Margaret Nelson Assesses SEC Enforcement Philosophy

Foley & Lardner LLP partner Margaret Gembala Nelson commented in the Private Equity Law Report article, “SEC Enforcement Action Raises Potential Materiality Threshold for Conflicts of Interest,” sharing insight on enforcement philosophy at the U.S. Securities and Exchange Commission.

Commenting on SEC v. Nagler, in which the SEC alleges breaches of fiduciary duties and conflicts of interest by an investment advisory firm, Nelson said that for now, any judgement on the severity of SEC Chair Paul Atkins or the commission’s long-term stance on conflicts of interest would be premature.

“As for what Nagler means for private funds, we’ll just have to wait and see,” she continued. “But clearly, Atkins is less worried about sophisticated investors who know enough to ask the right questions and do their due diligence, as opposed to Main Street investors.”

Nelson observed an enhanced perception by the SEC of wrongdoing by the defendants than it alleged in previous enforcement actions. “One thing that sets Nagler apart from other conflict of interest cases under both [former SEC Chairs Gensler and Clayton] is that it includes a 206(1) charge, not just 206(2),” she explained. “So, there was a determination here that the conduct was worse than what the SEC typically sees elsewhere.”

One material issue raised in Nagler is the SEC’s scrutiny upon the term “may” in policies and procedures. “Having dealt with this issue more than once, I would say that the SEC has been very clear,” Nelson said. “Anytime I have to review a Form ADV brochure for a client, or any other advisory document, ‘may’ always jumps out at me,” Nelson said.

“I wouldn’t say that Nagler stands for an absolute prohibition, and there could be valid reasons why a manager would feel the need to use it,” she added. “I would just think very long and hard about it, however, and make sure you have a justification. To the extent you are doing something only in certain circumstances, make that very clear without relying on the term ‘may,’ and be very thoughtful about its usage.”

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