Apr. 2, 2020

How Fund Managers Can Withstand the Coronavirus Pandemic: Form ADV Filing Relief, Investor Communications and Fund Valuation Issues (Part One of Three)

In addition to the general disruptions to businesses caused by the outbreak of the coronavirus – full or partial office shutdowns; limited travel; potential service disruptions; and volatility in the financial markets - fund managers need to take extra care to prepare for the effect the pandemic will have on their operations and investments. To assist with those efforts, the Hedge Fund Law Report interviewed legal professionals about considerations and best practices for fund managers to mitigate risks from the coronavirus pandemic. This first article in a three-part series examines the SEC’s recent orders offering relief from Form ADV and Form PF filings; considerations for managers to effectively communicate with investors during the pandemic; and issues relating to hedge fund valuations. The second article will detail other private fund-specific matters implicated by the coronavirus, including key person provisions and ongoing marketing efforts. The third article will address certain general operational risks that fund managers need to mitigate. See “Can Emerging Hedge Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2015); and “How Should Hedge Fund Managers Approach Formulating Risk Assessment Plans and What Regulatory Risks Should Be on Their Radar?” (Feb. 14, 2013).

Navigating the Proposed Amended Advertising Rule: Expanded Definition of Advertisement (Part One of Two)

The SEC recently released proposed amendments to modernize Rule 206(4)‑1 under the Investment Advisers Act of 1940 (Advisers Act), which governs advertisements by investment advisers. The comment period on the proposed amended advertising rule ended in February 2020, and the SEC is expected to release a final rule later this year. A recent K&L Gates program provided a comprehensive overview of the proposed amended rule. The program featured Michael S. Caccese and Michael W. McGrath, chairman and partner, respectively, at K&L Gates; and Todd Juillerat, senior vice president of The Spaulding Group. This two-part series distills their insights. This first article provides background on the current advertising rule, as well as a deep look into the proposed expanded definition. The second article will outline changes to the rules on content and performance in advertisements. See “Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017).

Advisers Must Have Strong Insider Trading Controls or Risk SEC Sanctions

Insider trading is a perennial source of SEC enforcement activity. In its 2019 fiscal year, 6 percent of the SEC’s standalone cases involved insider trading. A recent settlement with an investment adviser illustrates that the SEC remains keenly focused on whether advisers’ policies and procedures are reasonably designed to prevent insider trading. In this case, the adviser’s policies allegedly failed to “establish, maintain, and enforce written policies and procedures reasonably designed . . . to prevent the misuse of material nonpublic information.” Specifically, the adviser failed to provide sufficient procedures for considering its business-specific risks or the operation of its restricted list. This article details the adviser’s alleged compliance shortcomings and the other terms of the SEC’s settlement order. See “SEC Annual Report Details Robust Enforcement Efforts, With Continuing Focus on Retail Investors and Cyber Matters” (Jan. 9, 2020); and “HFLR Program Explores Current SEC Examination Practices and Issues (Part Two of Two)” (Jan. 10, 2019).

Survey Identifies Drivers and Obstacles for Sustainable Investing

A recent survey found that, although institutional investors are driving hedge fund managers to embrace sustainable investing, many challenges remain, including inadequate data; shortage of expertise; lack of consensus on definitions and standards; and greenwashing problems. The survey report (Report) was a joint effort by the Alternative Investment Management Association (AIMA), KPMG International, CREATE-Research and the Chartered Alternative Investment Analyst Association. This article discusses the key takeaways from the Report. For more from AIMA on ESG and sustainable investing, see “AIMA Survey Examines Evolution in the Ways That Managers Align With Investors” (Nov. 7, 2019); and “A Recap of AIMA’s 2019 Global Policy & Regulatory Forum” (May 23, 2019).

The Coronavirus Pandemic: Fund Managers Must Be Sensitive to Electronic Communication and Other Disclosure Issues

As fund managers adapt to the changes to their businesses – including potential activation of their business continuity plans, moves to remote work environments and adjustments to their business strategies – in light of the current coronavirus pandemic, they must also be sensitive to the various concomitant communication and disclosure issues. With increasing numbers of fund managers moving to remote work environments, their employees may be more inclined to communicate via electronic messaging – a practice that poses challenges in terms of compliance with certain provisions of the Investment Advisers Act of 1940 and the rules thereunder. Consequently, managers must ensure their electronic communication policies are properly designed and follow best practices to avoid SEC scrutiny. In addition to regulatory scrutiny, fund managers must be prepared for increased investor demands for information during this period. Finally, managers may be approached by – or consider disclosing information to – the media in light of the pandemic. In that spirit, this article comprises a list of key articles the Hedge Fund Law Report has compiled from its archives to address the above communication and disclosure issues.