Regulatory & Enforcement Update “Our Take” LIVE November 1, 2012

Recent Activity Marketing cases: backtesting Pay-to-Play: Goldman case Valuation IAA Compliance practices survey More enforcement activity SEC asserting authority over private fund managers 2

Marketing - Backtesting Hypothetical inflation rates and returns (In re Raymond Lucia) –Hypothetical inflation rates and returns –Negative effects of re-allocations Combining audited data and backtested data (In re D’Amato) –Mutual fund asset allocation program –Backtested data better than later audited data –Calling it “historical” data 3

Marketing Past specific recommendations (In re Stock Markets Institute) –Investment newsletter –Failure to include rolled options trades Lying about correlation in underlying funds (SEC v. Marks) 4

Pay-to-Play Working for campaign (In re Goldman Sachs) –$12 Million fine –Using firm resources during work hours –State Treasurer and Governor OCIE Risk Alert –Training – surveillance –Review potential employees and promotions –Requiring pre-clearance SEC delays solicitor implementation 5

Valuation No write-down during 2008 (In re Bunzel) Failure to follow policies (SEC v. Yorkville) Misleading real estate valuation in PPMs requires rescission (SEC v. The Companies) 6

Compliance Programs IAA Survey –2/3 of CCOs have additional duties –Little use of automated systems –Weak testing of performance marketing –Most firms require pre-clearance of political contributions Centralization vs. business units (HSBC) –CCO says that business units had to much AML autonomy –Insufficient resources review (Guggenheim Securities) –One per trader per day insufficient –Side deal with hedge fund 7

Enforcement States brought 399 enforcement actions against RIAs in 2011 –double 2010 –More prison time in criminal actions NYS sues Investment Bank for issuing MBS with weak due diligence (New York v. J.P. Morgan Securities) –Cross-agency working group –Predecessor liability SEC basing actions on events occurring before registration (SEC v. Harbinger) 8

Private Funds Presence Exams Form PF: See Staff guidance Investor Bulletin about hedge fund investing Changing performance fees without investor consent (SEC v. GEI Financial Services) Failure to deliver financials (In re Gerasimowicz) Stale PPM (Amish Helping Fund) Failure to oversee outsourced due diligence (In re Calhoun) 9

Other Developments Whistleblowers –First Whistleblower award –$50,000 up to $300,000 –8 tips per day CPO Registration –December 31, 2012 deadline –NFA offering help –ICI/Chamber case progressing JOBS Act: Due diligence rules 10

Lessons Misleading marketing materials are easy enforcement cases Require pre-clearance of all political contributions Review fair valuation procedures and implementation Get some compliance help Beware of the state attorney general Get ready for presence exams of private fund sponsors 11

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