Jan. 14, 2021

How to Allocate Pandemic-Related Expenses

Like most industries, hedge fund managers – and the way they operate – have been affected by the coronavirus pandemic. Most notably, the switch to remote work for an extended period of time has forced many managers to incur new or increased expenses, such as additional laptops and computer monitors for employees working from home; videoconferencing software licenses; and increased cybersecurity measures. Many of those managers are grappling with the question of who should bear the burden of those unexpected costs: the manager itself or its funds? This article analyzes the types of pandemic-related expenses fund managers may have incurred; the SEC’s perspective on pandemic-related issues and expenses in general; and ways to allocate pandemic-related expenses. See “The SEC’s Response to the Coronavirus Pandemic and Its 2020 Exam Priorities” (May 14, 2020).

Former SEC Enforcement Co‑Director Steven Peikin Discusses His New Position and Experience at the SEC (Part One of Two)

From 2017 to 2020, Steven Peikin served as Co‑Director of the SEC’s Division of Enforcement (Enforcement), where he oversaw all aspects of the SEC’s national enforcement program. Among other duties, Peikin was responsible for executing the Commission’s enforcement priorities; overseeing its thousands of investigations and hundreds of litigations; responding to complex cyber threats; developing a comprehensive enforcement approach to initial coin offerings and other digital assets; and protecting the long-term interests of retail investors. He also coordinated SEC enforcement activities with the DOJ, the CFTC and numerous foreign securities regulators around the world. The Hedge Fund Law Report recently spoke to Peikin in connection with his return to Sullivan & Cromwell. In this first article in our two‑part series, Peikin discusses his new position; his experience at the SEC; and the relationship between Enforcement and the SEC’s Division of Examinations – formerly the Office of Compliance Inspections and Examinations, or OCIE. In the second article, Peikin talks about Enforcement’s annual report, the whistleblower program, self-reporting, Enforcement’s use of technology, CCO liability, private funds and the pandemic. For our coverage of Peikin while he was at the SEC, see “SEC Enforcement Co‑Director Reviews Division Performance” (Oct. 10, 2019); and “What Remedies and Relief Can Fund Managers Expect in SEC Enforcement Actions?” (Jan. 10, 2019).

Proposed SEC Exemption Offers Much‑Needed Clarity on Use of Finders to Raise Investment Capital

The use of “finders” to raise capital has always been a cloudy area of securities regulation and often a pitfall for the unwary. Many folks, unaware of the regulatory framework governing broker-dealer and investment advisory activity, have walked into the crosshairs of the enforcement arm of the SEC for referring investors to issuers, including private investment funds, in exchange for compensation without being associated with an SEC-registered broker-dealer. The investment funds those investors are solicited for – as well as the investment advisers that manage those funds – also potentially face enforcement actions for paying those individuals. The SEC recently proposed an exemptive order (Exemptive Order) that would permit unregistered finders to engage in certain limited fundraising activities without the need to associate with a broker-dealer. In a guest article, Ralph A. Siciliano, partner at Tannenbaum, provides background on the regulatory status of finders, explains the proposed Exemptive Order and discusses its possible implications for private fund managers. For commentary from another Tannenbaum partner, see our two-part series “The Tax Cuts and Jobs Act One Year Later – Updates and Structuring Considerations for Private Funds and Their Managers”: Part One (Feb. 14, 2019); and Part Two (Feb. 21, 2019).

Structural and Operational Considerations for Hybrid Funds

As private fund managers seek new ways to generate alpha, the lines between private equity and hedge funds continue to blur. Managers are developing hybrid funds that offer investors the benefit of access to less liquid – but possibly more lucrative – investments, while retaining acceptable levels of investor liquidity. A panel at the Seward & Kissel 2020 Private Funds Forum examined common hybrid fund structures; liquidity, incentive allocations and other critical fund terms; and the key business, tax and operational issues that managers of hybrid funds may face. Patricia A. Poglinco, Seward & Kissel partner, moderated the discussion, which featured partners James C. Cofer, Joseph M. Morrissey and David R. Mullé. This article presents the speakers’ core insights. See “Sidley Panel Discusses Operational and Tax Challenges of Hybrid Funds” (May 23, 2019).

SEC Risk Alert Focuses on Multi‑Branch Investment Advisers

The SEC’s Division of Examinations (Division) – formerly known as the Office of Compliance Inspections and Examinations, or OCIE – recently issued a risk alert on observations from examinations of investment advisers with multiple branch offices (Risk Alert). The Risk Alert presents the key findings from the Division’s multi-branch adviser examination initiative, focusing on compliance and supervision practices; controls over investment recommendations; disclosure of conflicts of interest; and trading issues. The Risk Alert also highlights the effective practices that multi-branch advisers used in their compliance programs. This article distills the Division’s principal findings and recommendations. See our coverage of SEC risk alerts on the coronavirus pandemic; private fund managers; the transition from LIBOR; Regulation Best Interest and Form CRS; electronic messaging; the cash solicitation rule; best execution; fees and expenses; the advertising rule; compliance topics; custody; cybersecurity; business continuity and disaster recovery plans; and social media.