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    Aug. 6, 2020

OCIE Risk Alert on Private Funds: Focus on Conflicts; Fees and Expenses; and MNPI (Part One of Two)

Earlier this year, Peter Driscoll, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), advised that a risk alert focused on findings from exams of hedge and private equity fund managers would be forthcoming. In fact, he noted that CCOs for private fund advisers had been asking for such an alert. Driscoll also said OCIE will continue to focus on fees and expenses – a mainstay for the SEC – and compliance programs, and it will continue examining private fund managers, noting that “close to half of the registered investment advisers manage some sort of private fund.” OCIE recently delivered on Driscoll’s promise, issuing a risk alert on observations from examinations of investment advisers managing private funds (Risk Alert). Given Driscoll’s comments, it is not surprising that the Risk Alert focuses on fees and expenses, as well as conflicts of interest and material nonpublic information. This article, the first in a two-part series, provides an overview of the Risk Alert. The second article will spell out key takeaways from the Risk Alert for private fund managers and suggest what advisers should do now in response to the alert. See our coverage of OCIE’s risk alerts on the transition from LIBOR; Regulation Best Interest and Form CRS; electronic messaging; the cash solicitation rule; best execution; fees and expenses; the advertising rule; common examination deficiencies; custody; cybersecurity; business continuity and disaster recovery plans; and social media.

Marketing EEA‑Domiciled Hedge Funds in the U.K. Post Brexit

Brexit will have significant implications for fund managers marketing non-U.K. hedge funds into the U.K. In particular, implications will be felt by funds that are currently authorized under the E.U. Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. In a guest article, Cadwalader attorneys Michael Newell and Michael Sholem examine the U.K.’s Temporary Marketing Permissions Regime for both European Economic Area (EEA) alternative investment funds and EEA UCITS vehicles. The article also analyzes the U.K.’s proposed new Overseas Fund Regime for the marketing of non‑U.K. retail funds to U.K. investors. See our two-part series on “Navigating Changing E.U. Distribution, Marketing and AML Rules”: Part One (Jun. 11, 2020); and Part Two (Jun. 18, 2020). See also “How Hard Is Brexit Expected to Impact Alternative Fund Managers?” (Dec. 13, 2018).

SBAI Issues Guidance on Conflicts, Valuation and Structuring for Private Credit Fund Managers and Investors (Part One of Two)

The Standards Board for Alternative Investments (SBAI) recently published three memoranda pertaining to conflicts of interest, fund structuring and valuation in private credit strategies. The memoranda are intended to provide guidance to alternative credit fund managers and to highlight issues on which investors should focus in operational due diligence. This two-part series analyzes the key takeaways from the memos and presents insights from SBAI executive director Thomas Deinet. This first article provides general background on the SBAI and summarizes the conflicts of interest memorandum. The second part will examine the structuring and valuation memoranda. See our three-part series on hedge funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016).

Regulatory and Employment Concerns for Managers Reopening Their Offices

The nation’s economic reopening is proceeding in fits and starts. Managers that seek to return to on-site operations must be cognizant of the rules governing reopening and the new associated risks that they may face. A recent seminar hosted by Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA), looked at the formulation of reopening plans; communications with staff; personnel issues; legal and regulatory risks arising out of employees’ return to the office; and regulatory risks, including insider trading, which have persisted throughout the pandemic. The program featured Gibson Dunn partners Mylan L. Denerstein, Mary Beth Maloney, Mark K. Schonfeld and Greta B. Williams. This article distills their insights. For another collaboration from MLA and Gibson Dunn, see our two-part series on the Lynn Tilton trial: “Controversial Forum, Key Takeaways and Defense Themes” (Aug. 9, 2018); and “Principal Charges” (Aug. 23, 2018).

SEC Reaches Settlement After Supreme Court Decision in Lucia v. SEC

In 2012, the SEC commenced an enforcement proceeding against Raymond J. Lucia Companies, Inc. (RJL) and its principal, Raymond J. Lucia, Sr., alleging that they had made material misrepresentations when presenting backtested performance of their proprietary “Buckets of Money” investment strategy. Those routine fraud allegations eventually took a back seat to the respondents’ argument that the SEC’s administrative law judge who heard the case had not been validly appointed. In Lucia v. SEC, the U.S. Supreme Court (Court) agreed with the respondents’ argument and remanded the matter to the SEC for a new hearing. In a somewhat anticlimactic end to the eight-year litigation, Lucia and RJL recently consented to the entry of a settlement order (Final Order) against them, which gives the SEC essentially all of the relief it initially sought, albeit with a lower civil penalty. This article recaps the tortuous litigation and details the Final Order. For more on the Court’s decision, see “What Are the Implications of the Supreme Court’s Decision in Lucia v. SEC for Fund Managers?” (Jul. 19, 2018).

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