Greyline Insights Q1 2022

Greyline Insights Q1 2022

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The Next Chapter

The first quarter of 2022 was eventful, to say the least. With the uptick in COVID-19 cases early in the quarter, we were sent back to our work from home environments and the “getting back to normal” momentum came to a screeching halt. Later in the quarter, we were met with uncertain geopolitical events and devastation in parts of the world. We’re all acutely aware of those who are suffering, and our hearts and thoughts go out to everyone impacted.

As we enter the second quarter, there is still some uncertainty in the markets and across the globe. However, spring is ushering in some exciting developments for us. We’re getting back into offices, meeting with clients and colleagues around the country and continuing to build community with our new colleagues at IQ-EQ. As we’ve expressed previously, integrating Greyline under the IQ-EQ brand gives us the unique opportunity to combine the best attributes from each legacy firm into one cohesive entity. We’re excited to be fully rebranding to IQ-EQ later this month as it will further our mission to provide our clients with a broad range of services that are the best in the industry.

In this issue of Greyline Insights, we address some of the SEC proposed rules and how they could impact our clients. We are also highlighting key regulatory updates from Q1, including numerous notable compliance violations and several important updates from the SEC.

Talia Brandt



SEC Proposes Sweeping Reforms for RIAs

In the first months of 2022, the Securities and Exchange Commission (“SEC”) has announced a number of rule proposals that, in final form, will likely have an effect on our clients and our industry. Below are summaries of the relevant proposed rules.

Private Fund Proposed Reforms

In recent years, and in response to an increase to $18 billion in gross assets of private funds, the SEC has seen a need to enhance regulation and transparency in an area that had previously remained more private to the general public. The proposed reforms are meant to increase visibility, establish requirements on certain practices and prohibit activity that is contrary to the best interest of investors and the public. The proposed rule will require the following of private fund advisors:

  • Distribute quarterly statements to private fund investors which would:
    • Provide details related to all fees and expenses paid by the private fund during the reporting period.
    • Disclose information regarding compensation or other amounts paid by the private fund’s portfolio investments to the adviser.
    • Inform investors on the private fund’s performance (specific to liquid or illiquid funds).
  • Remove the permissibility to conduct surprise audits and require private funds to be audited at least annually and upon liquidation and distributed to investors promptly after the completion of the audit.
  • Obtain a fairness opinion from an independent, third-party provider in connection with an adviser-led secondary transaction. The adviser would also be required to distribute to investors a summary of any material business relationships the independent opinion provider has or had within the past two years with the adviser.
  • Prohibit practices which may be contrary to public interest, including charging of certain fees and expenses, seeking reimbursement of limitation of liability, reducing clawback or borrowing from an investor.
  • Prohibit provision of preferential terms to certain investors regarding redemptions or information about portfolio holdings, unless disclosed to current and prospective investors.
  • Document annual reviews in writing for all registered advisers.

The SEC fact sheet can be found here.

Cybersecurity Risk Management

Private fund advisers, like many other businesses, increasingly rely on technology to operate their funds, which leaves them vulnerable to cybersecurity failures and attacks that could harm investors. The proposed rule will require the following:

  • Adoption and implementation of policies reasonably designed to address cybersecurity risks with certain elements that advisers would be required to address in these policies.
  • Reporting of significant cybersecurity incidents by submitting a new Form ADV-C.
  • Amendment of Form ADV Part 2A to disclose cybersecurity risks and incidents to an adviser’s clients.
  • Maintenance of certain records regarding cybersecurity under the Books and Records Rule.

The SEC fact sheet can be found here.

Modernization of Beneficial Ownership Reporting

The SEC Exchange Act (the “Exchange Act”) Sections 13(d) and 13(g) require that an investor who beneficially owns more than 5% of a covered class of securities must report such beneficial ownership through a Schedule 13D or 13G, and the SEC is considering changes to the filing deadlines embedded in the rule.

