Edited by Yelena Maltser • [email protected]

Edited by Yelena Maltser • [email protected] MARCH 2017 SUPREME COURT REJECTS NEWMAN REQUIREMENT OF “PECUNIARY OR SIMILARLY VALUABLE” PERSONAL BENEFIT FOR INSIDER TRADING LIABILITY FOR TIPPING FAMILY AND FRIENDS BY SAMUEL J. LIEBERMAN The U.S. Supreme Court gave the government a major victory in Salman v. U.S., 1 which lowers the standard for proving insider trading involving tipping family or friends, and will embolden the government to bring similar cases. Salman holds that a gift of inside information to a family or friend is sufficient to prove insider trading tipping liability—even if the tipper did not receive a valuable quid pro quo in exchange for the tip. This significantly narrows U.S. v. Newman, in which Client Alert Status of the New DOL Fiduciary Rule BY DANIEL G. VIOLA Reprinted with permission of Hedgeweek The Department of Labor’s (the “DOL”) new fiduciary ruling (the “Rule”) has created strife in the securities industry and has the potential to significantly impact how financial advisers and brokers will manage retirement accounts in the future. Currently, brokers, financial advisers, and other finance professionals do not legally have to act Salman will almost certainly embolden the SEC and federal prosecutors to bring more insider trading cases, because it is much easier for the government to prove a “gift” to a “friend” than to prove a “pecuniary” or similar quid pro quo. the Second Circuit (a lower appellate court) held that a tipper must receive “at least a potential gain of a pecuniary or similarly valuable nature,” (continued on page 2) in a client’s best interest, with few exceptions, such as those who are registered as investment advisers with the U.S. Securities and Exchange Commission or in individual states. Those who are not registered, like brokers, just have to prove that the investment is suitable, not necessarily the best option, for their client—no matter that that fund might be more expensive and provide (continued on page 2) ■ Inside this Issue 1 Supreme Court Rejects Newman Requirement of “Pecuniary or Similarly Valuable” Personal Benefit for Insider Trading Liability for Tipping Family and Friends 1 Status of the New DOL Fiduciary Rule 4 A Cautionary Tale in the Use of Non- Compete Agreements 5 The Question On All Of Our Minds: What Impact Will the Trump Administration Have on the Hedge Fund Industry? 6 Compliance Deadlines – Second Quarter 2017 7 SEC & FINRA Release 2017 Exam Priorities 7 Gregory Hartmann Joins Sadis & Goldberg’s Corporate and Financial Services Practices 8 Recent and Upcoming Events WE PRACTICE LAW BUT WE LIVE BUSINESS Supreme Court Rejects Newman Requirement of “Pecuniary or Similarly Valuable” Personal Benefit for Insider Trading Liability for Tipping Family and Friends (continued from page 1) as a personal benefit necessary to be held liable for insider trading. 2 Salman will almost certainly embolden the SEC and federal prosecutors to bring more insider trading cases, because it is much easier for the government to prove a “gift” to a “friend” than to prove a “pecuniary” or similar quid pro quo. In Salman, an investment banker at Citigroup tipped his brother about certain pending healthcare mergers involving Citigroup clients. The brother traded on that information for a profit, and also tipped his brother-in-law, Mr. Salman, who also traded for a profit. At trial, the government relied solely on the tippers giving a gift of inside information to a close family member to satisfy the “personal benefit” requirement of tipper-tippee insider trading liability. The government did not identify any money or other valuable quid pro quo paid for the tip. Salman was convicted at trial, and his conviction was upheld by the Court of Appeals for the Ninth Circuit. (continued on page 3) Client Alert: Status of the New DOL Fiduciary Rule (continued from page 1) a better commission for the adviser. The Obama administration found that conflicted advice cost savers about $17 billion a year based on a 2015 report. To be clear, the Rule applies only to retirement accounts like 401(k)s and individual retirement accounts (“IRAs”), not to regular taxable accounts. According to the Investment Company Institute, Americans invest $7.8 trillion in IRAs and $7 trillion in 401(k)s. On January 20, 2017, the DOL issued two new sets of Frequently Asked Questions (“FAQs”) on the Rule. One of the sets of FAQs focuses on the new definition of fiduciary investment advice and the other set is geared toward retirement investors and consumers, covering consumer protection features of the new Rule. This is the second of three rounds of guidance to be published by the DOL prior to the effective date of the new Rule. The Executive Branch also issued responses to the Rule on January 20, 2017. The White House issued a Memorandum from Reince Priebus to the heads of the executive departments and agencies requesting a sixty (60)-day delay as the effective date of