Jun. 7, 2018

Why Fund Managers Must Review Their Positions on Succession Planning and CCO Outsourcing (Part One of Three)

The SEC proposed – and recently withdrew – a rule that would have required registered investment advisers to adopt and implement detailed business continuity and transition plans. Despite the rule’s withdrawal, however, the SEC has signaled that it will continue to scrutinize the robustness of advisers’ plans. To the extent that advisers’ business continuity and transition plans cover the departure of key personnel, they generally do so only with respect to founders; yet, from a business and regulatory perspective, they should also cover others, including chief compliance officers (CCOs). The proposed rule would have also required advisers to evaluate third-party service providers’ business continuity and transition plans, including those of outsourced CCOs. This article, the first in a three-part series, discusses the SEC’s proposed rule on business continuity and transition plans; the impact, if any, of the rule’s withdrawal; the importance of CCO succession planning; and the risks of using an outsourced CCO. The second article will examine CCO hiring and onboarding; whether managers should separate their compliance departments from their legal departments; and the risks of high CCO turnover. The third article will evaluate the risks of poor succession planning and provide a roadmap for developing a robust succession plan. See “Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds” (Sep. 14, 2017).

The SEC’s Proposed Form CRS: Does It Accomplish Its Goals? (Part Two of Two)

When the SEC recently released proposed Form CRS, it explained that the new short-form disclosure document is intended to give retail investors simple, easy-to-understand information about the nature of their relationships with their investment professionals; prompt them to ask informed questions; and enable them to compare firms that offer the same or substantially similar services. Does Form CRS actually accomplish these goals, however? This two-part series analyzes the proposed Form CRS requirements, reviews various issues the form raises and provides insight from lawyers and compliance professionals on the proposal. This second article in the series discusses whether the form is likely to achieve the SEC’s stated goals and explores potential issues it raises for registered investment advisers. The first article provided an overview of proposed Form CRS and its key requirements. For additional proposals by the SEC that would further regulate fund managers, see “SEC Emphasizes Investment Adviser Fiduciary Duty and Proposes Enhanced Adviser Regulation” (May 10, 2018).

K&L Gates Program Discusses the Ins and Outs of Global Fundraising for Fund Managers: The E.U. and the Middle East (Part One of Two)

A recent K&L Gates program provided an overview of how fund managers can market in certain key foreign jurisdictions. K&L Gates partner C. Todd Gibson moderated the program, which featured partners Natalie R. Boyd, Michelle Moran, Dr. Hilger von Livonius, Choo Lye Tan and Matthew J. Watts. This article, the first in a two-part series, reviews pending proposals to streamline cross-border fund marketing in the E.U.; the impact on fundraising of Brexit and the recast Markets in Financial Instruments Directive; and the challenges of marketing in the Middle East. The second article will discuss the new Asia Region Funds Passport, the Australian Collective Investment Vehicle, the available means to invest directly in securities in the People’s Republic of China and ways Asian securities authorities are regulating cryptocurrencies. For more on this topic from Boyd and Tan, see “Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). See also “KPMG Report Highlights Key Developments in Hedge Fund Regulation in the Americas, the Asia-Pacific Region, Europe, South Africa and the Middle East” (Sep. 4, 2014); and “Why and How Do Middle Eastern Sovereign Wealth Funds, Pension Funds and High Net Worth Individuals Invest in Private Funds?” (Jun. 6, 2013).

SEC Continues Scrutiny of Undisclosed Fees at Fund Managers

Although the SEC under Chair Clayton has prioritized protecting retail investors, the agency remains keenly focused on conflicts of interest of every sort, even when the alleged victims are sophisticated investors. In the most recent example of that continuing focus, the SEC issued a settlement order against a private equity manager alleging that the manager failed to disclose to its private equity fund clients that it would receive compensation from a third-party service provider based upon the volume of services that the third party provided to the portfolio companies owned by the manager’s private equity funds. Among other concessions, the manager has agreed to pay a significant amount in disgorgement, interest and penalties. This article details the circumstances leading up to the settlement and the terms of the order. For coverage of other SEC enforcement actions involving improper fee and expense arrangements, see “Full Disclosure of Portfolio Company Fee and Payment Arrangements May Reduce Risk of Conflicts and Enforcement Action” (Nov. 12, 2015); “Blackstone Settles SEC Charges Over Undisclosed Fee Practices” (Oct. 22, 2015); and “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure” (Jul. 9, 2015).

Planning Strategies for Private Fund Managers Under the Tax Cuts and Jobs Act

Businesses and individuals continue to struggle to grasp the full impact of – and develop tax-efficient strategies under – the landmark 2017 Tax Cuts and Jobs Act (Tax Act). See “New Tax Law Carries Implications for Private Funds” (Feb. 1, 2018). A recent program presented by Baker Tilly Virchow Krause addressed the key provisions of the Tax Act that affect private fund managers and their principals and offered insight into how they are reacting to the Tax Act. The program featured Baker Tilly senior tax manager Gregory Kastner, and this article summarizes his insights. For additional recent insight from Kastner and Baker Tilly on the Tax Act, see “How the Tax Cuts and Jobs Act Will Affect Private Fund Managers and Investors” (Feb. 22, 2018). For further commentary from Kastner, see “Ways Fund Managers Can Compensate and Incentivize Partners and Top Performers” (Dec. 14, 2017).

Five-Person Finance Team Joins Alston & Bird’s New York Office

Alston & Bird has added three partners and two counsel to the firm’s finance group in its New York office: partners David J. Hoyt, Ken Rothenberg and Russell Chiappetta, along with counsel Mathew Gray and Jason Cygielman. As members of the firm’s finance practice, they will advise clients on a variety of finance transactions, including the secondary market trading of par and distressed bank loans; bankruptcy claims; and other assets and portfolios traded in distressed and special situations. For commentary from another Alston & Bird partner, see “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018); and “SEC Review of Cybersecurity Finds Gains Since 2014, but Cites Gaps in Training and Compliance” (Aug. 24, 2017).