Marc Powers Discusses Issues Related to Self-Reporting Hedge Fund Regulatory Violations

News / November 18, 2016

Partner Marc Powers, national leader of the securities litigation and regulatory enforcement, and hedge fund industry teams, is quoted at length in an article published in Insights, a hedge fund and compliance publication, on Nov. 18, 2016. The article, “To Tell or Not to Tell: Best Practices for Manager Considering Whether to Self-Report Legal or Regulatory Violations,” discusses the factors that contribute to the analysis of whether to self-report to the Securities and Exchange Commission (SEC), as well as the pros and cons of self-reporting, and investor notification issues.

Powers explained, “Part of the analysis is whether the uncovered, non-public issue or wrongdoing is going to get out publicly anyway. In that instance, you may want to be ahead of the curve, self-report the issue to the SEC, and gain some cooperation credit.”

Regarding potential attorney-client privilege issues, he said, “You need to be sensitive to the issue, and when and how you disclose information to the SEC. Otherwise, the client may find in a subsequent non-governmental proceeding an argument of waiver of the fruits of an internal investigation. On the other hand, if you go to the government, you should consider the benefits of waiving the privilege to be deemed to have fully cooperated. So initially, at least, seek to only provide to the SEC underlying pre-existing company documents that don’t reflect your work product.”

Added Powers, “One of the drawbacks to self-reporting is that you may have given the regulators a case they may have never picked up and you were able to clean up fully privately. By self-reporting you could also hurt the client by putting it in the center of an SEC investigation.”

For hedge fund managers, there are no direct legal obligations to self-report issues to regulators. Powers explained, “Public companies have obligations to report promptly material issues that may affect their businesses, but there are no parallel obligations for investment managers under the federal securities laws.”

An when it comes to disclosing self-reported issues to investors, Powers advised, “You tell investors when you’re comfortable that you’ve gotten to the bottom of the facts and issues, or never, depending on whether it needs to be disclosed for legal or business reasons.”

Read the article (registration required).