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    Feb. 1, 2024

Are You Covered? Insurance Practice Pointers for Hedge Fund Managers Facing Increased Regulatory Scrutiny

Hedge fund managers have been increasingly targeted by government regulators, most notably the SEC. The money ordered in SEC enforcement actions – comprised of civil penalties, disgorgement and prejudgment interest – can be significant and totaled $5 billion in fiscal year 2023 (FY2023). And the SEC is not the only potential source of regulatory scrutiny. For example, the CFTC obtained orders imposing more than $4.3 billion in restitution, disgorgement and civil monetary penalties in FY2023. With the specter of increased enforcement activity looming, hedge fund managers should assess whether their insurance programs do (or could) cover SEC-imposed fines and penalties as part of a broader risk mitigation strategy. This guest article by Geoffrey B. Fehling and Alex D. Pappas, attorneys at Hunton Andrews Kurth LLP, details factors hedge fund managers should consider, including lessons learned from recent enforcement activity and the applicable state-specific legal landscape, and explains how issues tend to arise in practice under directors and officers; management liability; and other claims-made insurance policies. The article concludes with several practice pointers for fund managers looking to maximize available insurance coverage in the event of unwanted regulatory scrutiny. See “SEC and CFTC 2023 Enforcement Results: Robust Enforcement Activity and Significant Monetary Sanctions” (Jan. 18, 2024).

ACA Compliance Testing Survey: Marketing Rule Remains Top Compliance Focus

ACA Group, in collaboration with the Investment Adviser Association and Yuter Compliance Consulting, released its 18th annual Compliance Testing Survey. For the third consecutive year, compliance with the SEC’s new Marketing Rule, Rule 206(4)‑1 under the Investment Advisers Act of 1940, was the top compliance focus of investment advisers. The study covered other key compliance areas, including compliance programs, examination experience, best execution, remote operations, electronic communications, responsible investing, privacy, service providers and proxy voting. This article parses the study results. See our coverage of the 2021 ACA compliance testing survey: “Compliance Programs Holding Up and Significant Growth in ESG Interest” (Oct. 14, 2021); and “New Marketing Rule Is a Hot Topic” (Oct. 21, 2021).

Restrictive Covenant Laws at the Federal and State Level Increase Challenges of Enforcing Non‑Compete Agreements (Part Two of Two)

Employers were generally reluctant to enforce non-compete and other restrictive covenants against employees in the midst of the coronavirus pandemic when the unemployment rate was in double digits. Recently, however, there has been a resurgence in employers ensuring their non-compete and non-solicit provisions are enforced. At the same time, a patchwork of legal requirements is emerging from legislation and court holdings in various jurisdictions. For fund managers to comply with the relevant laws, they need to be aware that one size will not fit all employees across the U.S. The laws do, however, consistently attempt to balance, on one hand, employer concerns with protecting trade secrets, safeguarding confidential information and preventing unfair competition and, on the other hand, employees’ rights to earn a livelihood. Those issues were addressed in a Proskauer webinar featuring attorneys Guy Brenner and Daryl G. Leon. This second article in a two-part series identifies federal trends relating to restrictive covenants; how multiple states are handling choice of law provisions; and the treatment of restrictive covenants for low wage and other employees. The first article tracked the advancement of legislation targeting non-compete agreements in Illinois and Washington, D.C. See “Delaware Chancery Court Strikes Down Employee Restrictive Covenants in a Partnership Agreement” (Mar. 16, 2023).

Tennessee Sues BlackRock Over Allegedly “False and Deceptive” ESG Claims

In a significant challenge to the incorporation of environmental, social and governance (ESG) factors in the investment process, the Attorney General of the State of Tennessee (AG) has brought a civil enforcement action against BlackRock, Inc., accusing the firm of making misleading disclosures about its ESG practices. “BlackRock committed to global organizations that it would pursue [ESG] aims across all assets under management. And it did. For years, however, BlackRock has misled consumers about the scope and effects of its widespread ESG activity,” the AG claimed on December 18, 2023. BlackRock allegedly engaged in two patterns of deception: First, it falsely claimed that certain funds do not incorporate ESG considerations (non‑ESG funds). Second, it overstated “the extent to which its ESG aims bear on companies’ financial positioning and performance.” This article details the AG’s allegations and charges, with commentary from Lance C. Dial, partner at K&L Gates LLP. See “Money or Ethics: The ESG Investing Debate” (Oct. 13, 2022); and “Misleading ESG Claims Can Result in Significant SEC Penalties” (Jun. 16, 2022).

Private Fund Adviser Sanctioned for Inadequate Valuation Policies

Valuation of thinly traded or illiquid assets can be a challenging exercise for private fund advisers. Inaccurate valuations can result in misstatements of net asset value (NAV) and associated errors in the calculation of advisory fees. The SEC’s enforcement proceeding against a private fund adviser is an important reminder of the need for robust valuation governance. The adviser's policies and procedures provided only “minimal guidance” on how to value certain illiquid assets in accordance with generally accepted accounting principles and the standards set by the Financial Accounting Standards Board, the SEC alleged. As a result of those shortcomings, the adviser had to restate the NAV of one fund and retroactively adjust the management fees it charged over several years. This article discusses the alleged deficiencies and the terms of the settlement. See “Emerging Trends and Themes in the SEC’s Oversight of Private Funds” (Jun. 8, 2023); and “Valuation and Sub‑Adviser Oversight Failures Result in Sanctions Against Adviser” (Sep. 22, 2022).

K&L Gates Adds Investment Funds Partner to Dublin Office

Hazel Doyle has joined K&L Gates as a partner in the firm’s asset management and investment funds practice in its Dublin office, which launched in January 2023. With more than a decade of experience, Doyle’s practice covers the full spectrum of the advisory and regulatory aspects of the Irish funds industry. See “Three Investment Fund Lawyers Are Founding Partners of New K&L Gates Office in Dublin” (Feb. 2, 2023).

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