The proposed amendments in this area would:

  • Shorten the initial filing deadline from 10 days to 5 days, and require that amendments be filed within one business day, among other filing deadline requirements for certain 13G filers.
  • Provide that holders of certain derivative securities will be “deemed” beneficial owners of the referenced equity securities.
  • Clarify the circumstances under which two or more persons have formed a “group” under the Exchange Act and provide new exemptions to permit investors to:
    • Communicate and consult with each other.
    • Jointly engage with issuers.
    • Execute certain transactions without being subject to regulation.

The SEC fact sheet can be found here.

Table of Contents

Q1 2022 Regulatory Updates

Upcoming Events

  • April 24 – 27: GAIM Ops Cayman – We are sponsoring and attending the event, which will take place at The Ritz-Carlton, Grand Cayman
  • April 27 – 28: Private Equity International CFOs & COOs Forum, New York – Matt Okolita, Managing Partner, Greyline, will be on a panel discussing the future of PE compliance. We are also an event sponsor for the event, which will take place at the Sheraton New York Times Square Hotel.
  • May 12: Alternative Investment ConferenceWe are attending the event, which will take place at The Carolina Inn in Chapel Hill, NC.
  • May 10 – 11: Women of Silicon ValleyWe are attending this event at the Marriott Marquis in San Francisco.
  • May 26 – 27: 2nd Annual VC Latam Summit – We are sponsoring and attending this event in Miami.

Greyline Employee Spotlight: Tierney Mason

Tierney Mason is a Vice President at Greyline. She joined the company 18 months ago, and while she’ll always be a California girl, she is currently based in Chicago.

Q. What is your favorite thing about working for Greyline?

A. My coworkers have made each engagement I work on a productive, enjoyable experience, and they have become a terrific resource for me, even working remotely.

Q. What made you decide to work in the compliance field?

A. My entry into compliance was born out of having a law degree and not feeling at home practicing law. I much prefer the work and my relationships with my clients in a consultant capacity.

Q. How would you explain what you do to a 5-year-old?

A. I help the people with the money follow the rules. I explain it to adults this way too!

Q. What gets you out of bed in the morning?

A. Hungry pets are great for this.

Q. What are your hobbies outside of work?

A. I’ve been on a recreational bocce team for years!



Listen Up: The next episode of our podcast, Between the Lines, is coming soon! Keep an eye out for the new show featuring our compliance technology, gVue. Catch up on all the episodes now!

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Regulatory Updates

Investment Adviser and Broker-Dealer Compliance

SEC Charges NC-Based Investment Adviser, President, For Not Providing Records to Examiners

On Jan. 4, the SEC announced charges against North Carolina-based Bóveda Asset Management, Inc., as well as owner and president George Kenneth Witherspoon, Jr., for several violations, including failing to provide required books and records during an SEC examination.

The SEC’s complaint says the Commission requested books and records as part of an investment adviser examination in September 2019, but neither Bóveda nor Witherspoon have produced the materials. The SEC also claims Bóveda is improperly registered with the SEC as an Internet investment adviser; that Bóveda and Witherspoon have custody of client funds but have not complied with requirements to safeguard the assets; and that both made material misstatements in omissions in Bóveda’s Forms ADV filed between 2014 and 2021.

The SEC is seeking permanent injunctions from future violations of these provisions, as well as civil monetary penalties.

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SEC Issues Proposal for T+1

On Feb. 9, the SEC voted to propose rule changes to reduce risks in the clearance and settlement of securities, most notably by shortening the standard settlement cycle for most broker-dealer transactions from two business days after the trade (T+2) to one business day (T+1).

The SEC said market volatility amid both the COVID-19 pandemic starting in March 2020, as well as during a spike of interest in “meme stocks,” highlighted potential vulnerabilities in the U.S. securities market that shortening the standard settlement cycle and improving institutional trade processing can mitigate.

