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    Nov. 12, 2020

Valuations: Five Steps to Take When Deviating From Usual Procedure (Part Two of Two)

Fund managers are required not only to have policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 but also to follow their policies and procedures in the operation of their businesses. The SEC takes a dim view of managers that fail to comply with their own policies and procedures, especially those for areas vulnerable to abuse such as valuation. There may be circumstances, however, that make it difficult – if not impossible – for a manager to follow its usual valuation procedures. Unless the manager’s policy has a contingency plan for when the usual valuation procedure cannot be followed, the manager must proceed cautiously – and then fill that gap in its policies. This second article in a two-part series spells out the steps that a manager without a specified contingency plan in its valuation policy should take if it must deviate from its usual valuation procedures due to a crisis. The first article explained why proper valuation of a hedge fund’s assets is so important – especially in the eyes of the SEC – discussed circumstances that may make valuing a fund’s assets challenging and noted the importance of establishing fair market value. See “Three Approaches to Valuing Fund Assets and How Auditors Review Those Valuations” (May 11, 2017); and “Three Pillars of an Effective Hedge Fund Valuation Process” (Jun. 19, 2014). To shed light on other valuation-related issues, on November 18, 2020, at 10:00 am EST, the Hedge Fund Law Report will be hosting a webinar, entitled “How to Handle Level 2 and 3 Asset Valuation Challenges." The program will be moderated by Robin L. Barton, Associate Editor of the HFLR, and will feature Benjamin Kozinn, partner in Lowenstein Sandler’s investment management practice group, and Hugh Nelson, director in Houlihan Lokey's portfolio valuation and fund advisory business. To register for the program, click here.

Proposed Amendments Would Fundamentally Change HSR Compliance for Private Fund Managers

The Hart-Scott-Rodino Act (HSR or HSR Act) requires parties to transactions that meet specified dollar thresholds and do not fall within an exemption to notify the antitrust agencies and observe a waiting period prior to consummating a reportable transaction. The Federal Trade Commission (FTC), with the support of the Antitrust Division of the DOJ, recently announced two rulemaking notices that may materially affect the obligations of hedge fund managers, private equity firms and other financial investors under the HSR Act. In addition, the FTC is seeking input on a variety of other topics that may shape future changes to the HSR program, many of which also could meaningfully impact HSR compliance for investment funds. In a guest article, Cadwalader partner Joel Mitnick and counsel Ngoc Hulbig summarize the FTC’s proposals and offer a high-level analysis of their respective effects on private fund managers and other financial investors. For insights from other Cadwalader attorneys, see “Marketing EEA‑Domiciled Hedge Funds in the U.K. Post Brexit” (Aug. 6, 2020).

Advisers Must Prepare for the Upcoming Expansion of the E.U. and U.K. Prudential Regimes

The European Parliament adopted a regulation on the prudential requirements for investment firms (IFR) and a directive on the prudential supervision of investment firms (IFD). E.U. member states have months to implement the IFD/IFR; the U.K. is adopting a parallel regime. The new regimes will capture many investment advisers that were not previously subject to prudential regulation. A recent ACA Compliance Group seminar examined the scope of the IFD/IFR; its capital, remuneration, risk assessment and governance requirements; and ways the IFD/IFR and U.K. regimes may differ. The program featured Bobby Johal and Andrew Welch, managing directors at ACA Compliance Europe; Bernadette King, partner at accounting firm Haysmacintyre LLP; and John Young, international counsel at Debevoise & Plimpton. This article outlines the key takeaways from the seminar. See “Implications for Investment Managers of the New E.U. Investment Firm Prudential Regime” (Jul. 11, 2019); and “What Are the Implications for Investment Managers of the Revised Prudential Framework for E.U. Investment Firms?” (Mar. 22, 2018).

How University Endowments Approach Diversity at Asset Managers and Racial Equity in Investments

The Black Lives Matter movement has prompted a national discussion on racial equity that is reaching all areas of society and the economy. People of color have long been underrepresented in, and neglected by, the financial services industry. The endowments of some educational institutions have been taking the lead in promoting racial equity, primarily by seeking minority-owned or minority-led asset managers, but also by considering how to deploy their assets in a way that both benefits minority communities and delivers appropriate investment returns. Two recent studies shed light on how endowments are approaching these critical issues. The first, the Racial Equity Investing Primer (Primer), issued by the Intentional Endowments Network (IEN), discusses the economic risks posed by racial inequality and offers a roadmap for endowments that seek to promote racial equity through their investments. The second is a report (Inquiry Report) issued by Congressmen Emanuel Cleaver II, Democrat from Missouri, and Joseph Kennedy III, Democrat from Massachusetts, on their inquiry of 25 premier colleges and universities about their endowments’ use of diverse asset managers. This article discusses the key takeaways from the Primer and the Inquiry Report, with additional insight from Kaede Kawauchi, program manager at IEN. See our four-part series on diversity: “Why Equal Representation Within Fund Managers Is Essential” (Oct. 4, 2018); “Ways Fund Managers Can Promote Diversity and Inclusion” (Oct. 11, 2018); “What Implicit Biases Are and Whether Interventions Are Effective” (Oct. 18, 2018); and “How Constrained Decision Making, Along With Legal and Compliance Leadership, Can Help Reduce Fund Manager Bias” (Nov. 1, 2018).

Fund Managers Should Use a Checklist to Ensure a Privacy Compliant Return to Work

This return-to-work checklist is designed to help fund managers balance health and safety concerns with privacy and other legal considerations, which can be overwhelming when managers are implementing plans to get employees back into a physical workplace. The checklist has been derived from the Hedge Fund Law Report’s in-depth series on how to facilitate a safe and privacy compliant return to work – which featured insights from privacy leaders at Mastercard, Johnson Controls, Orrick, Dentons and Gibson Dunn – as well as from a panel presentation by Fenwick & West at the 2020 Privacy + Security Forum. See the three-part series referenced above: “Laws and Guidance” (Jun 18, 2020); “Policies and Protocols” (Jun 25, 2020); and “Contact Tracing” (Jul. 9, 2020).

Former GC and CCO Joins Schulte’s Investment Management Group in NY

Schulte Roth & Zabel announced the addition of Owen Schmidt as a partner in its investment management group in the New York office. Schmidt focuses his practice on private fund formation and compliance; advising on the formation and operation of hedge, private equity and credit funds, as well as co‑investment vehicles; and other types of investment management matters. For insights from other Schulte partners, see “OCIE Risk Alert on Private Funds: Key Takeaways for Managers (Part Two of Two)” (Aug. 13, 2020); “Avoiding Parallel Fund Conflicts: Common Challenges for Hedge Fund and Credit Strategies (Part Two of Two)” (Jun. 18, 2020); and “OCIE’s Targeting of ESG Investing Practices in Recent Examinations and What It Means for Hedge Fund Managers” (Jun. 11, 2020).

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