Mar. 26, 2020

Safeguards for Proper Disposal of Hardware: Effective Inventories, Policies and Due Diligence (Part Two of Two)

It is no secret that the SEC’s Office of Compliance Inspections and Examinations (OCIE) has been focused on cybersecurity the last few years. Now, as highlighted in two of its recent reports, it has a new focus: the proper disposal of hardware. This second article in a two-part series explores creating an inventory to track a firm’s hardware; drafting and implementing policies and procedures on the disposal of hardware; and performing due diligence on third-party disposal vendors. The first article addressed what is behind the focus on hardware disposal; the types of hardware that should be considered; applicable laws and guidelines; and what safeguards SEC examiners expect firms to have in place. For another regulator’s view on cybersecurity, see “FCA Head of Technology Outlines Regulator’s Cybersecurity Expectations and Three Key Lessons for Fund Managers” (Feb. 22, 2018).

How Compliance and HR Can Work Together

Given the overlap in HR and compliance professionals’ roles, a cross-functional approach can help both departments. The Hedge Fund Law Report spoke with Amii Barnard‑Bahn about where things can go wrong in HR and compliance relationships, along with strategies for optimal collaboration. Barnard‑Bahn is an executive coach who has served as a chief administrative officer, CCO and chief HR officer at organizations including McKesson U.S. Pharmaceutical, Fireman’s Fund Insurance/Allianz and River City Bank. See “A Checklist for Evaluating Employee Disciplinary Policies and Procedures of Private Fund Managers” (Mar. 22, 2018).

Key Considerations for Fund Managers Responding to the Coronavirus Outbreak

The recent outbreak of the coronavirus across the world – and in the New York City area, home to many hedge fund managers – is a critical reminder that fund managers must develop contingency plans to handle the inevitable disruptions caused by the outbreak. A recent Schulte Roth & Zabel webinar provided a detailed overview of the challenges associated with the coronavirus outbreak, including satisfying fiduciary and regulatory obligations, business continuity planning, remote operations, cybersecurity, disclosures and other business issues. The webinar featured Schulte partner Brian T. Daly and special counsel Kelly Koscuiszka. This article discusses the key takeaways from their presentation. See our two-part series on the key elements of hedge fund adviser contingency planning: “Business Continuity Plans” (Feb. 17, 2010); and “Disaster Recovery Plans” (Feb. 25, 2010).

Advisers Must Ensure Their Auditors Are Appropriately Competent and Capable

The SEC recently accused an audit firm of engaging in improper professional conduct in connection with its audits of certain private funds. A fund adviser used an unorthodox valuation model that overvalued its assets, which mainly consisted of structured notes. The auditor allegedly staffed audit teams with individuals who were not competent to conduct audits of funds whose primary assets were structured notes, or to understand and evaluate the manager’s valuation methodology. Although it appears that the fund manager may have intended to deceive the auditor and was separately investigated and charged by the SEC, the SEC’s settlement with the auditor is a reminder that fund managers must ensure that their auditors are actually qualified and staffed properly. This article analyzes the auditor’s alleged shortcomings and the terms of the settlement order. For another SEC proceeding involving alleged professional misconduct by the auditor, see “Lack of Auditor Independence Continues to Plague Advisers Under the Custody Rule” (Sep. 26, 2019).

The Coronavirus Pandemic: Fund Managers Must Have Strong Business Continuity Plans

If fund managers ever doubted the need for robust business continuity plans (BCPs), those doubts have surely been laid to rest during the current coronavirus pandemic. Fund managers with bare-bones plans – or none at all – have been forced to address an increasing number of regulatory, investment, employment and other challenges on the fly, while those with well-designed, thoughtful plans are already prepared to handle those challenges. Although this global health crisis is ongoing, it is not too soon for ill-prepared fund managers to start thinking about creating effective BCPs – or too late for them to implement certain elements of those plans. Managers with existing BCPs can also benefit from assessing how well their plans are operating and whether any changes need to be made now to improve their plans’ effectiveness. In that spirit, this article comprises a list of key articles the Hedge Fund Law Report has compiled from its archives to help fund managers create and implement – as well as identify and resolve any gaps in their existing – BCPs.