S5:E13 | Compliance Grab Bag! | Compliance In Context

Welcome back to the Compliance In Context podcast! On today’s show, we will be reviewing a multitude of regulatory and compliance topics, including artificial intelligence, books and records, types of marketing materials, the SEC Marketing Rule, post-commitment management fees, private fund recycling, and many more fantastic issues in our first ever Compliance Grab Bag!  To help guide us through the conversation, we welcome in Christine Schleppergrell from Morgan Lewis and Christopher Mulligan from Weil Gotshal.  In our Headlines section, we review the first Advisers Act enforcement action under the new administration and what it tells us about future actions, and we close up today with another installment of What’s On My Mind, where a recent statement from Commissioner Peirce provides us deep insight into the future state of crypto and digital currencies and the road ahead.

Show

Headlines

• First Advisers Act enforcement case under the new administration

Interview with Christine Schleppegrell and Chris Mulligan

• What are some of the regulatory and compliance issues you’re seeing in AI right now? 
• How are AI recordkeeping and marketing issues addressed during SEC exams?
• How are firms implementing AI inside their firms?
• What other SEC Marketing Rule items are in focus during SEC exams?
• What areas of the SEC Marketing Rule are you hoping the industry receives more guidance?
• What are some of the current areas of focus from the SEC as it relates to private funds?
• What are some of the challenges between outsourcing versus duplication of services?
• What other areas of focus have you seen recently from the SEC and how do you think they will be impacted by a new administration?

What’s On My Mind

• Reviewing “The Journey Begins” by Commissioner Hester M. Peirce and her commentary on the SEC Crypto Task Force

Quotes

15:17 - “There’s a temptation. So there are temptations on both sides, on the exam side and on the registrant side here, right? So investment advisors, obviously AI is a huge force in the economy and investing, and people what to talk about it. And that’s fine in terms of talking about, you know, how this is going to impact markets, how this is going to impact due diligence processes generally, right? You, sort of, can’t live today and not talk about AI. That’s fine. The problem is it’s easy to, sort of, fall into, it’s easy to fall into the representation of how you either use it, how you look for portfolio companies that use it, how it’s part of your management process, right? So it goes to, sort of, a high-level discussion of AI in our, sort of, you know, in, sort of, our culture and our society. And it goes into specific representations about how you are using it.” - Chris  

17:25 - “I think also the other side of the coin is the use of AI for non-investment purposes, so think compliance, operational purposes, to the point that you made earlier, just assessing staffing needs and how those can be addressed, and AI can be a huge time saver. So we’re looking at firms that are, we’re seeing firms that are considering whether they should disclose, for example, in their form ADV, the use of artificial intelligence, even if it is for that internal use case only that we talked about at the top of the podcast.” - Christine 

26:32 - “As they move forward in their journey of creating new communications using AI, maybe to create those communications, it makes it easier if they have that framework in place and they said, ‘Okay, well this looks like the other communications, it’s not an advertisement because X, Y, and Z.’ So it’s a very easy filtering mechanism to use. So just wanted to amplify that point because I think it’s really good. And then one thing to add, I know as we’re talking about back to basics, one thing that I keep going back to and keep getting the question is, ‘What is hypothetical performance?’ So I think that, in addition to what is an advertisement, are two of the really big picture questions that keep coming up, even though we’ve been living with this rule for some time now. But those two concepts because they are broadly defined, especially hypothetical performance, I think really trips people up.” - Christine 

36:57 - “I have a great answer to your question of, ‘Do disclosures have to be on the same page?’ And the answer, the universal answer to that question is, it depends on how many pages you have. If you have a 50-page pitch deck, then I do not think that the hypothetical performance, the mention of that can make its first appearance on slide 49..” - Christine