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    Jun. 24, 2021

ESG Risk Alert: Why the SEC Distinguishes ESG From Other Strategies and How to Prepare for a Potential Exam (Part One of Two)

The SEC’s Division of Examinations (Examinations) recently issued a risk alert focused on environmental, social and governance (ESG) investing (Risk Alert), detailing, among other things, practices inconsistent with disclosures; inadequate policies and procedures; and ineffective compliance programs. Given the slew of SEC announcements and statements about ESG investing issued earlier in the year, the Risk Alert serves as a guidepost to fund managers looking for clues about what the SEC is and will be focusing on in examinations, as well as enforcement generally. Further, CCOs would be well advised to review the Risk Alert in light of reports that Examinations is already taking a more focused approach to reviewing managers’ ESG programs. This first article in a two-part series describes the regulatory context in which the Risk Alert was released; why an ESG-focused risk alert addresses both familiar and unique issues; and how to use the Risk Alert as a roadmap for potential exams and anticipated SEC enforcement efforts. The second article will dig into the details of the Risk Alert, providing nuanced advice on how to avoid the deficiencies it identifies and establish the effective practices noted by SEC staff. See our two-part series “Navigating the Evolving Legal and Regulatory ESG Investing Terrain”: Part One (Nov. 19, 2020); and Part Two (Dec. 10, 2020).

How Fund Managers Can Handle Insider Trading Risks After U.S. v. Chow

Few areas of the law are in greater need of clear judicial guidance than insider trading, and tipper-tippee liability occupies perhaps the haziest corner of insider trading law. For fund managers, avoiding tipper-tippee liability involves asking questions without clear answers: Is this information material nonpublic information? Did the source violate a fiduciary duty by providing the information? Did the source get a “personal benefit” in exchange for the information? Over the years, courts have tried – but largely failed – to offer meaningful guidance. In U.S. v. Chow, the Second Circuit had another chance to clarify those lingering uncertainties. By affirming Benjamin Chow’s conviction for insider trading, however, the court arguably injected more uncertainty into the already fuzzy doctrine. Of note, the court’s opinion muddied the standard for assessing whether the alleged tipper had a fiduciary duty to the issuer, what counts as a breach of that duty and what sort of personal benefit the tipper must receive to trigger liability. In a guest article, MoloLamken attorneys Justin V. Shur, Jessica Ortiz and Kenneth Notter analyze what Chow means for tipper-tippee liability, what the risks facing private fund managers are and what practices managers can adopt to mitigate those risks. For additional commentary on insider trading by Shur, see “Although Martoma May Have Been Put to Rest, the Debate Over the ‘Personal Benefit’ Test Continues” (Sep. 6. 2018).

Using RegTech to Enhance Compliance

In the face of ever-increasing regulatory requirements, advisers may consider regulatory technology solutions (RegTech) to make their compliance processes more effective and efficient. A recent program at ACA Group’s Spring 2021 Virtual Conference examined how RegTech can be used to automate and facilitate compliance communications; surveillance and monitoring; regulatory filings; document management; vendor management; and preparation for SEC examinations. One panelist also discussed how RegTech assisted a new adviser with navigating its first SEC exam. The program featured ACA Group directors Leigh Emery and Elaine Vincent, as well as Shannon McLaughlin, CCO and controller at Boulevard Family Wealth. This article distills their insights. See our three-part series on AI for fund managers: “How to Use It to Streamline Operations” (Sep. 5, 2019); “Government Guidance, Service-Provider Negotiations and Risks of Bias” (Sep. 12, 2019); and “Automating the Legal Department and Maintaining Privacy” (Sep. 19, 2019).

SEC Sanctions Robo‑Adviser for Misleading Marketing and Improper Solicitation Practices

Regardless of how an SEC‑registered adviser renders investment advice, that adviser must comply with all applicable SEC rules. The informality of the internet does not justify use of hyperbolic or misleading marketing materials or payment for referrals in violation of rules for cash solicitations. The SEC recently sanctioned a robo-adviser, which allegedly touted hypothetical performance on its website without appropriate disclosures; paid bloggers for referring clients without complying with SEC rules for cash solicitation payments; and failed to implement or adhere to appropriate compliance policies and procedures. This article details the alleged misconduct and the terms of the settlement order. See “SEC Settles First Two Enforcement Actions Against Robo-Advisers” (Feb. 14, 2019).

Crypto Hedge Funds – and Interest in Digital Assets Among Traditional Funds – Increase, According to Study

PwC and Elwood Asset Management (Elwood) recently issued their third annual Global Crypto Hedge Fund Report, with assistance from the Alternative Investment Management Association (AIMA). The study surveyed the crypto hedge fund landscape, including fund performance; fees; exposure to bitcoin; use of derivatives and leverage; decentralized exchanges; and several aspects of fund operations, including staffing, custody, governance, valuation, liquidity, domiciles and tax issues. It also explored how traditional hedge funds are obtaining exposure to digital assets. This article discusses the main findings of the study, with commentary from Henri Arslanian, crypto leader and partner at PwC; Michelle Noyes, managing director at AIMA; and Alexandre Schmidt, investment analyst at Elwood. See our two-part coverage of a recent AIMA global hedge fund study: “Most Hedge Fund Managers Met or Exceeded Targets Last Year” (May 13, 2021); and “Manager and Investor Interest in ESG Is Growing” (May 20, 2021).

Kelli L. Moll Joins Proskauer’s Private Funds Group

Proskauer recently announced the arrival of Kelli L. Moll as a partner in its private funds group. Moll’s practice focuses on counseling investment advisers on the formation and ongoing operation of hedge, credit and growth equity funds. She regularly advises fund sponsors on fund formation, co‑investment arrangements, upper tier arrangements, seed capital arrangements, asset manager M&A, complex fund restructurings, funds-of-one, managed accounts and various regulatory issues. For additional insights from Moll, see our three-part series: “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights?” (Apr. 4, 2014); “Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees” (Apr. 11, 2014); and “Six Privacy-Related Topics to Be Covered by a Hedge Fund Manager’s Compliance Policies and Procedures” (May 23, 2014).

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