for seventh semester Director of SEC s Division of Investment Management Deputy Director, SEC s National Exam Program EVP and General Counsel, Chilton Investment Company Private Practice, Davis Polk & Wardwell Clerked in Federal District Court - SDNY 17

18 Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis Published by McGraw-Hill Education and is now available in stores and online. For more information, please visit 18

19 Kirkland s Core Regulatory Team +6 Partners +15 Associates Norm Champ Partner, New York Aaron Schlaphoff Partner, New York Jamie Lynn Walter Partner, Washington, D.C. Scott Moehrke Partner, Chicago Rob Sutton Partner, New York Josh Westerholm Partner, Chicago Prior Experience Former Director, SEC Division of Investment Management Prior Experience Former Attorney Fellow, SEC Division of Investment Management Prior Experience Former Senior Counsel, Private Funds Branch, SEC Division of Investment Management Large, Global, Multidisciplinary Investment Funds Team SEC Enforcement Practice New York: 60 San Francisco: 23 Chicago: 49 Washington, D.C.: 3 London: 25 Rob Khuzami Partner, Washington, D.C. Prior Experience Former SEC Director of Enforcement Ken Lench Partner, Washington, D.C. Prior Experience Former Chief of Structured and New Products, SEC Division of Enforcement Bob Pommer Partner, Washington, D.C. Prior Experience Assistant Chief Litigation Counsel, SEC Division of Enforcement Erica Williams* Partner, Washington, D.C. Prior Experience Former SEC Deputy Chief of Staff Special Assistant to the President and Associate White House Counsel Houston: 3 Hong Kong: 12 *Joining May 30 th,

20 2. SEC IN TRANSITION 20

21 Jay Clayton Nominee for SEC Chairman Mr. Clayton is an experienced corporate attorney who has worked on several highprofile transactions, including Alibaba s IPO in 2014, and has limited government experience The Senate Banking Committee voted 15-8 to advance Mr. Clayton s nomination to the full Senate floor for a final vote on confirmation, and the Senate is back in session as of yesterday, so a vote should take place soon Clayton has been critical of the Foreign Corrupt Practices Act (FCPA) Mr. Clayton has laid out a capital formation agenda, that includes: Jay Clayton was announced as President Trump s SEC Chair nominee on January 4 Easing rules relating to investor discussions prior to an IPO Easing burdens for mid-sized companies related to accounting and compliance regulations Streamlining disclosure requirements 21

22 Three SEC Commissioner Seats are Vacant Current Commissioners Nominated Chairman Vacant Commissioner Seats (D) (R) (I) (R) (D) Term expires 2017 Term expires 2018 Chair, Mary Jo White (right), stepped down on January 20, 2017 (I) To ensure that the Commission remains nonpartisan, no more than three Commissioners may belong to the same political party. 22

23 Five SEC Division Directors Have Resigned Since Election Division of Corporate Finance Division of Enforcement Division of Economic & Risk Analysis Division of Trading & Markets Division of Investment Management National Exam Program On December 6, Keith F. Higgins announced his plans to depart his role as Director of the Division of Corporate Finance Higgins led the SEC s implementation of significant rulemaking under Dodd-Frank After nearly four years as SEC Director, Andrew Ceresney departed his post in December 2016 While he was head of Enforcement, the SEC filed more than 2,850 enforcement actions and obtained judgments and orders totaling more than $13.8 billion in monetary sanctions Mark J. Flannery, former Chief Economist and Director of the Division of Economic & Risk Analysis, stepped away from his role in December 2016 to return to academia He has also represented the agency on the Financial Stability Board s Standing Committee on Assessment of Vulnerabilities (SCAV) Stephen Luperello departed at the end of 2016 Luparello was named Director of the SEC s Division of Trading and Markets in February 2014 David Grim was announced as Director of the Division of Investment Management in May 2015, after previously serving as the Acting Director following Norm Champ s departure Grim is expected to remain in his position in the near term Marc Wyatt was named Director of the Office of Compliance Inspections and Examinations (OCE) and leader of the National Exam Program in November 2015 Wyatt announced his resignation in January 2017, despite speculation that he d remain in his seat after the administration change Additionally, other key SEC roles, such as General Counsel, remain vacant 23

