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    May 9, 2019

Investing in Cannabis: Legal Background, Justice Department Guidance and State Legalization (Part One of Four)

Cannabis is a Schedule I drug under the Controlled Substances Act (CSA), which means that – despite increasing state legalization of recreational and medicinal use – cannabis businesses remain federally illegal. Nevertheless, the U.S. constitutional framework, certain federal laws and related guidance provide some level of comfort to those businesses and investors. This article, the first in a four-part series, discusses the legislative, judicial and executive cannabis framework, as well as state legalization and industry growth. The second article will analyze cannabis deal structures, how managers should diligence investments, what managers should include in offering documents and anti-money laundering concerns. The third article will evaluate the effect of federal illegality on underlying businesses, as well as residency requirements for investing. The fourth article will assess the international prospects for investing, including in Canada; public perception and valuation issues; and service providers in the space. See “Opportunities and Challenges Posed by Three Asset Classes on the Frontier of Alternative Investing: Blockchain, Cannabis and Litigation Finance” (Dec. 14, 2017).

Why Fund Managers Must Adequately Support CCOs and Compliance Programs: Recent Failures Lead to SEC Enforcement Action (Part One of Two)

In a June 2015 speech, then-SEC Commissioner Luis A. Aguilar advocated for the support of chief compliance officers (CCOs) by investment advisers given the “vital role” that CCOs play. According to the ACA Compliance Group’s 2018 Alternative Fund Manager Compliance Survey, 70 percent of hedge fund and illiquid fund manager respondents said that they receive sufficient compliance resources, leaving 30 percent at risk that failing to provide sufficient resources and support to their CCOs could undercut their compliance efforts and result in violations and enforcement actions. Recent related SEC enforcement actions illustrate this risk, as an investment adviser and its former CEO both settled charges relating to the adviser’s failure to perform adequate due diligence and monitoring of certain investments contrary to its representations to clients, as well as the CEO’s failure to address known resource deficiencies in the adviser’s compliance program. This two‑part series explains why it is important for investment advisers to provide adequate resources to support their CCOs and compliance programs. This first article details the compliance failures in the aforementioned enforcement actions. The second article will provide the key takeaways for investment advisers and their CCOs from these actions. For other enforcement actions in which insufficient compliance resources played a role, see “Lessons Private Fund Managers Can Learn From U.S. Bancorp’s Settlement of AML Violations” (Apr. 26, 2018); and “SEC Enforcement Action Shows Hedge Fund Managers May Be Liable for Failing to Adequately Support Their CCOs” (Jul. 23, 2015).

Neuberger Berman Adviser Faces $2.73 Million in Fines and Disgorgement for Improperly Allocating Employee Compensation to Its Funds

Managers’ allocations of expenses to their funds have been under near-continuous SEC scrutiny for the past several years. In a recent example, the SEC entered into a settlement order with NB Alternatives Advisers LLC (NBAA) after alleging that NBAA negligently violated the antifraud provisions of the Investment Advisers Act of 1940 by allocating all of the compensation expenses of certain employees to its funds, even though those employees had spent a small portion of their time doing other work. This article analyzes the terms of the SEC’s order. Although the order relates to improper expense allocation practices by a private equity adviser, the action offers lessons for all private fund managers. See “OCIE Risk Alert Warns of Six Most Frequent Fee and Expense Compliance Issues” (May 3, 2018); and “Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement: Five Key Priorities for OCIE (Part One of Two)” (Jan. 4, 2018).

The U.K. Senior Managers Regime: Certification Regime and Conduct Rules (Part Two of Two)

A recent ACA Compliance Group (ACA) webinar provided a roadmap for fund managers to navigate the transition to the U.K. Senior Managers and Certification Regime (SMCR), which will apply to the financial services industry in its entirety on December 9, 2019, and introduces, among other things, heightened levels of personal responsibility and accountability. The program featured Martin Lovick, ACA senior principal consultant; Josie Cooper, ACA consultant; and Dimitrios Sachinidis, ACA senior compliance analyst. This article, the second in a two-part series, summarizes the panelists’ insights on the firm-based certification of certain other personnel, the imposition of rules of conduct on virtually all firm employees and steps fund managers can take toward compliance. The first article covered the genesis and extension of the SMCR, as well as the responsibilities of senior managers. For additional commentary from ACA, see “Developing a 2018 Compliance Budget: How Investment Advisers Can Make the Most of Limited Resources” (Dec. 21, 2017); and “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017).

Forbes Insights and K&L Gates Examine How Financial Executives and GCs Are Responding to Technological Disruption

Technological change is affecting all aspects of the financial services industry, from basic business operations to regulatory compliance. A recent study by Forbes Insights and K&L Gates examined ways general counsels and other senior executives at financial industry firms are coping with those radical changes; the risks they face; the technologies that they have adopted; the evolving role of chief legal officers; and ways technology figures into their growth plans. This article highlights the key insights from the survey report. See “Fund Managers Should Prepare for Further Disruption to the Industry or Risk Being Left Behind” (Jan. 10, 2019).

Dechert Expands Its E.U. Presence With Two Additions to Global Funds Practice

Dechert has boosted its global funds presence in the E.U. with the hiring of Carol Widger and Marianna Tothova. Widger is managing partner of the firm’s Dublin office, while Tothova joins as a partner in London and Luxembourg. See our two‑part series on Luxembourg: “Luxembourg Positions Itself As a Calm in the Brexit Storm” (Jan. 10, 2019); and “How Luxembourg Is Affected by Regulatory Developments and the E.U. Retail Distribution Environment” (Jan. 31, 2019). For coverage of another recent Dechert hire, see “Former Co-Chief of the SEC’s Asset Management Unit Joins Dechert’s Washington, D.C., Office” (Jan. 24, 2019).

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