regulations published in the Office of the Federal Register have not taken effect as of yet. On February 3, 2017, President Trump signed a presidential memorandum to delay the Rule by six (6)-months, casting doubt on its viability. The memorandum instructs the DOL to conduct a new “economic and legal analysis” to determine whether the Rule is likely to harm investors, disrupt the industry or cause an increase in litigation and the price of advice. If the DOL concludes that the regulation does hurt investors or firms, it can propose a rule “rescinding or revising” the regulation. On March 1, 2017, the DOL issued a proposed rule, which will extend the applicability date of its fiduciary rule, including the Best Interest Contract Exemption, from April 10, 2017 to June 9, 2017, a 60-day delay. Some are saying the Rule would hurt investors because it would supposedly make it harder for people to receive retirement advice. For example, advisers would not be able to afford to service low-balance retirement accounts. On the other hand, consumer, labor and civil rights groups have pushed for the Rule saying that the current system provides a loophole that lets brokers drain money from retirement accounts in fees they receive that can sway the investment advice they give their retirement accounts. We see that many retirement advisers already have chosen to act in their clients’ best interests, opting to work under the fiduciary standard—it is ultimately a business advantage. The FAQs are available on the DOL’s website and the Memoranda are available on the White House Press Office website. FAQs https://www.dol.gov/sites/default/files/ebsa/ about-ebsa/our-activities/resource-center/ faqs/coi-rules-and-exemptions-part-2.pdf https://www.dol.gov/sites/default/files/ebsa/ about-ebsa/our-activities/resource-center/faqs/ consumer-protections-for-retirement-investorsyour-rights-and-financial-advisers.pdf Memoranda January 20, 2017–Regulatory Freeze Pending Review https://www.whitehouse.gov/the-pressoffice/2017/01/20/memorandum-heads-executive-departments-and-agencies February 3, 2017–Fiduciary Duty Rule https://www.whitehouse.gov/the-press-office/ 2017/02/03/ presidential-memorandum-fiduciaryduty-rule Daniel G. Viola is a Partner and the Head of the Regulatory and Compliance Group. He structures and organizes broker-dealers, investment advisers, funds and regularly counsels investment professionals in connection with regulatory and corporate matters. Mr. Viola served as a Senior Compliance Examiner for the Northeast Regional Office of the SEC, where he worked from 1992 through 1996. During his tenure at the SEC, Mr. Viola worked on several compliance inspection projects and enforcement actions involving examinations of registered investment advisers, ensuring compliance with federal and state securities laws. Mr. Viola’s examination experience includes financial statement, performance advertising, and disclosure document reviews, as well as, analysis of investment adviser and hedge fund issues arising under ERISA and blue sky laws. Dan can be reached at 212.573.8038, or [email protected]. S&G INVESTMENT MANAGER ALERT 2 Supreme Court Rejects Newman Requirement of “Pecuniary or Similarly Valuable” Personal Benefit for Insider Trading Liability for Tipping Family and Friends (continued from page 2) The Supreme Court affirmed Salman’s conviction, holding that a gift of inside information to family or friends is sufficient to prove a “personal benefit” for insider trading tipping liability. The Court reasoned that such a gift can be inferred to “provide the equivalent of a cash gift.” 3 Specifically, the Court reasoned that if the tipper personally traded on inside information himself for a profit, but gave the proceeds to his brother, the tipper received a personal benefit (cash) and is liable for insider trading. So, it reasoned, where a tipper achieves effectively the same result by gifting the information to his brother with the expectation that the brother will trade on the information to obtain a cash profit, the result should be the same. Importantly, the Supreme Court explicitly stated that it was narrowing the Second Circuit’s landmark Newman decision. It stated, “[t]o the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends,… we agree with the Ninth Circuit that this requirement is inconsistent with Dirks,” a prior Supreme Court ruling. 