May 6, 2021

A Checklist for Fund Managers to Ensure Form ADV, Part 2A Is Complete and Accurate

Since 1979, the SEC has required each registered investment adviser to deliver a written disclosure statement to clients pursuant to Rule 204‑3 under the Investment Advisers Act of 1940. Part 2A of Form ADV sets out minimum requirements for that disclosure statement, but in general, it requires advisers to disclose material facts; conflicts of interest; and risks to clients and investors. Over the years, Form ADV has been revised significantly, including through changes to the format of Part 2A and expansion of the scope of the information required in it. As a result, it is easy for private fund managers that are registered advisers to make mistakes on their Parts 2A, such as omitting required information or providing information that is inconsistent with other disclosures. Getting any part of Form ADV wrong can result in deficiency letters – and even enforcement actions. This article reviews the basics of Form ADV; discusses the possible consequences of mistakes on the filing; and provides a checklist developed by Victoria Hogan, president of NorthPoint Compliance and former SEC examiner, that advisers can use to evaluate their own Parts 2A and ensure that the forms are accurate and complete. For another checklist created by Hogan, see “A Checklist for Advisers to Prepare Their Traders for SEC Exam Interviews” (Mar. 14, 2019).

First 100 Days As GC/CCO: Developing Knowledge and Forging Key Relationships (Part Two of Three)

Joining a private fund as a new GC/CCO can be a heady, overwhelming transition, particularly during the critical first 100 days of the tenure. Familiarity with a firm’s business and the key relationships therein can provide a stable framework, however, around which all actions can be organized. Although those two objectives will remain part of a new GC/CCO’s agenda for more than 100 days, the GC/CCO can use his or her first three months in the role to set the groundwork for future efforts. This second article in a three-part series explores how new GC/CCOs can perform the foundational tasks of learning about the firm and developing strong relationships with key people during their first 100 days. The first article offered guidance for starting the GC/CCO role on the right foot, including ways to prepare before day one and the best approach to face the first 100 days. The third article will discuss how new GC/CCOs can balance their day-to-day legal and compliance work while settling into the role; when and how to propose reforms to the firm’s operations; and what to expect beyond the first 100 days. See our two-part series on the SEC Division of Examination’s risk alert on compliance: “Limited Staffing, Marginalized CCOs and an Overall Lack of Resources at Fund Managers” (Feb. 18, 2021); and “Inadequate Annual Reviews, Poorly Implemented Policies and Other Key Takeaways” (Feb. 25, 2021).

The E.U. Sustainable Finance Disclosure Regulation: New Disclosures for U.S. Asset Managers

New disclosure obligations for asset managers recently came into force under the E.U.’s Sustainable Finance Disclosure Regulation (SFDR). Although some uncertainties remain as to the precise scope of the new regime, it is generally accepted that U.S. and other non‑E.U. asset managers are subject to the SFDR with respect to any funds that they have registered for marketing under the E.U. Alternative Investment Fund Managers Directive national private placement regime. Specifically, the SFDR applies even when the funds being marketed by an asset manager do not pursue any particular sustainability objectives, so the SFDR applies more widely than to just environmental, social or governance (ESG) focused funds. Of course, in view of the SFDR’s underlying policy objective to combat so-called “greenwashing,” firms with funds that do seek to promote environmental or social characteristics, or that have sustainable investment objectives, are subject to significantly more detailed disclosures under the SFDR. In a guest article, Leonard Ng and Matt Feehily, partner and senior associative, respectively, at Sidley Austin, explain how the SFDR applies to U.S. asset managers, set out the key action points for U.S. asset managers that fall within the SFDR’s scope, discuss some common approaches to the disclosures taken to date and highlight remaining areas of uncertainty for U.S. asset managers with non‑ESG funds. Comments about U.S. asset managers apply equally to U.K., Asian and other non‑E.U. managers. For more on the SFDR, see “Navigating the Evolving Legal and Regulatory ESG Investing Terrain (Part Two of Two)” (Dec. 10, 2020).

Rogue SEC Examiner Who Leaked Information to Prospective Employer Pleads Guilty

A former examiner in the SEC Division of Enforcement recently pleaded guilty to theft of public property. The DOJ alleged that he had misappropriated confidential information maintained by the SEC about a New York-based private equity firm and revealed that information to help secure a lucrative position as the firm’s CCO. Although rogue employees are nothing new in the financial services industry, a rogue SEC employee is incredibly rare. This article details the circumstances giving rise to the former examiner’s downfall, his alleged misconduct and the terms of his plea, as well as an unrelated enforcement action involving the firm. It also explores the potential implications for fund managers of an SEC employee’s going rogue. See “Procedures for Hedge Fund Managers to Safeguard Trade Secrets From Rogue Employees” (Jul. 21, 2016).

SEC Commissioner Examines Regulatory Approach to Digital Assets

The crypto asset class and related technology have rapidly developed. First mined in January 2009, bitcoin has surged to more than $60,000, while other blockchains have created their own tokens and related communities. That rapid growth has challenged regulators, and that challenge will only increase along with institutional investor interest in digital assets. Thus, the call for further rulemaking and guidance is only beginning. The above were a few of the points raised by SEC Commissioner Hester M. Peirce in a recent speech in which she explored topics including the legitimate and potentially illicit uses for cryptocurrency; the focus of rulemaking and the SEC’s pilot program; the dangers of regulators taking an overly conservative approach; and the need for regulatory clarity. This article explores the key points from Peirce’s remarks. For further commentary from Peirce, see our two-part coverage of the HFLR’s fireside chat featuring the Commissioner: “Fiduciary Duty, Accredited Investor Standard and CCO Liability” (Nov. 21, 2019); and “Rule Updates, Technological Change, Role of Enforcement and Hot‑Button Issues” (Dec. 5, 2019). For coverage of other speeches by Peirce, see “Can Reddit’s Influence Be Regulated? SEC Commissioner Discusses Recent Market Volatility” (Mar. 18, 2021); “Views on Personal Liability for CCOs” (Nov. 5, 2020); and “Enforcement Efforts and Reforms” (Feb. 20, 2020).