Apr. 15, 2021

Division of Examinations’ 2021 Exam Priorities: New and Emerging Focus Areas (Part One of Two)

The SEC’s Division of Examinations recently published its 2021 Examination Priorities (Priorities), which reflect the new Biden administration’s increased regulatory focus on securities market participants – including private fund managers. Understanding the Priorities and preparing for an exam in advance is the best defense fund managers can have against prolonged regulatory inquiries and possible enforcement actions. In preparation for an exam, private fund managers should ensure they have robust policies and procedures in place that address perennial risk areas, such as disclosures of conflicts of interest. They should also cover new and emerging risk areas, such as liquidity; environment, social and governance investing; pandemic and recent economic impacts on investment portfolios; disclosure of investment risks; scrutiny of non-performing assets; and digital assets. In a two-part guest series, Jane Jarcho, Sarah Curran and Drew Weilbacher from Promontory Financial Group summarize the topics discussed in the Priorities and include their expectations regarding specific focus areas, documents that an exam team might request and potential individuals who are likely to be interviewed. This first article addresses new or emerging focus areas, and the second article will discuss perennial focus areas in private fund manager exams. For additional commentary from Promontory staff, see our two-part series “Present and Former SEC Leaders Discuss the SEC’s Approach to Exams and Enforcement During the Coronavirus Pandemic”: Part One (Jul. 16, 2020); and Part Two (Jul. 23, 2020).

Digital Identity Management in a Post‑Pandemic World: A Framework for Identity‑Centric Cybersecurity (Part Two of Two)

Robust digital identity management is a key part of an effective cybersecurity program. This second article in a two-part series on digital identity provides a framework for an identity-centric cybersecurity program and discusses how the adoption of Fast ID Online has grown as a phishing-resistant authentication tool. The first article covered how the pandemic has shifted the virtual landscape, the identity aspects of the SolarWinds incident, the Zero Trust infrastructure and certain identity management challenges firms are facing. For a look at another recent cyber incident, see our two-part series “Eleven Lessons From Cyber Hack That Forced an Australian Hedge Fund to Close”: Part One (Feb. 4, 2021); and Part Two (Feb. 11, 2021).

SBAI Responsible Investment Policy Framework: Four Ways to Incorporate Into Investment Strategies (Part One of Two)

There is a growing expectation among institutional investors that fund managers develop and disclose their approaches to responsible investments (RI), according to the Responsible Investment Policy Framework (Framework) recently issued by the Standards Board for Alternative Investments (SBAI), an association of alternative investment managers. The Framework discusses the fundamental considerations for developing an approach to RI and the key components of RI policies in four principal areas, including responsible integration; asset selection; ownership and voting; and corporate and market citizenship. “Allocators want to ensure that, when a manager is using RI approaches within its products, the approach has been carefully considered, is appropriately resourced and is governed effectively,” SBAI content/research director Maria Long told the Hedge Fund Law Report. This article, the first in a two-part series, explains how to use the Framework, identifies five approaches to RI in general and discusses four approaches to incorporating RI principles into investment strategies, with additional insights from Long. The second article will analyze governance, disclosure and measurement, as well as three key considerations for fund managers. For more from SBAI, see our two-part series “Guidance on Conflicts, Valuation and Structuring for Private Credit Fund Managers and Investors”: Part One (Aug. 6, 2020); and Part Two (Aug. 13, 2020).

CCOs Share Recent SEC Exam Experiences

The SEC Division of Examinations continues to prioritize examinations of advisers that have never been examined or have not been examined for a considerable number of years. To help advisers learn what to expect in those exams, a recent webinar provided an overview of new examination priorities and a step-by-step look at the recent exam experiences of two SEC-registered investment advisers, including the timeline of the exams; the impact of the coronavirus pandemic; document production; asset and custody verification; and the ways those firms navigated the stressful exam process. The presentation featured Krista S. Zipfel and Caleb B. Diaz, director and compliance associate, respectively, at Focus 1 Associates LLC; Abraham J. Freidin, CCO of Capital Counsel LLC; and Jeffrey J. Kearns, president and CCO of Kearns and Associates, LLC. This article distills the key lessons from the discussion. See our two-part series “HFLR Program Explores Current SEC Examination Practices and Issues”: Part One (Dec. 20, 2018); and Part Two (Jan. 10, 2019).

WilmerHale Attorneys Review Recent CFTC Enforcement Actions (Part One of Two)

The CFTC Division of Enforcement’s annual report notes that fiscal year 2020 was a “record-breaking year,” including the most enforcement actions in its history and significant recoveries. That was one of the observations made at a recent seminar sponsored by WilmerHale, offering a comprehensive look at the CFTC’s enforcement and regulatory activities over the past year. The program featured partner Elizabeth L. Mitchell; senior counsel Paul M. Architzel, who was former Chief Counsel at the CFTC Division of Economic Analysis (now the Division of Market Oversight); special counsel Petal P. Walker, who was former Chief Counsel to CFTC Commissioner Sharon Bowen; special counsel Matthew Beville; and senior associate Aaron Friedman. This first article in a two-part series reviews the portion of the program during which WilmerHale attorneys drilled down into the CFTC’s enforcement priorities, including market conduct, digital assets, foreign corruption, anti-money laundering, expectations for compliance programs, whistleblowers, coordination with other regulators and use of technology. The second article will explore the panelists’ review of the CFTC’s rulemaking affecting pandemic-related operations; speculative position limits; swap execution facilities; digital assets; derivatives clearing organizations; margin and capital requirements; commodity pool operator/commodity trading advisor matters; regulatory reporting; cross-border swaps; and security-based swap dealers. See “Anticipating SEC and CFTC Enforcement Priorities Under the Biden Administration” (Mar. 18, 2021); and “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

David Pentlow Joins Kleinberg Kaplan in New York

Kleinberg Kaplan announced that David Pentlow has joined the firm as senior counsel in its private funds and investment management practice in New York. Pentlow has extensive experience representing hedge, private equity and real estate funds, as well as investors, financial institutions and issuers – from start-ups to established public companies – in connection with securities offerings and other finance transactions; fund and product launches; SEC, CFTC and related regulatory matters; and other transactions. For insights from other members of the firm, see “2020 Year‑End Tax‑Planning Considerations for Fund Managers” (Dec. 10, 2020); and “Proxy Rules Now Apply to Proxy Voting Advice Businesses” (Sep. 3, 2020).