• |

    Aug. 31, 2023

Compliance Corner Q4‑2023: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

The end of the calendar year can be a busy time for hedge fund managers. For example, they may be wrapping up the ends of their fiscal years, making various tax elections, arranging for custody rule audits, conducting annual compliance reviews, making required regulatory filings, handling year-end redemptions, calculating fund expenses and conducting performance reviews of their employees. Thus, it is never too soon to start planning for the tasks that lie ahead in the last quarter of the year. This twenty-sixth installment of the Hedge Fund Law Report’s quarterly compliance update highlights upcoming filing deadlines and reporting requirements that fund managers should be aware of during the fourth quarter. This guest article by ACA Group consultants Grazia Gatti, Valerie Speare and Dan Campbell also includes information on an SEC proposal to address risks to investors from conflicts of interest associated with the use of certain technologies – comments on which are due by October 10, 2023 – the release of the SEC’s Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions and a recent SEC enforcement matter concerning alleged naked short selling. For coverage of an ACA Group program, see “Understanding and Mitigating Risks of Using ChatGPT and Other AI Systems” (Jul. 6, 2023).

SEC Adopts Final Rules to Address Security-Based Swaps Fraud and Undue Influence Over Certain CCOs

In December 2021, the SEC released proposed rules (Proposed Rules) intended to prevent fraudulent, deceptive or manipulative conduct in connection with security-based swaps (SBSs); prohibit undue influence over the CCOs of SBS dealers and major SBS participants; and require persons with SBS positions exceeding a specified threshold to report certain information on their SBS positions to the SEC. On June 7, 2023, the SEC adopted the anti-fraud rule (Rule 9j‑1), with some modifications, and the prohibition on undue influence over CCOs. It did not, however, act on the proposed SBS reporting rule. Rule 9j‑1 will be an important additional tool to augment the SEC’s oversight of the SBS markets, according to the SEC’s final rules release (Final Rules). The Final Rules were published in the Federal Register on June 30, 2023, and took effect August 29, 2023. This article examines the Final Rules, noting the differences from the Proposed Rules, with insights from Fabien Carruzzo, partner at Kramer Levin. For other SEC swaps-related rulemaking, see “SEC Chair Gensler Discusses Swaps Risks and Regulation and Proposed Rules for Security‑Based Swap Execution Facilities” (Jun. 9, 2022).

Messaging Apps Come Under Increasing Regulatory Scrutiny

As enforcement actions increase, the intensifying spotlight on WhatsApp and other ubiquitous mobile texting software is prompting many companies to actively seek legal guidance and make compliance and technology changes, while some in the lesser regulated space may be taking more of a “wait-and-see” approach. Already this year, the SEC, FINRA and CFTC have lodged enforcement actions against companies over improper use of off-channel messaging apps, and the DOJ issued updated guidance in March on its expectations for compliance programs, including a warning that all companies facing investigations are expected to have stated policies and procedures around usage. “There is no easy solution yet, and that is why companies are grappling with this,” said Nisa Gosselink-Ulep, partner at Paul Hastings, who has been fielding questions from domestic and multinational clients alike on how to put the DOJ directives into practice within an existing compliance practice. “If it was easy, we would all go out and buy the software and be done with it. We are not there,” she said. This article offers a glimpse into current corporate concerns about messaging apps and how partners at Ballard Spahr and Paul Hastings are helping clients address them. See “SEC Remains Focused on Off-Channel Communications” (May 11, 2023).

Auditor and Engagement Partner Sanctioned for Inadequate Audit Procedures for Level 3 Assets

The SEC has always focused on the conduct of auditors and other important fund gatekeepers. In some instances, it tests the conduct and adequacy of audits. In a recent administrative proceeding, the SEC accused an accounting and auditing firm and one of its partners of engaging in improper professional conduct in connection with their audits of two private funds. The respondents allegedly failed to comply with professional auditing standards in evaluating the funds’ valuations of certain investments in preferred stock. This article details the SEC’s allegations, the alleged audit deficiencies and the sanctions and undertakings imposed on the respondents, with commentary from John Hunt, partner at Sullivan & Worcester. See “SEC Enforcement Action Accuses Fund Auditor and Partners of Widespread Failures Valuing Level 3 Assets and Lack of Independence” (Sep. 9, 2021).

Ireland’s Department of Finance Consults on Framework for Funds Sector

In April 2023, Ireland’s Minister for Finance, Michael McGrath T.D., announced a wide-ranging review of the Irish funds sector. As part of that review, Ireland’s Department of Finance is now conducting a consultation (Consultation) and will report back to the Minister in mid-2024. The Consultation provides a broad overview of the Irish funds sector; the available fund structures; the regulatory and supervisory framework; taxation of investment products; and real estate and securitization vehicles. It also poses multiple questions about all of those topics. This article parses the Consultation. The deadline for submission of comments on the Consultation is September 15, 2023. All submissions will be made public, with personal data redacted. See our two-part series “ALFI Seminar Examines E.U. Funds Landscape and Regulatory Developments Affecting Distribution”: Part One (Nov. 18, 2021); and Part Two (Dec. 9, 2021).

Daniel Viola Joins Seward & Kissel’s Investment Management Group

Seward & Kissel announced that Daniel Viola has joined the firm in the New York office as a partner in the investment management group. Viola has decades of experience advising investment advisers; private funds; broker-dealers; proprietary trading firms; blockchain and digital assets firms; commodity pool operators; and commodity trading advisers. For insights from Viola, see “Are You Prepared for OCIE’s Sweep of Business Continuity Plans and Coronavirus Actions?” (Jul. 30, 2020); and “The SEC’s Proposed Form CRS: Does It Accomplish Its Goals? (Part Two of Two)” (Jun. 7, 2018).

Most-Read Articles