Apr. 23, 2020

Use a Risk Assessment Template to Take a Thoughtful Approach to Compliance

Rule 206(4)‑7 under the Investment Advisers Act of 1940 requires any investment adviser registered with the SEC to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws; review those policies and procedures annually for their adequacy and the effectiveness of their implementation; and designate a CCO to be responsible for administering the policies and procedures. The SEC has also made clear that it expects an adviser’s compliance program to be tailored for its specific operations, infrastructure and investment strategy. To comply with Rule 206(4)‑7 and meet the SEC’s expectations, a fund manager must identify the various risks it faces and then design its compliance program to eliminate, mitigate or control those risk factors. Thus, although Rule 206(4)‑7 does not expressly require risk assessments, as a practical matter, an assessment is necessary for a fund manager to ensure that its compliance program is appropriately tailored and effective. This article explains why fund managers should conduct risk assessments, when they should do so, who should be involved in the assessment process, how to use a risk assessment template and what the next steps should be after the assessment. The article also contains a downloadable risk assessment template created for use by both outside counsel and in-house GCs and CCOs at fund managers. For another tool to assist fund managers, see our two-part series “A Checklist for Investment Advisers to Streamline and Organize Their Annual Compliance Program Reviews”: Part One (Dec. 13, 2018); and Part Two (Dec. 20, 2018).

Compliance Corner Q2‑2020: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

During this extraordinary time, fund managers are faced with numerous operational and business continuity challenges to address risks associated with the coronavirus pandemic. The pandemic has demanded a “new normal” of remote human interaction and caused fund managers to take unprecedented measures to ensure the continuity of their operations. Despite those challenges, CCOs must be vigilant that compliance operations, including regulatory filings, continue as orderly and timely as possible. This twelfth installment of the Hedge Fund Law Report’s quarterly compliance update, authored by consultants Anne Wallace, John Mrakovcic and Chris Ray at ACA Compliance Group (ACA), highlights upcoming filing deadlines and reporting requirements that fund managers should be aware of during the second quarter. This article also discusses recent SEC coronavirus-related statements and exam program developments; cybersecurity risks related to the coronavirus; items to consider when enhancing coronavirus-related business continuity efforts and operational resiliency; and E.U. short selling restrictions. For more from ACA, see “A Roadmap for Preparation and Delivery of New Form CRS” (Mar. 19, 2020).

Key Considerations for Private Fund Investors Navigating the Coronavirus Crisis

The coronavirus pandemic has created vast social disruption and unprecedented volatility in the financial markets, raising risks for both hedge fund managers and their investors. A recent program presented by the Investment Management Due Diligence Association (IMDDA) offered a roadmap for private fund investors to navigate the crisis with their managers, including the tools that managers have at their disposal to manage the crisis; the steps that investors should take to monitor their investments; a comprehensive set of questions for investors to ask managers; and the remedies that may be available to aggrieved investors. The program was hosted by IMDDA co‑founder and managing director Daniel Strachman and featured Anne E. Beaumont and Scott M. Berman, partners at Friedman Kaplan Seiler & Adelman. This article explores the salient points from their presentation, which should also help fund managers prepare to answer potential questions from investors. See “HFLR Webinar Covers Key Topics for Fund Manager GCs and CCOs in Light of Coronavirus” (Mar. 19, 2020).

Sidley Briefing Outlines Recent Regulatory and Enforcement Developments Relevant to Private Fund Advisers

At the recent Sidley Austin Private Funds 2020 conference, a panel of attorneys discussed recent regulatory and enforcement matters relevant to private fund managers, including CFTC and SEC regulatory amendments and initiatives; potential enforcement activity concerning manufactured credit events and short selling; and private litigation involving alternative investment managers. The program featured Sidley partners Laurin Blumenthal Kleiman, Kate L. Lashley, Benjamin R. Nagin and Nader H. Salehi. This article reviews the key takeaways from the presentation. For more from Sidley attorneys, see “The Global Whistleblowing Legal Landscape and Best Practices in the U.S. and U.K.” (Mar. 12, 2020); and our two-part series “How Funds Are Achieving Performance Compensation Equilibrium”: Considerations on Hurdles, Benchmarks, High Water Marks and Clawbacks (Jan. 9, 2020); and Designated Investments, “1 or 30” Structures, Caps and First Loss Arrangements (Jan. 16, 2020).

SEC Chair Reinforces Compliance Deadlines During Coronavirus Pandemic

Despite the recent upheaval caused by the coronavirus pandemic and the SEC’s relief from certain filing deadlines, fund managers should not expect the June 30, 2020, compliance date for Regulation Best Interest or Form CRS to be extended. That was the message SEC Chair Jay Clayton sent in a recent speech. Clayton’s remarks provide valuable insight for fund managers into the SEC’s perspective and commitment to protect “long-term Main Street investors,” which the SEC Chair insisted remained strong despite the uncertainties caused by the coronavirus pandemic. This article highlights the key points from Clayton’s speech. For coverage of another speech by Clayton, see our two-part series “Efforts to Modernize Regulatory Framework”: Part One (Jan. 30, 2020); and Part Two (Feb. 6, 2020).

Willkie Farr Adds Hedge Fund Litigator to D.C. Office

Mark Stancil has joined Willkie Farr & Gallagher in the firm’s Washington, D.C., office as a partner in the litigation group. Stancil will focus on trial and appellate advocacy in complex commercial litigation, with a particular focus on investment disputes. A substantial portion of his practice is devoted to representing hedge funds; multi-strategy asset managers; and various trustees, agents and ad hoc groups with significant financial interests in the outcome of litigation. For commentary from another recent addition to Willkie Farr, see our two-part interview with former CFTC Chair J. Christopher Giancarlo: “Accomplishments, Relationships With Other Regulators and the CFTC’s Approach to Rulemaking” (Jan. 30, 2020); and “Technology, LabCFTC, Project KISS and the CFTC’s Enforcement Manual” (Feb. 6, 2020).