0Goodwin Procter Attorney to Participate in Financial Markets Association’s Securities and Compliance Seminar

Goodwin Procter Financial Services Group Partner, Peter W. LaVigne, will be participating in The Financial Markets Association’s 22nd Annual Securities Compliance Seminar.  Mr. LaVigne will co-lead a workshop entitled “KYC and Suitability” that will cover all aspects of broker-dealer know your customer and suitability obligations with respect to retail and institutional investors.  The seminar will be held from Wednesday, April 24, 2013 to Friday, April 25, 2013 at the B Ocean Hotel in Fort Lauderdale, Florida.  For more information concerning the seminar or to register please click here.

0SEC Settles Administrative Proceeding Over Deviation from Valuation Policy Stated in Fund Offering Materials and Investor Reports for Registered Adviser’s Fund of Private Equity Funds

The SEC settled public administrative proceedings against a registered investment adviser and its wholly owned subsidiary, also a registered investment adviser, (together, the “Adviser”) over misrepresentations made to prospective and existing investors in a private equity fund of funds they managed (the “Fund”) regarding the manner in which the Fund’s largest asset (the “Underlying Fund”) was valued.  The SEC found that, in contravention of the Adviser’s compliance procedures and without disclosure to appropriate personnel at the Adviser or to Fund investors or prospects, the Fund’s portfolio manager (the “Portfolio Manager”) substituted a valuation method for the Underlying Asset that differed from the one described in Fund marketing materials and quarterly reports to investors; the Portfolio Manager’s implementation of the alternative valuation methodology materially increased Fund performance over what it would have been had the valuation methodology disclosed in Fund documentation been applied.

This article summarizes the SEC’s findings set forth in the settlement order (which the Adviser has neither admitted nor denied) and the sanctions imposed (including sanctions imposed as a result of a related proceeding by the Massachusetts’ Attorney General).

Undisclosed Change in Valuation Methodology for Fund Holding

On Thursday, October 22, 2009, the Adviser’s compliance personnel approved a pitch book for use in marketing the Fund which stated that the value of the Fund’s assets was “based on the underlying managers’ estimated values,” as had been the Fund’s valuation practice since its launch in April 2008.  Over the succeeding weekend, the Portfolio Manager and his team revised the marketing materials for the Fund, including the pitch book, to substitute a “par value” valuation for the Underlying Fund created by the Portfolio Manager for the valuation provided by the Underlying Fund’s manager.  The Adviser’s compliance department was not informed of the change in valuation methodology and the revised presentation bore the same code indicating compliance department approval as on October 22, 2009.  The Adviser did not verify that the valuations provided were the underlying managers’ estimated values.

The valuations for the Underlying Fund produced by the “par value” methodology were incorporated into performance summary tables in pitch books and quarterly reports to Fund investors from October 26, 2009 through June 2010.  Marketing efforts for the Fund during this period resulted in approximately $61 million in new investments.  The performance of the Fund and the Underlying Fund was touted to prospective investors without disclosing the use of the par value methodology in valuing the Underlying Fund.  Former employees of the Adviser made the following misrepresentations in connection with marketing the Fund: (i) the increase in the value of the Fund’s largest investment was due to an increase in performance (when, in fact, the increase was attributable to the Portfolio Manager’s use of the par value methodology), (ii) a third party valuation firm used by the Underlying Fund’s manager wrote up the value of the Underlying Fund (which was not true), and (iii) the Fund’s underlying funds were audited by independent, third party auditors (when, in fact, the Underlying Fund was not audited).

The SEC found that, because the Underlying Fund was the Fund’s largest holding, the increase in its value resulting from the use of the par value methodology materially improved the Fund’s return.  The SEC noted, for example, that for the quarter ended June 30, 2009, it increased the Fund’s IRR from approximately 3.8% to 38.3%.

Violations of Law

The SEC found that (1) the undisclosed change in valuation methodology described above caused the Fund’s marketing materials and investor reports during the relevant period to be materially misleading and (2) the Adviser’s written policies and procedures were not reasonably designed to ensure that valuations provided to prospective and existing investors were presented in a manner consistent with written representations regarding those valuations.  The SEC further determined that, as a result, the Adviser willfully violated:

  • Section 17(a)(2) of the Securities Act of 1933, which prohibits any person in the offer or sale of securities from obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading;
  • Section 17(a)(3) of the Securities Act of 1933, which prohibits any person in the offer or sale of securities from engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser;
  • Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, which prohibits any fraudulent, deceptive, or manipulative act, practice, or course of business by an investment adviser to any investor or prospective investor in a pooled investment vehicle; and
  • Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, which requires, among other things, that registered investment advisers adopt and implement written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and its rules.


In addition to censure and a cease-and-desist order, the Adviser agreed to disgorge a total of $2,269,098 to investors who invested in the Fund between October 2009 through June 2010, an amount representing the management fees collected by the Adviser from these investors from October 2009 through June 2010, plus reasonable interest, and including amounts from a related proceeding by the Commonwealth of Massachusetts.  The Adviser also agreed to a civil money penalty of $617,579, an amount that the SEC noted could have been larger but for the Adviser’s cooperation in the SEC’s investigation and related enforcement action.  The Adviser agreed to engage an independent consultant to conduct a review of the adequacy of the Adviser’s valuation policies and procedures and make recommendations.  In addition, the Adviser agreed, by no later than the 10th day after the entry of the settlement order, to (a) post a hyperlink to the order on its website and keep the link active for 12 months, and (b) provide a copy of the order to each of its existing advisory clients.