The proposed changes would:

  • Shorten the standard settlement cycle from two business days after trade (T+2) to one business day after trade (T+1). This would be the third such shortening – the cycle was cut from T+5 to T+3 in 1993, then again from T+3 to T+2 in 2017.
  • Delete Exchange Act Rule 15c6-1(c), eliminating the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.
  • Improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations.
  • Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers.

Read More

SEC Proposes Rule Amendments to Modernize Beneficial Ownership Reporting

On Feb. 10, the SEC announced it had proposed rule amendments governing beneficial ownership reporting under Exchange Act Sections 13D and 13G.

The proposed amendments to Regulation 13D-G would:

  • Accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports. For Schedule 13D, the initial filing deadline would be shortened from 10 days to five days, and amendments must be filed within one business day. For certain schedule 13G filers (namely qualified institutional investors and exempt investors), the initial filing deadline would be shortened from 45 days after year-end to five business days after the end of the month in which the investor beneficially owns more than 5% of the covered class. Meanwhile, for passive investors, Schedule 13G filers’ initial filing deadline would be shortened from 10 days to five days. Finally, all Schedule 13G filers would have to file an amendment five business days after the month in which a material change occurred rather than 45 days after the year in which any change occurred.
  • Expand the application of Regulation 13D-G to certain derivative securities.
  • Clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations.
  • Require that Schedules 13D and 13G be filed using a structured, machine-readable data language.

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SEC Charges Robo-Adviser With Misleading Clients

On Feb. 10, the SEC charged New York-based robo-adviser Wahed Invest, LLC with making misleading statements and breaching its fiduciary duty, and also for compliance failures related to its Shari’ah advisory business.

The SEC alleges that from September 2018 through July 2019, Wahed Invest advertised the existence of its own proprietary funds even though no such funds existed. It also promised investors that it would periodically rebalance their advisory accounts, but it did not do so.

Additionally, the SEC stated that Wahed Invest seeded the launch of a proprietary ETF in July 2019 with clients’ advisory assets without prior disclosure to clients of any conflicts of interest.

Lastly, the SEC says Wahed Invest marketed itself as providing advisory services compliant with Islamic, or Shari’ah law, but it did not adopt and implement written policies and procedures addressing how it would assure Shari’ah compliance.

Wahed Invest did not admit nor deny the SEC’s findings, but did agree to a cease-and-desist order, a $300,000 penalty and to retain an independent compliance consultant.

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SEC Charges 12 Additional Financial Firms for Failure to Meet Form CRS Obligations

On Feb. 15, the SEC announced that six investment advisers and six broker-dealers have agreed to settle charges of failing to file and deliver client or customer relationship summaries (Form CRS) to retail investors by the required deadline, and in some cases failed to include all information necessary to satisfy Form CRS requirements.

Form CRS was adopted on June 5, 2019, and required SEC-registered investment advisers and broker-dealers to file those forms with the SEC, begin delivering them to prospective and new retail investors by June 30, 2020, and deliver them to existing retail investor clients or customers by July 30, 2020. Firms also were required to prominently post their current Form CRS on their website, if they had one.

The SEC’s orders find that each of the charged firms missed those regulatory deadlines, and that certain firms failed to include information and language specifically required for Form CRS.

The following firms did not admit nor deny the findings but agreed to be censured, to cease and desist from violating the charged provisions and to pay civil penalties:

  • Arthur Zaske & Associates, LLC, a Bingham Farms, Michigan-based investment adviser ($15,000 civil penalty)
  • Banyan Securities, LLC, a Greenbrae, California-based broker-dealer ($10,000 civil penalty)
  • Church, Gregory, Adams Securities Corporation, a Decatur, Georgia-based broker‑dealer ($10,000 civil penalty)
  • Gutt Financial Management, LLC, an Atlanta, Georgia-based investment adviser ($25,000 civil penalty)
  • Hinsdale Associates, Inc., a Hinsdale, Illinois-based investment adviser ($25,000 civil penalty)
  • K. Financial Services, Inc., a Norco, California-based broker-dealer ($10,000 civil penalty)
  • V.N.G. Investments, Inc., a Kalamazoo, Michigan-based investment adviser ($15,000 civil penalty)
  • Personal Financial Planning, Inc., a Deerfield, Illinois-based investment adviser ($25,000 civil penalty)
  • Stone Run Capital, LLC, a New York, New York-based investment adviser ($25,000 civil penalty)
  • The Winning Edge Financial Group, Inc., a Clifton, New Jersey-based broker-dealer ($10,000 civil penalty)
  • Wall Street Access, a New York, New York-based broker-dealer ($97,523 civil penalty)
  • Watermark Securities, Inc., a New York, New York-based broker-dealer ($25,000 civil penalty)

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SEC Charges Investment Adviser With Failing to Disclose Conflicts

On March 2, the SEC charged Cambridge Investment Research Advisors, Inc. (“CIRA”), an Iowa-based registered investment adviser, with failing to disclose material conflicts of interest and breaching its duty of care related to its selection of mutual funds and wrap accounts for clients.

The SEC says that since at least 2014, CIRA repeatedly breached its fiduciary duty to advisory clients by failing to disclose material conflicts of interest. The complaint alleges that CIRA invested client assets in certain mutual funds and money market sweep funds that generated millions of dollars in revenue-sharing payments to an affiliated broker-dealer, Cambridge Investment Research, Inc., instead of lower-cost share classes and investment options that would have yielded less or no revenue sharing. The SEC says these undisclosed investment practices also allowed CIRA to avoid paying millions of dollars in transaction fees.

The complaint also says CIRA converted hundreds of accounts to its more expense wrap account program without adequate disclosure, and without analyzing whether doing so was in its clients’ best interests. Finally, the SEC says CIRA failed to disclosed that its investment adviser representatives received compensation (forgivable loans) in exchange for meeting certain criteria, such as maintaining certain asset levels and tenure with CIRA.

The SEC seeks a permanent injunction, disgorgement including prejudgment interest, and civil penalties.

Read More

City National Rochdale to Pay More Than $30 Million for Undisclosed Conflicts of Interest

On March 3, the SEC announced that registered investment adviser City National Rochdale, LLC (“CNR”) has agreed to pay more than $30 million to settle charges that its undisclosed conflicts of interest defrauded current and prospective clients.

The SEC says that from around 2016 and 2019, CNR failed to inform its clients that it invested their assets in proprietary mutual funds that generate fees for CNR and its affiliates, rather than in competitor funds whose fees might have been lower. The SEC also says during that same time period, CNR failed to inform some prospective clients that they could invest in those proprietary funds at a lower cost. Clients who opened accounts with certain CNR affiliates didn’t pay annual marketing or distribution fees, known as 12b-1 fees, but most clients who invested with CNR through their own financial advisors did.

CNR did not admit nor deny the SEC’s findings, but did agree to cease and desist from committing or causing any future violations of these provisions, to be censured, to provide notice of the settlement to affected advisory clients, to retain an independent compliance consultant; and to pay disgorgement, prejudgment interest and a civil penalty totaling $30,361,803.

The money CNR pays will be placed into an SEC Fair Fund for distribution to harmed investors.

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SEC Division of Examinations Announces 2022 Examination Priorities

On March 30, the SEC’s Division of Examinations announced its 2022 examination priorities, including several significant areas of focus and many perennial risk areas.