4 This significantly lowers the standard of proof for insider trading tipping liability in cases involving family or friends. The government often cannot find evidence of money or a similarly valuable quid pro quo between the tipper and tippee in insider trading cases. So it is much easier to prove a case of insider trading by arguing that the exchange of information was a “gift,” which essentially only requires some evidence (even circumstantial evidence such as phone logs) that the tipper gave information to the tippee. So where does this leave the Newman decision? The Newman decision itself was not overturned by the Supreme Court, because Newman also relied on the lack of proof that the tippees who traded on inside information knew that the tippers provided Salman significantly lowers the standard of proof for insider trading tipping liability in cases involving family or friends. inside information in exchange for a personal benefit—especially since the tippees were several steps removed from the original tippers. In addition, Newman‘s “pecuniary or similarly valuable” benefit test should still apply to cases that do not involve tipping family or friends. Nevertheless, the Salman decision tips the scales back in favor of the government in tipping insider trading cases. The SEC and federal prosecutors have shown in the past that they will bring cases based on alleged gifts of inside information to mere social acquaintances, fellow employees, or networking contacts —using strained arguments of “friendship.” And they will bring insider trading cases based solely on circumstantial evidence (e.g., a pattern of phone calls) where there is no direct proof of trading based on inside information. Accordingly, with Salman imposing a lower standard of proof, it is imperative that clients contact counsel immediately at the first hint of a government insider trading investigation. 1 Salman v. U.S., No. 15-628, 580 U.S. ___., slip op. (Dec. 6, 2016). 2 773 F.3d 438, 452 (2d Cir. 2014). 3 Salman, Slip Op. at 9-10. 4 Id. at 10. Samuel J. Lieberman is a Partner in the Securities Litigation Group of Sadis & Goldberg LLP. He regularly handles high-profile securities litigation, enforcement actions, and government investigations on behalf of companies and individuals. He has handled investigations covering a wide-range of securities law issues before the SEC, FINRA, CFTC, CFE/CBOE, and CME. He has also handled precedent-setting cases addressing corporate governance, including in Delaware Chancery Court. His recent representations have been profiled in the Wall Street Journal, the New York Times, the New York Post, Bloomberg, Reuters and Law360. Sam also regularly advises companies and individuals about compliance programs and preparing for SEC compliance examinations. Sam can be reached at 212.573.8164, or [email protected]. Feedback? Topics you’d like us to address in future issues? Please send comments to [email protected] Visit the Sadis & Goldberg LLP website at sglawyers.com MARCH 2017 3 A CAUTIONARY TALE IN THE USE OF NON-COMPETE AGREEMENTS BY DOUGLAS R. HIRSCH AND JENNIFER ROSSAN Employers should give careful consideration to the inclusion of non-competition provisions in employment agreements for low-level employees. The New York Attorney General (the “AG”) recently announced that it settled investigations with two companies over their use of non-compete provisions in employment agreements for low-level employees. Policing non-compete provisions is a new regulatory frontier for the AG and it is flexing its regulatory muscle pursuant to § 63 (12) of New York’s Executive Law, which provides the AG with authority to enjoin businesses from utilizing “unconscionable contractual provisions.” 1 The AG investigated and recently settled charges with two companies—Law 360 and Jimmy John’s Gourmet Sandwiches—based on their use of “unconscionable” non-compete provisions in employment contracts. In the Law 360 matter, the Attorney General found that Law 360’s policy of requiring the majority of its employees—including “rank and file” editorial staff who had little to no knowledge of any trade secrets or confidential information—to sign a one-year non-compete was contrary to New York law. Because these employees did not have access to trade secrets and confidential information, the AG charged that the noncompete was not narrowly tailored to Law 360’s legitimate business interests and did nothing more than baldly restrain competition. As part of the settlement, Law 360 agreed that, going forward, only a small number of its highly paid executives would be required to sign non-compete agreements. Similarly, in its investigation of Jimmy John’s, the AG found that some franchisees required sandwich makers to sign two-year non-competes that prevented them from working at any establishment within a two-mile radius of a Jimmy John’s location that made more than 10% of its revenue from sandwiches. The AG charged that these employees “are highly unlikely to be privy to trade secrets or confidential customer lists or to have unique skills.” Consequently, the AG concluded that the non-compete provisions were “unconscionable”. As part of its settlement, Jimmy John’s agreed to inform its franchisees that the AG found the noncompete provisions to be unlawful and void. In both of these cases, the AG focused on the effect of a non-compete provision on a low-level employee. Companies should consider avoiding the use of non-compete provisions for administrative personnel and other non-managerial staff. Such provisions are appropriate and are more likely to withstand