Separately, the Adviser will pay a penalty of $132,421 to the Commonwealth of Massachusetts with respect to a related proceeding.

Oppenheimer Asset Management Inc. and Oppenheimer Alternative Investment Management, LLC, SEC Release No. 33-9390, IA-3566 (March 11, 2013).

0SEC Staff Provides Guidance on SEC Filing Obligations for Social Media Postings Regarding Mutual Funds

The staff of the SEC’s Division of Investment Management (the “Staff”) provided guidance (the “Guidance”) regarding the obligation to file with the SEC interactive content regarding mutual funds and certain other investment companies (collectively, “Funds”) posted in real-time electronic forums (i.e., chat rooms and social media) (“Interactive Content”).  The Guidance is designed to address the circumstance in which Interactive Content relating to a Fund may be subject to an SEC filing obligation because it has not been filed with the Financial Industry Regulatory Authority (“FINRA”) pursuant to FINRA Rule 2210, as Fund marketing materials customarily are.

Background.  In addition to FINRA filing requirements, Fund marketing materials may also be subject to the filing requirements of Section 24(b) of the Investment Company Act of 1940 (“Section 24(b)”) relating to “sales literature” and Rule 497 under the Securities Act of 1933 (“Rule 497”) relating to advertisements relying on Rule 482 under the Securities Act of 1933 (collectively, “SEC Filing Obligations”); however, any SEC Filing Obligation is met if the Fund marketing materials in question have been filed with FINRA.  Interactive Content is not subject to FINRA filing requirements under 2010 FINRA guidance that treats Interactive Content, in contrast to static content that stays posted on a website until removed, as a “personal appearance.”  The Guidance addresses the question of whether, in the absence of any FINRA filing, Interactive Content regarding a Fund must be filed with the SEC to satisfy SEC Filing Obligations.

SEC Filing Obligations May Not Apply.  The Staff believes that not all Interactive Content must be filed with the SEC.  The Guidance is qualified by the statement that the determination regarding whether Interactive Content should be filed with the SEC will vary depending on the particular facts and circumstances, such as the underlying substantive information transmitted to the social media user and whether the interactive communication is merely a response to a request or inquiry from the social media user or is forwarding previously-filed content. 

The Guidance lists the following categories of Interactive Content that the Staff believes would generally not be subject to SEC Filing Obligations (with examples that provide important illustrative detail):

  1. “An incidental mention of a specific investment company or family of funds not related to a discussion of the investment merits of the fund.”
  2. “The incidental use of the word ‘performance’ in connection with a discussion of an investment company or family of funds, without specific mention of some or all of the elements of a fund’s return (e.g., 1, 5 and 10 year performance).”
  3. “A factual introductory statement forwarding or including a hyperlink to a fund prospectus or to information that is filed pursuant to Section 24(b) or Rule 497.”
  4. “An introductory statement not related to a discussion of the investment merits of a fund that forwards or includes a hyperlink to general financial and investment information such as discussions of basic investment concepts or commentaries on economic, political or market conditions.”
  5. “A response to an inquiry by a social media user that provides discrete factual information that is not related to a discussion of the investment merits of the fund.”

When SEC Filing Obligations Apply.  The Guidance also lists the following categories of Interactive Content that the Staff believes generally are subject to SEC Filing Obligations (with examples that provide important illustrative detail):

  1. “A discussion of fund performance that provides specific mention of some or all of the elements of a fund’s return (e.g., 1, 5 and 10 year performance) or promotes a fund’s returns.”
  2. “A communication initiated by the issuer that discusses the investment merits of the fund.”

The Guidance notes that an issuer cannot avoid SEC Filing Obligations by posting Interactive Content that “hyperlinks to or attaches material that should be, but has not been, filed (e.g., a fund fact sheet).”

0OCC Issues Proposed Reporting Requirements for Annual Stress Tests of Covered Financial Institutions with Consolidated Assets of $10 Billion to $50 Billion

The OCC issued a notice of proposed information collection (the “Proposal”) seeking comments on annual stress test reporting requirements for covered financial institutions with consolidated assets of $10 billion to $50 billion (“Mid-Sized Covered FIs”).  Under Section 165(i)(2) of the Dodd-Frank Act certain financial companies with consolidated assets between $10 billion and $50 billion are required to conduct annual stress tests, and the primary federal financial regulatory agency (the OCC, FDIC or FRB) for the applicable company  is required to issue regulations implementing the stress test requirements.  In October 2012, the OCC, FDIC and FRB issued separate regulations implementing the stress test requirements for Mid-Sized Covered FIs, see the discussion of the FDIC’s implementing final rule in the October 16, 2012 Financial Services Alert.  The Proposal describes the annual stress testing reporting requirements and includes copies of reporting templates for Mid-Sized Covered FIs.  The OCC’s implementing regulation concerning annual stress test requirements for covered financial institutions with more than $50 billion in consolidated assets was issued separately by the OCC in August 2012.  The OCC stated that the reporting templates involve “quantitative projections of balance sheet, capital, losses, and income across three or more macroeconomic scenarios, along with qualitative information on methodologies used.”  Comments on the Proposal are due by May 10, 2013.