Aug. 27, 2020

Former SEC Enforcement Attorney Discusses Selective Disclosure Risks and Practical Solutions

The SEC has carefully scrutinized fund managers’ disclosures to investors for years to ensure that managers are making required disclosures; those disclosures are accurate and complete; and they match managers’ actual operations. In addition, the SEC will raise an eyebrow, so to speak, if a manager gives certain information to some investors but not others – especially if that information gives those select investors a financial advantage. In today’s economic climate, managers should expect heightened scrutiny of any selective disclosures. The Hedge Fund Law Report recently spoke to Philip Moustakis, counsel at Seward & Kissel and former Senior Counsel in the SEC’s Division of Enforcement, about increases in investor inquiries during the pandemic; the factors managers should consider when deciding what information to provide to investors; practical steps managers can take to avoid pitfalls when responding to investor inquiries; the SEC’s focus on selective disclosures; and the importance of documenting all communications with investors. For additional insights from Moustakis, see “How Managers Can Navigate the Thin Line Between SEC Examinations and Enforcement” (Nov. 14, 2019); and our two-part interview in which he discussed: “The Digital Assets Space” (Mar. 7, 2019); and “Enforcement Trends and Whistleblowers” (Mar. 14, 2019).

A New Dawn for U.K. Investment Vehicles?

The U.K. has historically been a popular home to fund managers, whether they originally hail from the U.K., the U.S. or elsewhere. Unfortunately, the same cannot be said about the U.K. with respect to intermediate investment vehicles for international investment funds (i.e., intermediate holding companies or vehicles that house fund assets). Instead, those intermediate holding structures are predominantly found in other jurisdictions in Europe, including Luxembourg, Ireland and the Netherlands. In a guest article, White & Case attorneys Will Smith and Lily Teh outline the main reason why the U.K. has historically proven to be an unpopular jurisdiction for intermediate holding structures. The article also provides details as to why that might change in the near future, especially in light of an ongoing consultation into the issue by the U.K. government. Finally, the article examines why the change, if it occurs, may have significant long-term benefits for international investment managers. For more from Smith, see “Current Tax Challenges for Funds With European Investments” (Jun. 25, 2020).

Kentucky Sues Blackstone, KKR/Prisma, PAAMCO and Their Principals Over State Pension Losses

In recent years, there has been growing concern over the amount of fees paid by public pension funds to private fund managers and whether the returns on private fund investments justify those fees. In the evolving drama over the Kentucky State Retirement System (KRS) – reportedly one of the shakiest in the nation – the Kentucky Attorney General (AG) has joined the fray. In 2017, several state employees brought a lawsuit against certain KRS trustees, officers and advisers, as well as KKR; Prisma Capital; Blackstone; Pacific Alternative Asset Management Company; and their respective founders and principals, that allegedly sold KRS extraordinarily risky and opaque fund of hedge fund products. After the Kentucky and U.S. Supreme Courts ruled that individual pension beneficiaries lacked standing to sue, the AG intervened in the lawsuit and now seeks damages on behalf of the state. This article summarizes the allegations in the 140+ page intervening complaint. For discussion of other actions involving alleged mismanagement of pensions, see “Class Action Lawsuit May Affect Retirement Plan Allocations to Hedge Funds” (Nov. 12, 2015); and “U.S. District Court Allows ERISA Claims For Breach of Fiduciary Duties to Proceed Against a Pension Fund’s Investment Advisers” (Oct. 8, 2010).

Debevoise Attorneys Discuss AI Regulation With Head of FINRA’s Office of Financial Innovation

Financial services firms are embracing artificial intelligence (AI) and machine learning to make their back-office processes more efficient; assist with risk management and compliance-related functions; facilitate interactions with customers; and improve their investment processes. As the use of AI grows dramatically, so too do the associated business and compliance risks. A recent Debevoise & Plimpton seminar explored the current state of AI regulation in the securities industry, focusing on FINRA’s recent work in the area. Debevoise partner Avi Gesser moderated the discussion, which featured associate Anna R. Gressel and Haimera Workie, senior director at FINRA and head of its Office of Financial Innovation. This article outlines the key takeaways from the presentation, including ways to manage AI risks. See “AI and Machine Learning: IOSCO Seeks Input on Proposed Guidance” (Jul. 30, 2020); and “The Current State and Future of AI Regulation” (May 14, 2020).

ACA Compliance Testing Survey: Form CRS; Anti‑Bribery and Anticorruption Controls; Cybersecurity; and Privacy (Part Two of Two)

ACA Compliance Group (ACA) conducted its 2020 Investment Management Compliance Testing Survey in conjunction with the Investment Adviser Association and Brightsphere Investment Group. This second article in a two-part series discusses the recently released survey results relating to Form CRS; anti-bribery and anticorruption controls; cybersecurity; and privacy. The first article covered the survey results as to hot compliance topics; compliance programs; business continuity plans; and the impact of the coronavirus pandemic. 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. For coverage of another recent industry survey, see “AIMA Report Outlines Adoption, Challenges and Prospects for Use of Alternative Data by Hedge Fund Managers” (Jun. 4, 2020).