scrutiny when included in the employment agreements of senior personnel and individuals with unique skills—as long as the provisions are drafted to protect a legitimate business interest. Non-competes are Non-competes are more likely to be upheld if they are designed to ensure that a departing employee will not provide a competitor with an unfair competitive advantage by supplying it with the former employer’s trade secrets and/or confidential information. more likely to be upheld if they are designed to ensure that a departing employee will not provide a competitor with an unfair competitive advantage by supplying it with the former employer’s trade secrets and/or confidential information. However, it is important to note that requiring all employees—including lower-level staff—to adhere to confidentiality provisions that protect proprietary information and trade secrets does not implicate the same concerns, because enforcement of such provisions does not restrain the employee from working elsewhere. Therefore, confidentiality provisions should be used in all employment agreements where the employee’s position involves access to confidential information or trade secrets. Even when a non-compete is appropriate— such as in the case of a senior manager whose departure would create an unfair advantage for a competitor—its scope and duration must be narrowly tailored to protect a legitimate business interest. To be enforceable in New York, a non-compete must be reasonable in time and scope, necessary to protect the employer’s legitimate interests, not harmful to the public and not unreasonably burdensome to the employee. In addition to confidentiality provisions, employers should strongly consider the use of a non-solicitation provision in their employment agreements. Non-solicitation provisions are generally enforceable if they are reasonably related to the employer’s interest in protecting relationships with clients the employee worked with or became familiar with while employed. But like non-compete agreements, non-solicitation provisions must also be limited in time and scope. 1 See New York Executive Law § 63 (12). Douglas R. Hirsch is the Partner in charge of Sadis & Goldberg’s Litigation Practice. Mr. Hirsch’s practice is focused on hedge fund and securities litigation and he regularly represents both investors and investment advisers in a wide range of investment-related disputes, such as fraud, breach of fiduciary duty, derviative actions, class actions, and SEC enforcement actions. Mr. Hirsch’s 25 years of litigation experience has encompassed a broad range of trials, class action litigations, arbitrations and mediations. Doug can be reached at 212.573.6670, or at [email protected]. Jennifer Rossan practices in the firm’s Litigation Group. Ms. Rossan has extensive trial experience and has obtained successful verdicts for her clients in a number of large federal court trials. Ms. Rossan focuses her practice on a wide range of financial services disputes including SEC and FINRA enforcement actions. She also litigates complex commercial matters and employment law matters, including claims of wrongful termination and harassment, and negotiates and reviews employment contracts. Jennifer can be reached at 212.573.8783, or [email protected]. S&G INVESTMENT MANAGER ALERT 4 THE QUESTION ON ALL OF OUR MINDS: WHAT IMPACT WILL THE TRUMP ADMINISTRATION HAVE ON THE HEDGE FUND INDUSTRY? BY RON S. GEFFNER AND YEHUDA BRAUNSTEIN Reprinted with permission of Hedgeweek With the Trump administration in the White House, regulatory uncertainty permeates the financial services industry. While many on Wall Street are very excited by the Trump presidency, others are approaching this new era with trepidation. President Trump is unpredictable in many ways, and the industry eagerly awaits his actions hoping that the financial markets do not respond negatively and create chaos in the global marketplace. While we should expect that the Trump administration will aim to cut back financial regulation implemented during the last eight years, it is unrealistic to expect that these laws will be eliminated in their entirety. Though the financial markets have been extremely volatile of late and react very swiftly upon the announcement of any meaningful global news, various aspects of recent financial regulation have been positive for the industry. For example, the requirement for many investment advisers to register with the U.S. Securities and Exchange Commission (“SEC”), one of the requirements of The Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) which was signed into federal law by President Obama to be effective as of July 21, 2010, in retrospect, has been viewed as a positive change within the industry. Understandably, when initially introduced in 2010, many asset managers located within the United States and abroad that were required to register as investment advisers with the SEC as a result of Dodd-Frank were opposed to the changes. However, many