June 6, 2024

Third Round of Form PF Amendments Focuses on Granular Hedge Fund Data (Part One of Two)

On February 8, 2024, the SEC and CFTC jointly issued amendments (Amendments) to enhance private fund reporting on Form PF. Key changes effected by the Amendments include enhanced reporting by all advisers required to file Form PF; more granular reporting on hedge funds, including the exposures, positions and borrowings of large hedge funds; and disaggregated reporting on fund structures. This is the third round of amendments to Form PF in the last two years. The Amendments and the adopting release were published in the Federal Register on March 12, 2024; the Amendments will take effect on March 12, 2025. This article, the first in our two-part coverage, discusses the Amendments. The second article will provide key takeaways and next steps for hedge fund managers. See our two-part series on the originally proposed amendments to Form PF: “Overview and Goals” (Sep. 15, 2022); and “Rationale, Commissioner Views and Need for Comments” (Sep. 22, 2022).

What Fund Managers Should Know About the FTC’s Ban on Non‑Competes

Non-compete agreements have long been an important and commonplace contractual safeguard employed by hedge fund and other private fund managers to protect their valuable confidential information, client relationships and investments in their employees. However, non-compete provisions have been the subject of increasing scrutiny by state legislatures and courts in recent years, and employers have had to pay careful attention to crafting covenants that are narrowly tailored to protect their valid business interests. This scrutiny has now reached new heights as the federal government entered the fray. After proposing a ban on non-competes (Proposed Rule) in January 2023 and considering more than 26,000 comments on the proposal, on April 23, 2024, the Federal Trade Commission adopted a final rule supplanting the laws of most states and prohibiting virtually all non-compete provisions as an unfair method of competition (Final Rule). The Final Rule will take effect on September 4, 2024 – unless one of the numerous pending legal challenges is successful in pausing its implementation. This guest article by Dechert attorneys J. Ian Downes, Jeffrey W. Rubin and Sierra Sanchez discusses the scope of the Final Rule; the opposition and challenges to it; and guidance for navigating what could be a seismic shift in the law. For commentary from Downes and Rubin on the Proposed Rule, see “What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions” (Feb. 16, 2023).

Third Marketing Rule Risk Alert and New Settlements Portend Vigorous Enforcement

The SEC Division of Examinations recently issued a third risk alert (Risk Alert) concerning advisers’ compliance with new Rule 206(4)‑1 (Marketing Rule or Rule) under the Investment Advisers Act of 1940 (Advisers Act). The Risk Alert focuses on not only observed deficiencies in compliance with the Rule but also associated deficiencies in compliance with Advisers Act Rule 206(4)‑7, Rule 204‑2 and Form ADV. Days before issuing the Risk Alert, the SEC also resolved five enforcement proceedings involving Marketing Rule violations. This article discusses the Risk Alert and those settlements, with commentary from Michael W. McGrath, partner at Dechert. “Neither the Risk Alert nor the settlements break new ground in terms of interpreting an adviser’s obligations under the Marketing Rule, but they are helpful to understand where the SEC staff is devoting its time and attention,” McGrath told the Hedge Fund Law Report. See “Second Marketing Rule Risk Alert Provides Little Substantive Guidance” (Aug. 3, 2023); and “Marketing Rule Risk Alert Forecasts Coming Exams” (Oct. 20, 2022).

New Hedge Funds: Short‑Term Challenges Create Long‑Term Views

The 2023 New Manager Hedge Fund Study by Seward & Kissel LLP shows a willingness among all parties to negotiate terms so investment activity can stay robust at a time of high interest rates and high costs. “Even in an environment in which it’s difficult to raise capital, the continued launch of funds and investor interest in funds is evidence that investors are still looking to deploy capital for the right opportunities with the right strategies and on the right terms,” said Noelle Indelicato, partner in the investment management group of Seward & Kissel. This article examines the study’s most significant findings, with commentary by Indelicato. For coverage of prior Seward & Kissel surveys, see “Study Finds Fee Discounts and MFN Provisions Still Common in Side Letters” (Jan. 19, 2023); and “Report Examines Appetite for Separately Managed Accounts and Key Terms” (Oct. 27, 2022).

Measures Against Russia Pose Serious Compliance Challenges

For some companies engaged in business with Russia, it has proven pragmatic to act as if the country were under more wide-ranging U.S. sanctions than is actually the case. Although not as comprehensive as the sanctions against Iran or North Korea, the U.S. measures against Russia affect fundamental aspects of the local economy, such as the banking system, making any kind of business in Russia effectively difficult to accomplish without violations. Moreover, U.S. authorities have adopted positions that give them a wider potential field of maneuver than they have, in practice, implemented, leaving much to public officials’ own discretion. The U.S. has coordinated its sanctions ever more closely with those of partners such as the E.U. and the U.K. to close off circumvention opportunities. Business with Russia is likely to become more limited as regulators become more proactive and prohibitive. This article distills insights offered by Davis Polk attorneys during a firm webinar addressing sanctions and similar measures taken against Russia by the U.S. Office of Foreign Assets Control, DOJ, Department of Commerce, Financial Crimes Enforcement Network and in Europe, noting compliance challenges and enforcement efforts. For a look at sanctions basics, see our three-part series: “How Sanctions Regimes Work” (Jun. 16, 2022); “Their Impact on Private Fund Investors and Investments” (Jun. 23, 2022); and “How to Comply With Them” (Jul. 7, 2022).

Proskauer Expands Hedge Funds Practice With Addition of Jennifer Dunn

Jennifer Dunn, a credit and hedge fund specialist, has joined Proskauer as a partner in its private funds group. Based in New York, Dunn focuses on advising hedge funds, closed‑end funds (including debt funds), hybrid funds, co‑investment platforms and investment advisers in connection with their structuring, formation, ongoing operational needs and general securities law matters, as well as regulatory and compliance issues. For insights from Dunn, see our three-part series “Investment Opt-Out Rights for Hedge Fund Investors: Rationales, Mechanics, Regulatory Risks and Operational Challenges”: Part One (Nov. 8, 2013); Part Two (Nov. 14, 2013); and Part Three (Nov. 21, 2013).