1. NEWMAN AND INSIDER TRADING:
In 2014, the U.S. Court of Appeals for the Second Circuit handed down a landmark insider trading decision in United States v. Newman. This decision seemingly redefined the government’s ability to prosecute insider trading cases by increasing the government’s burden of proof. The Court generally held that a ‘tippee’ who was tipped inside information by an insider of a company could only be held criminally liable for insider trading if:
• The insider breached a fiduciary duty by disclosing the inside information to the tippee in exchange for a personal benefit.
• The tippee knew of the tipper’s breach and of the personal benefit conveyed to the insider. 

The government essentially held that a personal benefit could not be inferred from “the mere fact of a friendship” between the tipper and tippee. The government must establish that the tippee was aware of a benefit that is objective and consequential. Many believed that the heightened requirements of the Newman decision would significantly impact the SEC’s ability to bring insidertrading cases. However, Newman should not be interpreted by fund managers to mean that it is now acceptable to loosen their policies
governing the use of inside information.

Newman’s applicability is limited in a number of ways:
• Newman only applies to the Second Circuit, and it has yet to be seen whether other circuits will fully embrace this standard.
• The SEC’s burden of proof in a civil-enforcement proceeding is substantially lower than the government’s burden of proof in a criminal matter (“recklessly” vs. “wilfully”).
• Even the appearance of impropriety or the public announcement of an SEC investigation is sufficient to cause significant harm to a fund manager’s business. A conviction is only the last step in a long and public process that casts a manager’s business in a negative light.
• The US government has filed a certiorari petition with the Supreme Court against Newman. The government argues that the Newman decision should be reversed based on its misinterpretation of Dirks, which is contradictory to the decisions rendered by other federal appeals courts.
• The government also argues that the Newman decision harms markets by making it difficult to distinguish between lawful and insider trading. If the Supreme Court decides to hear this case, the Newman decision may take on new meaning.
• Lastly, the Newman decision has also captured the attention and legislative interests of Congress. These interests may inevitably impact the applicability of Newman. 

In short, fund managers should view Newman as  a defence to insider trading and not an invitation to amend or expand current policies regarding the use of information resources.

2. CYBER-SECURITY

Many companies are reliant on the use of computer networks and face increased risks of cyberattacks. The focus and scope of these attacks has expanded to reach new targets, including investment advisers. Last year the SEC launched a cyber-security initiative to assess preparedness and obtain information about cyber threats from market participants. The SEC examined 57 registered broker-dealers and 49 registered investment advisers to assess cyber-security preparedness, compliance, and controls. Of the firms examined, the SEC found that 88% of broker-dealers and 74% of investment advisers had experienced a cyber-attack, directly or through a third-party vendor. Sensitive firm and client data, as well as funds and securities, were compromised by attacks that involved the use of fraudulent emails, requests for transfer of funds, and employee misconduct. 

Companies can no longer depend on the average IT support vendor for protection as this method is inefficient and viewed by regulators as an increasingly weak barrier to combat cyber-attacks. The SEC’s expected strategy to monitor the controls that firms have in place is to focus on firm governance, risk assessment procedures, controls, and methods of identifying critical assets with a view toward how these procedures prevent cyber intrusions. Thus, investment advisers should begin taking steps now in devoting resources and revising policies and procedures to effectively address these threats.

3. AMENDMENTS TO FORM ADV
The SEC recently proposed several amendments to Form ADV. Generally, these amendments would require advisers to disclose information regarding their separately managed accounts, including assets under management and information related to the use of derivatives and borrowings. Unlike the reporting requirements for private funds, the information reported on Form ADV would be available to the public. The SEC has stated that this information will assist the SEC and the public in monitoring risk and adviser activities related to separately managed accounts. Managers have expressed concerns that the requirements of this proposed rule are burdensome,
costly, and may potentially expose proprietary or client information. No set timeline has been established for the adoption of the proposed rule, but the rule could be finalised as early as the first quarter of 2016.