Jan. 23, 2020

ALFI Director and Chairwoman Examine Brexit, E.U. Pre‑Marketing Rules, Trends in Distribution and ESG

The Association of the Luxembourg Fund Industry (ALFI) recently held its New York roadshow, which featured discussions on, among other topics, distribution in Europe and beyond; sustainable finance; and E.U. regulatory updates. Prior to the seminar, the Hedge Fund Law Report interviewed Marc‑André Bechet and Corinne Lamesch, ALFI deputy director general and ALFI chairwoman, respectively, in connection with Brexit; Luxembourg’s status as a global financial center; the new E.U. rules on pre-marketing and reverse solicitation; trends in distribution; and environmental, social and governance investing. This article presents their thoughts on the foregoing. For an interview with ALFI’s previous chairwoman, see “ALFI Chairwoman and Director General Discuss Luxembourg Fund Structures, FinTech and Brexit” (Jun. 20, 2019).

Compliance Corner Q1‑2020: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

For most hedge fund managers, the first quarter in the new year is the time to update Form ADV; finalize and deliver an updated compliance manual to employees; and collect employees’ annual disclosures and personal holdings reports. Fund managers will also have to consider the California Consumer Privacy Act of 2018, which took effect on January 1, 2020; creates new consumer rights related to the access, deletion and sharing of personal information collected by businesses; and requires implementation of policies and procedures to address, among other things, protection of personal information, privacy, security protections and facilitation of consumer rights. See “A Roadmap to Understanding and Complying With the California Consumer Privacy Act” (Nov. 14, 2019). In addition to summarizing the upcoming filing requirements and code of ethics reporting deadlines, this eleventh installment of the Hedge Fund Law Report’s quarterly compliance update, authored by consultants Anne Wallace, John Mrakovcic and Chris Ray at ACA Compliance Group (ACA), provides important points hedge fund managers should consider to ensure a smooth process for completing the annual updating amendments to Form ADV, as well as an assortment of annual compliance-related matters. It also discusses considerations for the upcoming Form CRS filing; proposed changes to the accredited investor definition and the advertising and cash solicitation rules; and 2020 exam priorities for the Office of Compliance Inspections and Examinations. For more from ACA, see “2019’s Key Compliance Trends and Issues” (Jan. 9, 2020).

ACC Study Outlines Outlook for Private Credit (Part Two of Two)

In connection with a recently released paper (Report), the Alternative Credit Council (ACC), an affiliate of the Alternative Investment Management Association, and Dechert co‑sponsored a roundtable in which they presented the key findings of their research. Jiří Krόl, global head of the ACC, moderated the discussion, which featured Benjamin Fanger, founder and managing partner of ShoreVest Partners; Joseph Glatt, general counsel of Apollo Capital Management, L.P.; Richard Horowitz, partner at Dechert; Olga Kosters, head of private debt secondaries at Tikehau Capital; and Elissa Von Broembsen‑Kluever, partner and managing director at Omni Partners LLP. This two-part series summarizes the key takeaways from the presentation, with relevant information from the Report. This second article details the outlook for private credit. The first article outlined the drivers of growth of private credit; issues relating to transparency and benchmarks; fee considerations; and responsible investing factors. See our three-part series on hedge funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016).

Present and Former Regulators Discuss Current SEC and NFA Examination and Enforcement Environment (Part Two of Two)

A panel of current and former regulators spoke at a session of the 2019 National Conference of the National Society of Compliance Professionals. Speakers included Bruce Karpati, chief compliance officer at Kohlberg Kravis Roberts & Co. L.P. and former Co‑Chief of the Asset Management Unit of the SEC, who moderated the discussion; Patricia Cushing, NFA Director of Compliance; Daniel Kahl, Associate Director and Chief Counsel of the SEC Office of Compliance Inspections and Examinations; and Anthony S. Kelly, partner at Dechert and former Co‑Chief of the SEC Asset Management Unit. Our two-part series summarizes the insights from that panel. This second article reviews the panel’s discussions on cybersecurity, digital assets and data privacy. The first article covered the NFA’s focus on commodity pool operator internal controls; the SEC’s regulatory issues and priorities; notable examination experiences; compliance programs; regulatory resources; responsible investing; and common issues involving private funds. See “CFTC Enforcement Division Aims to Foster ‘True Culture of Compliance,’ According to Report” (Jan. 16, 2020).

Faulty Design and Implementation of Share Class Selection Tool Costs Morgan Stanley More Than $1.5 Million

As part of the SEC’s continuing focus on retail investors, the agency has been targeting advisers and broker‑dealers that fail to make appropriate disclosures to clients about their practices for selecting mutual fund share classes. The SEC’s latest target, Morgan Stanley Smith Barney LLC (MSSB), represented to certain brokerage customers that it used an automated tool to select the most economical mutual fund share class for them. There were, however, certain issues with the tool itself. In addition, MSSB failed to use the tool at all for certain customers, resulting in some customers not being sold the most cost-effective share classes for which they were eligible. This article discusses the circumstances giving rise to the enforcement proceeding and the terms of the settlement order, including a significant civil penalty. For discussion of SEC enforcement proceedings against MSSB in its capacity as an investment adviser, see “Investment Advisers Must Have Adequate Policies, Procedures and Controls to Prevent Theft of Client Funds” (Jul. 26, 2018); and “Failure by Investment Advisers to Ensure Accurate Client Billing May Lead to SEC Enforcement Action and Penalties” (Feb. 2, 2017).

Estate Planning Attorney Joshua M. Kaplan Joins Kleinberg Kaplan

Kleinberg Kaplan announced that Joshua M. Kaplan has joined the firm as a partner in its estate planning and administration practice. With more than a decade of experience in private wealth matters, Kaplan advises a variety of clients, including hedge and private equity fund managers, on a broad range of issues, such as estate planning and administration; estate, gift and generation-skipping transfer tax planning; business succession planning; charitable giving; and life insurance. For commentary from another Kleinberg Kaplan partner, see “SDNY: In Absence of Attorney-Client Relationship, Communications With Consultants Who Happen to Be Attorneys Are Not Protected” (Aug. 8, 2019).