There were several important developments impacting private investment funds in 2020. The SEC continued to prioritize this area of the capital markets, and it issued important rules and guidance impacting private funds and investment advisers. There also were two important court rulings, one by the United States Supreme Court and one by the Delaware Supreme Court. This Article summarizes the most important developments in the private fund space – in chronological order.
OCIE Examination Priorities
On January 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (OCIE) started off the year by announcing its examination priorities. OCIE identified a continued focus on registered investment advisers, including for private funds. Among other things, OCIE explained that it would focus on potential conflicts when an investment adviser provides services to both private funds and to other accounts. It also noted that “OCIE will review RIAs to private funds to assess compliance risks, including controls to prevent the misuse of material, non-public information and conflicts of interest, such as undisclosed or inadequately disclosed fees and expenses, and the use of RIA affiliates to provide services to clients.”
Supreme Court decides Liu
On June 22, 2020, the United States Supreme Court decided Liu v. Securities and Exchange Commission. In an 8-1 decision, the Supreme Court held “that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” in civil actions brought by the SEC.
However, the Supreme Court also imposed a number of significant constraints on the SEC’s ability to obtain disgorgement. First, the Supreme Court held that in most cases disgorged sums must be distributed to investors and cannot go into the general government coffers. Second, the Supreme Court explained that the remedy of disgorgement may not be available against parties who are being pursued under a theory of joint and several liability. The Court explained that allowing disgorgement in those circumstances is inconsistent with its reasoning that disgorgement is permitted in order to deprive the wrongdoer of his profits and would transform the remedy into a penalty. Third, the Supreme Court held that the disgorgement remedy is limited to net profits of the wrongdoer and that courts must therefore “deduct legitimate expenses before ordering disgorgement.”
Disgorgement is a critical weapon in the SEC’s...
