Aug. 15, 2019

Key Takeaways for Private Fund Managers From SEC’s Latest Reg Flex Agenda

The SEC recently published its Spring Reg Flex Agenda for 2019, continuing the trend – advocated by Chair Jay Clayton – toward more “tailored yet ambitious” agendas. This article reviews the various components of the latest Reg Flex Agenda and highlights the key takeaways for private fund managers. For coverage of the Autumn Reg Flex Agenda for 2017, see “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018). To further explore some of the items on the Reg Flex agenda, the Hedge Fund Law Report will host a complimentary webinar featuring SEC Commissioner Hester M. Peirce. During this fireside chat, Robin L. Barton, Senior Reporter for the Hedge Fund Law Report, and Commissioner Peirce will discuss topics of interest to private fund managers, such as the Interpretation Regarding Standard of Conduct for Investment Advisers; the possible expansion of the definition of “accredited investor”; chief compliance officers and the SEC’s focus on individual accountability; and the SEC’s adaptation to the modern asset management industry, particularly in the application of the custody and advertising rules. Details of this upcoming webinar will be provided shortly.

Deciphering Deer Park: Lessons for Fund Managers From a Recent SEC Valuation Settlement

The SEC recently filed an order against investment adviser Deer Park Road Management Company, LP (Deer Park) and its chief investment officer for violations relating to the firm’s valuation process for certain distressed residential mortgage-backed securities. Deer Park is the latest in a line of over a dozen cases relating to the valuation of securities conducted by investment advisers. Although the SEC’s case against Deer Park does not fit perfectly with precedent in several key ways, it is generally instructive in several respects as to the SEC’s ongoing push to address valuation-related misconduct. In a guest article, Jenner & Block partners Charles D. Riely and Stephen L. Ascher, along with associate Nicolas G. Keller, analyze the Deer Park action, ways it differs from prior SEC valuation cases and lessons that fund managers can learn from it. For more on Deer Park, see “Recent SEC Action Shows That Even Undervaluing Fund Assets Can Draw Significant Penalties” (Jul. 11, 2019). For additional commentary from a Jenner & Block attorney, see “FTI Consulting Inc. Hosts Conference on Structured Finance Securities Litigation” (Jun. 10, 2009).

The Robare Decision: Implications for Advisers and the SEC (Part Two of Two)

The SEC continues to focus on disclosure issues, particularly in the context of conflicts of interest. A recent court decision supports the SEC’s push for adequate disclosure of potential and actual conflicts of interest, while undermining the regulator’s characterization of willful omissions in disclosures. The U.S. Court of Appeals for the D.C. Circuit (Court) ruled in Robare v. SEC that an investment adviser and two of its principals violated Section 206(2) of the Investment Advisers Act of 1940 by negligently failing to adequately disclose to investors its financial arrangement with a service provider. The Court held, however, that this negligent conduct could not also be the basis for a violation of Section 207 for willful inadequate disclosures to the SEC. This two‑part series analyzes the Robare decision. This second article provides a former senior SEC official’s perspectives on the implications of the Robare decision for investment advisers and the SEC’s Division of Enforcement. The first article summarized the Commission’s findings and the Court’s rulings on those findings. For analysis of other recent significant court rulings, see “What the Supreme Court’s Decision in Lorenzo v. SEC Means for Fund Managers” (Apr. 25, 2019); “Recent Cayman Grand Court Decision Signals That Fund Managers Should Review Indemnification Provisions in Governing Documents” (Apr. 11, 2019); and “U.S. District Court Rules That Digital Tokens in Initial Coin Offerings May Not Constitute Securities” (Jan. 24, 2019).

Current Trends and Issues in Hedge Fund Direct Lending

At Morgan Lewis’ recent Advanced Topics in Hedge Fund Practices conference, Morgan Lewis partners Marion Giliberti Barish and Matthew Edward Schernecke discussed the mechanics of investments in syndicated loans; opportunistic and defensive lending; common risks associated with direct lending; and recent trends in direct lending. This article highlights the key takeaways from the presentation. See our two-part primer on compliance issues for credit strategies: “Key Credit Concepts and Risks in Credit Investing” (Apr. 4, 2019); and “Additional Risks in Credit Investing” (Apr. 11, 2019); and our two‑part series “Ropes & Gray Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment”: Part One (Jul. 19, 2018); and Part Two (Jul. 26, 2018).

ACA 2019 Hedge Fund Survey Examines Insider Trading Controls, Cybersecurity, Valuation, Marketing and Custody (Part Two of Two)

In a recent webinar, L. Allison Charley and Lisa Ollar, both senior principal consultants at ACA Compliance Group (ACA), discussed the results of ACA’s 2019 Alternative Fund Manager Survey pertaining to hedge funds. This second article in our two-part series reviews the survey’s findings with respect to insider trading controls adopted by fund managers, cybersecurity, valuation, marketing and custody. The first article explored the survey’s demographics and its findings with respect to SEC examination trends, common questions that arise pertaining to an adviser’s code of ethics, surveillance of electronic communications, trade documentation and expense allocations. See our coverage of ACA’s 2017 compliance survey: “SEC Exams and Practices Used to Mitigate Counterparty Risk” (Jan. 18, 2018); and “Investment Allocations, Conflicts of Interest and Valuation” (Feb. 1, 2018).