Three questions with the former SEC NY exam head

Managers of retail and retirement capital and those investing in cryptocurrencies are ‘on notice for increased scrutiny,' says Ken Joseph

Ken Joseph, previously head of the Securities and Exchange Commission’s New York New York Regional Office Investment Management Examination Program, has been hired by Duff & Phelps, the valuation and corporate finance firm.

Joseph led a team of over 130 examiners, accountants, attorneys and other professionals with responsibility for compliance examinations of over 2,800 New York and New Jersey-area managers and has joined Duff & Phelps as a managing director in its disputes and investigations practice.

PFM caught up with him and asked him about the next areas of focus for the commission, the rise of GP-led secondaries transactions and his motivations for moving to private practice.

What is the next issue that private fund managers need to get to grips with in order to stay on the right side of regulators? 

KJ: I wish the problem was simple enough to narrow it down to one issue. The Commission continues to devote significant resources to private fund examinations and investigations. The Enforcement Division’s Asset Management specialized unit, the OCIE’s Private Fund unit, and the Division of Investment Management are staffed with highly-trained specialists and utilize sophisticated technology solutions to detect outliers and a variety of potential violations of the securities law.

The Commission is paying particular attention this year to advisors of all stripes who manage funds that have a high concentration of retail and retirement clients, including not-for-profits and pension plans. In addition, funds that are involved in Initial Coin Offerings or are making investments in cryptocurrencies are on notice for increased scrutiny. These relatively new focus areas should not be read to mean that the Commission has curtailed its interest in disclosures, conflicts, transactions with affiliates, insider trading, fees and expenses, marketing/performance, compliance programs, preferential redemptions, valuation, cybersecurity, and the accuracy and timeliness of required filings with the Commission.

In addition, private fund managers that engage in transactions in high-risk foreign jurisdictions should at a minimum evaluate their exposure to FCPA violations.

Admittedly, this is a long, yet not comprehensive list. To stay on the right side of regulators, the expectation is that the advisers devote sufficient resources to the compliance function, tailor the compliance program to the risks of the business, actively monitor and surveil to uncover misconduct, have a knowledgeable and engaged CCO, and periodically (at least annually) review the compliance program.

Whether private or public, there is a common interest in complying with the law

When problems are detected, regulators ideally would like to see self-reporting, co-operation with investigators and examiners, prompt and comprehensive corrective action, and remediation of losses to affected clients. That’s what regulators expect in almost every instance, and I think the trend is towards providing ‘incentives’ for early and effective co-operation and remedial action.  Obviously, advisers who find themselves in the cross-hairs have to evaluate and balance the desire to cooperate against their right to defend against assertions and allegations.  Getting that decision wrong could lead to significant financial and reputational penalties.

The market for so-called GP-led secondaries transactions is taking off. Are investors sufficiently protected in this situation?

KJ: Properly designed and executed GP-led secondary transactions can benefit investors by providing much needed liquidity. However, those investors must be on alert for the potential conflicts, valuation, fee and expense allocation, and disclosure concerns that are often inherent in these types of transactions. Whether investors/LPs are “sufficiently protected” in these transactions is wholly dependent on whether the GP has complied with its fiduciary obligations and, at a minimum, disclosed all material conflicts, fairly valued the assets that are subject of the transaction, provided adequate notice and obtained any required consents, allocated transaction fees, expenses, and offsets in a manner that is consistent with the advisor’s disclosures and obligations as stated in the fund governing documents and in investor communications, and otherwise proceeded in a manner that is arms-length, fair and in the best interest of the clients.

Why have you chosen now to move into private practice? 

KJ: My decision to leave public service was not an easy one. I truly enjoyed the 21-plus years that I spent doing my part to protect investors, while leading dedicated professionals in the enforcement division and in the OCIE. And, I appreciated the many initiatives with law enforcement partners at the State, local, federal, and international levels.

Strangely enough, I do not see my role in private practice as being much different from my service in the public sector.Whether private or public, there is a common interest in complying with the law. Most clients want the best advice in order to do just that. When I decided to leave federal service, I simply felt it was the right time to pursue new challenges and to apply to a new clientele the same principles of good judgment, creativity, knowledge, tenacity, ethical compliance and accountability that I had applied for years in the public sector. The values and approaches practiced by the Duff & Phelps Disputes and Investigations team dovetailed seamlessly with my principles and expertise, so the choice was a no-brainer.