Oct. 29, 2020

Fund Managers Must Continue to Guard Against Pay to Play Violations

As the U.S. election cycle draws to a close, investment advisers’ compliance departments need to remain ever vigilant that their firms’ employees have not run afoul of the federal pay to play requirements of Rule 206(4)‑5 under the Investment Advisers Act of 1940 or state and local rules. To explore best practices for ensuring that an adviser stays on top of pay to play matters, the Hedge Fund Law Report interviewed Beverly Duke, CCO of investment management firm Markston International. This article contains her insights on the difficulties faced by small and large investment advisers with managing pay to play; potential SEC enforcement in the area, as well as the possibility of waivers of enforcement activity; and best practices for a manager’s compliance staff to ensure that it is adequately well versed in the pay to play requirements and has adopted appropriate policies and procedures. For a practical tool for compliance to use in connection with pay to play reviews, see “Use a Preclearance Checklist to Avoid Violating the Pay to Play Rule” (Oct. 15, 2020).

Data Breaches, Leaked Documents and the Attorney-Client Privilege – Can the Bell Really Be Unrung?

With a relentless increase in cyber attacks against companies and their law firms, the list of issues that keep GCs up at night has expanded to include what happens when protected attorney-client privileged information is compromised in a cybersecurity incident. In a guest article, Locke Lord partners Theodore P. Augustinos and Donald E. Frechette examine both the historical and modern-day judicial treatment of otherwise privileged internal communications that find their way to the world wide web as the result of a cyber attack and offer a series of “best practices” to increase the chances that a court will maintain the privileged nature of the relevant communications. See also “After Capital One Ruling, How Will Companies Protect Forensic Reports?” (Jul. 30, 2020).

Update on Hedge Fund Trends and Terms

Morgan Lewis recently hosted a webinar exploring some of the key trends in hedge funds emerging from the first six months of 2020, specifically in performance and assets under management; opportunities; the subscription process; co‑investments; and customized structures. The program also included an update on key hedge fund terms, including fees, operating expenses, fiduciary duties, liquidity and most favored nation provisions. The presentation featured Morgan Lewis partners Christopher J. Dlutowski, Peter M. Phleger and Carrie J. Rief. This article summarizes their key insights and takeaways from the discussion. For additional commentary from a Morgan Lewis partner, see our three-part series on tailoring a compliance program: “Why Fund Managers Should Customize” (Jul. 16, 2020); “What Fund Managers Should Consider” (Jul. 23, 2020); and “When Fund Managers Should Review and Update” (Jul. 30, 2020).

Advisers Should Be Planning Now for the End of LIBOR

The sunset of the London Interbank Offered Rate (LIBOR) at the end of 2021 is fast approaching and is likely to affect multiple areas of an investment adviser’s operations, including portfolio management; client agreements and disclosures; fee calculations; and counterparty contracts, according to the speakers at a recent ACA Compliance Group (ACA) seminar. The program, which discussed the unified regulatory approach to the LIBOR transition and the steps advisers should be taking to navigate that transition, featured Michael Abbriano and Andrew Poole, director and senior principal consultant, respectively, at ACA; John Mack, managing director at Oak Hill Advisors, LP; Robin Meister, professor at New York Law School and former global head of U.S regulatory affairs at BNP Paribas Asset Management; and Leonard Ng, partner at Sidley Austin. This article distills the critical takeaways from the presentation. For additional insights from Ng, see “The European Commission and ESMA Lay Groundwork for AIFMD II” (Sep. 17, 2020).

Adviser’s Self‑Reporting, Remediation and Cooperation Help Avoid Penalty for Disclosure Failures

Disclosure is at the heart of the U.S. securities laws. Advisers that fail to disclose material information do so at their peril – especially when that information relates to fees and expenses. The SEC’s recent settlement order (Order) against an investment adviser alleges that the adviser failed to disclose its right to recapture certain fees that it waived or expenses that it reimbursed to four funds it advised and the fact that fee and expense recaptures caused those funds to exceed certain expense caps. Notably, the adviser escaped a penalty by self-reporting, taking remedial action and cooperating with the SEC. Although the action pertains to management of money market funds, the Order is an important reminder of the potential benefits to all investment advisers of self-reporting, remediation and cooperation. This article discusses the alleged misconduct and the other relevant provisions of the Order. See “OCIE Risk Alert on Private Funds: Focus on Conflicts; Fees and Expenses; and MNPI (Part One of Two)” (Aug. 6, 2020).