advisers, investors and regulators now agree that requiring a larger number of advisers to be accountable to higher regulatory standards has created an environment where investors and counterparties have more confidence in the oversight of those managers and the industry as a whole. It is also important to remember that any time the government or a regulator changes the laws, rules or regulations, those businesses affected incur capital and opportunity costs in connection with analyzing the changes in law and implementing operational changes to comply with the new laws. For example, when Dodd-Frank was originally enacted, at the time of registration, those investment advisers that were required to register as advisers with the SEC were required to adopt written policies and procedures and invested capital into their operations and technology to support compliance. Therefore, we expect that caution will be exercised before significant change is made to avoid the various costs associated with implementing change. A case in point is the new DOL Rule (discussed earlier in this newsletter), originally set to take effect on April 10, 2017. Investment advisers impacted by the DOL Rule, have already been forced to analyze the DOL Rule and its impact on their businesses, and some advisers have already begun to implement changes to their operations and procedures. The DOL Rule has been the subject of much debate. While some industry experts believe that the DOL Rule is onerous and materially increases the costs associated with providing services to clients, supporters of the DOL Rule believe that it is necessary to protect investors against brokers who are unnecessarily selling high-fee investments to their clients. On February 3, 2017, President Trump signed a memorandum to delay the DOL Rule by six (6)-months. On March 1, 2017, the DOL issued a proposed rule, which will extend the applicability date of its fiduciary rule, including the Best Interest Contract Exemption, from April 10, 2017 to June 9, 2017, a 60-day delay. If the DOL Rule is ultimately modified or even eliminated, some advisers may have to reverse their recently-implemented changes. In conclusion, we do not believe that regulations in the financial industry will be eliminated in their entirety. For example, if the requirement to register as an investment adviser with the SEC is materially modified or no longer required, we expect that many investment advisers would maintain their registration as it is perceived to be a competitive advantage compared to those managers that are not registered. While we expect the Trump administration to improve the financial services industry by having more balanced regulations, we believe that this administration will quickly realize that there are a lot of reasonable and sensible regulations currently in place that are working well, and that eliminating rules wholesale can create chaos in the financial markets and may come at a high price to their constituents. Ron S. Geffner is a Partner and Head of the Financial Services Group of Sadis & Goldberg LLP. He regularly structures, organizes and counsels private investment vehicles, investment advisory organizations, broker-dealers, commodity pool operators and other investment fiduciaries. Mr. Geffner also routinely counsels clients in connection with regulatory investigations and actions. His broad background with federal and state securities laws and the rules, regulations and customary practices of the SEC, Financial Industry Regulatory Authority, Commodity Futures Trading Commission and various other regulatory bodies enables him to provide strategic guidance to a diverse clientele. He provides legal services to hundreds of hedge funds, private equity funds and venture capital funds organized in the United States and offshore. Ron can be reached at 212.573.6660, or at [email protected]. Yehuda M. Braunstein heads up the Family Office practice and is also a member of the firm’s Financial Services and Corporate Groups. Mr. Braunstein counsels family office clients in connection with all aspects of their operations, including formation issues, governance and compensation issues, transactional and day-to-day matters, as well as compliance issues. Mr. Braunstein’s practice also focuses on investment funds, securities, joint ventures and investment advisers. He regularly structures and organizes hedge funds, private equity funds (including real estate, distressed and lending funds), funds of funds, separately managed accounts and hybrid funds. Additionally, he advises private fund managers on structure, compensation, employment and investor issues, and other matters relating to management companies. Mr. Braunstein also structures and negotiates seed investments and operating agreements. He provides ongoing advice to investment advisers on securities law issues, including SEC filings. His practice also involves counseling clients in SEC regulatory matters, including compliance issues related