Disposition, Discovery and Dodd Frank
Hedge fund reporting and retention policies have gotten more attention since Dodd Frank--particularly those in the recent ring of insider trading busts:
"About 2 a.m. on a November night, a former hedge fund manager named Donald Longueuil allegedly left his apartment in Manhattan with fragments of chopped-up hard drives tucked in his jacket. He walked through the darkened city tossing the pieces in the backs of garbage trucks - four of them, to be safe."
... a disposition strategy that might even have worked, if he hadn't told a coworker cooperating with the FBI.
Reporting requirements and regulatory enforcement were top of mind at IQPC's E-discovery for Financial Services event this week, in a panel featuring Counsel from the FTC and FINRA, Bank of America Security, and moderated by the Hon. Ronald J. Hedges, former US Magistrate Judge for the District of New Jersey. Regulators didn't speak officially as representatives of their offices, but their comments did give some clues as to possible future direction for regulatory enforcement.
- One of the greatest changes under Dodd-Frank is regulation of hedge funds, which must now maintain stricter retention and reporting requirements on e-mail and other records if they manage more than a certain amount. How this will be enforced is uncertain according to the panel--it could fall to some combination of the FTC and an SRO funded by fees, or it could be FINRA.
- As for the rapidly-growing Consumer Financial Protection Bureau, panelists said Title X of Dodd Frank calls for the CFPB to promulgate 243 new regulations. Some of these are against "abusive" practices--a new responsibility much broader than the FTC's enforcement against "unfair and deceptive" practices--which will take years to define through administrative actions and judicial precedent. Rules have also been transferred from the FTC to the CFPB as well, and enforcement authority is shared on these, particularly as the CFPB is ramping up its regulations in the first few years (It begins operations on 7/21/11 - the one-year anniversary of Dodd-Frank).
- Another hot topic from audience members was wiretaps. The Galleon case has ignited new issues around the DoJ sharing them with the SEC, which the presiding Judge Rakoff reportedly called "really kind of interesting." Not bad coming from the judge who ruled on the wiretap that busted Elliot Spitzer.
- Clawback agreements were also discussed--this non-waiver of privilege on documents produced accidentally is allowed in Federal discovery by FRE 502, but can leave those in regulatory matters vulnerable without a court order, according to one panelist.
Ultimately, execution for regulators like the SEC, FTC, and DoJ going forward may depend greatly on the Federal budget, which could give them either 2008 or 2011 funding levels by the time it passes (note that CFPB has dedicated funding).
Panelists did give some advice on preparing for (and dealing with) potential investigations:
- Retention requirements and production requirements are different--i.e., regulators can request more than companies are even formally required to retain if it's there.
- Regulators typically make broad requests for data, but welcome the chance to confer with those being investigated to narrow the scope and relevancy of production.
And remember: if you can't find at least four garbage trucks, just make sure you don't tell anybody.
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