We asked our London colleagues at that time what they thought the impact would be on the UK investment management industry (see “Regulating Brexit”), and now it is the New York office’s turn to provide our insight on the results of the U.S. election.

In a hard-fought campaign against the Democratic challenger, Hilary Rodham Clinton, President-

elect Trump ran partly on a platform of change in the status quo and a reduction in regulatory requirements for U.S. businesses. In addition to electing President-elect Trump, the American electorate also voted to maintain Republican majorities in both the U.S. House of Representatives and the U.S. Senate (collectively, “Congress”).

CONTINUED >>

On November 8, Republican candidate Donald J. Trump was elected President of the United States. President-elect Trump’s surprise election is reminiscent of the UK’s recent Brexit vote on June 23, 2016.

THE U.S. ELECTION’S POTENTIAL IMPACT ON THE ALTERNATIVE MANAGEMENT INDUSTRY

>

> The U.S. Election’s Potential Impact on the Alternative Management Industry: P1/2/3/4

> FCA Watch: P5> SEC Watch: P5

> Cybersecurity: The FCA Makes Its Position Known: P6

ISSUE 09 I DECEMBER 2016

OUR NEWSLETTER ADDRESSING THE LOCAL AND GLOBAL REGULATORY HOT TOPICS FOR FIRMS IN THE INVESTMENT MANAGEMENT INDUSTRY

2 I OPTIMIZE I DECEMBER 2016

“President-elect Trump indicated

that he believed that the Dodd-Frank Act was

a burden on U.S. banks.”

CONTINUED >>

Based on publicly available information to date, we believe that there are three (3) main areas where a Trump Administration can have a significant impact on the future regulation of investment management: (i) changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); (ii) the appointment of three (3) new SEC Commissioners, including a new Chair and (iii) a moratorium on new federal agency rulemaking.

“Dismantling” Dodd-Frank?During the campaign, President-elect Trump indicated that he believed that the Dodd-Frank Act was a burden on U.S. banks that stifled lending and that, if elected, he would dismantle the Dodd-Frank Act. Early in the transition from the current Democratic administration, President-elect Trump has posted on his new transition website that, “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

However, President-elect Trump’s transition team has indicated that, rather than a complete overhaul of the Dodd-Frank Act, it plans to focus on rescinding or

scaling back those provisions that Republicans find most objectionable. Former SEC Commissioner Paul Atkins (2002-2008), who has called the Dodd-Frank Act a “disaster,” is heading President-Elect Trump’s Financial Services Policy Implementation team and is considered to be a top contender for SEC Chair.

A preview of potential changes to the Dodd-Frank Act may be contained in the “Financial CHOICE Act” that recently passed the House Financial Services Committee. Among eliminating other provisions of the Dodd-Frank Act, the Financial CHOICE Act contains a provision that exempts private equity fund advisers from registering as investment advisers with the SEC.

SEC Commissioner AppointmentsThe SEC has five (5) Commissioners who are appointed by the President subject to Senate confirmation. Their terms last for five (5) years and are staggered.

The President designates the SEC Chairman, and no more than two (2) Commissioners may belong to the same political party. Currently, there are two (2) Commissioner vacancies and there will be a third

OPTIMIZE I DECEMBER 2016 I 3

following Chair Mary Jo White’s announcement that she will be stepping down two (2) years before the end of her term in January 2017.

There currently is one Democratic Commissioner and one Republican Commissioner. Based on Mr. Atkin’s stated views, and assuming that Mr. Atkins and/or individuals who share his views are appointed, the SEC would not impose large fines on corporate violators, focusing instead on the individuals involved and holding them accountable for their actions, and would apply a lighter touch on enforcement and corporate governance issues broadly. In addition, in 2006, Mr. Atkins dissented from rules designed to regulate hedge funds (that were overturned in the Goldstein decision but later re-imposed by the Dodd-Frank Act) partly because he did not believe that fraud was then rampant in the industry.

However, another recent candidate for SEC Chair, Debra Wong Yang, a former Los Angeles U.S. Attorney, may signal that a Trump Administration would be more focused on continuing former Manhattan U.S. Attorney Mary Jo White’s record of pursuing high-profile investigations of Wall Street firms. Significantly, current Manhattan U.S. Attorney

Preet Bharara, well-known for his aggressive prosecution of insider trading cases, has agreed to stay in his position at President-elect Trump’s request.

Moratorium on RulemakingPresident-elect Trump has vowed to "issue a temporary moratorium on new agency regulations that are not compelled by Congress or public safety."

