Mar. 2, 2017

Acting SEC Chair Emphasizes Agency Will Protect the “Forgotten Investor” 

The SEC has a number of clearly defined priorities for 2017 and beyond, including a strong commitment to protecting those who fall under the rubric of the “forgotten investor.” In the interest of protecting smaller investors, it is appropriate for the agency to reexamine and revise outdated notions about different investment options being suitable for different types of investors. It may also be time for the SEC to eliminate rules prohibiting non-accredited investors from accessing certain opportunities and risk-mitigation tactics that accredited investors have freely used for decades. All of these points were conveyed in a speech delivered by acting SEC Chair Michael Piwowar at the “SEC Speaks Conference 2017,” dedicated to the theme “Remembering the Forgotten Investor.” This article explores the principal takeaways from Piwowar’s speech, providing managers with key insight into the SEC’s priorities and potential direction under President Trump’s administration. For HFLR coverage of a prior SEC Speaks event, see “SEC Commissioner Calls for Increased Transparency and Accountability in Capital Markets” (Mar. 3, 2016). For a summary of SEC examination priorities for 2017, 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 analysis of a speech on SEC enforcement priorities by former SEC Chair Mary Jo White, see “Outgoing SEC Chair Outlines New Model for Enforcement Priorities in 2017 and Beyond” (Jan. 12, 2017). 

Winding Down Funds: How Managers Make the Decision and Communicate It to Investors and Service Providers (Part One of Two)

A fund manager typically spends most of its time not only contemplating how to maximize returns for investors, but also navigating the array of compliance and regulatory concerns involved in running a private fund. Because the manager is so caught up in thinking about these daily considerations, it may lose sight of the multitude of issues that arise when it comes time to wind down that same fund. If the manager exercises some foresight regarding the fund’s eventual wind-down and puts proper procedures in place, however, the whole process can be both smoother and less fraught with legal and regulatory risks. In a recent interview with the Hedge Fund Law Report, Michael C. Neus, senior fellow in residence with the Program on Corporate Compliance and Enforcement at New York University School of Law and former managing partner and general counsel of Perry Capital, LLC, shared his detailed insights about the various considerations caused by winding down a fund. For additional commentary from Neus, see “Practical Solutions to Some of the Harder Fiduciary Duty and Other Legal Questions Raised by Side Letters” (Feb. 21, 2013). This first article in a two-part series presents Neus’ thoughts on the factors leading to the decision to wind down a fund, which personnel should lead that process and how it should be disclosed to investors and service providers. The second article will explore what types of fees and expenses investors should be charged during the wind-down, as well as how managers can maximize the value of illiquid assets during a liquidation. For more on winding down funds, see “Practical Tips for Fund Managers to Mitigate Litigation Risk From Regulators, Investors and Vendors When Winding Down Funds” (Oct. 27, 2016).

How U.S. Private Fund Managers May Avoid Running Afoul of Proposed U.K. Legislation Criminalizing the Facilitation of Tax Evasion (Part Two of Two)

In its latest effort to identify and punish those involved in tax evasion, the U.K. has proposed legislation making it a criminal offence for companies and partnerships to fail to prevent their agents from facilitating tax evasion. The proposed regulations – known as the “failure to prevent the facilitation of tax evasion” rules (UKFP rules) – are broad in nature and will affect a range of businesses, including private fund managers and other financial services firms. In this guest article, the second in a two-part series, Sidley Austin partner Will Smith provides an in-depth discussion of how the UKFP rules may apply to private fund managers, including U.S.-based investment managers that have a link to the U.K. The first article provided an overview of the UKFP rules and discussed the two new criminal offences prescribed therein. For insight from Smith’s partner, Leonard Ng, see “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015); and “Sidley Austin, Ivaldi Capital and Advise Technologies Share Lessons for U.K. Hedge Fund Managers From the January 2015 AIFMD Annex IV Filing” (Mar. 27, 2015).

