Regulatory Compliance Association Risk Assessments for Investment - - PowerPoint PPT Presentation

Regulatory Compliance Association

Risk Assessments for Investment Advisers: Upgrading Your Compliance Framework™

Beth R. Kramer Chadbourne & Parke LLP Scott Naidech Chadbourne & Parke LLP James Hartmann Arena Investors Jeffrey Schultz GPB Capital Holdings, LLC

June 20, 2017

CPAM-12506114v3

Introduction and Overview

• Under Rule 206(4)-7, SEC-registered investment advisers are

required to develop a compliance program of policies and procedures reasonably designed to comply with the Advisers Act

• Through the process of conducting regular risk assessments,

many advisers identify various risk to their firms and client accounts so that their firm’s compliance program adequately addresses these risks

• Common review areas to consider in risk assessment analysis
• SEC areas of focus, including conflicts of interest and fees

and expenses

• Customize to your firm’s business
• Tips for conducting a risk assessment

2

Purpose of Risk Assessment

• Purposes of risk inventory assessment and common

issues advisers should consider when developing and implementing their risk inventory:

• Determine what types of risks (e.g., business,
• perational, legal, etc.) may be present at the firm.
• Assess whether adequate controls are in place to

manage or mitigate such risk.

• Make modifications to update the firm’s current

policies and procedures to address new identified risks.

3

Measuring and Ranking Risk

• Likelihood - The possibility that a given event will occur and factor

in whether the event has occurred before.

• Impact - The effect the event will have on clients or potential

clients, disclosures, finances, reputation and regulatory

• bligations should it occur.
• Probability - The anticipated frequency of a risk event given the

regularity of the activity or process that is associated with the risk.

• Rank risks as high, medium, or low.
• Levels are subjective, unique to adviser’s

specific business.

• Understand firm’s overall business.
• Issues regulators have raised in past examinations should be

given special consideration; likely given “high risk” designation.

4

Common Risk Assessment Issues

• Do you have processes and internal controls in place to

help detect and address risks?

• What is a control objective?
• What types of controls may mitigate identified

risks? (Policies and associated procedures, training / education, monitoring and testing)

• Automated or manual controls?
• How robust should you go in a particular control

implementation?

• If implemented appropriately, controls should

reduce the specific inherent risk identified for a particular activity and leave the firm with a residual risk (which may still be deemed high)

• Does your compliance program adapt to changes?

5

Common Review Areas To Consider In Risk Assessment Analysis

• Conflicts of Interest
• Undisclosed fees and expenses
• Allocation of fees / expenses
• Related party transactions
• Co-investment allocation issues
• Cybersecurity
• OCIE Risk Alert: Common Compliance Topics

6

SEC Focus on Conflicts of Interest and Fees and Expenses

• Undisclosed Fees and Expenses

– Does a manager (or its affiliates) charge fees (or provide services) beyond “2 and 20”?

• Acceleration of monitoring fees
• Charging of additional service fees and use of fee offsets
• Expense Allocations
• Allocation of expenses as between the manager and the fund,

and as between a fund and other funds under management

• Is the manager following the fund’s governing documents? Are

“grey” areas being allocated in favor of the fund or the manager?

• Legal fee discounts
• Fees charged by third parties that primarily benefit the

manager (consulting, legal, compliance, etc.), but allocated to the fund

7

SEC Focus on Conflicts of Interest and Fees and Expenses (cont’d)

• Expense Allocations (cont’d)
• Other non-service related costs (filing and regulatory fees,

compliance fees and costs, and other overhead, such as rent, utilities, etc.) incurred by the manager in the course

• f its activities
• “Horizontal” allocations among multiple funds: do

allocations favor one vehicle over another?

• Expense allocations across managed funds
• Allocation methodologies
• Broken deal expenses among managed funds and co-

investment vehicles

8

SEC Focus on Conflicts of Interest and Fees and Expenses (cont’d)

• Related party transactions; conflict of interest disclosures

relating to payments to affiliates

• Hiring of consultants, which may sometimes be quasi-

affiliates (former employees) of manager

• Outsourcing of manager operations and expenses
• Loans received from clients by firm principals
• Monitoring outside business activities of principals

9

SEC Focus on Conflicts of Interest and Fees and Expenses (cont’d)

• Co-investment allocation issues:
• Is the manager making allocations in accordance with

the fund documents?

• Do the disclosure/fund documents/policies adequately

cover those vehicles?

• Trading overlap and allocation of investment
• pportunities; disclosure of conflicts and overlapping

investment policies

• Fee offset allocations

10

Cybersecurity

• Continues to be priority issue for SEC
• Risk Alert regarding "WannaCry" ransomware and failure of
• rganizations to install crucial software security patches in a

timely fashion

• Considerations for your cybersecurity risk assessment:
• evaluating and assessing risk management systems,

policies, and procedures;

• making any appropriate changes to address or strengthen

them;

