Dan O'Connor, co-leader of Ropes & Gray's securities & futures enforcement practice, addresses the recent uptick in how the SEC is approaching issues at fixed income and credit funds.
We've seen a recent uptick in how the SEC is approaching issues at fixed income and credit fund managers where they're taking data that they've obtained either from market participants, brokers that are in the area, or that they've obtained during exams or enforcements, and they're going through that data using analytics. So kind of a combination of big data to look at trading patterns that they find to be problematic, focusing on issues related to what are called cross trades, where an investment advisor has a product at one fund that they move to another fund, also issues around valuation, and in some instances allocation as well. It kind of brings together an issue that's a real focus for the SEC, kind of a big data analytics approach, but they also are getting at issues that they think hit retail investors. A lot of these funds are invested in by folks that are on the retail level, whether it be through mutual funds or through their 401Ks. Additionally, it also involves pension plans, and sometimes those are big investors in credit funds.
I think the difficulties that folks face is that the rules here are really particular depending on the exact product that you're managing. What you can do in a 40 Act fund versus a private fund is very different. How you document things and the policies and procedures you need to put in place for each of those, I think, can be particular, as well as making sure you have a risk-based monitoring program. A lot of folks will have a good set of compliance policies and procedures, but then the monitoring becomes a challenge because there are different issues that you face depending on the specific fund and the securities that are in play.
Over the last couple years, we've handled about five or six of these matters for different clients, so that's given us a good experience base. We also have a really strong and deep investment management bench here, and we're able to pull together folks from the enforcement space and the investment management space to provide a best practice approach. We've also partnered with a data analytics firm and we're able to go in to our clients and give them an assessment as to how they would look if the SEC came in at an exam or if their data found its way to the SEC through some market participation. We do the exact same thing, essentially, the SEC does – look at their data, look for the trends, help them identify the things they need to fix and where their monitoring could perhaps be strengthened along with, if needed, policies and procedures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.