Ways the Trump Administration’s Policies May Affect Private Fund Advisers

With a Republican president and Republican-controlled Congress, there is the possibility for comprehensive changes in several areas of concern to private fund managers, including taxation, regulation and enforcement. In his first weeks in office, President Trump issued a series of sweeping, yet sometimes confusing, orders directed at fulfilling some of his campaign promises. A recent seminar presented by the Association for Corporate Growth (ACG) provided insight on the impact of the Trump executive orders regarding the pending fiduciary rule and other regulatory matters; developments at the SEC; the future of the Dodd-Frank Act and other laws that may affect the private fund industry; proposed tax reform; cybersecurity; and political contributions. Scott Gluck, special counsel at Duane Morris, moderated the discussion, which featured Langston Emerson, a managing director at advisory firm The Cypress Group; Basil Godellas, a partner at Winston & Strawn; Ronald M. Jacobs, a partner at Venable; and Michael Pappacena, a managing director at ACA Aponix. This article summarizes their insights. For coverage of other ACG webinars, see “SEC Staff Provides Roadmap to Middle-Market Private Fund Adviser Examinations” (May 16, 2014); and “SEC’s David Blass Expands on the Analysis in Recent No-Action Letter Bearing on the Activities of Hedge Fund Marketers” (Mar. 13, 2014). 

Post-Brexit Environment Requires Fund Managers to Combine Granular Knowledge of Europe’s Varied Funds Markets With Appropriately Targeted Marketing Campaigns

There are several issues that hedge fund managers must take into account prior to marketing and distributing their products in Europe. They need to consider various fund products, structures and regulatory requirements across the multiple jurisdictions in Europe. These factors have to be weighed together with the impact of recent developments – such as Brexit and the Panama Papers revelations – on European investors’ appetites for those products. See “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016). These topics were addressed in a recent panel discussion that took place under the auspices of the Hedge Fund Association. Moderated by Michael Delano, an audit partner for PwC Luxembourg, the panel featured Guillaume Touze, founder and managing director of Quadra Capital; Jérôme Wigny, a partner at Elvinger Hoss Prussen; and Carl Verbrugge, a capital partner at Lombard Odier Group. This article presents the primary takeaways from the panel discussion. For more on marketing in Europe, see “Marketing Strategies for U.S. Hedge Fund Managers Under AIFMD (Part One of Two)” (Jul. 21, 2016); and “Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)” (Jul. 14, 2016).

SEC Settlement Reminds Fund Managers With Affiliated Broker-Dealers of Importance of Robust Controls Over Use of MNPI

In an effort to expand its business, a broker-dealer established a private fund that traded in many of the same securities that it covered in its research and investment banking activities. That broker-dealer allegedly failed to adopt policies and procedures to prohibit its employees from using material nonpublic information learned from its investment banking clients in connection with the fund’s trading, however. The SEC’s recent settlement order (Order) with that broker-dealer is a timely reminder that fund managers and broker-dealers must adopt and implement appropriate policies and procedures to ensure compliance with insider trading and other applicable rules under the securities laws. This article summarizes the Order and crucial lessons for fund managers that can be gleaned from it. For more on mitigating the risk of insider trading through compliance programs, see “General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action” (Nov. 3, 2016); “Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities” (Jan. 30, 2014); and “How Hedge Fund Managers Can Use Technology to Enhance Their Compliance Programs” (Nov. 17, 2011).

Former SEC Associate Director Joins Sidley Austin in Washington, D.C.

Stephen Cohen, a former Associate Director of the SEC’s Division of Enforcement, has joined Sidley Austin’s securities and derivatives enforcement and regulatory practice as a partner in Washington, D.C. Cohen’s experience includes enforcement of securities law violations, including insider trading, disclosure fraud, accounting fraud and Foreign Corrupt Practices Act violations. Additionally, Cohen acted as a senior advisor to former SEC Chair Mary Schapiro and played a key role in the launch of the commission’s whistleblower program. For additional insight from Cohen, see “Current and Former Regulators and Prosecutors Particularize the Enforcement Challenges Facing Hedge Fund Managers in 2014” (Jan. 30, 2014). 

Schulte Adds Significant Shareholder Activist Expertise in NYC

Aneliya Crawford has joined Schulte Roth & Zabel as a partner in the firm’s mergers and acquisitions (M&A), shareholder activism and securities practices. Crawford advises hedge funds on shareholder activism, M&A, hostile takeovers and corporate governance issues. For additional insight from Schulte attorneys, see “Implications of Lehman Brothers Decision on Hedge Fund Managers Trading CDOs” (Jul. 28, 2016); and “Non-Competition and Non-Solicitation Provisions and Other Restrictive Covenants in Hedge Fund Manager Employment Agreements” (Nov. 23, 2011).