Sep. 12, 2019

AI for Fund Managers: Government Guidance, Service-Provider Negotiations and Risks of Bias (Part Two of Three)

Under the Trump administration, the U.S. government has prioritized American innovation in artificial intelligence (AI). Although the SEC and CFTC have said little about AI, other domestic and international governmental agencies have issued guidance on how firms can responsibly use AI, as well as diligence and contract with service providers who may provide AI solutions. This article, the second in a three-part series, analyzes what the U.S. government and others are doing to both promote AI and foster its responsible use; how fund managers should diligence and contract with third-party AI service providers; and what risks of bias exist. The first article explored what AI is; how prevalent it is in the funds industry; how it can be used; how fund managers can determine what to automate and what obstacles may interfere with implementing AI solutions; and whether humans are still needed in the process. The third article will evaluate how fund managers can automate their legal departments and what they should do to ensure that they maintain their data subjects’ privacy. See our three-part series on big data: “Its Acquisition and Proper Use” (Jan. 11, 2018); “MNPI, Web Scraping and Data Quality” (Jan. 18, 2018); and “Privacy Concerns, Third Parties and Drones” (Jan. 25, 2018).

How Fund Managers Should Prepare for the Cayman Islands Data Protection Law

The Cayman Islands Data Protection Law, 2017 (DPL) comes into force on September 30, 2019, and will regulate the future processing of all personal data in the Cayman Islands. Drafted around a set of internationally recognized privacy principles, the new law provides a framework of rights and duties designed to give individuals greater control over their personal data. With the implementation date less than a month away, managers of Cayman funds must ensure that they understand their funds’ obligations under the new law, including enacting policies and procedures to ensure the proper protection of all personal data under their control, as well as creating an effective governance regime for approving, overseeing, implementing and reviewing those policies. Cayman funds must get it right – reputations and criminal liability will soon be at stake. In a guest article, Appleby partners Sailaja Alla and David Lee, along with counsel Peter Colegate, review the key provisions of the DPL and how Cayman funds can achieve compliance with it. See “How Fund Managers Can Navigate the E.U. General Data Protection Regulation and the Cayman Islands Data Protection Law” (Aug. 9, 2018). For additional commentary from Appleby attorneys, see “Cayman Economic Substance Has Arrived: Steps In-Scope Fund Managers Must Take to Respond” (Jun. 27, 2019); “How Funds Formed in the Cayman Islands Can Mitigate Legal Risk by Aligning Their Constitutional Documents and Operations” (Oct. 11, 2018); and “Changes to Redeeming Investor Distribution Priority and Other Ramifications of the Primeo Appellate Decision for Cayman Islands Hedge Funds” (Sep. 15, 2016).

The Exempt Offering Framework: Key Takeaways From the Concept Release for Private Fund Managers (Part Two of Two)

Under the Securities Act of 1933 (Securities Act), every offer and sale of securities must be registered with the SEC unless an exemption applies. The Securities Act itself contains a number of exemptions from registration, and over the years, statutes such as the Jumpstart Our Business Startups Act of 2012; Fixing America’s Surface Transportation Act of 2015; and the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 have created additional exemptions. As a result of this patchwork development of exemptions, market participants have raised concerns about the exempt offering framework’s complexity. To address these concerns, the SEC recently published its Concept Release on Harmonization of Securities Offering Exemptions (Concept Release) as a device for reviewing the design and scope of the exempt offering rules. This two-part series examines the exempt offering framework and the Concept Release’s questions about that framework. This article discusses the key takeaways from the Concept Release for private fund managers. The first article summarized the elements of the Concept Release of particular interest to private fund managers. See “Seasoned Hedge Fund Lawyer and Industry Executive Discusses the Evolution of Laws Governing Private Fund Managers” (Aug. 1, 2019). To further explore the foregoing, on Thursday, October 3, 2019, at 1:00 p.m. EDT, the Hedge Fund Law Report will host a complimentary webinar, entitled “Focus on Private Funds: A Fireside Chat With SEC Commissioner Hester M. Peirce.” During the program, Robin L. Barton, Senior Reporter for the Hedge Fund Law Report, and Commissioner Peirce will discuss the Concept Release and other topics of interest to private fund managers, and Commissioner Peirce will also answer attendees’ questions during a Q&A session at the end of the webinar. To register for the webinar, click here.

SEC Accuses Broker-Dealer of “Rubber Stamping” Certifications in Violation of Its Gatekeeper Duties

The SEC regards so-called “gatekeepers,” such as broker-dealers, fund administrators, accountants and attorneys, as important players in its overall efforts to protect investors. In a recently settled administrative proceeding, the SEC accused a broker-dealer of playing fast and loose with its duty to perform due diligence on the over-the-counter securities in which its traders desired to make a market; failing to comply with its existing policies and procedures; and lacking sufficient controls to ensure compliance with those policies and procedures. This article outlines the relevant factual and regulatory background; the broker-dealer’s alleged violations and remedial measures; and the sanctions imposed by the SEC. See “SEC Chair Outlines Approach to Dodd-Frank Rulemaking and Expectations for Fund ‘Gatekeepers’” (Feb. 15, 2018); and “What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers” (Oct. 20, 2016).

A Roadmap for Compliance With the U.K.’s Senior Managers and Certification Regime

The U.K. Senior Managers and Certification Regime (SMCR) has applied to the banking sector since 2016. The SMCR will soon be extended to include all firms regulated solely by the U.K.’s Financial Conduct Authority. A recent ACA Compliance (Europe) Ltd. (ACA) program provided an overview of the SMCR and a detailed look at senior managers’ prescribed responsibilities, statements of responsibility, “fit and proper” determinations and staff certifications. The program featured ACA senior principal consultant Paul Henshaw, along with principal consultants Anthony Wells and Josie Cooper. This article highlights the key takeaways from the presentation. For additional insight on the SMCR, see our two-part series: “Responsibilities of Senior Managers” (Apr. 25, 2019); and “Certification Regime and Conduct Rules” (May 9, 2019).

DLA Piper Adds Adam Tope to New York Office

DLA Piper announced that Adam Tope has joined the firm’s finance practice as a partner in the New York office. Tope is a fund formation attorney who represents hedge, private equity, infrastructure, venture capital and real estate fund sponsors and managers, as well as secondaries firms, middle market managers and startup managers/spinouts. For another recent hire by DLA Piper, see “John D. Reiss Is Newest Member of DLA Piper’s Finance Practice” (Jul. 11, 2019).