to registered advisers, as well as conducting mock audits. Yehuda can be reached at 212.573.8029, or ybraunstein@ sglawyers.com. MARCH 2017 5 COMPLIANCE DEADLINES – Second Quarter 2017 There are many regulatory filings and compliance forms that investment managers need to complete throughout the year. Below is a list of some of the key compliance dates for the second quarter of 2017. Please note that this is general advice that is applicable to most investment advisers with a December 31st fiscal year end. This list is not exhaustive and contains some best practice compliance suggestions. DATE ACTIVITY DATE ACTIVITY April 1 April 10 April 15 April 30 May 15 May 30 May 31 ERISA Schedule C of Form 5500 Disclosure. Adviser may be required to report certain information to its ERISA plan clients and investors for their use in completing Department of Labor Form 5500. Form 13H. Form 13H (large trader) quarterly filing is due for Q1 2017 for advisers that already have Form 13H filing obligation and have changes to any of the information reported. Form PF for Large Liquidity Fund Advisers. Large liquidity fund advisers must file Form PF with the U.S. Securities and Exchange Commission (“SEC”) on the IARD system within 15 days of each fiscal quarterly end. Brokerage Committee Meeting. Conduct quarterly brokerage committee meeting. Private Fund Audited Financial Statements. Distribute audited financial statements to investors for any private investment fund for which the adviser or a related person has custody of the fund’s assets, assuming the adviser is registered with the SEC or a state authority. Annual Delivery of Form ADV Part 2. Send to all clients and fund investors a copy of the adviser’s Form ADV Part 2, assuming the adviser is registered with the SEC or a state authority. 1 U.S. FATCA Notification Deadline. Deadline by which all Cayman Financial Institutions (“FIs”) and Non Reporting FIs are required to make certain notifications as to their Common Reporting Standard (“CRS”) reporting status to the Cayman Islands Tax Information Authority (the “TIA”), as the jurisdiction’s competent authority for purposes of the CRS. Access Person Quarterly Transaction Reports. Collect quarterly reports from access persons for their personal securities transactions. Code of Ethics and Compliance Manual. Distribute code of ethics and compliance manual to employees, including acknowledgment form. Annual Filers – Form PF with SEC. Private equity funds and smaller private fund advisers with a December 31st fiscal year end, assuming the adviser is registered with the SEC. Form 13F. File any required Form 13F with the SEC. Privacy Policy Notices. Send an annual privacy notice to every natural person client or fund investor, which could be included with the delivery of Form ADV Part 2 to clients and fund investors. 2 Form PF for Large Hedge Fund Advisers. Large hedge fund advisers must file Form PF within 60 days of each quarter end on the IARD system. U.S. FATCA Reporting Deadline. First reporting date deadline to the Cayman Island TIA in respect of Reportable Accounts for reporting year 2016. It is necessary for Cayman Reporting FIs to provide a NIL report where they have no Reportable Accounts. S&G INVESTMENT MANAGER ALERT 6 June 15 June 30 Anniversary Date of Filing As Necessary Quarterly Employee Compliance Training. Conduct a quarterly employee training session to review requirements under the adviser’s written compliance policies and procedures, including the code of ethics, as well as any material changes to these materials. Maintain list of attendance. 3 Form 13H. Review transactions and assess whether Form 13H needs to be amended. Form PF. Review assets/holdings to determine filing requirements. PQR (For Registered Commodity Pool Operators). Small and mid-sized CPOs quarterly reports to be filed using NFA Easy File System. CRS Notifications. The Cayman Islands TIA announced a soft opening for the first year of the CRS. CRS registrations will be accepted up to June 30, 2017 (original deadline was April 30, 2017). Annual Form D. Amendment due on or before anniversary date of prior Form D filing(s). CPO/CTA Questionnaires. Due on or before anniversary date, and promptly when material information changes. Schedule 13D. Must be filed within 10 days after acquisition of beneficial ownership of 5% of a voting class of a company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934. See: https://www.sec.gov/answers/sched13.htm Forms 3, 4 & 5 (Sec 16 Filings). Corporate insiders—meaning a company’s officers and directors, and any beneficial owners of more than 10% of a class of the company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934—must file with the SEC a statement of ownership regarding those securities. See: https://www.sec.gov/answers/form345.htm Bureau of Economic Analysis Filings (“BEA”) (BE-11, BE-13, BE-577, etc.). Should the BEA contact you via letter or otherwise, you are required to respond to this inquiry by law. Please contact us should the BEA contact you to discuss. A Form BE-577 is required from every U.S. person who had direct transactions or positions with a foreign business enterprise in which it had a direct and/or indirect ownership interest of at least 10% of the voting stock if an incorporated business enterprise or an equivalent interest if an unincorporated business enterprise at any time during the reporting period. 