Oct. 15, 2020

Use a Preclearance Checklist to Avoid Violating the Pay to Play Rule

In any presidential election year, a fund manager is likely to see an increase in employees’ contributions to various political campaigns. Given the current political climate – coupled with the pandemic, societal unrest and economic turmoil – that increase in donations may be even more dramatic in 2020. As a result, fund managers that have government entity investors, such as public pension funds, must be particularly careful to ensure that employee political contributions do not run afoul of Rule 206(4)‑5 of the Investment Advisers Act of 1940 – the so-called “pay to play rule” (Rule). The centerpiece of many pay to play compliance policies and procedures is a requirement that employees preclear donations in advance. This article reviews the Rule’s requirements and restrictions, discusses the importance of preclearance and provides a checklist that CCOs can use to approve or deny employee contributions. The article also contains a standalone version of the checklist that can also be downloaded, adapted and used. For a look at the consequences of violating the Rule, see “SEC Continues to Target Pay to Play Violations” (Aug. 30, 2018); “Pay to Play, Revenue Sharing and Wrap Fees Remain on the SEC’s Radar” (Apr. 20, 2017); and “SEC Starts Year With Pay to Play Penalties” (Jan. 28, 2016).

Identifying and Preventing Ransomware Attacks

A recent SEC Office of Investigations and Examinations cybersecurity risk alert focused on ransomware – a persistent and evolving threat to financial firms, as demonstrated by the recent attack on TCW Investment Management. In a guest article, Simon Eyres, managing director at Drawbridge Partners, discusses the best practices identified by the alert to prevent, detect and mitigate the damage from ransomware attacks, as well as the threat environment in the financial services sector. See our two-part series “How Fund Managers Can Identify and Prepare for Ransomware Threats”: Part One (Apr. 19, 2018); and Part Two (May 3, 2018). For additional insights from Drawbridge, see “Six Ways for Fund Managers to Prepare for the SEC’s Focus on Cybersecurity and Resiliency” (Apr. 30, 2020).

SEC Fines Investment Adviser for Improper Cross Trades and Principal Transactions

Cross trades and principal transactions present investment advisers with unique conflicts of interest and regulatory challenges, which are compounded when one of the parties to a cross trade is a registered investment company. In a recent SEC settlement, a registered investment adviser believed it was acting in the best interests of its clients by effecting cross trades to retain desirable investments and save clients transaction costs. In fact, although the SEC acknowledged that the adviser believed that it was acting fairly, it apparently did not understand that those trades fell within applicable provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940. This article explores the relevant rules and regulations; the facts underlying the enforcement proceeding; and the terms of the settlement order. This enforcement action is an important reminder that advisers must have robust policies and procedures for principal transactions and cross trades; adhere to those policies and procedures; and conduct appropriate training. See “SEC Continues to Focus on Cross Trades and Principal Transactions” (Apr. 16, 2020); and “OCIE Risk Alert Details Concerns About Principal Transactions and Agency Cross Trades” (Oct. 24, 2019).

HFLR Webinar Explores Legal and Compliance Employment Trends, Including Compensation, Staffing, Diversity and the Pandemic’s Impact

Fund managers have faced enormous challenges in 2020 due to the onslaught of the coronavirus pandemic, unprecedented market volatility, the remote work environment and social disruption arising out of growing awareness of racial injustice in the U.S. A recent webinar conducted by the Hedge Fund Law Report and the Private Equity Law Report explored how those seismic events have affected staffing and compensation in fund managers’ legal and compliance departments; ways managers are preparing for life after the pandemic; and managers’ approaches to growing calls for greater diversity and inclusion in employment. William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report and the Private Equity Law Report, moderated the discussion, which featured David Claypoole, founder and president of Claypoole Executive Search; Jennifer J. Pearson, head of human resources and employment counsel at Deerfield Management; and Julie Siegel, executive managing director, chief administrative officer and deputy chief legal officer at Sculptor Capital. This article distills the key takeaways from the program. For coverage of Claypoole’s studies of in-house compensation at fund managers, see our two-part series: “How Have Industry Developments Affected the Value of Legal and Compliance Staff?” (Feb. 2, 2017); and “Will Industry Deregulation Affect the Value of Legal and Compliance Staff?” (Feb. 16, 2017); as well as our two-part series: “What Is the Value of Legal and Compliance Staff?” (Mar. 12, 2015); and “Trends in Legal and Compliance Hiring and Staffing” (Mar. 19, 2015).

SEC Officials Clarify the Commission’s Stance on ESG Investing and the Role of Disclosure

Demand among investors for hedge funds with investment strategies influenced by environmental, social and governance (ESG) factors has grown rapidly in recent years. Investors require clear and meaningful information to evaluate a fund’s approach toward ESG issues, compare funds and make informed investment decisions. Although investors increasingly rely on quantitative models, ESG considerations are often subjective and are more effectively assessed qualitatively. Three SEC officials highlighted the importance and challenges of disclosures relating to ESG investing at recent events. First, Chairman Jay Clayton discussed the issues at a webinar hosted by FCLTGlobal and moderated by Mark Wiseman, chair of the Alberta Investment Management Corporation. Commissioner Elad L. Roisman later addressed the topic in his keynote speech at the Society for Corporate Governance National Conference. Finally, Commissioner Hester M. Peirce discussed the topic in her remarks at a virtual roundtable on the role of asset management in ESG investing, which was hosted by Harvard Law School. This article highlights the key takeaways from Clayton’s, Roisman’s and Peirce’s remarks. For coverage of the views of Clayton, Peirce and Roisman on the accredited investor definition, see “The Accredited Investor Definition: Proposed Changes and SEC Commissioner Perspectives (Part One of Two)” (Feb. 13, 2020).

Former SDNY Securities Chief Jason Cowley Joins McGuireWoods

McGuireWoods announced that Jason Cowley, former Co‑Chief of the Securities and Commodities Fraud Task Force and former Chief of the Money Laundering and Asset Forfeiture Unit of the U.S. Attorney’s Office for the Southern District of New York, has joined the firm’s government investigations and white collar litigation team. As a partner working out of the New York and Charlotte, NC offices, Cowley will represent investment funds, financial institutions, corporations and executives in criminal investigations and trials; regulatory enforcement proceedings; and complex civil litigation. For commentary from another McGuireWoods partner, see “How Fund Managers Can Withstand the Coronavirus Pandemic: Business Continuity and Other Operational Risks (Part Three of Three)” (Apr. 16, 2020).