• imposing access controls;
• training employees to avoid risks; and
• gathering documentation of such changes as well as those

documents likely to be requested

11

OCIE Risk Alert: Common Compliance Topics

• Five most common compliance topics in deficiency letters sent

to SEC-registered investment advisers

• Compliance Rule: compliance manuals not reasonably tailored

to the adviser’s business practices

• Regulatory Filings: advisers’ failure to accurately complete and

timely file certain regulatory filings with the SEC

• Custody Rule: advisers’ failure to recognize that they may have

custody due to online access to or certain authority over client accounts

• Code of Ethics Rule: failure to identify access persons for

purposes of reviewing personal securities transactions, miss required information in their codes of ethics, submit transactions and holdings untimely

• Books and Records Rule: failure to maintain all required

records or keep records up-to-date, and inconsistent recordkeeping

12

Tips for Conducting a Risk Assessment

• Prioritize and conduct monitoring and testing

suitable to each risk

• Document results of risk assessment, testing and

follow-up

• Conduct risk reviews throughout the year, quarterly
• r annually
• Make modifications to update the firm’s current

policies and procedures to address new identified risks

• Conduct periodic testing of your compliance

program to determine areas that your policies and procedures may have been circumvented

13

Closing Thoughts

14

Speaking Faculty Biographies

15

Beth Kramer, JD, Partner, Fund Formation & Investment Management Group, Chadbourne & Parke

Beth Kramer focuses her practice on investment management and securities law. She regularly advises investment advisers on the formation and ongoing management of funds and on the regulatory and compliance aspects of their businesses. She counsels investment companies, private funds and separately managed accounts on structuring, organization, distribution, and SEC regulatory and compliance issues, including responses to SEC examinations.

• Ms. Kramer’s practice includes the creation of new advisory businesses, including registration and

formation with appropriate regulatory authorities, creation of disclosure documents for private funds, drafting of investment management products, evaluating fund documents for institutional investors and family offices seeking alternative investments, development of compliance policies and procedures, performing compliance reviews, representations of advisers in connection with SEC examinations, counseling clients on compliance with the Dodd-Frank Act, and adviser

• acquisitions. She advises clients with respect to compliance with, and exemptions from the

Investment Advisers Act of 1940, as amended and the Investment Company Act of 1940, as amended.

• Ms. Kramer was recognized by The Legal 500 US in 2014 through 2017 for her work in investment

fund formation and management.

• Ms. Kramer serves on the New York City Bar Association's Investment Management Regulation

Committee for a three year term which began in September 2015. She is also a member of the American Bar Association (Section of Business Law) and 100 Women in Finance.

16

Scott Naidech, JD, Partner, Fund Formation & Investment Management Group, Chadbourne & Parke

Scott Naidech represents a broad array of private fund sponsors in the structuring, establishment and operation of their funds. He has formed buyout, growth capital, real estate and venture capital funds ranging in size from $100 million to over $16 billion of committed capital, including both geography focused and industry focused funds. In addition to private funds, he advises clients on a number of other complex business transactions, including leveraged buyouts, recapitalizations, acquisitions and divestitures, as well as general corporate matters.

• Mr. Naidech is recognized in Chambers USA 2017 and 2016 as a Noted Practitioner in Investment

Funds, Private Equity: Fund Formation nationwide. He is annually recognized by The Best Lawyers in America for his work in Private Funds and Hedge Funds Law and by The Legal 500 US as a leading lawyer in the “Private Equity Funds” category.

17

James Hartmann, Arena Investors

James Hartmann is Chief Compliance Officer for Arena Investors, LP, which was formed in partnership with the Westaim Corporation, a publicly traded Canadian holding company focused on the financial services industry. Arena is managed by an experienced team of professionals that has originated, structured and managed over $10 billion in special situation financing and asset-oriented investments globally. Prior to Arena, Mr. Hartmann was CCO for Prudential Fixed Income, an adviser focusing on public fixed income markets with separate account, mutual fund, CLO and hedge fund clients. Prior to returning to Prudential in 2010, Mr. Hartmann was the Chief Compliance Officer for UBS Alternative & Quantitative Investments’ US-based advisory business. Earlier in his career he performed regulatory consulting for a wide variety of clients of Ernst & Young, and PricewaterhouseCoopers, and also was the Chief Operating Officer and Chief Compliance Officer for two advisers with venture capital, hedge fund, and mutual fund

• clients. Mr. Hartmann started his career as an examiner for the U.S. Securities and

Exchange Commission's New York Regional Office and then joined Prudential’s Compliance Unit in the mid 1990s. He holds a B.S. in Corporate Finance from the Indiana University School of Business.

18

Jeffrey Schultz, GPB Capital Holdings, LLC

Jeffrey Schultz, Managing Director, General Counsel and Chief Compliance Officer, Mr. Schultz is responsible for GPB’s general legal matters, including fund formation and corporate governance, as well as oversight of GPB’s compliance program. Prior to joining GPB, Mr. Schultz served as Chief Legal Officer and Chief Compliance Officer of Phoenix Investment Adviser LLC, where he oversaw all legal and compliance matters for the hedge fund manager with over $1B in assets under management. Before that, he served as Legal Counsel for BNP Paribas Investment Partners, the global bank’s North American asset management business. Mr. Schultz also served as an associate in the asset management practices of Bingham McCutchen LLP and Katten Muchin Rosenman

• LLP. He received his B.A. from the University of Michigan and his J.D. from the Benjamin
• N. Cardozo School of Law.

19

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