Feb. 13, 2020

The Accredited Investor Definition: Proposed Changes and SEC Commissioner Perspectives (Part One of Two)

The term “accredited investor” is a critical component of several exemptions from registration, most notably Rules 506(b) and 506(c) of Regulation D under the Securities Act of 1933, and plays an important role in other securities law contexts. Qualifying as an accredited investor is significant because accredited investors may participate in investment opportunities that are generally unavailable to non-accredited investors – including investments in offerings by hedge funds and private equity funds. The definition of accredited investor, however, has not been significantly updated since it was adopted in 1982. The SEC recently approved proposed changes to that definition (Proposal) and is accepting comments on the Proposal through mid‑March. This two-part series explores the proposed amendments to the accredited investor definition and their implications in the private funds context. This first article examines the key proposed amendments to this important definition, along with the views of the SEC commissioners on the Proposal. The second article will discuss the key takeaways from the Proposal for private fund managers. For more on the concept release on the exempt offering framework that initially broached the idea of updating this definition, see our two-part series: “Review of the Concept Release” (Sep. 5, 2019); and “Key Takeaways From the Concept Release for Private Fund Managers” (Sep. 12, 2019).

Beyond Codes of Ethics: Why Simply Having a Code Is Not Enough

Many businesses have codes of ethics or codes of conduct, and they come in various lengths and address varying types of ethical issues. Some companies even have codes for senior executives that are separate and apart from the code for the company’s employees in general, and some businesses maintain integrity statements or “credos.” Since 2003, the SEC has required registered investment advisers to have written codes of ethics pursuant to Rule 204A‑1 under the Investment Advisers Act of 1940. Having a code of ethics is not sufficient, however, to create a culture of compliance or ethical behavior within an investment adviser. Rather, an adviser’s senior management must regularly communicate its code of ethics and general commitment to ethics to employees in order to embed the code and the firm’s ethical values in the fabric of all of its operations, activities and decisions. In a guest article, Dr. David E. McClean, principal of DMA Consulting Group, reviews the requirements of Rule 204A-1 and discusses the importance of effectively communicating an adviser’s code of ethics to its employees, including examples of effective ethics communicators. See “ACA 2019 Hedge Fund Survey Examines SEC Exam Experience, Codes of Ethics, Electronic Communications and Expense Allocations (Part One of Two)” (Aug. 8, 2019).

Best Practices for Using Alternative Data: Mitigating Regulatory and Other Risks (Part Two of Two)

As the use of alternative data by hedge fund managers increases, the risks relating to that use – including issues relating to insider trading, regulatory scrutiny, data privacy considerations and cybersecurity concerns – similarly grow. Managers must thus ensure that they are cognizant of and mitigate any risks as they employ alternative data in the pursuit of alpha. A recent webinar presented by the Hedge Fund Law Report reviewed the above risks as part of an in-depth look at the regulatory and compliance issues involved in collecting and using alternative data. William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, moderated the program, which featured Stacey M. Brandenburg, shareholder at ZwillGen; Jeffrey D. Neuburger, partner at Proskauer; and Adam J. Reback, director at Optima Partners. This second article in our two-part series details the panelists’ thoughts regarding insider trading, regulatory risk, data privacy laws, cybersecurity and web scraping. The first article covered the portions of the webinar that explored data gathering and managing third-party data providers, including due diligence, contract provisions and associated issues. See “Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping” (Jun. 15, 2017).

HFA Program Explores Trends and Challenges in Digital Assets, Including Need for Clearer Regulations

A recent Hedge Fund Association (HFA) program explored the explosive growth in digital assets in recent years, continuing efforts to satisfy custody duties, recent regulatory developments, the need for clearer regulation, Facebook’s stumble with its Libra cryptocurrency, the developing infrastructure for digital assets and where the digital assets space is headed in the coming year. William Herrmann, managing partner of Wilshire Phoenix and HFA regional director, moderated the discussion, which featured Gary R. Markham, CEO of aXpire Fund Solutions and HFA director; Christine Sandler, head of sales and marketing at Fidelity Digital Assets; and Anthony Tu‑Sekine, partner at Seward & Kissel. This article summarizes their insights. For coverage of other HFA programs, see “Briefing Explores Fundraising Environment, Investor Allocation Trends, Third-Party Marketers and Operational Due Diligence” (Jun. 6, 2019); and “Briefing Covers U.S. and Global Regulatory Climate Relating to Liquidity, Enforcement, Examinations and Cybersecurity” (Jan. 4, 2018).

NFA Representatives Detail New Swaps Proficiency Requirements

The NFA’s new swaps proficiency requirements (SPR or the Requirements) recently took effect. As a result, associated persons of NFA firms that engage in CFTC‑regulated swaps activities, along with their supervisors, have less than a year to take and pass the Requirements. A recent NFA program provided a comprehensive overview of the Requirements, including their applicability, the two available training tracks, the process for completing the Requirements and how to navigate the NFA’s online SPR system. Christie Hillsman, NFA manager, moderated the discussion, which featured Sudhir Jain, NFA director; Jennifer Sunu, NFA compliance director; and Don Thompson, NFA board and executive committee member. Other NFA personnel also contributed to the presentation. This article highlights the key takeaways from the program. For coverage of other NFA rulemaking activity, see “NFA Notice Requires CPOs to Implement Internal Controls Systems” (Feb. 28, 2019); and “NFA Mandates New Disclosures on Certain Virtual Currency Activities” (Sep. 20, 2018).