The Division’s main priorities this year will include:

  • Private funds: Examinations will review issues under the Advisers Act, including an adviser’s fiduciary duty, and will assess risks, including a focus on compliance programs, fees and expenses, custody, fund audits, valuation, conflicts of interest, disclosures of investment risks, and controls around material nonpublic information, among other things.
  • Environmental, social and governance (ESG) investing: Examinations will typically focus on whether RIAs and registered funds are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices.
  • Retail investor protections: Examinations will focus on how registrants are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors’.
  • Information security and operational resiliency: Examinations will continue to review whether firms have taken appropriate measures to safeguard customer accounts and prevent account intrusions; oversee vendors and service providers; address malicious email activities, such as phishing or account intrusions; respond to incidents, including those related to ransomware attacks; identify and detect red flags related to identity theft; and manage operational risk as a result of a dispersed workforce.
  • Emerging technologies and crypto-assets: RIA and broker-dealer examinations will focus on firms that are, or claim to be, offering new products and services, or employing new practices to assess whether operations and controls in place are consistent with disclosures made and the standard of conduct owed to investors and other regulatory obligations; advice and recommendations, including by algorithms, are consistent with investors’ investment strategies and the standard of conduct owed to such investors; and controls take into account the unique risks associated with such practices.

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Private Fund Compliance

SEC Proposes Amendments to Enhance Private Fund Reporting

On Jan. 26, the SEC proposed amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds.

Form PF provides the SEC and the Financial Stability Oversight Counsel (FSOC) with important, confidential information about private funds’ basic operations and strategies, and has created a baseline picture of the industry for use in assessing systemic risk. These proposed amendments, which are meant to further enhance investor protections, would apply to large hedge fund advisers, private equity advisers and large liquidity fund advisers.

The proposed amendments would make three main changes to Form PF:

  • Require new current reporting of certain events for large hedge fund advisers and advisers to private equity funds. For instance, large hedge fund advisers would have to file current reports within one business day of occurrences such as extraordinary investment losses, material changes in prime broker relationships, changes in unencumbered cash and more. Meanwhile, advisers to private equity funds would be required to do the same within one business day of occurrences such as the removal of a fund’s general partner or the termination of a fund.
  • Reduce the threshold for reporting as a large private equity adviser to $1.5 billion from $2.0 billion previously.
  • Require large liquidity fund advisers to report substantially the same information that money market funds would report on Form N-MFP. Forms N-MFP and PF are designed to provide a complete picture of the short-term financing markets in which money market funds and liquidity funds both invest.

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Observations from Examinations of Private Fund Advisers

On Jan. 27, the SEC Division of Examinations (“EXAMS”) published a risk alert detailing additional observations as a follow up to a 2020 Risk Alert about compliance issues observed by EXAMS staff in examinations of registered investment advisers (“RIAs”) that manage private funds (“private fund advisers”).

Among the deficiencies observed:

Conduct Inconsistent With Disclosures: EXAMS staff observed private fund advisers failing to obtain informed consent from Limited Partner Advisory Committees, Advisory Boards or Advisory Committees (“LPACs”) required under fund disclosures; failing to follow practices described in fund disclosures regarding the calculation of Post-Commitment Period fund-level management fees; failing with regard to recycling practices; and other issues.

Disclosures Regarding Performance and Marketing: EXAMS staff observed private fund advisers providing misleading track records, inaccurate performance calculations and misleading statements regarding awards to prospective or current investors; omitting material information about predecessor performance; and other issues.

Due Diligence Issues: EXAMS staff observed potential failures to conduct a reasonable investigation into an investment, follow the due diligence process described to clients or investors, and adopt and implement reasonably designed due diligence policies and procedures pursuant to the Compliance Rule.

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SEC Proposes to Enhance Private Fund Investor Protection

On Feb. 9, the SEC voted to propose new rules and amendments that would enhance regulation of private fund advisers and protect private fund investors.

The new rules would:

  • Require registered private fund advisers to distribute a quarterly statement to private fund investors with a detailed accounting of all fees and expenses paid by the private fund during the reporting period.
  • Require registered private fund advisers to cause the private funds they advise to undergo a financial statement audit at least annually and upon liquidation.
  • Require registered private fund advisers, in connection with an adviser-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the adviser and the opinion provider.
  • Prohibit all private fund advisers, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors.
  • Prohibit all private fund advisers from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors.

