May 30, 2019

Investing in Cannabis: Implications of Federal Illegality and Residency Requirements (Part Three of Four)

To fully comprehend the risks of investing in cannabis, fund managers must also understand the host of issues faced by the businesses in which they intend to invest. For instance, cannabis businesses face unique intellectual property (IP), tax and marketing/advertising restrictions that make it more difficult for them to realize profits. Managers must also be aware of any residency requirements that restrict their abilities to make investments in certain jurisdictions. Because investing in underlying cannabis companies creates a risk of loss with limited – or no – recourse for recovery, it is imperative for fund managers to understand the legal and compliance issues faced by those companies. This third article in a four-part series evaluates how federal illegality affects underlying businesses, as well as residency requirements for investing. The first article discussed the legislative, judicial and executive cannabis framework, as well as state legalization and industry growth. The second article analyzed cannabis deal structures, ways managers should diligence investments, disclosures managers should include in offering documents and anti-money laundering concerns. 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 our two-part series on how hedge funds can protect their brands and IP: “Trademarks and Copyrights” (Feb. 23, 2017); and “Trade Secrets and Patents” (Mar. 9, 2017).

SEC Commissioner Peirce Shares Views on Gender Diversity, Shareholder Issues, Cryptocurrency and Her SEC Dissents

At a recent program presented by Women in Funds and Gibson Dunn, Mary Beth Maloney, partner at Gibson Dunn, conducted an extensive discussion with SEC Commissioner Hester M. Peirce, who shared her views on a wide range of topics, including gender diversity mandates, corporate governance issues, cryptocurrency and her frequent dissents in SEC matters. Peirce was sworn in as a Commissioner on January 11, 2018, and has served at the SEC as Staff Counsel and in other roles for many years. This article summarizes the key takeaways from the discussion. For more from Maloney, see our two-part series “Gibson Dunn Attorneys Analyze Lynn Tilton Trial”: Controversial Forum, Key Takeaways and Defense Themes (Aug. 9, 2018); and Principal Charges (Aug. 23, 2018).

Adviser’s Conflict of Interest and Due Diligence Failures Lead to Significant Losses and SEC Rebuke

A recent SEC settlement is a cautionary tale for advisers vetting potential investments for their funds, highlighting the need for appropriate and thorough investment due diligence. The SEC claimed that a registered investment adviser and its principal invested several million dollars of their funds’ money with an individual who promised a tenfold payout in just 90 days. Although the respondents’ improvident investment did not directly give rise to liability, their alleged misstatements to investors about the amount of due diligence they had conducted, along with the principal’s undisclosed personal investment in the deal, did. This article analyzes the facts and violations alleged by the SEC and the terms of the settlement order. For more on the importance of due diligence, see “The Importance of Exercising Due Diligence When Hiring Auditors and Other Vendors” (Jun. 21, 2018).

KPMG Reports on AIFMD’s Efficacy Five Years After Implementation

It has been five years since the E.U. introduced the Alternative Investment Fund Managers Directive (AIFMD) to address risks in the global financial system by harmonizing requirements, extending regulations and enabling oversight of alternative investment fund managers at the E.U. level. While the industry was initially wary of its potential impact, AIFMD has been widely adopted and implemented more seamlessly than anticipated. See “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated” (Oct. 22, 2015). KPMG was contracted by the European Commission to carry out a general survey and evidence-based study to evaluate whether AIFMD’s objectives have been met. KPMG’s report provides an in-depth assessment of AIFMD’s success at achieving its objectives, while also identifying areas of weakness where adjustments may be appropriate. The report is a detailed resource that will likely underpin decisions about the future of AIFMD. This article reviews the key findings in the report. For a previous KPMG survey on compliance costs related to AIFMD, see “KPMG/AIMA/MFA Survey Quantifies the Impact of the AIFMD, FATCA, Form PF and Adviser/CPO Registration on Hedge Fund Manager Compliance Budgets” (Nov. 8, 2013).

FINRA RegTech Conference Reviews AI, RegTech Adoption and Compliance Challenges (Part Two of Two)

Regulatory technology (RegTech) can assist fund managers in complying with legal requirements by, among other things, automating processes and digitizing records. Although RegTech can reduce costs and increase efficiency, it does not come without challenges. For example, properly training systems with appropriate data can be difficult. FINRA recently analyzed these and other issues in a conference focused on RegTech, which featured regulators, financial services firms and subject matter experts. This two-part series covers the second half of that conference. This second article examines the benefits and challenges of artificial intelligence; approaches to the adoption of RegTech; and associated compliance challenges. The first article discussed the portions of the conference that focused on digital identification, suspicious activity reporting and machine learning. For more on RegTech, see “Cordium and Aite Group Survey Benchmarks Use of ‘RegTech’ by Asset Management Firms” (Feb. 8, 2018).

Senior SEC Enforcement Lawyer Charles D. Riely Joins Jenner & Block in New York

Jenner & Block announced that Charles D. Riely, a former senior SEC official, joined the firm’s New York office as partner. While at the SEC for more than ten years, Riely worked extensively with criminal authorities in parallel investigations and developed deep expertise in all aspects of the federal securities laws. For our coverage of one of the hedge fund cases Riely handled, see “Despite His ‘Bad Acts,’ Issuers Beneficially Owned by Steven A. Cohen Are Not Precluded From Private Offerings Based on the Bad Actor Rule” (Jan. 21, 2016); and “SEC Charges Steven A. Cohen With Failing to Supervise Employees Who Allegedly Engaged in Insider Trading” (Jul. 25, 2013).