It is likely that, following his inauguration, then-President Trump will follow the practice of past administrations of calling on federal agencies: (i) not to finalize any rules by sending them to the Federal Register unless they have been reviewed by a Trump appointee; (ii) to withdraw from the Federal Register final regulations that have not been published; and (iii) to postpone the effective dates of any regulations that were published in the Federal Register but have yet to take effect.

Regardless, SEC Chair Mary Jo White has indicated that she intends to move forward with her agenda until she departs the agency, although she also said that “I don’t see any last-minute rushes.”

CONTINUED >>

“The SEC would not impose large fines on corporate violators, focusing instead on the individuals.”

4 I OPTIMIZE I DECEMBER 2016

“The Trump Administration can have a significant impact through: (i) changes to the Dodd-Frank Act; (ii) the

appointment of three new SEC Commissioners and (iii) a moratorium on new federal agency rulemaking.”

“The SEC’s recent rulemaking proposal requiring investment

advisers to have a business continuity

and transition plan is in limbo.”

CONTINUED >>

Our Take It is apparent that a Trump Administration has designs on repealing or changing the Dodd-Frank Act. A wholesale repeal seems unlikely, if for no other reason than the limitations of the Republican’s majority in the Senate where they will only have 52 seats, short of the 60 needed to defeat filibusters and advance legislative changes. Massachusetts Democratic Senator Elizabeth Warren appears poised to be a significant thorn in the Republicans’ side in this regard.

Even though the Financial CHOICE Act contains a provision that would exempt private equity fund advisers from SEC registration, this appears contradictory to the experience of SEC examinations that have found significant violations by private equity fund advisers (which is different than Mr. Atkin’s pre-Goldstein perception of the hedge fund industry). In addition, our experience is that registration as an investment adviser, including adopting policies and procedures that are consistent with an investment adviser’s fiduciary duty to its clients, is no longer just a regulatory requirement but an integral part of an adviser’s

operations that most investors require before committing significant amounts of capital. President-elect Trump’s recent continuation of Mr. Bharara as the U.S. Attorney in New York’s Southern District, combined with the potential appointment of Ms. Yang, may signal that President-elect Trump wishes to maintain tough enforcement of laws that remain on the books following de-regulation.

Finally, the SEC’s recent rulemaking proposal requiring investment advisers to have a business continuity and transition plan is in limbo and, if not adopted and finalized in the Federal Register before President-elect Trump’s first day in office on January 20, 2017, may not become part of the Investment Advisers Act of 1940.

However, the proposed rule is basically a codification of current best practices with the exception of the business transition plan requirement. We will continue to keep you informed of new developments as the Trump Administration continues to formulate policies that may impact the investment management industry.

SEC alert on examining whistleblower agreements that may violate the whistleblower rulesOn October 24, 2016, the OCIE issued an important Risk Alert regarding provisions contained in an investment adviser’s documentation that may inhibit an employee from communicating directly with the SEC about possible securities law violations. The Risk Alert concerns “Rule 21F -17” of the SEC’s regulations under the Securities Exchange Act of 1934, which provides that;

“no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

The OCIE indicated that recent Division of Enforcement actions have identified certain provisions in confidentiality or other agreements (such as employee severance agreements) required by employers as causing violations of Rule 21F-17 because they contained language that impeded employees and former employees from communicating with the SEC concerning possible securities law violations.

The OCIE stated that examiners will review “compliance manuals, codes of ethics, employment agreements, and severance agreements to determine whether provisions in those documents pertaining to confidentiality of information and reporting of possible securities violations may raise concerns under Rule 21F-17.”

The OCIE will be looking for express provisions that may limit the types of information that an employee may convey to the SEC, or that may require departing employees to waive their rights to any individual monetary recovery in connection with reporting information to the SEC. Significantly, in addition, the OCIE also will look for more general provisions that may contribute to a violation

of Rule 21f-17 by (i) prohibiting any and all disclosures of confidential information, or (ii) requiring an employee to notify and/or obtain consent from the adviser prior to disclosing confidential information, or (iii) purporting to permit disclosures of confidential information only as required by law, without any exception for voluntary communications with the SEC concerning possible securities laws violations.

SEC alert on examinations of advisers with employees who have disciplinary historiesOn September 12, 2016, the OCIE issued an important Risk Alert regarding its “Supervision Initiative” to examine registered investment advisers regarding their compliance oversight and controls over employees who have a history of disciplinary events, including individuals who have been barred from a broker-dealer. Specifically, the OCIE states that registrants that hire and employ individuals with disciplinary events are expected to implement policies and procedures specific to the added risks to their clients presented by employees with a disciplinary history. Examiners conducting Supervision Initiative examinations will review:

• Hiring practices to evaluate the adviser’s “tone at the top” for evidence of an ethical environment. • Disclosures of regulatory, disciplinary, or other actions to assess the accuracy, adequacy, and effectiveness of such disclosures.