The SEC also is proposing to require all registered advisers, including those that do not advise private funds, to document the annual review of their compliance policies and procedures in writing.

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SEC Charges Venture Capital Fund Adviser With Misleading Investors

On March 4, the SEC charged venture capital fund adviser Alumni Ventures Group, LLC (AVG) with making misleading statements about its management fees and engaging in inter-fund transactions in breach of fund operating agreements. The SEC also charged AVG’s CEO Michael Collins with causing AVG’s violations.

The SEC says that AVG’s website and other marketing communications represented that its management fee for the VC funds it managed was the “industry standard ‘2 and 20.’” The order found that these representations were misleading because they led some investors to believe AVG would collect a 2% management fee during each year of its funds’ 10-year term, and separately collect a 20% performance fee. However, AVG’s typical practice was to assess management fees totaling 20% of an investor’s fund investment (representing 10 years of 2% annual management fees) upon the investor’s initial fund investment. Moreover, the SEC found that Collins approved of AVG employees using the “2 and 20” language.

The SEC also found that AVG made inter-fund loans and cash transfers between funds, and made loans to certain funds in violation of the funds’ respective operating agreements.

Neither AVG nor Collins admitted nor denied the SEC’s findings, but they did agree to a cease-and-desist order. AVG agreed to a censure and to pay a $700,000 penalty, while Collins agreed to pay a $100,000 penalty.

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SEC Proposes Rules to Enhance Disclosure and Investor Protection Relating to SPACs, Shell Companies and Projections

On March 30, the SEC proposed new rules and amendments to enhance disclosure and investor protection in initial public offerings by special purpose acquisition companies (“SPACs”) and in business combination transactions involving shell companies (such as SPACs) and private operating companies.

The proposed new rules and amendments would, among other things:

  • Enhance disclosures and provide additional investor protections in SPAC initial public offerings and in business combination transactions between SPACs and private operating companies (de-SPAC transactions). Disclosures would regard, among other things, SPAC sponsors, conflicts of interest, dilution and de-SPAC transactions.
  • Address the treatment under the Securities Act of 1933 of business combination transactions involving a reporting shell company and amend the financial statement requirements applicable to transactions involving shell companies.
  • Provide additional guidance on the use of projections in SEC filings to address concerns about their reliability.
  • Assist SPACs in assessing when they may be subject to regulation under the Investment Company Act of 1940.

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Insider Trading

SEC Settles Charges Against Silicon Valley Insider Trading Ring

On Feb. 7, a federal district court judge entered final consent judgments against Nathaniel Brown and Benjamin Wylam. The judgments ended the SEC’s case against a Silicon Valley insider trading ring whose members generated nearly $1.7 million in illegal profits and avoided losses by trading on confidential information of two local technology companies.

The SEC says that Brown, who served as revenue recognition manager for Infinera Corporation (NASDAQ:INFN), repeatedly tipped Infinera’s unannounced quarterly earnings and financial performance to his best friend, Wylam, between April 2016 and November 2017, when Brown left the company. The SEC says Wylan traded on this information and also tipped Naveen Sood, who owed Wylam a six-figure gambling debt. Sood traded on this information and also tipped three friends – Marcus Bannon, Matthew Rauch and Naresh Ramaiya, each of whom also illegally traded on the information.

The SEC alleges that Bannon tipped Sood with material, nonpublic information concerning his employer, Fortinet, Inc. (NASDAQ:FTNT). Sood used it to trade, and tipped Wylam and Ramaiya, who also used the information to trade.

Brown and Wylam consented to the entry of final judgments resolving all claims and permanently enjoining them from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

In parallel actions brought by the United States Attorney’s Office for the Northern District of California, Brown and Wylam each pleaded guilty to related criminal charges. Brown was sentenced to 22 months in prison and ordered to forfeit $30,000. Wylam was sentenced to one year and one day in prison and ordered to forfeit $999,000.

