Feb. 27, 2020

Encryption for Fund Managers: Basics of Its Use and Challenges for Implementation (Part One of Three)

Many fund managers are failing to properly encrypt their data due to various challenges, including determining which data to encrypt, performance overhead and key management. This article, the first in a three-part series, discusses the basics of encryption, when it should be used and challenges with implementing it. The second article will analyze the legal and regulatory framework surrounding encryption, including various federal and state laws. The third article will evaluate what policies and procedures a manager should enact; the role of legal and compliance personnel; and the management of third parties with respect to data security. For more on cybersecurity, see “How Hackers Can Infiltrate Fund Managers Through Executives, and How to Stop Them” (Apr. 18, 2019).

Focus Areas for Private Fund Managers From OCIE’s 2020 Exam Priorities

The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently published its 2020 Examination Priorities (Priorities), which include several areas for which private fund managers should ensure they have robust policies and procedures in place. New to the Priorities are specific risk areas targeting private fund managers, as well as other areas generally applicable to those managers. In a guest article, Jane Jarcho, special advisor to Promontory Financial Group (Promontory) and former Deputy Director of OCIE, and Sarah Curran, director of Promontory and former Exam Manager in OCIE’s Private Fund Unit, summarize the above topics and include insights regarding documents that an exam team might request and potential individuals who are likely to be interviewed on those topics as part of an OCIE exam, as well as ways a chief compliance officer can prepare for an OCIE exam in one of the priority areas. For additional commentary from Jarcho, see “The Relationship Between OCIE and Enforcement” (Mar. 28, 2019); and “OCIE’s National Exam Program and Annual Priorities” (Apr. 4, 2019).

Distribution, Fundraising and Regulatory Environment in Luxembourg and the E.U.

A recent seminar presented by the Association of the Luxembourg Fund Industry (ALFI) offered a snapshot of the current state of the funds space in Luxembourg and addressed key business and regulatory developments that may have an effect on E.U. fund managers. As with prior ALFI events, the program featured panel discussions with representatives from financial services, asset management, legal and accounting firms. This article covers the portions of the seminar that discussed distribution and fundraising in the E.U.; pre-marketing rules and potential revisions to the Alternative Investment Fund Managers Directive; anti-money laundering and know your customer issues; and evolving anti-tax avoidance measures. For coverage of other portions of the ALFI event, see “Luxembourg Plays Prominent Role in ESG Investing and Sustainable Finance” (Nov. 21, 2019). For coverage of ALFI’s May 2019 event, see our two-part series: “Luxembourg Vehicles Can Assist Managers With Marketing Private Funds in the E.U.” (Jul. 18, 2019); and “Brexit and Sustainable Investing Remain Key Considerations in Luxembourg Funds Space” (Jul. 25, 2019).

K&L Gates Program Examines Recent CFTC Developments Affecting CPOs and CTAs

A recent K&L Gates program examined developments at the CFTC under new Chair Heath Tarbert. The program emphasized CFTC and NFA rule changes that affect commodity pool operators and commodity trading advisers, including family offices; supervision; promotional materials; performance advertising; training; exemptions; and harmonization with SEC rules on general solicitation. The program featured K&L Gates partners Cary J. Meer and Stephen M. Humenik, as well as associate Edgar Mkrtchian. This article outlines the key takeaways from their presentation. See “CFTC Proposes Amendments to Regulations to Codify Existing Relief for CPOs and CTAs” (Nov. 15, 2018).

OIG Report Highlights SEC Staffing Shortages and Resulting Challenges for Examination and Enforcement Efforts

The SEC is dealing with the effects of a prolonged hiring freeze and staff attrition, while being asked to oversee a growing and ever-more-complex securities market, according to the SEC’s Office of Inspector General (OIG). In its annual report, the OIG discussed challenges faced by the SEC in four key areas: meeting its regulatory oversight responsibilities; protecting systems and data; improving contract management; and ensuring effective human capital management. This article explores the report’s relevant findings and includes commentary from attorneys on the practical effect of the report’s findings on the SEC’s enforcement and examination efforts. For examples of recent SEC enforcement actions, see “Recent Case Illustrates How Not to Respond When SEC Examiners Voice Concerns” (Feb. 6, 2020); and “Fund Managers May Be Liable for Incorrect Fee Calculations, Regardless of Intent” (Jan. 30, 2020).