Mar. 7, 2019

How Fund Managers Can Mitigate the Risks of Open-Source Software (Part Three of Three)

Although open-source software (OSS) poses a number of risks, fund managers can take several steps to mitigate those risks. Managers should, for example, develop robust policies, procedures and controls regarding, among other things, the download and use of OSS, which may include the use of a committee to sign off on the introduction of new software. Additionally, managers should ensure they receive certain representations and warranties when dealing with software developers who integrate OSS into proprietary products. Finally, managers must conduct appropriate due diligence not only of OSS vendors, but of the software itself. This article, the third in a three-part series, evaluates actions fund managers can take to mitigate OSS risks, including policies, procedures and controls to adopt; ways to deal with third-party vendors; and due diligence. The first article discussed the basics of OSS, actions governments are taking to support it, relevant regulatory guidance and ways OSS is being used by fund managers. The second article analyzed the benefits of OSS, as well as the disadvantages and risks that it presents. For more on developing policies and procedures, see “A Checklist for Evaluating Employee Disciplinary Policies and Procedures of Private Fund Managers” (Mar. 22, 2018); and “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017).

Former SEC Senior Counsel Discusses the Digital Assets Space (Part One of Two)

Philip Moustakis, most recently a Senior Counsel in the SEC’s Division of Enforcement, has joined Seward & Kissel as counsel. As Senior Counsel for more than a decade, Moustakis investigated and prosecuted complex matters involving violations of the federal securities laws. He also served a lengthy tenure in the Asset Management Unit; was a founding member of the Cyber Unit, where he focused on cryptocurrencies and initial coin offerings; and was a founding member of the Distributed Ledger Technology Working Group, which was formed to coordinate the response to the emerging technology across the SEC’s divisions and offices. The Hedge Fund Law Report recently interviewed Moustakis in connection with his move to Seward & Kissel. This first article in our two-part series summarizes his thoughts on his experience in the government, as well as the regulatory approach to digital assets and blockchain. The second article will explore enforcement trends in general and in the digital asset space specifically, along with whistleblowers. For additional insight from other Seward & Kissel attorneys, see “With the Filing Deadline Looming for Many Advisers, Seward & Kissel Attorneys Provide a Roadmap to Amended Form ADV” (Mar. 8, 2018); and our two-part series “HFLR and Seward & Kissel Webinar Explores Trends Identified in Side Letter Study”: Part One (Nov. 16, 2017); and Part Two (Nov. 30, 2017).

Taxation of Carried Interests for Senior Level Fund Managers (Part One of Four)

Carried interest arrangements have been common for years in many types of private investment funds, including private equity, real estate and hedge funds. Carried interest arrangements can be controversial, in part, because of the ability of fund managers to treat the pass-through of earnings in certain types of funds as long-term capital gains for tax purposes, notwithstanding that the carried interest arrangement provides for compensation in connection with the performance of personal services by the fund manager. In a four-part guest series, Arthur H. Kohn, partner at Cleary Gottlieb, along with Andrew L. Oringer and Steven W. Rabitz, partners at Dechert, summarize the principal U.S. federal income tax and related design considerations associated with carried interest arrangements for fund managers. This first article provides background on carried interest arrangements and examines relevant analytical considerations, including the statutory scheme; judicial background; proposed regulations; applicable revenue procedures; and capital shifts and book-ups. The remaining articles in the series will outline numerous practical and design considerations. For additional insights from Oringer and Rabitz, see our four-part series “A ‘Clear’ Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans”: Part One (Jul. 28, 2016); Part Two (Aug. 4, 2016); Part Three (Aug. 11, 2016); and Part Four (Aug. 25, 2016).

RCA Symposium Explores Common Examination Risk Areas (Part Two of Two)

An all-star cast of chief compliance officers (CCOs) and regulatory attorneys offered their thoughts on common examination risk areas at the Compliance, Risk & Enforcement Symposium sponsored by the Regulatory Compliance Association (RCA). Moderated by Robert Van Grover, partner at Seward & Kissel, the program featured Lawrence S. Block, managing director, counsel and CCO of Island Capital Group; David L. Fitzgerald, general counsel and CCO at Gabelli & Company; Lucy Frew, partner at Walkers; Michael C. Neus, general counsel of ExodusPoint Capital Management; Heather Traeger, CCO of the Teacher Retirement System of Texas; and Steven A. Yadegari, chief operating officer and general counsel at Cramer Rosenthal McGlynn. This article, the second in a two-part series, discusses challenges associated with fee and expense allocations; social media; and political contributions, as well as the current regulatory climate in the Cayman Islands. The first article covered compliance issues that are likely to come under SEC scrutiny during an examination, including an adviser’s culture of compliance; marketing and other disclosures; addressing past compliance deficiencies; compliance training; and cybersecurity. For additional coverage of events sponsored by the RCA, see “Best Practices for Investment Advisers Using Social Media to Mitigate Advertising Rule Violations and Other Risks” (Mar. 23, 2017); “Risks With Investment Allocation, Trade Execution, Soft Dollars, Client Solicitation and Valuation” (Apr. 14, 2016); and “Issues Pertaining to the Custody Rule, ERISA, Client Agreements, Fees, Codes of Ethics and Confidentiality” (Apr. 7, 2016).

SEC’s Pursuit of Mutual Fund Share Class Violations Continues Unabated

Consistent with its oft-repeated goal of protecting retail investors, the SEC recently settled three enforcement actions against investment advisers who allegedly failed to make adequate disclosures concerning their conflicts of interest in selecting mutual fund share classes for clients, failed to achieve best execution for those clients and made material misstatements in public filings concerning those practices. This article analyzes the alleged violations and the settlement order against each of the three advisers. For other recent enforcement actions involving mutual fund share class recommendations, see “SEC Continues to Pursue Advisers That Provide Inadequate Disclosures About Mutual Fund Share Class Selection Practices and Other Conflicts of Interest” (Nov. 15, 2018); “SEC Continues to Pursue Advisers That Fail to Make Adequate Disclosures About Selection of Mutual Fund Share Classes” (Oct. 4, 2018); and “SEC Settles Three Additional Enforcement Actions for Inadequate Share-Class Disclosures” (May 17, 2018).

Scott Fisher Is Newest Addition to Steptoe’s Corporate Group in New York

Steptoe & Johnson recently announced the arrival of Scott Fisher in the firm’s New York office as partner in its corporate group, with a focus on capital markets and securities. Fisher advises clients on securities law; corporate governance; public and private offerings of debt and equity securities; and mergers and acquisitions. For coverage of other recent hires at the firm, see “William E. Turner II Joins Steptoe’s Chicago Office” (Jan. 31, 2019); and “Former SEC Deputy Director of Trading and Markets Gary Goldsholle Rejoins Steptoe” (Dec. 6, 2018).