24 3. RECENT DEVELOPMENTS - LEGISLATION / RULEMAKING 24

25 Recent Developments - Legislation / Rulemaking Financial CHOICE Act / CHOICE Act 2.0 Calls for, among other things: Repeal of the Volcker Rule Broad changes to SEC authority and oversight Credit rating transparency Exemption of private equity advisers from Advisers Act reporting Refinements to the accredited investor definition Streamlining of Reg. D offering Streamlining of Investment Company Act exemptive application processes The House Financial Services Committee will hold a hearing to discuss the Financial CHOICE Act 2.0 onapril 26 Financial CHOICE Act was introduced by Rep. Hensarling, Chairman, House Financial Services Committee, in 2016 Department of Labor (DOL) Fiduciary Rule Would expand definition of investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) Automatically elevates all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, thus imposing additional legal and ethical standards on such professionals Being reviewed, and delayed effective date Financial Stability Oversight Council (FSOC) New Secretary of the Treasury, Steve Mnuchin, chairs the FSOC The Financial CHOICE Act 2.0 would retroactively repeal the authority of the FSOC to designate firms as systemically important financial institutions (SIFI) On April 21, President Trump issued a memo to the Secretary of the Treasury calling for a thorough review of FSOC SIFI designation process within 180 days 25

26 Recent Developments - Legislation / Rulemaking Form ADV Amendments New Schedule R for managers using umbrella registration for relying advisers Other enhanced reporting requirements, including whether the manager s CCO is compensated or employed outside of the manager Adopted August 2016; effective October 2017 Enhanced Performance Recordkeeping Requirements Registered advisers will be required to maintain records supporting performance information sent to any person (rather than current ten or more persons threshold) Will also be required to maintain records of performance-related communications sent and received (e.g., one-off diligence requests, s, etc.) Adopted August 2016; effective October 2017 Liquidity Risk Management / Swing Pricing Requires mutual funds and other open-end management investment companies, including ETFs, to establish liquidity risk management programs; compliance dates of December 2018 for fund complexes with $1B or more in AUM and June 2019 for smaller fund complexes Permits open-end funds (except money market funds or ETFs) to use swing pricing; effective date November 2018 Investment Company Reporting Modernization Act Requires funds to report portfolio holdings, including information about risk metrics and the use of derivatives, on a monthly basis Creates new reporting forms (compliance date as early as June 2018) Makes revisions to Regulation S-X (compliance date of August 2017)

27 Recent Developments - Legislation / Rulemaking SEC Rules Pending Adoption Adviser Business Continuity and Transition Plans Registered Funds Use of Derivatives Incentive-Based Compensation Arrangements 27

28 4. EXAMINATION TRENDS 28

29 General Examination Trends in 2017 Late 2015, 2016 and 2017 seeing pickup in routine exams Seeing some second-time exams after initial private fund presence exams The presence of the Asset Management Unit in enforcement, and exams focusing on asset management issues, have intensified Has led to the SEC referring more asset manager cases to enforcement and/or requiring significant remediation as part of deficiency letter process 29

30 Exam Focus Areas: Fees and Expenses Disclosure and Allocation Limited Partners Fund / Client Adviser Fund / Client vs. Other Adviser Vehicles Affiliated/ Unaffiliated Service Providers Portfolio Companies Coinvestors 30

31 Additional Exam Focus Areas Allocation of investment / Co-investment opportunities Financial statement disclosures Whistleblower rule compliance Political contributions / Pay-to-play Valuation methodologies and adherence thereto Code of Ethics / Personal securities trading Compliance policies and procedures Cross-fund investing Marketing materials Custody rule issues (including auditor independence issues) Fee calculations Cybersecurity 31

32 Auditor Independence Requirements SEC independence requirements can disqualify auditors of funds Could prevent issuance of audited financial statements to comply with the Custody Rule SEC can give relief Possibility of future guidance 32

33 5. ENFORCEMENT THEMES 33

34 SEC Enforcement Trends A top priority of the incoming SEC chairman will be to appoint a new Director of the Division of Enforcement Under Andrew Ceresney, Enforcement set another record with number of cases in Fiscal Year total enforcement actions (807 in 2015), and the most ever 160 involving investment advisers or investment companies Over $4 billion in aggregate disgorgement and penalties (approx. $4.2 billion in 2015) First-of-its-kind case against a private equity adviser for acting as an unregistered broker (Blackstreet Capital Management, (June 2016)) The SEC has brought 11 private equity-related actions over its last two fiscal years (including 8 in 2016) 34

35 Enforcement Structure and Issues The Asset Management Unit within the Division of Investment Management is a specialized enforcement unit specifically focused on bringing cases against investment advisers, investment companies, hedge funds and private equity funds Common enforcement matters involving fund sponsors include: Conflicts of Interest Fiduciary Duty Disclosure Fees and Expenses Pay-to-Play Valuation Management Fee Waiver 35

36 Potential Areas for Future SEC Enforcement Actions Advertising / performance presentation / marketing materials Equity and/or investment advisory compensation paid in underneath-the-fund structures Investment / co-investment allocations Operating partners Pay-to-play rule violations Stapled secondaries / fund restructurings Valuation of alternative investments 36

37 Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis Published by McGraw-Hill Education and is now available in stores and online. For more information, please visit 37

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