May 28, 2020

Suspending Withdrawals: Key Steps in the Process (Part Two of Three)

Suspending withdrawals or redemptions from a hedge fund is a last-resort option for a fund manager facing a financial crisis. If circumstances – such as the impact of the coronavirus pandemic on the global markets – compel a manager to consider imposing a suspension, it is critical that the manager follow certain key steps to avoid lawsuits by investors and enforcement actions by the SEC. This three-part series explores the process of suspending withdrawals. This second article examines the process by which a fund manager may initiate a suspension. The first article reviewed suspensions during the 2008 financial crisis compared to the current pandemic; reasons a fund manager may consider imposing a suspension; the downsides of doing so; and the SEC’s view of suspensions. The third article will explain the steps for lifting a suspension and actions that managers should be taking now to prepare for a potential suspension in the future. See our two-part series on winding down funds: “How Managers Make the Decision and Communicate It to Investors and Service Providers” (Mar. 2, 2017); and “Navigating Illiquid Assets, Unanticipated Windfalls and Fees and Expenses During Liquidation” (Mar. 16, 2017).

Investment Managers’ Reporting Obligations Under the E.U. Securities Financing Transactions Regulation

The E.U. Securities Financing Transactions Regulation (SFTR) introduces a reporting obligation for certain counterparties to securities financing transactions. The reporting obligation applies in stages, starting in April 2020 and extending to January 2021. For alternative investment funds (AIFs); undertakings for the collective investment in transferable securities (UCITS) structures; or any trading vehicles owned by an AIF or UCITS structure that fall within the scope of the SFTR reporting requirement, the most relevant phase-in dates will be within the next eight months. In a guest article, Leonard Ng and Chris Poon, partner and senior associate, respectively, at Sidley Austin, discuss the SFTR, including listing the entities that must report, the types of transactions included, the information that must be reported and the reporting start dates. In addition to providing next steps under SFTR, the article also explores the effect of the coronavirus pandemic on that regulation. For more on UCITS structures, see “How Managers Can Launch and Market UCITS Funds in the E.U. and Across the Globe” (Apr. 11, 2019). For additional commentary from Ng and Poon, see “Implications for Investment Managers of the New E.U. Investment Firm Prudential Regime” (Jul. 11, 2019).

OCIE Risk Alerts on Reg BI and Form CRS: What to Expect in Future Exams (Part One of Two)

The SEC recently adopted Form CRS, which requires registered investment advisers and broker-dealers to deliver client relationship summaries on Form CRS to all retail investors and to file the forms with the SEC. At the same time, the SEC also adopted Regulation Best Interest (Reg BI), which imposes a fiduciary standard on broker-dealers with regard to retail customers. The June 30, 2020, compliance date for Reg BI and Form CRS is fast approaching. The SEC Office of Compliance Inspections and Examinations (OCIE) issued a pair of risk alerts (Risk Alerts) pertaining to examinations focusing on compliance with Reg BI and Form CRS. The Risk Alerts detail the specific areas on which OCIE will focus in initial exams, emphasizing the adoption of appropriate compliance policies and procedures and the documentation that advisers will be expected to produce. This article, the first in a two-part series, reviews the key provisions of the Risk Alerts, as well as the status of the June 30 compliance deadline. The second article will provide key takeaways from the Risk Alerts for broker-dealers and investment advisers. See “A Roadmap for Preparation and Delivery of New Form CRS” (Mar. 19, 2020). For discussion of Reg BI, see “Present and Former SEC Attorneys Discuss Retail Investors, CAT Implementation, Enforcement Issues, Reg BI and SRO Oversight” (Dec. 12, 2019); and “SEC Chair Defends Regulation Best Interest and Investment Adviser Fiduciary Duty” (Sep. 19, 2019).

Direct Lending Funds: Structural Approaches to Address Liquidity Considerations and Ensure Regulatory Compliance (Part One of Two)

Direct lending strategies are growing in popularity, fueled by regulatory constraints on bank lending and investor demand for income strategies that can provide meaningful returns in a low-interest-rate environment. Fund managers face difficult choices, however, when deciding how to structure direct lending funds to address tax, compliance and marketing concerns. To help address those issues, a recent program hosted by Strafford CLE Webinars, featuring Sadis & Goldberg partners Alex Gelinas, Steven Huttler and Daniel G. Viola, examined the advantages and disadvantages of different structures for direct lending funds. This first article in a two-part series weighs the merits of pursuing a closed-end, open-end or hybrid fund structure, as well as certain regulatory concerns associated with the strategy. The second article will analyze the tax impact of different direct lending fund structures on U.S. investors, U.S. tax-exempt investors and non‑U.S. investors. For additional commentary from Sadis & Goldberg partners, see “Program Gets Into the Weeds on Cannabis M&A” (Aug. 1, 2019).

Advisers That Fail to Diligently Challenge Pricing Service Marks May Draw SEC Scrutiny

Advisers often use pricing services to value securities that do not have readily available market quotations. The SEC’s recent enforcement action against an investment adviser is a reminder that advisers must be vigilant when considering the appropriateness of pricing service marks. In this case, the adviser allegedly used pricing service marks for round lots when calculating its fund’s net asset value (NAV), even though it knew that round lot prices were typically higher than odd lot prices. The SEC claimed that, among other things, the adviser lacked appropriate compliance policies and procedures, sold shares at other than NAV and made materially misleading disclosures to investors about fund performance. This article outlines the adviser’s alleged violations and the terms of the SEC settlement order. For a similar action, see “SEC Settlement With PIMCO Highlights the Importance of Proper Valuation and Performance Disclosures” (Dec. 8, 2016).

Former Counsel to SEC Commissioner Roisman Rejoins Goodwin As Partner

Goodwin Procter announced that Nick Losurdo has returned to the firm as a partner in its financial industry practice, splitting his time between Boston and Washington, D.C. Losurdo, who served as Counsel to SEC Commissioner Elad Roisman, advises a variety of clients on regulatory, compliance, transactional and enforcement matters. He counsels broker-dealers; equity and options exchanges; alternative trading systems; and investment advisers regarding SEC and FINRA rules and regulations. For insights from other Goodwin attorneys, see our two-part series “Establishing and Marketing Private Funds in the E.U. Under AIFMD”: Key Provisions (Jun. 27, 2019); and Jurisdiction; AIFs and AIFMs; Private Placements; and Reverse Solicitation (Jul. 11, 2019).