• Financial arrangements initiated by employees with disciplinary events for material conflicts of interest.

• Advertisements, including pitch-books, website postings, and public statements, to identify any conflicts of interest or risks associated with employees with a history of disciplinary events.

> SEC WATCH

OPTIMIZE I DECEMBER 2016 I 5

> FCA WATCHFormer Equity Investment Portfolio Manager at Blackrock Investment Management (UK) Ltd charged with insider dealing

• Mr Mark Lyttleton will be sentenced on 21 December 2016 and is charged with three counts of insider dealing.

• The offences relate to trading in equities and a call option October to December 2011.

• He traded based on insider information he obtained during his employment at BlackRock, through an overseas asset manager trading on behalf of a Panamanian registered company.

FCA fines Aviva Pension Trustees UK Limited and Aviva Wrap UK Limited £8.2m for Client Money and Assets Failings • The FCA has fined Aviva Pension Trustees UK Limited and Aviva Wrap UK Limited £8,246,800 for failings in its oversight of its outsourced providers in relation to the protection of client assets January 2013 to September 2015.

• Aviva outsourced the administration of client money and external reconciliations in relation to custody assets, but failed to ensure that it had adequate controls and oversight arrangements.

FCA imposes penalties on Sonali Bank (UK) Limited and its former money laundering reporting officer for serious anti-money laundering systems failings

• The FCA has fined Sonali Bank (UK) Limited (SBUK) £3,250,600 and has imposed a restriction, preventing it from accepting deposits from new customers for 168 days.

• The FCA also fined the bank’s former MLRO, Steven Smith, £17,900 and prohibited him from performing the MLRO or compliance oversight functions at regulated firms. 

• The FCA found serious and systemic weaknesses in respect of customer due diligence, the identification and treatment of politically exposed persons, transaction and customer monitoring and making suspicious activity reports.

The opinions expressed herein are those of the authors and other contributors and do not necessarily reflect the views of the Firm. This is not intended as specific legal advice for any purpose.

Optima Partners is a market leading regulatory compliance advisory firm based in New York, London and Hong Kong. Optima Partners LLC is a limited liability corporation registered in New York, company number 46-4518926.

OPTIMIZE I DECEMBER 2016 I 6

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Visit Us Online:www.optima-partners.com

The Director of Specialist Supervision at the Financial Conduct Authority (“FCA”), Nausicaa Delfas, delivered a speech on 21 September 2016 at the FT Cyber Security Summit. During the speech, Ms. Delfashighlighted the ever evolving and asymmetric threat that cyber risk represents, relating this to the impact it can have on the Regulator’s objectives to maintain market integrity, enhance consumer protection and promote competition.

Attacks on investment managers have been increasing, with five reports being made to the Regulator in 2014, twenty-seven in 2015 and seventy-five in the first nine months of 2016. It’s important to note, this only represents the number of reported cyber-attacks on firms. We estimate that the majority of the 56,000 firms the FCA regulates have experienced some form ofattempted cyber-attack during the last 18-months(phishing emails, ransomware etc.).

FCA expectationsThe FCA expects firms to have an effective top down security culture, with appropriate governance arrangements to effectively manage cyber risk. This is not simply an issue for the IT department, but rather all persons at the Firm. Firms should identify key assets and establish

appropriate protections to mitigate cyber risk, including the implementation of effective detection capabilities. It is essential firms test their systems to ensure that they can carry on business in the event of an unforeseen interruption.

Finally, the FCA expects firms to report material breaches under Principle 11 and to share information with others, on the Cyber Information Sharing Partnership (otherwise known as the CISP platform).

Cybersecurity in statistics for 2016

Of clients Optima works with: • 95% have received phishing emails• 80% Lock USB inputs• 70% conduct penetration testing• 65% have increased training on cyber risk issues• 60% utilise third party cloud services for data storage• 50% utilise a third-party for active firewall monitoring• 20% have experienced a sophisticated cyber-attack

For further information on this topic, please contact info@optima-partners.com.

“Attacks on investment managers have been increasing, with five reports being made to the Regulator in 2014, twenty-seven in 2015 and seventy-five in the first nine months of 2016.”

CYBERSECURITY: THE FCA MAKES ITS POSITION KNOWN In recent years, we have seen the Securities and Exchange Commission (“SEC”) take the lead on cybersecurity within financial services sector. The Financial Conduct Authority (“FCA”) has until recently been silent on the issue, but September saw the first real indication that cybersecurity was clearly on the FCA’s radar.