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Former Director of Investor Relations Charged With Insider Trading

On Feb. 22, the SEC charged John-Michael Havrilla, the former Director of Investor Relations of medical device company PAVmed Inc. (NASDAQ:PAVM), with insider trading in advance of the company’s April 2020 earnings announcement.

The SEC says that three days before the April 9, 2020 earnings release, Havrilla received a draft copy of the company’s earnings results for the fourth quarter and full year of 2019. The next day, in breach of his duties to both PAVmed and its shareholders, Havrilla allegedly purchased 227,500 shares of PAVM stock, which he then sold after the earnings release, generating profits of $80,115.

Havrilla did not admit nor deny the allegations, but he did agree to be enjoined from violations of the charged provisions, to pay civil penalties of $160,230, and to be prohibited from serving as an officer or director of a public company for five years.

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SEC Charges Seven California Residents in Insider Trading Ring

On March 28, the SEC announced insider trading charges against three software engineers employed at cloud computing communications firm Twilio, Inc. (NYSE:TWLO), as well as four family members and friends, for allegedly generating more than $1 million in collective profits via insider trading ahead of the company’s first-quarter earnings announcement on May 6, 2020.

The SEC says friends and Twilio software engineers Hari Sure, Lokesh Lagudu and Chotu Pulagam had access to various databases relevant to the company’s revenue reports. Around March 2020 they learned that Twilio’s customers had increased their usage of the company’s products and services in response to health measures regarding the COVID-19 pandemic, and said in a joint chat that Twilio’s stock price would “rise for sure.”

Sure, Lagudu and Chotu knowingly tipped off, or used the brokerage accounts of, their family and close friends – Dileep Kamujula, Sai Nekkalapudi, Abhishek Dharmapurikar and Chetan Pulagam – to trade Twilio options and stock ahead of its May 6, 2020, earnings announcement. The scheme generated more than $1 million in illegal trading profits.

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SEC Charges Infinity Q Founder With Orchestrating Massive Valuation Fraud

On Feb. 17, the SEC charged James Velissaris, former chief investment officer and founder of Infinity Q Capital Management, with overvaluing assets by more than $1 billion and pocketing tens of millions of dollars in fees.

The SEC alleges that from at least 2017 through February 2021, Velissaris orchestrated a scheme to overvalue assets held by the Infinity Q Diversified Alpha mutual fund and the Infinity Q Volatility Alpha private fund. The SEC says he altered inputs and manipulated the code of a third-party pricing services used to value the funds’ assets. Velissaris also allegedly netted more than $26 million in profit distributions through his fraudulent conduct, which was not disclosed to investors.

“We allege that, while Velissaris marketed the mutual fund as a way for retail investors to access investment strategies typically reserved for high net worth clients, what he actually offered them were fraudulent documents, altered performance results, and manipulated valuations,” says Gurbir S. Grewal, director of the SEC’s Division of Enforcement.

Velissaris also is alleged to have deceived staff by creating backdated minutes of valuation meetings that never occurred and altering documents that described Infinity Q’s valuation policies. By masking actual performance, Velissaris sought to thwart redemptions by investors who likely would have requested that their money be returned had they know the funds’ actual performance. Indeed, at times during the pandemic, the SEC says the funds’ actual values were half of what investors were told.

The SEC is seeking permanent injunctive relief, return of allegedly ill-gotten gains and civil penalties. The SEC is looking to bar Velissaris from serving as a public company officer and director.

The CFTC also announced civil charges against Velissaris, and the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against him.

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Whistleblower Program

SEC Proposed Changes to Two Whistleblower Program Rules

On Feb. 10, the SEC proposed two amendments to the rules governing its whistleblower program.

