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    Sep. 26, 2024

Compliance Corner Q4‑2024: Regulatory Filings and Other Considerations Hedge Fund Managers Should Note in the Coming Quarter

At the end of the calendar year, hedge fund managers may be busy wrapping up the ends of their fiscal years by arranging for Custody Rule audits, conducting annual compliance reviews, making required regulatory filings, handling year-end redemptions, making various tax elections, calculating fund expenses and conducting performance reviews of employees. Therefore, it is never too soon to start planning for the tasks that lie ahead in the last quarter of the year. This latest installment of the Hedge Fund Law Report’s quarterly compliance update highlights upcoming filing deadlines and reporting requirements fund managers should be aware of during the fourth quarter. This guest article by ACA Group consultants Grazia Gatti, Luis Garcia and Dan Campbell also includes information on upcoming amendments to Schedule 13D and 13G filings; recent SEC enforcement cases focusing on Custody and Marketing Rule compliance; and the SEC Division of Examination’s recent sweep of investment advisers to assess their implementation of a shortened standard settlement time for securities transactions. In addition, the 2024 regulatory filings calendar prepared by ACA Group, which is designed to help hedge fund managers stay on top of important filing obligations, is available here. For more from ACA Group, see “Compliance Program Implementation: Compliance Calendars and Testing” (Jul. 18, 2024); and “Testing Is an Integral Component of Compliance Programs” (May 9, 2024).

Navigating Ransomware’s Challenges

Ransomware is growing in its speed, complexity and the size of the financial damage it can visit upon a victim company, amplifying challenging questions for how to deal with such events. Meanwhile, the regulatory environment in this field has advanced, putting additional demands on affected companies. Speakers during the Incident Response Forum Masterclass 2024 discussed these issues. This article distills their insights, including those regarding ransomware response challenges and suggested practices for achieving an effective combination of people, processes and technologies. The presenters included Alston & Bird partner Katherine Doty Hanniford, Latham & Watkins partner Antony Kim, FGS Global partner Scott Lindlaw and Skadden partner David Simon. See our two-part series on the evolution of ransomware: “Growing Threats and Response Considerations” (Feb. 16, 2023); and “Government Efforts and Cyber Insurance” (Mar. 2, 2023).

SEC Risk Alert Discusses Broker-Dealer Exam Selection, Scoping and Document Requests

As of March 2024, there were approximately 3,400 SEC-registered broker-dealers, with more than 125,000 registered offices, 625,000 registered personnel and $5.5 trillion in assets, according to a risk alert (Risk Alert) issued by the SEC Division of Examinations (Division). The Risk Alert describes the Division’s approach to broker-dealer examinations, including how it selects firms for examination; how it determines the scope of exams; and the documents it usually requests at the outset of an exam. The Risk Alert is intended to help broker-dealers prepare for exams and assist them in their compliance efforts. The Risk Alert expresses the views of Division staff and does not add, alter or amend any law, regulation or SEC statement. This article discusses the key takeaways from the Risk Alert. See “SEC Risk Alert Provides Clarity on Exam Selection Process for Advisers” (Dec. 7, 2023).

SEC Penalizes Adviser for Preferential Redemptions and Undisclosed Conflicts

When an investment adviser has a conflict of interest, it must, at minimum, make full and fair disclosure to affected investors. The SEC penalized an adviser and its principal for making inadequate disclosures to separately managed account (SMA) clients and private fund investors regarding compensation he received as an executive producer in connection with the adviser’s SMA and fund investments in the film production industry. The respondents also allegedly made a preferential redemption payment to a favored investor when the fund in question lacked sufficient liquidity to satisfy all pending redemption requests. This article details the alleged misconduct and the terms of the resolution, with commentary from Philip Moustakis, partner at Seward & Kissel. See “Identifying and Managing Common Conflicts of Interest” (May 9, 2024).

26 Firms Fined Nearly $393 Million in Newest Off‑Channel Communications Settlements

The SEC’s focus on registrants’ practices for monitoring and preserving employee communications on unapproved devices and systems continues unabated. In the latest round of settlements under its Initiative to Investigate Off-Channel Communications at Registered Entities (Initiative), the SEC has imposed nearly $393 million in civil penalties on 26 firms that failed to preserve employees’ electronic communications and supervise employees with a view to preventing violation of the recordkeeping requirements under the Investment Advisers Act of 1940 and/or the Securities and Exchange Act of 1934. As in most other recent resolutions under the Initiative, 25 of the respondents have agreed to retain an independent compliance consultant to review their electronic communications policies, procedures and practices. This article discusses the new settled enforcement orders and an associated order waiving “bad actor” disqualification. For more enforcement actions resulting from the Initiative, see “16 Firms Fined $81 Million in Latest SEC Electronic Communications Recordkeeping Settlements” (Apr. 11, 2024).

Paul Weiss Welcomes Derivatives Partner to New York

Kerri Durso has joined Paul Weiss as a partner in the finance group within the corporate department based in the New York office. Durso’s practice focuses on broad-based over-the-counter and exchange-traded derivatives, as well as the negotiation of complex derivatives instruments across all major asset classes. For more from a Paul Weiss partner, see “Senior GCs at Leading Private Fund Managers Share Practical Tips and Insights” (Dec. 8, 2022).

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