Sep. 17, 2020

How Compliance Departments Have Responded to the Coronavirus Pandemic

In a short amount of time, the coronavirus pandemic has changed the world and forced companies – including fund managers – to rethink even the most basic assumptions about their businesses. For many, the initial reaction was a scramble to protect employees’ safety while keeping the business running. Now that most companies and fund managers have settled into these changed circumstances, the Hedge Fund Law Report reached out to in-house compliance professionals to see how their companies and their compliance programs are adjusting to the “new normal.” See “Former OCIE Private Funds Examiner Explores Compliance Issues Introduced by the Coronavirus Pandemic and Mitigation Tips (Part Two of Two)” (May 14, 2020).

The European Commission and ESMA Lay Groundwork for AIFMD II

When the E.U. Alternative Investment Fund Managers Directive (AIFMD) was implemented in E.U. member states, it introduced a harmonized framework for the regulation of alternative investment fund managers, including hedge fund managers. Article 69 of AIFMD required the European Commission (EC) to start a review on the application and the scope of AIFMD, the timing of which has been pushed back, primarily as a result of the U.K.’s vote to leave the E.U. (commonly referred to as Brexit). The EC recently published its long-awaited report assessing the scope and application of AIFMD (Commission Report), and the European Securities and Markets Authority (ESMA) sent a letter to the EC reviewing AIFMD (ESMA Review). It is clear that the Commission Report and ESMA Review are influenced, in part, by what the post-Brexit E.U. asset management landscape should look like. In a guest article, Sidley partner Leonard Ng explores the Commission Report and the ESMA Review, concluding that it is likely that, together, they will form the basis for the policy direction of what will ultimately become “AIFMD II.” For additional commentary from Ng, see “Investment Managers’ Reporting Obligations Under the E.U. Securities Financing Transactions Regulation” (May 28, 2020).

SEC Adopts Incremental Expansion of Accredited Investor Definition

In December 2019, the SEC issued proposed amendments (Proposed Rule) to the definition of “accredited investor” contained in Rule 501(a) under the Securities Act of 1933, a status that gives investors access to private placements of securities pursuant to Regulation D under that Act. The Commission, by a three-two vote, recently adopted final amendments to Rule 501(a) (Final Rule), thereby effecting the first significant change in the accredited investor definition in decades. The two Commissioners who voted against the Final Rule argued that it fails to protect vulnerable investors and that the SEC lacked sufficient data to support the changes. This article discusses the final changes to Rule 501(a) and other SEC rules that rely on the definition of accredited investor set forth in the Final Rule, as well as the Commissioners’ divergent perspectives on the Final Rule. See our two-part series on the Proposed Rule: “Proposed Changes and SEC Commissioner Perspectives” (Feb. 13, 2020); and “Key Takeaways for Private Fund Managers” (Feb. 20, 2020). See also “SEC Commissioners and Staff Discuss Possible Amendments to Definition of Accredited Investor” (Jun. 2, 2016).

What to Expect on Hedge Fund K‑1s in the Coming Year

Hedge fund accounting can be challenging in the best of times. Recently, fund accountants have had to contend with the new centralized partnership audit regime; changes to the Internal Revenue Code implemented by the 2017 Tax Cuts and Jobs Act; new and proposed IRS regulations; relief afforded under the CARES Act; and a revised Form K‑1 (K‑1). A recent Strafford program tackled the above issues, offering a roadmap for understanding the critical information reported to investors on K‑1s. The program featured Laura L. Ross and Yvonne Yang, partner and tax director, respectively, at EisnerAmper. This article distills their insights. See “What Critical Issues Must Hedge Fund Managers Understand to Inform Their Preparation of Schedules K‑1 for Distribution to Their Investors?” (Mar. 14, 2013).

Despite Challenges, Survey Finds Compliance Processes Have Remained Effective During the Pandemic

Financial compliance software firm StarCompliance recently surveyed more than 160 asset managers, private equity firms, broker-dealers and other financial services firms. It asked participants to identify the top compliance-related challenges they have faced during the coronavirus pandemic; evaluate how their compliance processes and certifications procedures have fared; and explain how they are using technology to assist with their compliance processes. Although respondents faced challenges associated with employee communications and compliance-related requests, most reported that their compliance processes and certifications have remained effective. This article outlines the key takeaways from the survey report, with added insights from StarCompliance staff. For the results of another recent survey, see our two-part series on ACA Compliance’s testing survey: “Hot Topics, Compliance Programs, BCPs and the Pandemic” (Aug. 13, 2020); and “Form CRS; Anti‑Bribery and Anticorruption Controls; Cybersecurity; and Privacy” (Aug. 27, 2020).

Former AUSA and Member of Insider Trading Task Force Joins Akin Gump in New York

Katherine Goldstein, a former federal prosecutor, is the newest partner in Akin Gump’s New York office in its white collar defense and government investigations practice. Previously at Millbank, Goldstein’s practice focuses on representing individuals and entities in government and corporate investigations; criminal and regulatory enforcement proceedings; and related private litigation. For additional commentary from Goldstein, see “HFLR Panel Identifies Best Practices for Avoiding Insider Trading Liability in the Aftermath of Martoma” (Jan. 18, 2018); and “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016).