Jul. 30, 2020

Tailoring a Compliance Program: When Fund Managers Should Review and Update (Part Three of Three)

Tailoring a fund manager’s compliance program is not a one-and-done project. The program needs to be regularly reviewed and, if necessary, updated. Those reviews can be triggered by internal events, such as breaches of fund policies or material changes to the fund’s operations, or external events, such as the adoption of new rules by the SEC. This three-part series explores the logistics of tailoring a fund manager’s compliance program. This third article identifies five key triggers for a review – and possible update – of a fund manager’s compliance program. The first article outlined the expectations of the SEC, DOJ and investors as to the customization of compliance programs, as well as the consequences of failing to tailor the program. The second article laid out what fund managers should consider when tailoring their programs, including the role of off-the-shelf programs. See “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017).

After Capital One Ruling, How Will Companies Protect Forensic Reports?

A loss for Capital One may have wider consequences for defendants’ ability to shield breach investigation reports from discovery. This article addresses the implications of a recent Virginia federal court’s decision rejecting the bank’s claim that its attorney-directed post-breach incident report is protected work product, including the decision’s potential chilling effects on companies’ discussions after a breach and steps companies might take to protect forensic reports, with insights from industry practitioners as well as advice on an alternative approach to handling forensic facts. For more on privilege, see “When and How Attorney-Client Privilege Applies to Communications With In-House Counsel” (Jun. 22, 2017).

Are You Prepared for OCIE’s Sweep of Business Continuity Plans and Coronavirus Actions?

As the coronavirus pandemic continues to disrupt the private funds industry, regulators are keeping a close eye on advisers’ abilities to weather the crisis. As part of that effort, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has sent targeted document requests to multiple fund managers centered on their business continuity plans (BCPs). OCIE’s document requests have, among other things, sought copies of advisers’ BCPs and information about how they are being used during the pandemic, including preliminary assessments of weaknesses revealed to date. OCIE has also included questions about BCPs in ongoing routine examinations and phone interviews with advisers as the agency attempts to assess the pandemic’s effect on the industry. To help fund managers prepare for the SEC sweep of BCPs, the Hedge Fund Law Report interviewed several attorneys and compliance consultants for their insights. In addition to examining the scope and nature of the SEC’s efforts to date, this article includes a redacted OCIE document request list (OCIE Request List) received by a fund manager at the outset of the coronavirus pandemic. Fund managers should review the OCIE Request List to prepare for potential future SEC scrutiny of their BCPs. See our three-part series on withstanding the coronavirus pandemic: “Form ADV Filing Relief, Investor Communications and Fund Valuation Issues” (Apr. 2, 2020); “Marketing Disruptions, Key Person Clauses and Cybersecurity Concerns” (Apr. 9, 2020); and “Business Continuity and Other Operational Risks” (Apr. 16, 2020).

Debevoise Attorneys Discuss E.U. Sustainability Disclosure and Taxonomy Regulations

The E.U.’s 2018 Action Plan: Financing Sustainable Growth aims to reorient capital toward sustainable investments, explained Debevoise & Plimpton partner Patricia Volhard at a recent seminar presented by the firm. The initiative includes a new regulation on sustainability‐related disclosures in the financial services sector (Disclosure Regulation); a framework to facilitate sustainable investment (Taxonomy); a low-carbon benchmarks regulation; and amendments to the Alternative Investment Fund Managers Directive (AIFMD) and other E.U. directives to take into account sustainable investing. The program, which elucidated the fundamental requirements and potential impact of the Disclosure Regulation, the Taxonomy and AIFMD amendments, also included Debevoise & Plimpton attorneys Simon Witney, Jin‑Hyuk Jang, John Young and Eric Olmesdahl. This article explores the key takeaways from the program, including the impact of Brexit on those developments and the key implementation deadlines. For the U.S. regulatory perspective on sustainable investing, see “ESG Considerations for Fund Managers: The U.S. Landscape (Part One of Two)” (Jun. 25, 2020); and “OCIE’s Targeting of ESG Investing Practices in Recent Examinations and What It Means for Hedge Fund Managers” (Jun. 11, 2020). See also “Regulators Are Focusing on Sustainable and ESG Investments” (May 7, 2020).

AI and Machine Learning: IOSCO Seeks Input on Proposed Guidance

The Board of the International Organization of Securities Commissions (IOSCO) recently issued a consultation report (Consultation) on the use of artificial intelligence (AI) and machine learning (ML) by asset managers and market intermediaries. The purpose of the Consultation is to solicit comments on proposed guidance intended to ensure robust governance over the development, deployment and monitoring of AI and ML models, as well as appropriate transparency to investors, regulators and other relevant stakeholders. Although the guidance, once final, will not be binding, IOSCO’s goal is to encourage members to consider the proposals carefully in the context of their legal and regulatory frameworks for AI and ML. This article discusses the key takeaways from the Consultation. See “The Current State and Future of AI Regulation” (May 14, 2020); and “The Death of Alpha: A True Challenge or a Poor Manager’s Excuse? DMS Summit Discusses Alpha Generation, ‘2 and 20’ Fees, AI and Impact Investing” (Apr. 12, 2018).