Dec. 12, 2019

A Checklist for Advisers to Ensure Compliance With the Advertising Rule

Rule 206(4)‑1 under the Investment Advisers Act of 1940 governs advertising by investment advisers (Advertising Rule). Although the Advertising Rule is fairly short, compliance with it has vexed advisers since it was first enacted in 1961, and those compliance challenges have only increased as the rule has fallen behind developments in technology and methods of communicating with investors and potential investors. The SEC has recently proposed amendments to the Advertising Rule in an effort to modernize it and aggregate guidance from no‑action letters and enforcement actions. Until the SEC releases final amendments and those changes take effect, advisers must nonetheless continue to comply with the Advertising Rule in its current form. This article discusses why the current Advertising Rule poses compliance challenges for advisers; provides a checklist developed by a compliance consultant with more than 20 years of experience; and explains how advisers can use this checklist when preparing and reviewing advertisements, as well as training staff on compliance with the Advertising Rule. See our three-part advertising compliance series: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

What Legal, Regulatory and Operational Challenges Do Single‑Asset Funds Present for Managers?

Single-asset funds pool capital from multiple investors to invest in a single security, transaction or acquisition. As managers continue to explore offerings beyond traditional strategies and fund structures, they frequently pursue opportunities through vehicles designed to acquire a single asset. Distinguished from funds that invest in many assets and transactions, single-asset funds involve unique legal, regulatory and operational challenges. In a guest article, Eileen Overbaugh, partner at Lowenstein Sandler, examines these challenges, including in the context of structure; fees and expenses; term and liquidity; and follow-on investments and restructurings. See “Operational and Tax Challenges of Hybrid Funds” (May 23, 2019); and “Hedge Fund Managers Turn to Hybrid Fund Structures to Reconcile Fund Liquidity Terms and the Duration of Assets” (Feb. 4, 2009). For additional commentary from Lowenstein attorneys, see “Key Takeaways for Private Fund Managers From SEC’s Latest Reg Flex Agenda” (Aug. 15, 2019); and “How the GDPR Will Affect Private Funds’ Use of Alternative Data” (Jun. 14, 2018).

Present and Former SEC Attorneys Discuss Retail Investors, CAT Implementation, Enforcement Issues, Reg BI and SRO Oversight

At the recent Securities Enforcement Forum 2019, a panel that included several present and former SEC attorneys discussed the SEC’s focus on retail investors; its use of big data and the consolidated audit trail; its continued focus on valuation and conflicts of interest; other issues that arise in examinations, enforcement proceedings and settlements; Regulation Best Interest; oversight of self-regulatory organizations; and the Share Class Selection Disclosure Initiative. Elizabeth P. Gray, partner at Willkie Farr & Gallagher, former Assistant Director of the SEC Division of Enforcement (Enforcement) and former Counsel to former Chair Arthur Levitt, moderated the discussion, which featured Adam S. Aderton, Co‑Chief of the Asset Management Unit of Enforcement; Michael Liftik, partner at Quinn Emanuel Urquhart & Sullivan and former SEC Deputy Chief of Staff; and Kurt Wolfe, associate attorney at Troutman Sanders. This article summarizes the key takeaways from the discussion, with additional relevant insights from the program’s keynote discussion with SEC Chair Jay Clayton. For additional commentary from Clayton, see “SEC Chair Defends Regulation Best Interest and Investment Adviser Fiduciary Duty” (Sep. 19, 2019); and “SEC Chair Offers Observations on Culture at Fund Managers and the SEC” (Jun. 28, 2018).

Practical Guidance for Advisers Seeking to Foster Diversity and Inclusion

The hedge fund industry remains “overwhelmingly homogenous in demographic terms,” according to a recent survey report (Report) issued by the Alternative Investment Management Association (AIMA). Diversity and inclusion (D&I) is rapidly becoming a business imperative. Not only are many investors asking about it, but broadening the talent pool may also help to improve investment performance by avoiding “group think” and drawing on novel perspectives and experiences. According to the Report, hedge fund managers must first lay an appropriate foundation for D&I. Building on that foundation, they can then embrace D&I in connection with hiring and promotion practices, employee retention efforts and third-party relationships. This article focuses on the practical guidance offered by the Report, with additional commentary from Michelle Noyes, managing director of AIMA. See our four-part series on diversity: “Why Equal Representation Within Fund Managers Is Essential” (Oct. 4, 2018); “Ways Fund Managers Can Promote Diversity and Inclusion” (Oct. 11, 2018); “What Implicit Biases Are and Whether Interventions Are Effective” (Oct. 18, 2018); and “How Constrained Decision Making, Along With Legal and Compliance Leadership, Can Help Reduce Fund Manager Bias” (Nov. 1, 2018).

EY 2019 Survey Finds Hedge Funds Losing Ground to PE; Need for Cost Controls; and Growth of Non‑Traditional Investment Products, ESG and Separate Accounts (Part One of Two)

The 13th annual Global Alternative Fund Survey published by EY examines broad trends in the alternative investment industry, including ever-shifting allocation preferences, growth prospects, talent management and the impact of technology, juxtaposing the perspectives of hedge fund and private equity (PE) managers on the one hand, with those of their investors on the other. It also compares how hedge fund managers and PE managers address key issues. This two-part series summarizes the survey’s key findings and includes additional insights from one of the authors of the survey. This article explores allocation preferences; investor and manager business priorities; and asset growth, including non-traditional hedge fund products, separately managed accounts and responsible investing. The second article will cover talent management; diversity and inclusion; use of technology, big data and artificial intelligence; cybersecurity; and potential industry disruptors. See also our coverage of EY’s 2018 Survey; 2017 Survey; 2016 Survey; and 2015 Survey.

Foley Hoag Expands New York Office with Addition of John W.R. Murray

Former SEC official John W. R. Murray has joined Foley Hoag as a partner in the New York office. As a member of the firm’s securities litigation and white collar/government investigations practices, Murray will focus primarily on government and corporate internal investigations; securities and commercial litigation; and related compliance matters. He will represent regulated entities, including fund managers and individuals, as well as public and private companies on SEC‑related and other regulatory issues. For commentary from another Foley Hoag partner, see “Trends in the Use of Capital Call Facilities Across the Private Funds Industry” (Nov. 1, 2018).