Feb. 28, 2019

What Are the Benefits and Risks of Using Open-Source Software? (Part Two of Three)

Open-source software (OSS) can provide fund managers with several benefits, including cost savings; increased customization; access to a collaborative community that provides extensive support; and assistance with attracting talent and honing technical employees’ skillsets. Nevertheless, OSS does not come without risks, such as the risk that a manager may need to release its own proprietary source code or face breach of contract or copyright infringement liability. OSS may also pose greater security risks than commercial software, which means that managers must carefully assess the areas in which they seek to utilize OSS. This article, the second in a three-part series, analyzes the benefits of OSS, as well as the disadvantages and risks that it presents. The first article discussed the basics of OSS, actions governments are taking to support it, relevant regulatory guidance and ways OSS is being used by fund managers. The third article will evaluate actions fund managers can take to mitigate OSS risks, including what policies, procedures and controls to adopt; ways to deal with third-party vendors; and due diligence. For a discussion of another growing technology, see our two-part series on implementing electronic signatures: Part One (Dec. 21, 2017); and Part Two (Jan. 4, 2018).

How Fund Managers Can Navigate Sections 13(d) and 16 of the Exchange Act

Shareholders who acquire beneficial ownership of more than 5 percent of the outstanding shares of a class of an issuer’s stock must file reports on Schedule 13G or 13D pursuant to Section 13(d) of the Securities Exchange Act of 1934 (Exchange Act). These reports can come with certain disclosure obligations pertaining to shareholder background information and investment intentions. In addition, Exchange Act Section 16 requires shareholders that own more than 10 percent of a class of an issuer’s stock to report certain transactions involving the issuer’s securities and imposes liability on those shareholders that engage in short selling. To help readers understand issues related to Sections 13(d) and 16 of the Exchange Act, the Hedge Fund Law Report conducted an exclusive interview with Frank Zarb and Louis Rambo, partner and associate, respectively, at Proskauer Rose, in connection with the firm’s recent publication of a new chapter of its Hedge Fund Handbook. This article presents their insights. See “Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Insider Trading, Proposed Changes to Form 13F and Schedule 13D and Employment-Related Disputes (Part Three of Four)” (Feb. 5, 2015). For additional commentary from Proskauer attorneys, see “What Are the Key Takeaways for Fund Managers From the SEC’s Draft Strategic Plan for 2018-2022?” (Jul. 26, 2018); “New Tax Law Carries Implications for Private Funds” (Feb. 1, 2018); and “Tips and Warnings for Navigating the Big Data Minefield” (Jul. 13, 2017).

NFA Notice Requires CPOs to Implement Internal Controls Systems

Over the last few years, the NFA has paid greater attention to the internal controls systems used by members, particularly with respect to handling and safekeeping customer funds, as well as financial reporting. Based on data gained from this practice, the NFA’s Board of Directors has stated that it believes that an internal controls system is the foundation for producing reliable financial statements, and deterring errors and fraudulent activity by employees, management and third parties. To that end, the NFA recently submitted a Proposed Interpretive Notice (Notice) to the CFTC that will take effect on April 1, 2019. The Notice requires commodity pool operators (CPOs) that accept, hold and redeem customer funds to have internal controls systems that address the safeguarding of customer funds, as well as provide reasonable assurance that the books and records of the CPOs’ commodity pools are reliable and that the CPOs are in compliance with all CFTC and NFA requirements. This article summarizes the key elements of the Notice, with commentary from a former CFTC attorney. For another recent development on regulation of CPOs, see “CFTC Proposes Amendments to Regulations to Codify Existing Relief for CPOs and CTAs” (Nov. 15, 2018).

RCA Symposium Explores Common Examination Risk Areas (Part One of Two)

At the Compliance, Risk & Enforcement Symposium sponsored by the Regulatory Compliance Association (RCA), a panel of chief compliance officers (CCOs) and regulatory attorneys discussed the current regulatory environment that private fund advisers are facing. The program was moderated by Robert Van Grover, partner at Seward & Kissel, and featured Lawrence S. Block, managing director, counsel and CCO of Island Capital Group; David L. Fitzgerald, general counsel and CCO at Gabelli & Company; Lucy Frew, partner at Walkers; Michael C. Neus, general counsel of ExodusPoint Capital Management; Heather Traeger, CCO of the Teacher Retirement System of Texas; and Steven A. Yadegari, chief operating officer and general counsel at Cramer Rosenthal McGlynn. This article, the first in a two-part series, covers compliance issues that are likely to come under SEC scrutiny during an examination, including an adviser’s culture of compliance; marketing and other disclosures; addressing past compliance deficiencies; compliance training; and cybersecurity. The second article will discuss challenges associated with fee and expense allocations; social media; and political contributions, as well as the current regulatory climate in the Cayman Islands. For additional coverage of events sponsored by the RCA, see “Compensation Trends Panel Discusses Strong Market for Private Fund Compliance and Legal Personnel” (Jan. 25, 2018); “SEC, NFA and OFAC Shed Light on Their AML Enforcement Efforts and Priorities” (May 4, 2017); and “Usable Lessons and Proven Survival Techniques From the Hedge Fund Examination Trenches” (Oct. 24, 2014).

Dechert Attorneys Discuss Compliance With the GDPR (Part Two of Two)

A recent Dechert webinar explored the E.U.’s General Data Protection Regulation (GDPR), its impact on fund managers and firm compliance. The program was moderated by Dechert partner Timothy C. Blank and featured Dechert partners Dr. Olaf Fasshauer and Paul Kavanagh, as well as associates Hilary Bonaccorsi, Jennifer McGrandle and Sophie Montagne. This article, the second in a two-part series, analyzes the impact of key GDPR provisions, including data subject rights; data privacy management systems and notices; data protection officers; data protection impact assessments; and breach notification. The first article outlined how regulators have promoted compliance with the GDPR, the cross-border transfer of data and the impact of Brexit. See our two-part series “What Are the GDPR’s Implications for Alternative Investment Managers?”: Part One (Apr. 26, 2018); and Part Two (May 10, 2018).

Former Senior SEC Official Joins King & Spalding’s Atlanta Office

King & Spalding LLP announced that Aaron Lipson, former Associate Director for Enforcement in the SEC’s Atlanta Regional Office, has joined the firm as a partner in the special matters and government investigations team. Working in the firm’s Atlanta office, Lipson will counsel investment advisers, broker-dealers, private funds, public companies, accounting firms and individuals facing complex government investigations. He will also assist regulated entities with compliance and disclosure matters, as well as conduct independent investigations. For coverage of other recent hires at the firm, see “King & Spalding Boosts Private Equity Practice With Addition of Nine Lawyers” (Sep. 6, 2018).