Aug. 26, 2021

The SEC’s 2021 Reg Flex Agendas: Key Items for Private Funds and the Rulemaking Process (Part Two of Two)

The SEC recently published its Spring 2021 “Reg Flex” agendas – the first under new Chair Gary Gensler. The items included on the short-term and long-term agendas indicate the agency’s priorities for the near future. It is no surprise that some of the items on those agendas will impact – directly or indirectly – private fund managers. After all, Gensler has identified the “significant growth in the number of private funds” as a key capital market trend. This article, the second in a two-part series, discusses the key agenda items for private fund managers and the rulemaking process in general, including criticism by Commissioners Hester M. Peirce and Elad L. Roisman of Gensler’s apparent plans to reopen recently completed rules. The first article covered the components of the latest Reg Flex agendas and the key factors driving the items on those agendas. For our coverage of prior Reg Flex agendas, see “Former OCIE Official Discusses SEC’s Latest Reg Flex Agendas” (Sep. 24, 2020); “Key Takeaways for Private Fund Managers From SEC’s Latest Reg Flex Agenda” (Aug. 15, 2019); and “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018).

Navigating Indemnification and Exculpation Provisions in Fund Documents (Part One of Two)

Periodically, the Standards Board for Alternative Investments (SBAI) – an association of alternative investment managers – publishes “toolbox” memos on topics of interest to the alternative investment industry. Its latest toolbox memo (Memo) covers indemnification and exculpation provisions in private fund governing documents. This two-part series explores the key issues raised in the Memo and associated market practice on indemnification rights, with insights from Maria Long, SBAI content/research director; Christopher J. Dlutowski, partner at Morgan Lewis; James Oussedik, partner at Sidley Austin; and Nick Hoffman and James Smith, partner and counsel, respectively, at Harneys. This first article addresses key concerns with indemnification provisions and associated negotiating points; common indemnification terms and carve-outs; and jurisdictional differences in standards of care. The second article will explore indemnification by investors; the interplay between indemnification and exculpation clauses and between indemnification provisions and insurance; the limited opportunity to negotiate indemnification provisions; and the role of side letters. For coverage of another recent SBAI release, see our two-part series on its Responsible Investment Policy Framework: “Four Ways to Incorporate Into Investment Strategies” (Apr. 15, 2021); and “Three Key Considerations for Fund Managers” (Apr. 22, 2021).

FCA Details Shortcomings of “Host” Authorized Fund Managers

The U.K. Financial Conduct Authority (FCA) recently issued a report detailing the key findings of its examinations of a sample of authorized fund managers (AFMs), commonly referred to as “host” AFMs or authorized corporate directors, which delegate investment management to third parties outside the AFM’s corporate group. The FCA found significant shortcomings in AFMs’ due diligence practices; oversight and monitoring of the funds they manage; governance, especially as to independent directors, conflicts of interest and fees; and financial resources and risk management. This article highlights the FCA’s findings, with analysis from Sidley Austin partner Leonard Ng and Morgan Lewis partner William Yonge. For more from Ng, see “FCA Consults on Proposed Changes to U.K. Version of MiFID” (Jun. 3, 2021); and from Yonge, see “The Global Hedge Funds Landscape: Europe, Asia and the Middle East (Part Two of Two)” (Jul. 15, 2021).

FinCEN Issues First AML/CFT Priorities

The Financial Crimes Enforcement Network (FinCEN) under the U.S. Department of the Treasury recently issued its first-ever set of priorities for anti-money laundering (AML) and countering the financing of terrorism (CFT) policy. Covered firms will be expected to incorporate the priorities into their AML/CFT programs following FinCEN’s issuance of related regulations. Simultaneously, FinCEN and the Board of Governors of the Federal Reserve System issued parallel statements on their expectations for how and when banks and covered non-bank financial institutions must incorporate those priorities into their AML compliance programs. This article analyzes the FinCEN priorities and the accompanying explanatory statements, with commentary on the implications of those priorities for private fund managers from Perkins Coie partner Jamie A. Schafer and Miller & Chevalier, Chartered member William P. Barry. See “FBI Sees Significant Risk That Private Funds Are Used for Money Laundering” (Sep. 24, 2020).

Measures Fund Managers Can Adopt to Factor Diversity Into Hiring and Investing Processes (Part Two of Two)

Although it has been widely acknowledged that the private funds industry needs to bolster its diversity and inclusivity, efforts to date have still lagged. There is reason to believe that is attributable to some legitimate factors, such as a limited pipeline of qualified candidates. There are plenty of other ways, however, that firms can still improve their diversity practices – both internally and in the industry as a whole – despite those limitations. Those and other matters were addressed in a New York Alternative Investment Roundtable webinar featuring Tracy McHale Stuart, CEO of Corbin Capital Partners; Nasrine Ghozali, chief risk officer at Oasis Management; and Imogen Rose‑Smith, co‑founder of Combinate Capital. This second article in a two-part series offers guidance for adjusting hiring practices to include diversity; thoughts on how to factor diversity into all stages of the investment process; and regional efforts in the U.S. and Asia. The first article summarized the immense value of improving diversity at firms and in the industry; suggested how firms could self-audit their existing diversity efforts; and provided guidance for how firms can approach diversity training. See “HFLR Webinar Explores Legal and Compliance Employment Trends, Including Compensation, Staffing, Diversity and the Pandemic’s Impact” (Oct. 15, 2020).

Former Member of the SEC’s Asset Management Unit Joins Patterson Belknap

Patterson Belknap announced that H. Gregory Baker has joined the firm as a partner in its New York office. Baker will serve as chair of the firm’s securities litigation practice and as a member of the white collar defense and investigations group. He advises clients including hedge fund and private equity fund managers on investigations and litigation strategy to help them manage risk and achieve positive outcomes in matters led by financial regulators such as the SEC. See our two-part series “Practical Guide for Private Fund Managers Navigating SEC Exams in the Biden/Gensler Era”: Part One (Jul. 8, 2021); and Part Two (Jul. 15, 2021).