May 16, 2019

Investing in Cannabis: Structuring Investments, Due Diligence, Offering Documents and the BSA (Part Two of Four)

Managers wishing to invest in cannabis cannot avail themselves of specific corporate structures or contractual language to shield themselves absolutely from potential federal liability. Nevertheless, a manager can take a number of steps to reduce the attendant risks, including conducting rigorous due diligence on underlying businesses and providing robust disclosure in offering documents to investors. This article, the second in a four-part series, analyzes cannabis deal structures, ways managers should diligence investments, disclosures managers should include in offering documents and anti-money laundering concerns. The first article discussed the legislative, judicial and executive cannabis framework, as well as state legalization and industry growth. The third article will evaluate how federal illegality affects 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. For more on conducting due diligence in other contexts, see “IMDDA Offers Fund Managers a Blueprint for Conducting Sexual Harassment Due Diligence” (Aug. 2, 2018); and “Key Considerations for Fund Managers When Selecting and Negotiating With a Cloud Service Provider” (Sep. 21, 2017).

Why Fund Managers Must Adequately Support CCOs and Compliance Programs: Six Valuable Lessons From Recent Enforcement Actions (Part Two of Two)

Rule 206‑4(7) under the Investment Advisers Act of 1940 – the so-called “Compliance Rule” – requires an investment adviser to establish compliance policies and procedures; appoint a chief compliance officer (CCO) to administer those policies; and review the effectiveness of the policies at least annually. Implicit in the Compliance Rule is the requirement that the adviser provide adequate resources to support the CCO and the compliance program. Recent SEC enforcement actions illustrate the consequences of ignoring a CCO’s repeated calls for additional resources and support, as an investment adviser and its CEO settled charges that, among other things, they failed to address known resource deficiencies in the adviser’s compliance program, which undermined the program’s effectiveness and resulted in compliance failures. This two‑part series explains why it is important for investment advisers to provide adequate resources to support their CCOs and compliance programs. This second article provides the key takeaways – including six valuable lessons learned – from the enforcement actions. The first article detailed the compliance failures in those actions. See our two‑part series “What a Recent SEC Opinion on a FINRA Disciplinary Action Says About CCO and CEO Liability”: Part One (Jan. 24, 2019); and Part Two (Jan. 31, 2019).

FINRA RegTech Conference Examines Digital Identification, Suspicious Activity Reporting and Machine Learning (Part One of Two)

Fund managers can utilize regulatory technology (RegTech) to enhance compliance with applicable laws and regulations through the use of automation, digitization and other information technology processes. During a recent FINRA conference focused on RegTech, regulators, financial services firms and subject matter experts explored the growth of RegTech and its associated benefits and challenges. This two-part series covers the second half of the FINRA 2019 RegTech Conference. This first article summarizes the portions of the program that focused on digital identification, suspicious activity reporting and machine learning. The second article will examine the benefits and challenges of artificial intelligence; approaches to the adoption of RegTech; and associated compliance challenges. For coverage of the first half of the conference, see our two-part series: “AI and Big Data; Blockchain; and Regulators’ Views” (Mar. 21, 2019); and “Current Uses of RegTech and Considerations Before Deployment” (Mar. 28, 2019).

JPM Institutional Investor Survey Explores Drivers of Hedge Fund Allocations and Fee Pressures (Part One of Two)

The J.P. Morgan Capital Advisory Group recently surveyed over 200 institutional investors, gauging their perspectives on a number of issues pertaining to hedge fund investments. This two-part series summarizes the findings detailed in the survey report. This first article details drivers of hedge fund allocations; industry concerns; fee and liquidity terms; allocation sizes and preferences; and performance expectations. The second article will explore the use of nontraditional alternative investment vehicles, along with investment and operational due diligence. For coverage of another recent investor survey, see “Investor Survey Finds Growing Interest in Private Market Vehicles, Lower Return Expectations and Continuing Fee Pressures” (Feb. 7, 2019).

SEC Chief Counsel Advises on Exemptive Applications and Requests for No‑Action Relief

The SEC promotes transparency by publicizing its priorities and areas of focus, as well as by showing an increasing willingness to engage on issues with interested parties. This more-collaborative approach was reflected in a recent speech by Paul Cellupica, Deputy Director and Chief Counsel for the SEC’s Division of Investment Management (IM), at the Practising Law Institute. Cellupica acknowledged that there is a lack of visibility into the full range of the important work carried out by SEC staff. To help address that, he provided an overview of the IM’s Chief Counsel’s Office (Office); offered tips for engaging with the Office on exemptive applications or requests for no-action relief; and discussed the Office’s current review of past staff statements and guidance. Finally, Cellupica highlighted two current areas of focus for the Office: international engagement and board outreach. This article highlights these key points from his remarks. For coverage of other SEC speeches, see “The Power of ‘No’: SEC Commissioner Peirce on Enforcement As Last Resort” (Jun. 21, 2018); “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018); and “SEC Chair Outlines Approach to Dodd-Frank Rulemaking and Expectations for Fund ‘Gatekeepers’” (Feb. 15, 2018).

Sidley Expands Chicago Office With Addition of Funds Lawyer Joshua Cohen

Joshua S. Cohen has joined the Chicago office of Sidley Austin as a partner in its investment funds practice. Cohen has extensive experience in the formation, structuring and maintenance of hedge funds, private equity funds, credit funds, hybrid funds, funds of funds, liquid alternative mutual funds and fund platforms. He also counsels clients on regulatory matters related to securities and derivatives. For insight from another Sidley partner, see our three‑part series on the SEC’s enhanced order routing disclosures: “How New Disclosures Shed Light on Rebates Paid to Broker-Dealers” (Mar. 28, 2019); “Understanding Rule 606(a) and Rule 606(b)(3) Reports” (Apr. 4, 2019); and “How Fund Managers Should Use These Additional Disclosures Going Forward” (Apr. 11, 2019).