1 An adviser is required to deliver Form ADV Part 2 to clients; it is not required to deliver Form ADV Part 2 to investors in a pooled investment vehicle. However, it is considered a best practice and it is recommended that an adviser delivers Form ADV Part 2 to each investor in a pooled investment vehicle. 2 Although Regulation S-P does not specify the exact day by which the annual privacy notice must be sent, May 30 seems to be an appropriate date because the mailing can be coordinated with delivery of Form ADV Part 2 (which can include the Privacy Policy) to clients or fund investors. 3 The Investment Advisers Act of 1940 does not specify that any training session is necessary, and therefore the date on which training should occur is not specified. However, a registered adviser must distribute and receive signed acknowledgements of changes to its code of ethics. Since the code (as well as an adviser’s compliance policies and procedures) may be amended as part of an adviser’s annual review, as well as at any other time, quarterly training should help to keep personnel up-to-date regarding policies and procedures and otherwise remind personnel of their compliance obligations. SEC & FINRA RELEASE 2017 EXAM PRIORITIES BY DANIEL G. VIOLA The Securities and Exchange Commission (“SEC”) released their Exam Priorities for 2017. The SEC’s 2017 priorities are organized around the following areas: (1) examining matters of importance to retail investors; (2) focusing on risks specific to elderly and retiring investors; and (3) assessing marketwide risks. FINRA also issued its 2017 Regulatory and Examinations Priorities Letter, which identifies compliance, supervision and risk management as areas of focus. FINRA will be introducing a compliance calendar and a directory of service providers as tools to assist firms. FINRA will also be initiating electronic, off-site reviews to supplement traditional on-site cycle examinations. These off-site exams will affect only a select group of firms that are not currently scheduled for a cycle exam in 2017. The SEC priorities address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges and municipal advisers. Under each category, a number of key exam areas include: 1. Protecting Retail Investors: ■ Electronic Investment Advice ■ Wrap Fee Program ■ Exchange-Traded Funds ■ Never-Before Examined Investment Advisers ■ Recidivist Firms and Their Employees ■ Multi-Branch Advisers ■ Share Class Selection 2. Focusing on Senior Investors and Retirement Investments: ■ ReTIRE – Retirement-Targeted Industry Reviews and Examinations ■ Public Pension Advisers ■ Senior Investors 3. Assessing Market-Wide Risks: ■ Money Market Funds ■ Payment for Order Flow ■ Clearing Agencies ■ FINRA ■ Regulation Systems Compliance and Integrity ■ Cybersecurity ■ National Securities Exchanges ■ Anti-Money Laundering 4. Other Initiatives: ■ Municipal Advisers ■ Transfer Agents ■ Private Fund Advisers The FINRA Examination Priorities Letter includes a long list of topics that FINRA will prioritize this year, including product suitability, excessive and short-term trading of long-term products, outside business activities, social media and electronic communications, liquidity risk, credit risk policies, cybersecurity, segregation of client assets, Regulation SHO, and anti-money laundering and suspicious activity monitoring. FINRA’s Top Five Exam Priorities Include: ■ High-Risk and Recidivist Brokers ■ Bad Sales Practices ■ Practices that Lead to Financial Risk ■ Conduct that Enhances Operational Risks ■ Market Manipulation To read the SEC & FINRA’s 2017 Exam Priorities, please go to the links below: https://www.sec.gov/about/offices/ocie/ national-examination-program-priorities-2017.pdf http://www.finra.org/sites/default/files/2017- regulatory-and-examination-priorities-letter.pdf Daniel G. Viola is a Partner and the Head of the Regulatory and Compliance Group. He structures and organizes brokerdealers, investment advisers, funds and regularly counsels investment professionals in connection with regulatory and corporate matters. Mr. Viola served as a Senior Compliance Examiner for the Northeast Regional Office of the SEC, where he worked from 1992 through 1996. During his tenure at the SEC, Mr. Viola worked on several compliance inspection projects and enforcement actions involving examinations of registered investment advisers, ensuring compliance with federal and state securities laws. Mr. Viola’s examination experience includes financial statement, performance advertising, and disclosure document reviews, as well as, analysis