In January 2022, on the heels of the numerous public remarks from Chairman Gensler and other senior U.S. Securities and Exchange Commission (SEC) staff that we analyzed in our Q4 2021 Private Markets Update, the SEC issued a series of rule proposals seeking to reform the private fund industry. Certain rule proposals try to outright ban a host of practices that have long been accepted by general partners (GPs) and limited partners (LPs) alike, whereas other rule proposals set additional requirements to engage in certain types of business practices (e.g., GP-led secondary transactions). Further, certain rule proposals seek more transparent, granular, and consistent disclosures across the private fund industry relating to fees, expenses, and fund performance. The rule proposals easily represent the SEC ‘s biggest attempt to shape the GP-LP relationship since the implementation of the Dodd-Frank Act.
It is particularly noteworthy that many aspects of the rule proposals are aimed specifically at the private markets fund industry – perhaps the SEC ‘s first such attempt in Advisers Act rule-making history. Equally noteworthy is the fact that some of the most controversial and hard-hitting aspects of the new rule proposals impact all private markets fund advisers (including those not registered with the SEC – such as exempt reporting advisers (ERAs)) and, as such, could have deeply global ramifications for the private funds industry. Additionally, as currently proposed, the SEC will not permit GPs to waive or modify any aspects of the proposed rules with LP consent.
Key takeaways&
Irrespective of the ultimate outcome of these rule proposals, these SEC rule-making efforts reveal much about how the SEC ‘s examination and enforcement agenda is likely to unfold in the coming months and years. As such, even though it is too soon to know exactly what form the final rule-making will take, we recommend the following steps for all private markets fund& advisers:&
- Carefully undertake a gap analysis of current business practices in the areas touched upon by the proposed rules and assess how they would implement applicable changes if and when required. Such an analysis should involve some degree of assessment of potential increases in business costs (e.g., an increase in D&O/E&O insurance premiums as a result of the proposals’ attempt to significantly limit a fund managers’ ability to seek indemnification from their private funds) – and how such costs will be absorbed should they materialize&
- Consider early implementation in those areas where a transition to a more robust disclosure/reporting regime now seems inevitable based on growing investor demands (e.g., more granular and frequent disclosures to LPs relating to fees and expenses, and enhanced disclosures relating to side letter terms)
Watch our on demand webcast&
For the SEC ‘s own insights into the rule proposals, please click here to access a recent webcast hosted by ACA featuring Christine A. Schleppegrell, Acting Branch Chief of the SEC ‘s Private Funds Branch – Division of Investment Management.
How we help
Compliance teams need continuous support and knowledge sharing to stay on top of regulatory initiatives. Our team helps you navigate the evolving regulatory landscape while considering the complexity of your firm ‘s unique compliance requirements. &
We help our clients manage regulatory compliance, cybersecurity and risk, and performance verification through our consulting, outsourcing, and technology solutions. Our services and solutions include standard and customized compliance packages, cybersecurity and technology risk assessments, Global Investment Performance Standards (GIPS®) compliance and other performance services, and a variety of business advisory, technology, and training solutions for financial services firms. &
Contact us if you have any further questions about these rule proposals, or how ACA can help your firm meet your regulatory requirements.
Regulatory Notice 22-18&
The Financial Regulatory Authority (FINRA) recently issued Regulatory Notice 22-18 (“the Notice”) to remind member firms of their regulatory obligation to monitor digital signatures to prevent or detect forgery or falsification activities. &
The Notice highlights the need for member firms that allow digital signatures to have adequate controls to detect possible instances of signature forgery or falsification. &
What Constitutes Forgery or Falsification?&
- Forgery occurs when one person signs or affixes, or causes to be signed or affixed, another person ‘s name or initials on a document without the other person ‘s prior permission.&
- Falsification occurs when a person creates a document or entry in a firm ‘s system that creates a false appearance by including altered or untrue information.&
Forgery and falsification are violations of FINRA Rule 2010, which requires associated persons to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business. Where the forged or falsified document is a book or record that the member firm maintains, the associated person may also separately violate FINRA Rule 4511. In addition, FINRA Rule 3110(a) requires each member to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules. &
Helpful Ways to Identify Digital Signature Forgery or Falsification&
The Notice suggests the following five (5) methods to help firms identify and monitor for forgeries or falsifications:&
- Following up on customer inquiries or complaint investigations&
- Reviewing digital signature audit trails&
- Reviewing email correspondence&
- Conducting administrative staff inquiries&
- Implementing customer authentication controls and supervisory reviews&
In addition, the Notice describes various scenarios in which member firms discovered and reported to FINRA situations in which representatives forged or falsified customer signatures. Among other things, it noted the following instances:&
- Account transfers where firm investigations revealed that representatives facilitated the transfer process by digitally signing forms on behalf of customers&
- Customer signatures originating from email addresses associated with their representative or other email addresses that were inconsistent with customer email addresses the firm maintained&
- Discrepancies between the location of the user (e.g., the individual affixing the customer ‘s digital signature) and the customer ‘s residence&
- Identical IP addresses for the representative and customer digital signatures on a document&
- Complaints from administrative staff that representatives directed them to manipulate the digital signature process, claiming the modifications were acceptable accommodations to the customer&
Our guidance
Firms should take note of this Notice and assess their practices and procedures for:&
- Maintaining procedures that properly address methods to identify and respond to suspicious activity;&
- Conducting training related to digital forgeries and falsifications, including how to spot “red flags” and how to resist pressure to manipulate or modify documents; &
- Promptly reviewing customer complaints, digital signature audit trails, and email correspondence; and &
- Ensuring procedures and controls address safeguards around the authentication/verification process and clearly indicate any restrictions on employee access to customer passwords and answers to verification questions.
How we help&
We can help broker-dealers understand the compliance and operational issues presented by digital signatures as they relate to their business. Our consultants can assist in designing customized procedures that will detail the steps needed to address digital signature requirements as they relate to your firm.&
For more information about digital signatures, forgery, and falsification, or to find out how we can help your firm comply, please reach out to your ACA consultant or contact us below.