The SEC’s Office of Compliance Inspections and Examinations recently issued a risk alert on observations from examinations of investment advisers that manage hedge and private equity funds (Risk Alert). The areas on which the Risk Alert focuses include conflicts of interest; fees and expenses; and material nonpublic information and codes of ethics. As with prior risk alerts, one of the goals of the Risk Alert is to “assist private fund advisers in reviewing and enhancing their compliance programs.” To further that goal, this second article in a two-part series discusses the key takeaways from the Risk Alert for private fund managers and suggests what advisers should do now in response to the alert. The first article provided an overview of the Risk Alert. See “Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program” (Aug. 28, 2014). Read full article …

The London Interbank Offered Rate (LIBOR), as a reference rate of interest, may be contained in the financial products that a private fund uses or trades, or to which the fund is exposed. The U.K. Financial Conduct Authority, which regulates LIBOR, will no longer require financial institutions to submit LIBOR quotations after December 31, 2021, and as a result, it is likely that LIBOR quotations after that date will not be available or will no longer be representative of the rate at which banks can borrow from other banks on an unsecured basis. Thus, advisers have a duty to understand how LIBOR will be phased out and how that transition process will affect their funds and investments. To avoid significant liability, advisers must plan for how they and the funds that they manage will respond to the transition away from LIBOR – and the coronavirus pandemic is no excuse to delay preparing for that transition. In a guest article, Morgan Lewis partner Thomas D’Ambrosio discusses the background of the end of LIBOR, spells out recommendations from the Alternative Reference Rates Committee on handling the transition and explains the SEC’s requirements for private fund advisers navigating the transition. See “How Hedge Fund Managers Can Prepare for the Anticipated ‘End’ of LIBOR” (Aug. 24, 2017). Read full article …

In a recent administrative proceeding, the SEC claimed that two registered investment advisers caused the mutual funds they advise to violate Section 12(d)(1) of the Investment Company Act of 1940, which limits an investment company’s ownership of other investment companies. One adviser compounded its problems by failing to implement its own policies and procedures, as well as those of the funds it advised. This article analyzes the alleged violations and the terms of the SEC settlement order. Although the settlement concerns open-end investment companies, it is an important reminder that the SEC carefully scrutinizes advisers’ compliance with investment restrictions, whether those restrictions are internal or imposed by statute. See “Adviser Faces Significant Fines and Disgorgement for Misrepresentations Concerning Investment Concentration and Risk Controls” (Jun. 11, 2020). Read full article …

The Standards Board for Alternative Investments (SBAI) recently published memoranda regarding three issues in private credit strategies: fund structuring, valuation and conflicts of interest. While the memoranda provide investors with useful questions to ask when investing in a credit strategy, they are also intended to provide guidance to alternative credit fund managers. This two-part series discusses the key takeaways from the memos, including insights from SBAI executive director Thomas Deinet. This second article examines the fund structuring and valuation memoranda. The first article provided general background on the SBAI and summarized the conflicts of interest memorandum. See our two-part series on an ACC study on credit funds: “Continued Growth in Private Credit, Despite Headwinds” (Jan. 16, 2020); and “Outlook for Private Credit ” (Jan. 23, 2020). Read full article …

ACA Compliance Group (ACA) recently completed its 2020 Investment Management Compliance Testing Survey, which it conducted in cooperation with the Investment Adviser Association (IAA) and Brightsphere Investment Group. This article, the first in a two-part series, covers the survey’s results as to hot compliance topics, compliance programs, business continuity plans and the impact of the coronavirus pandemic. The second article will examine the results relating to Form CRS; anti-bribery and anticorruption controls; and cybersecurity and privacy. Both articles include additional insights from Enrique Alvarez, senior principal consultant at ACA, who discussed the survey’s results with the Hedge Fund Law Report. See our coverage of the 2018 ACA‑IAA investment management compliance testing survey: “Fees and Expenses, Investment Mandates, Big Data and Custody” (Aug. 2, 2018); and “Best Execution, Soft Dollars, Advertising, Individual Clients and Cryptocurrency Trading” (Aug. 9, 2018). Read full article …