Currently, under Exchange Act Section 21F(b) and Rule 21F-11, a whistleblower who obtains an award based on an SEC-covered action also may be eligible for an award based on monetary sanctions collected in an action brought by other authorities. The proposed rule would allow the Commission to make an award for a related action that might otherwise be covered by an alternative whistleblower program, even where the alternative program has more direct or relevant connection to the related action.

The other proposed change would affirm the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount, but it would eliminate the Commission’s authority to consider the dollar amount of a potential award for the purpose of decreasing it.

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SEC Proposes Cybersecurity Risk Management Rules, Amendments for RIAs and Funds

On Feb. 9, the SEC voted to propose rules related to cybersecurity risk management for registered investment advisers, as well as registered investment companies and business development companies (“funds”). It also proposed amendments to certain rules governing investment adviser and fund disclosures.

The proposals would:

  • Require advisers and funds to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risks. The proposed rules list certain elements that advisers and funds would be required to address in their cybersecurity policies and procedures to help explain operational and other risks that could harm advisory clients and fund investors or lead to the unauthorized access to or use of adviser or fund information, including the personal information of their clients or investors.
  • Require advisers to report significant cybersecurity incidents to the Commission on proposed Form ADV-C, which would help bolster the efficiency and effectiveness of the Commission’s efforts to protect investors.
  • Enhance adviser and fund disclosures related to cybersecurity risks and incidents. Namely, the proposal would amend Form ADV Part 2A to require disclosure of cybersecurity risks and incidents to an adviser’s clients and prospective clients; funds would be required to provide similar disclosures.
  • Require advisers and funds to maintain, make and retain certain cybersecurity-related books and records.

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SEC Proposes Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies

On March 9, the SEC proposed amendments to its rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance and incident reporting by public companies.

Specifically, the proposal would:

  • Require current reporting about material cybersecurity incidents on Form 8-K. For instance, registrants would have to disclose information about a material cybersecurity incident within four days after determining it has experienced a material cybersecurity incident.
  • Require periodic disclosures regarding, among other things:
    • A registrant’s policies and procedures to identify and manage cybersecurity risks, including whether the registrant considers cybersecurity as part of its business strategy, financial planning and capital allocation.
    • Management’s role in implementing cybersecurity policies and procedures.
    • Board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk.
    • Updates about previously reported material cybersecurity incidents.
  • Require the cybersecurity disclosures to be presented in Inline XBRL.

The proposed amendments are meant to better inform investors about a registrant’s risk management, strategy and governance, as well as to notify investors of material cybersecurity incidents.

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Digital Assets

BlockFi Agrees to Pay $100 Million in Penalties, Pursue Registration of Its Crypto Lending Product

On Feb. 14, the SEC charged BlockFi Lending LLC with failing to register the offers and sales of its retail crypto lending product. The SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940 – a first-of-its-kind action.

The SEC says that from March 4, 2019, through Feb. 14, 2022, BlockFi offered and sold BlockFi Interest Accounts (BIAs) to the public. Through these BIAs, investors lent crypto assets to BlockFi in exchange for the company’s promise to provide a variable monthly interest payment. The order finds that BIAs are securities under applicable law, and the company therefore was required to register its offers and sales of BIAs but failed to do so or to qualify for an exemption from SEC registration.

The order also found that BlockFi operated for more than 18 months as an unregistered investment company because it issued securities and also held more than 40% of its total assets, excluding cash, in investment securities, including loans of crypto assets to institutional borrowers.

Finally, the order found that BlockFi made a false and misleading statement for more than two years on its website regarding the level of risk in its loan portfolio.

To settle the charges, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of BIAs, and attempt to bring its business within the provisions of the Investment Company Act within 60 days. BlockFi’s parent company also announced that it intends to register under the Securities Act of 1933 the offer and sale of a new lending product.

BlockFi agreed to pay an additional $50 million in fines to 32 states to settle similar charges in parallel actions.

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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