The Hedge Fund Law Report

When an investor raises a complaint, fund managers often scramble to hastily address and soothe the investor’s concerns. That’s the nature of client relationship management, particularly in today’s ruthlessly competitive fundraising environment. It is important, however, for fund managers to balance being responsive with their fiduciary duty to carefully and accurately describe all matters related to their funds – especially quantitative items such as disputed performance data. The significance of that lesson was emphasized anew by the SEC when the agency released two orders settling cease and desist actions against an investment adviser and one of its principals (together, the Orders) for material misstatements and omissions made in response to queries raised by an institutional investor client. Ultimately, the series of fraudulent responses by the adviser and its representatives caused the institutional investor to inadvertently breach its statutory obligations. Although the fact pattern is unique, the Orders highlight the degree to which the SEC may scrutinize fund managers’ communications with investors generally, as well as the importance of ensuring the accuracy of performance calculations, performance reporting and any other information provided to investors. This article summarizes the key features of the Orders and provides additional insights from industry experts. #HFLR #investorrelations https://lnkd.in/eGkWud7Y

Although legal challenges and the upcoming presidential election have put a damper on rulemaking, federal agencies continue to advance initiatives affecting private fund advisers and other financial services firms – and SEC enforcement activity continues unabated. At a program entitled “Fall 2024 Regulatory Roundup,” attorneys from Morgan, Lewis & Bockius LLP discussed the newly adopted rule requiring investment advisers to implement anti-money laundering programs; SEC enforcement activity against investment advisers and broker-dealers; the new clearing requirement for secondary market transactions in U.S. Treasury securities; CFTC enforcement activity; and NFA rulemaking. This article distills the key takeaways from the program. #HFLR #enforcement #rulemaking https://lnkd.in/eaJfWpEj

The rules on political contributions by investment advisers and their associates to elected officials who make decisions for government entities on advisory services are strict. Neither investment advisers nor certain employees may provide compensated advisory services within two years of a contribution, as per Rule 206(4)‑5 under the Investment Advisers Act of 1940, often called the Pay to Play Rule. No quid pro quo or actual intent to influence an elected official is required to run afoul of this rule. Moreover, the Pay to Play Rule applies to contributions made by designated employees while they are employed by the adviser, as well as to certain pre-employment contributions. An SEC enforcement action against an investment adviser serves as a cautionary tale in this election year that advisers should not forget that pre-employment political contributions may trigger the restrictions of the Pay to Play Rule. This article summarizes the cease-and-desist order entered by the SEC against the adviser on August 19, 2024. #HFLR #playtopay https://lnkd.in/eNMTkqwk

Only good things can come of Private Equity Law Report joining Mergermarket at this year's PE Forum taking place in Austin, Texas - a thriving hotspot in America's private equity landscape. If you are attending, be sure to check out the Institutional Investor Panel that will be moderated by Rorie Norton.

Given recent acceleration of developments in artificial intelligence (AI), regulators and authorities globally have begun to examine the use of AI in various industries, including by investment advisers in connection with trading and investment decisions. Although the SEC has proposed a rule focused on conflicts of interest created by the use of predictive data analytics (PDA), including AI, (PDA Rule), U.S. regulators have yet to provide firm guidance on the application of existing regulations to advisers’ use of AI in connection with trading and investment activities. In the absence of such guidance, advisers should consider adopting AI policies and procedures that focus on insider trading concerns and are consistent with current best practices for alternative data (alt data) use. This guest article by Lowenstein Sandler LLP attorneys Boris Liberman and George Danenhauer describes how advisers’ use of AI has evolved, discusses the applicable regulatory framework and explains how to apply alt data best practices to AI systems. #HFLR #AI #altdata https://lnkd.in/eS7XegEH

The SEC’s focus on registrants’ practices for monitoring and preserving employee communications on unapproved devices and systems continues unabated. In the latest round of settlements under its Initiative to Investigate Off-Channel Communications at Registered Entities (Initiative), the SEC has imposed nearly $393 million in civil penalties on 26 firms that failed to preserve employees’ electronic communications and supervise employees with a view to preventing violation of the recordkeeping requirements under the Investment Advisers Act of 1940 and/or the Securities and Exchange Act of 1934. As in most other recent resolutions under the Initiative, 25 of the respondents have agreed to retain an independent compliance consultant to review their electronic communications policies, procedures and practices. This article discusses the new settled enforcement orders and an associated order waiving “bad actor” disqualification. #HFLR #ecomms #recordkeeping https://lnkd.in/etZTU3Rm

When an investment adviser has a conflict of interest, it must, at minimum, make full and fair disclosure to affected investors. The SEC penalized an adviser and its principal for making inadequate disclosures to separately managed account (SMA) clients and private fund investors regarding compensation he received as an executive producer in connection with the adviser’s SMA and fund investments in the film production industry. The respondents also allegedly made a preferential redemption payment to a favored investor when the fund in question lacked sufficient liquidity to satisfy all pending redemption requests. This article details the alleged misconduct and the terms of the resolution, with commentary from Philip Moustakis, partner at Seward & Kissel LLP. #HFLR #conflictsofinterest #redemptions https://lnkd.in/eVJApG-M 

As of March 2024, there were approximately 3,400 SEC-registered broker-dealers, with more than 125,000 registered offices, 625,000 registered personnel and $5.5 trillion in assets, according to a risk alert (Risk Alert) issued by the SEC Division of Examinations (Division). The Risk Alert describes the Division’s approach to broker-dealer examinations, including how it selects firms for examination; how it determines the scope of exams; and the documents it usually requests at the outset of an exam. The Risk Alert is intended to help broker-dealers prepare for exams and assist them in their compliance efforts. The Risk Alert expresses the views of Division staff and does not add, alter or amend any law, regulation or SEC statement. This article discusses the key takeaways from the Risk Alert. #HFLR #brokerdealers #exams https://lnkd.in/gMvrzsSw

Ransomware is growing in its speed, complexity and the size of the financial damage it can visit upon a victim company, amplifying challenging questions for how to deal with such events. Meanwhile, the regulatory environment in this field has advanced, putting additional demands on affected companies. Speakers during the Incident Response Forum Masterclass 2024 discussed these issues. This article distills their insights, including those regarding ransomware response challenges and suggested practices for achieving an effective combination of people, processes and technologies. The presenters included Alston & Bird partner Katherine Doty Hanniford, Latham & Watkins & Watkins partner Antony ("Tony") P. Kim, FGS Global partner Scott Lindlaw and Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates partner David Simon. #HFLR #ransomware #cybersecurity https://lnkd.in/eidqTjPW

At the end of the calendar year, hedge fund managers may be busy wrapping up the ends of their fiscal years by arranging for Custody Rule audits, conducting annual compliance reviews, making required regulatory filings, handling year-end redemptions, making various tax elections, calculating fund expenses and conducting performance reviews of employees. Therefore, it is never too soon to start planning for the tasks that lie ahead in the last quarter of the year. This latest installment of the Hedge Fund Law Report’s quarterly compliance update highlights upcoming filing deadlines and reporting requirements fund managers should be aware of during the fourth quarter. This guest article by ACA Group consultants Grazia Gatti, LLM, CFE, Luis Garcia and Dan Campbell also includes information on upcoming amendments to Schedule 13D and 13G filings; recent SEC enforcement cases focusing on Custody and Marketing Rule compliance; and the SEC Division of Examination’s recent sweep of investment advisers to assess their implementation of a shortened standard settlement time for securities transactions. #HFLR #compliance #regulatoryreporting https://lnkd.in/erDjEta7