Oct. 14, 2021

Implications of the SEC‑European Central Bank MOU on Security‑Based Swaps

The SEC and the European Central Bank (ECB) announced the signing of a Memorandum of Understanding (MOU) to consult, cooperate and exchange information in connection with the supervision, enforcement and oversight of certain security-based swap dealers and major security-based swap participants that are registered with the SEC, are supervised by the ECB and participate in the Single Supervisory Mechanism (SSM). In addition, the MOU will support the SEC’s oversight of the operation of substituted compliance orders that the Commission has issued for security-based swap entities in France and Germany, as well as any future substituted compliance orders for those firms in other E.U. Member States that participate in the SSM. This article provides an overview of the MOU, discusses the relevance of the collapse of family office Archegos Capital Management to the MOU and outlines the key takeaways from the MOU for hedge fund managers that engage in security-based swap transactions. See “European Central Bank Official Regards Hedge Fund Leverage As Risk to Financial System” (Mar. 24, 2016).

SEC Cybersecurity Disclosure Enforcement Heats Up: Best Practices (Part Two of Two)

The SEC is intensifying its focus on cybersecurity disclosures, and in the current enforcement environment, it is crucial for fund managers to have effective disclosure policies and controls in place. This second article in a two-part guest series by King & Spalding attorneys William Johnson, Matthew Hanson, Joseph Zales and Charles Cain examines ongoing SEC investigations and provides practical guidance for fund managers on best practices for formulating and implementing policies and procedures that address disclosure, as well as on determining what to disclose. The first article reviewed the applicable SEC regulations and guidance, along with the growing body of enforcement actions, including the recently announced Pearson, First American and Cetera cases. See “Six Ways for Fund Managers to Be Prepared for the SEC’s Focus on Cybersecurity and Resiliency” (Apr. 30, 2020).

ACA Compliance Testing Survey: Compliance Programs Holding Up and Significant Growth in ESG Interest (Part One of Two)

ACA Group (ACA), in collaboration with the Investment Adviser Association and Yuter Compliance Consulting, recently completed its 2021 investment management compliance testing survey. This article, the first in a two-part series, explores the findings of the study with respect to compliance programs and testing; advisers’ responses to the coronavirus pandemic; responsible investing; and climate change risk. The article also includes thoughts from Enrique Alvarez, director at ACA, who discussed the survey’s results with the Hedge Fund Law Report. The second article will cover the survey’s findings as to hot topics, the new marketing rule, disclosure to regulators, trading matters and regulatory priorities. For coverage of ACA’s 2020 compliance testing survey, see our two-part series: “Hot Topics, Compliance Programs, BCPs and the Pandemic” (Aug. 13, 2020); and “Form CRS; Anti‑Bribery and Anticorruption Controls; Cybersecurity; and Privacy” (Aug. 27, 2020).

SEC Action Against Alternative Data Vendor Is Warning to Fund Managers

Hedge funds have increasingly turned to so-called “alternative data” – which does not come from a company’s financial statements or other traditional sources – to enhance their investment processes, although the use of that data, whose provenance may be unclear and which may contain material nonpublic information, poses significant risks. The SEC recently took aim at an alternative data vendor, which purported to use the mobile app data it collected to generate anonymized estimates of app downloads, usage and revenue that it sold to fund managers and other businesses. In the settled enforcement proceeding, the SEC charged the vendor and its founder with securities fraud for misrepresenting how it used the data it collected and manipulating the results generated by its statistical models. This article details the SEC’s allegations and the terms of the settlement order, with commentary on mitigating the risks of using alternative data vendors from Benjamin Kozinn, partner at Lowenstein Sandler. For additional insights from Kozinn, see our two-part coverage of the SEC’s 2021 Reg Flex Agendas: “Key Components and Driving Factors” (Aug. 19, 2021); and “Key Items for Private Funds and the Rulemaking Process” (Aug. 26, 2021); as well as “HFLR Program Explores Valuation of Illiquid Assets and Valuation Governance” (Jan. 28, 2021).

Adviser and CCO Sanctioned for Undisclosed Conflicts; Custody Rule Violations; and Deficient Policies and Procedures

Identifying and managing conflicts of interest is a fundamental fiduciary duty. In a recently settled enforcement proceeding, the SEC alleged that an investment adviser, along with its co-founder and CCO, breached that duty by failing to make adequate disclosures about investments by a private fund they advised into an affiliated business operated by the co-founder’s son. The respondents also allegedly violated the custody rule by failing to comply fully with the annual audit exception to the surprise custody inspection requirement. This article analyzes the alleged violations and the terms of the SEC’s settlement order. The settlement is an important reminder of the SEC’s expectations regarding robust and precise disclosures of all conflicts of interest; the need for effective compliance policies and procedures to ensure those disclosures; and the importance of strict compliance with the custody rule. See “Division of Examination’s 2021 Exam Priorities: Perennial Focus Areas for Private Fund Managers (Part Two of Two)” (Apr. 22, 2021); and our two-part coverage of the SEC’s risk alert on private funds: “Focus on Conflicts; Fees and Expenses; and MNPI” (Aug. 6, 2020); and “Key Takeaways for Managers” (Aug. 13, 2020).