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    Jun. 11, 2020

OCIE’s Targeting of ESG Investing Practices in Recent Examinations and What It Means for Hedge Fund Managers

Environmental, social and governance (ESG) strategies are increasingly popular with investors and hedge fund managers. Thus, the SEC’s Office of Compliance Inspections and Examinations (OCIE) stated that it plans to review ESG investing with “particular interest” as part of its 2020 Examination Priorities. In fact, OCIE’s scrutiny of ESG investing may have already begun. A number of fund managers have reported receiving extensive document requests from OCIE – such as the sample version included in this article – about their ESG investing practices, including their disclosures, marketing, use of metrics, internal controls and other policies. In light of that scrutiny, fund managers must ensure that they know the risks associated with ESG investing and take steps to mitigate them. To understand the scope of the SEC’s efforts in this area to date and going forward, the Hedge Fund Law Report interviewed hedge fund practitioners advising managers with respect to recent OCIE exams that have covered ESG investing. This article analyzes the SEC’s recent approach to ESG oversight, potential ESG‑related risks for managers facing SEC scrutiny and steps managers can take to mitigate those risks in advance. See “Focus Areas for Private Fund Managers From OCIE’s 2020 Exam Priorities” (Feb. 27, 2020).

Avoiding Parallel Fund Conflicts: New SBAI Standards and Case Study Provide Guidance for Mitigating Conflicts (Part One of Two)

There are various reasons – such as tax issues, regulatory concerns or investor control – why fund managers decide to launch supplemental funds in parallel with their flagship funds. The problem, however, is that fund managers can focus so intently on curing those issues that they overlook some of the potential conflicts of interest introduced by operating parallel funds. In addition, fund managers may occasionally develop blind spots for when multiple funds operate with sufficiently similar investment strategies to qualify as parallel funds and thus necessitate careful treatment. To bolster industry best practices in this area, the Standards Board for Alternative Investments (SBAI) recently issued a case study (Case Study) focusing on those issues and providing information on other resources available through SBAI. This first article in a two-part series discusses the key takeaways from the Case Study, with added insights from industry practitioners including SBAI executive director Thomas Deinet. The second article will outline different contexts in the hedge fund and private credit sectors where parallel funds can arise, with tips for mitigating conflict of interest risks. See “Will Hedge Fund Industry Self-Regulatory Codes, Such As the ‘Standards’ Promulgated by the Hedge Fund Standards Board, Preempt Additional Hedge Fund Regulation or Complement It?” (Apr. 23, 2009).

ALFI Seminar: Navigating Changing E.U. Distribution, Marketing and AML Rules (Part One of Two)

The Association of the Luxembourg Fund Industry (ALFI) recently presented a seminar, which featured panel discussions with representatives from financial services, asset management, legal and accounting firms. The seminar was hosted by ALFI deputy general director Marc‑André Bechet. This article, the first in a two-part series, covers the discussions on the impact of the coronavirus pandemic on Luxembourg’s funds industry; E.U. liquidity risk management measures; E.U. distribution challenges for U.S. fund managers; the E.U.’s incipient pre-marketing regime; AIFMD II; and European Long-Term Investment Funds. The second article will review the discussions on marketing E.U. funds outside the E.U.; implementation of the Sustainable Finance Disclosure Regulation; the “digitalization” of financial services in the E.U.; and developments in Luxembourg’s and the E.U.’s anti-money laundering and counter-terrorist financing efforts. For coverage of other ALFI events, see “Luxembourg Plays Prominent Role in ESG Investing and Sustainable Finance” (Nov. 21, 2019); and our two-part series: “Luxembourg Vehicles Can Assist Managers With Marketing Private Funds in the E.U.” (Jul. 18, 2019); and “Brexit and Sustainable Investing Remain Key Considerations in Luxembourg Funds Space” (Jul. 25, 2019).

Adviser Faces Significant Fines and Disgorgement for Misrepresentations Concerning Investment Concentration and Risk Controls

The market disruptions triggered by the coronavirus pandemic have caused huge swings in asset values, potentially throwing many managers’ portfolios out of balance and increasing the risk that they will breach concentration limits or other investment restrictions specified in their funds’ governing documents. A recent SEC settlement order issued against an investment adviser and its chief investment officer is a reminder that the SEC is paying careful attention to advisers’ adherence to stated investment restrictions and risk-related disclosures. The SEC claimed that although the respondents represented to investors that their fund would not take a concentrated position in any region – and that its investments were subject to rigorous risk controls – the fund made a massive bet on a single currency, which was not disclosed to investors or subject to those controls. This article discusses the facts and circumstances of the enforcement proceeding and the terms of the order. See “Former OCIE Private Funds Examiner Explores Compliance Issues Introduced by the Coronavirus Pandemic and Mitigation Tips (Part Two of Two)” (May 14, 2020); and “Key Considerations for Private Fund Investors Navigating the Coronavirus Crisis” (Apr. 23, 2020).

Paul Hastings Attorneys Discuss Issues for Open‑End, Closed‑End and Registered Funds Due to the Coronavirus Pandemic (Part Two of Two)

Women in Funds recently sponsored a program that examined certain critical issues that fund managers are facing due to the coronavirus pandemic and offered practical guidance on navigating those matters. Laura Tucker Schnaidt, founder and CEO of Women in Funds, introduced the panel, which featured Paul Hastings partner Ira P. Kustin, counsel Runjhun Kudaisya and associate Alexandra Marghella. This two-part series highlights the speakers’ insights. This second article outlines their perspectives on the issues for open-end, closed-end and registered funds. The first article presented their views on fund governance, investor relations, fiduciary duty, board meetings, valuation and lines of credit issues. See “Key Considerations for Fund Managers Responding to the Coronavirus Outbreak” (Mar. 26, 2020).

WilmerHale Adds Private Funds Team to Boston Office

Private fund lawyers Steven Giordano and Omar Hemady have joined WilmerHale’s investment management practice and securities department as partners in the firm’s Boston office. Giordano and Hemady focus their practices on fund formation across the liquidity spectrum, including hedge, credit, private equity, venture, hybrid, crossover and real estate funds, as well as permanent capital vehicles, bespoke vehicles, funds of funds and funds of one. They serve as counsel to fund sponsors on the full range of strategic matters, including corporate governance, compensation planning and buy-out arrangements, as well as transactional matters, such as seed capital and revenue sharing arrangements; minority and majority asset acquisitions; and strategic equity investments. For another recent addition to WilmerHale, see “Former FINRA Head of Enforcement Joins WilmerHale” (Mar. 5, 2020).

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