Mar. 21, 2019

Preparing for the Impact Revolution: How Fund Managers Can Implement the Philosophy of “Doing Well by Doing Good”

The desire for investors to receive profit with purpose was one of the central themes explored at the 2019 Cayman Alternative Investment Summit (CAIS). The Hedge Fund Law Report recently interviewed CAIS panelist Asha Mehta, portfolio manager and director of responsible investing at Acadian Asset Management, a quantitative investment manager that invests globally across the equities markets and incorporates environmental, social and governance (ESG) considerations into its investment process as return-seeking and risk-mitigating factors. This article presents Mehta’s insights on the evolution of the meaning of responsible investing; common categories of ESG criteria and the steps being taken to standardize those concepts; the tools available to fund managers to gather ESG data; challenges currently facing fund managers employing ESG criteria into their investment decision-making processes; and the impact that the responsible investing movement is having on the investment management industry. See our two-part series on responsible investing in the hedge fund industry: “Past, Present and Future” (Nov. 10, 2016); and “Designing an ESG Investing Policy” (Nov. 17, 2016).

FINRA RegTech Conference Examines AI and Big Data; Blockchain; and Regulators’ Views (Part One of Two)

Regulatory technology (RegTech) aims to improve regulatory compliance by automating processes; facilitating reporting; and using advanced data analytics to identify and manage risks. FINRA recently convened a group of regulators, financial services firms and RegTech experts to explore the growth of RegTech and its associated benefits and challenges. This article, the first in a two-part series, covers the portions of the FINRA 2019 RegTech Conference that examined artificial intelligence and big data; blockchain; RegTech challenges; and regulators’ views on RegTech. The second article will explore current uses of RegTech by regulated entities and regulators; considerations before deploying RegTech; and a case study of RegTech implementation. See “Cordium and Aite Group Survey Benchmarks Use of ‘RegTech’ by Asset Management Firms” (Feb. 8, 2018).

FCA Evaluates Firms’ Cyber Resilience

Cyber resilience is an important concern of the U.K. Financial Conduct Authority (FCA). In 2017 and 2018, at the request of the FCA, several hundred financial services firms completed a cross-sector self-assessment survey of their cyber resilience or technological resilience. At the same time, the FCA also conducted informal interviews with directors and senior managers of 20 asset management and wholesale banking firms. This article summarizes the key takeaways from the survey and its associated findings. See “FCA Head of Technology Outlines Regulator’s Cybersecurity Expectations and Three Key Lessons for Fund Managers” (Feb. 22, 2018). For a comparison of the FCA and SEC stances on cybersecurity, see our two-part series “Navigating FCA and SEC Cybersecurity Expectations”: Part One (Jan. 7, 2016); and Part Two (Jan. 14, 2016).

Court Reconsiders November 2018 Order and Issues Preliminary Injunction Against ICO

In October 2018, the SEC sought a preliminary injunction from the U.S. District Court for the Southern District of California (Court) to stop an allegedly fraudulent initial coin offering (ICO). The SEC complaint alleged that, to give legitimacy to the ICO, the defendants created a bogus self-regulatory agency modeled on the SEC; falsely claimed that the offering was approved by the SEC and exempt from registration; and engaged in other misleading conduct. The Court initially ruled that the SEC had not established entitlement to a preliminary injunction. In the latest chapter of this saga, however, the Court reversed course and issued a preliminary injunction against the defendants. This article analyzes the Court’s order granting the SEC’s motion for partial reconsideration. For coverage of prior rulings by the Court in this action, see “U.S. District Court Rules That Digital Tokens in Initial Coin Offerings May Not Constitute Securities” (Jan. 24, 2019); and “SEC Halts Allegedly Fraudulent ICO That Employed a Bogus Regulatory Agency and False Claims of SEC Approval” (Nov. 29, 2018).

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

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 individuals who are employed by or otherwise provide services to sponsors of private investment funds. This third article reviews practical and design considerations related to profits interests in a tax partnership, including the treatment of profits interests and capital interests as separate interests in a partnership; dual-status issues; phantom income; and tax distributions. The first article provided background on carried interest arrangements and examined relevant analytical considerations. The second article discussed 83(b) elections; fee-waiver provisions; and the tax treatment on the repurchase or disposition of profits interests or the payment in liquidation of profits interests. The fourth article will explore additional practical and design considerations. For additional commentary from Rabitz, see “Becoming a Plan Assets Fund May Limit Hedge and Other Private Funds’ Abilities to Charge Fees” (Apr. 21, 2016); and “Recent Developments Affect Classifications of Control Groups and Fiduciaries Under ERISA” (Apr. 14, 2016).

Funds Lawyer Erica Moscarello Joins McDermott Will & Emery in New York

McDermott Will & Emery announced that Erica Moscarello has joined its transactions practice group in New York and will assist clients in fund formation, structuring and operational matters, as well as regulatory and compliance issues. For commentary from other McDermott partners, see our two-part series on internal compensation arrangements for investment professionals: “Carried Interest and Deferred Compensation” (Mar. 15, 2018); and “Hedge Fund Compensation and Non-Competes” (Mar. 22, 2018).