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    May 27, 2021

NFA Issues New Rules on Use of Third Parties to Perform Members’ Regulatory Functions

Earlier this year, the NFA issued Interpretive Notice 9079 (Notice) to help NFA members identify and mitigate problems that can arise when members delegate their regulatory functions to outside service providers (Third-Party Service Providers). The Notice establishes general requirements relating to members’ written supervisory frameworks, which require them to address, at a minimum, the following areas: an initial risk assessment, onboarding due diligence, ongoing monitoring, termination and recordkeeping relating to Third-Party Service Providers. When the Notice becomes effective, those general requirements will become mandatory for all NFA members engaged in activities subject to the supervisory framework referenced in the Notice. In a guest article, David Slovick, partner at Barnes & Thornburg and former senior enforcement official at the CFTC, outlines the general requirements set by the Notice in five substantive aspects of the member/Third-Party Service Provider relationship and provides observations on the implications of those requirements. For coverage of another NFA notice, see “NFA Notice Requires CPOs to Implement Internal Controls Systems” (Feb. 28, 2019).

Tokenization on the Blockchain: Unique Challenges and Benefits and Its Use by Hedge Funds

The use of bitcoin and other cryptocurrencies has exploded in recent years, pushing the underlying blockchain technology into the spotlight. The private funds industry has struggled, however, to develop ways to take advantage of that new technology. Fortunately, tokenization of tangible assets on the blockchain may provide a path forward for the technology to modernize and improve the industry as a whole. Those concepts were presented in a recent white paper (Paper) co‑authored by the Chartered Alternative Investment Analyst (CAIA) Association, BNP Paribus Asset Management (BNPP AM) and Liquefy, a licensed financial technology platform. In addition, CAIA hosted a webinar to explore the Paper’s findings in further detail, which was moderated by Jo Murphy, managing director at CAIA, and featured Emmanuelle Pecenicic, digital transformation manager at BNPP AM; Adrian Lai, CEO of Liquefy; and Jack Wu, director at CAIA. This article explores drivers of tokenization in the alternative investments industry, some of the benefits it can offer and ways it can be used effectively in the hedge funds industry. See our three-part series on blockchain and the private funds industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).

Unregistered Adviser Liable in Ponzi‑Like Scheme That Defrauded Hedge Funds

The SEC recently obtained a final judgement against an unregistered investment adviser who allegedly ran a 10‑year Ponzi-like scheme that defrauded, among others, several hedge funds. The SEC and DOJ claimed that, over a decade, the adviser used funds raised from new investors, along with additional investments from existing investors, to make redemption payments to other investors, pay himself and satisfy unrelated obligations. This article details the facts and circumstances underpinning the alleged fraud; the government’s allegations; and the terms of the civil and criminal resolutions. See “SEC Prevails Against Hedge Fund Manager and Its Principal for Ponzi‑Like Scheme” (Sep. 6, 2018).

Recent Developments in Fund Structuring and Marketing in the E.U., U.K. and Asia

A panel at the Clifford Chance Global Funds Week 2021 event examined recent developments in fund structuring, marketing and distribution in the E.U., U.K. and Asia. Clifford Chance partner Kristof Meynaerts moderated the panel, which featured partners Xavier Comaills, Simon Crown, Mark Shipman and Paul Van den Abeele, as well as counsel Alexandra Margarete Uhl. This article discusses the key takeaways from the presentation on updates to the E.U. cross-border fund distribution regime; efforts by France and Germany to make their regimes more fund friendly; regulatory developments in China, Hong Kong and Singapore; and the impact of Brexit on the U.K. investment management industry. For a look at another development in the E.U., see “The E.U. Sustainable Finance Disclosure Regulation: New Disclosures for U.S. Asset Managers” (May 6, 2021).

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