As security breaches continue to proliferate and criminals become more sophisticated at compromising their many targets, fund managers face significant and potentially devastating reputational and financial threats. Even a small cyber incident can erupt into a high-profile cyber event depending on whether it becomes public. The publicity surrounding these events can escalate the problem beyond the technical breach and raise the stakes on how fund managers respond. This first installment of our two-part series on cyber breach communication plans discusses how to identify vital participants and their roles; details key playbook components and the benefits of advance planning; and offers guidance on how to communicate during a cyber crisis event. The second article will detail how to coordinate with a third-party vendor; strategies for handling external communications to the media, regulators and others; and how to overcome common pitfalls and challenges. See “Cyber Insurance Coverage, Pre-Breach Mitigation Efforts and Post-Breach Response Plans Can Reduce Harm to Fund Managers From Cyber Attacks” (Jan. 19, 2017); and “Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations” (Oct. 6, 2016). Read full article …

The possibility of a significant change to, or discontinuation of, the London Interbank Offered Rate (LIBOR) has been discussed for some time. A recent speech by Andrew Bailey, Chief Executive of the U.K. Financial Conduct Authority, however, has crystallized the issue and made it appear almost certain that LIBOR will eventually cease to be published. Given LIBOR’s pervasive use by hedge funds and other market participants, the consequences of its permanent discontinuation will be felt – for better or worse – throughout the financial markets, and a misstep could affect investors worldwide. In a guest article, Anne E. Beaumont, partner at Friedman Kaplan Seiler & Adelman, discusses the possible consequences for derivatives transactions that involve USD LIBOR and are governed by ISDAs, while also suggesting five steps that advisers can take today to prepare for this impending change. For additional commentary from Beaumont on derivatives documentation, see “The 1992 ISDA Master Agreement Says Notice Can Be Given Using an ‘Electronic Messaging System’; If You Think That Means ‘Email,’ Think Again” (May 23, 2014); and “Five Steps for Proactively Managing OTC Derivatives Documentation Risk” (Apr. 25, 2014). Read full article …

Valuation remains a perennial hot-button issue for the SEC. In a recent settlement order, the Commission charged an investment adviser and two of its principals with using unrealistic assumptions when valuing one of their funds’ major holdings and failing to discount the value of an inter-fund loan that had little hope of being repaid in full. The SEC asserted that these valuations were not only fraudulent, but also gave rise to a custody rule violation by rendering the funds’ financial statements non-compliant with generally accepted accounting principles. All investment advisers should pay attention to the lessons from this case in light of the SEC’s focus on valuation and the potential ramifications of violations. This article summarizes the SEC’s allegations, specific charges and the terms of the settlement. For coverage of other recent SEC actions involving improper valuations, see “Failure to Consider Relevant Market Inputs When Valuing Assets May Draw SEC Enforcement Action Against Fund Managers” (Apr. 20, 2017); and “SEC Settlement With PIMCO Highlights the Importance of Proper Valuation and Performance Disclosures” (Dec. 8, 2016). Read full article …

The private funds industry is at risk of potentially devastating cyber breaches. Despite being fiduciaries responsible for investing vast amounts of assets, many advisers have only recently developed cybersecurity training, procedures and protocols, and in some cases their defenses remain quite rudimentary, leaving them vulnerable to deceptive practices. In a recent risk alert, the SEC praised recent progress made by firms in the asset management space while identifying a number of critical areas where preparedness still falls short. In particular, the alert cited 12 robust practices that advisers should consider for adoption at their own firms. The presence of persistent gaps in preparedness, and the SEC’s principles-based approach to regulating cybersecurity, make it all the more imperative for advisers to increase their investments in and oversight of internal cybersecurity procedures and preparedness. Doing so will enable advisers to meet their compliance obligations and to shield investors from catastrophic losses of money and personally identifiable information. To help readers understand these issues, this article presents the key points from the risk alert, together with insights from legal practitioners with cybersecurity expertise. For more on the SEC’s approach to cybersecurity, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017). For more on cybersecurity generally, see “Surveys Show Cyber Risk Remains High for Investment Advisers and Other Financial Services Firms Despite Preventative Measures” (Jul. 20, 2017); and “Navigating the Intersection of ERISA Fiduciary Duties and Cybersecurity Data Breach Protections” (Jun. 29, 2017). Read full article …

A recent SEC resolution with an unregistered fund manager, its principal and several affiliates serves as yet another reminder that private fund managers must make scrupulously accurate disclosures to investors – both in their offering documents and when conflicts of interest arise – and must use appropriate valuation methodologies. For more on proper disclosure, see “Flawed Disclosures to Avoid – and Policies and Procedures to Adopt – for Managers to Reduce Risk of SEC Scrutiny of Fee and Expense Practices (Part Two of Three)” (Sep. 8, 2016). The SEC charged that, in an effort to prop up one fund that they managed, the defendants caused another fund to purchase a 50 percent interest in a portfolio company owned by the first fund at a price set “unilaterally” by the principal. The defendants also allegedly violated the investment-company, broker-dealer and securities-registration provisions of the securities laws. This article summarizes the allegations in the SEC’s 17-count complaint and the terms of the resolutions. See also “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017); and “Eight Bad Excuses Fund Managers Have Raised Trying to Avoid SEC Sanctions for Fee and Expense Allocation Violations and Undisclosed Conflicts of Interest” (Oct. 13, 2016). Read full article …

The tax practice of Goodwin Procter has gained Jason Vollbracht as a partner based in San Francisco. Vollbracht advises clients on the tax aspects of fund formation; the buying and selling of fund businesses; partnerships; real estate transactions; and real estate investment trusts. For insight and analysis from Goodwin Procter attorneys, see “How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part Three of Three)” (May 29, 2015); and “Critical Components of a Hedge Fund Manager Cybersecurity Program: Resources, Preparation, Coordination, Response and Mitigation” (Jan. 15, 2015). Read full article …

On September 1, 2017, Christopher Kellett will join the private equity practice of Linklaters as a partner in the firm’s Frankfurt office. Kellett advises private equity clients on a broad range of large- and mid-cap deals. See “Anatomy of a Private Equity Fund Startup” (Jun. 22, 2017); and “Private Equity in 2017: How to Seize Upon Rising Opportunity While Minimizing Compliance and Market Risk” (Jun. 8, 2017). Read full article …