of investment adviser and hedge fund issues arising under ERISA and blue sky laws. Dan can be reached at 212.573.8038, or [email protected]. Gregory Hartmann Joins Sadis & Goldberg’s Corporate and Financial Services Practices Sadis & Goldberg LLP is proud to announce the addition of Gregory Hartmann as member of the firm’s Corporate and Financial Services Groups. Mr. Hartmann has extensive experience representing assets managers, investment banks, insurance companies, and other clients, on a wide variety of transactional and regulatory matters. “Based upon his extensive industry experience, Greg has a comprehensive understanding of the challenges that businesses face and a talent for helping them understand their legal risks and manage them, particularly in the financial services industry” said Ron Geffner, a member of the firm’s Executive Committee. “His in-house experience gives him a unique capability to anticipate what our clients need and advise them most effectively.” Prior to joining the firm, Mr. Hartmann was Corporate Counsel and Vice President in the Retirement Law Group of the Prudential Insurance Company of America, where he supported the pension risk transfer business, including U.S. pension buy-outs and international longevity reinsurance. Before that, Mr. Hartmann was Deputy General Counsel at Pine- Bridge Investments and Associate General Counsel at AIG Investments, where he was the head of the legal department’s Asset Management Group in New York. At AIG, Mr. Hartmann advised on registered and private funds, managed accounts, regulatory and compliance issues, and sales and marketing matters. MARCH 2017 7 Before joining AIG, Mr. Hartmann was the general counsel of a private equity and hedge fund manager, where he built the legal and compliance department. Prior thereto, he was general counsel of an investment bank, and also a venture capital firm. Earlier in his career, Mr. Hartmann was in private practice at Weil, Gotshal & Manges, and also at Shea & Gould, in New York. Mr. Hartmann earned his J.D. from Columbia University’s School of Law, his M.A. from Northwestern University, and his B.A., magna cum laude, from the University of Notre Dame. Mr. Hartmann is a member of the American College of Investment Counsel, and is admitted to practice in New York. Upcoming Events Weston Hill Global Private Wealth Forum April 25, 2017 Roosevelt Hotel 45 E 45th Street, New York City 13D Monitor Active-Passive Investor Summit April 27, 2017 The Plaza Hotel, New York City NCS Regulatory Compliance Conference June 21 – 23, 2017 Eau Palm Beach Resort & Spa Manalapan, FL Sadis & Goldberg’s 10th Annual Alternative Investment Management Seminar November 8, 2017 The New York Athletic Club 180 Central Park South, New York City Ron S. Geffner, Partner and head of the Financial Services Group, will be speaking at Weston Hill Global Private Wealth Forum on April 25, 2017 on hedge funds. The event will be held at the Roosevelt Hotel, 45 E 45th Street in New York City. For more information, please go to: http://www.globalprivatewealth. org/index.php. Sam Lieberman, Partner and member of the Securities Litigation Group, will be moderating a panel at the 13D Monitor Conference in New York City on April 27, 2017. The event will take place at the Plaza Hotel, New York City. For more information, please go to: http://www.13dmonitorconference.com/ Dan Viola, Partner and head of the Regulatory and Compliance Group, will be speaking at the NCS Regulatory Compliance Conference on June 21, 2017 in Manalapan, FL. He will be speaking on four panels. The panels are entitled “Risk Management and CCO Liability”, “Preparing for a Regulatory Exam”, “Creating a Culture of Compliance: Internally and with Regulators”, and “Private Equity and Alternative Investments: Advancing Your Strategy”. For more information, please go to: https://www. eiseverywhere.com/ehome/index.php?eventid=194010& Sadis & Goldberg LLP will be hosting the 10th Annual Alternative Investment Management Seminar on Wednesday, November 8, 2017. This seminar will include discussions on the latest trends and issues relevant for private investment funds to be successful in today’s business environment. We practice law but we live business. 551 Fifth Avenue, 21st Fl., New York, NY 10176 212.947.3793 Any U.S. federal tax advice included in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal tax penalties. The information contained herein was prepared by Sadis & Goldberg LLP for general information purposes for clients and friends of Sadis & Goldberg LLP. Its content should not be construed as legal advice, and readers should not act upon the information in this newsletter without consulting counsel. This information is presented without any representation or warranty as to its accuracy, completeness or timeliness. Transmission or receipt of this information does not create an attorney-client relationship with Sadis & Goldberg LLP. 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