Oct. 28, 2021

Electronic Communications: Current Technological Landscape and Relevant Regulatory Measures (Part One of Three)

Although the use of various messaging applications and platforms in business communications had been steadily increasing before the pandemic, a widespread, mandatory remote work environment accelerated the pace of adoption. With pandemic restrictions loosening and many returning to the office, regulators’ interest in ensuring fund managers’ compliance with recordkeeping and supervisory obligations for electronic communications may be poised to rise. Thus, now is a good time for CCOs and other compliance officers to review their firms’ electronic communications policies and ensure they account for new technologies. This first article in a three-part series sets out the regulatory framework for electronic business communications and delves into how and why managers are facing a seismic shift in the way their employees and investors communicate. The second article will offer practical advice on ways CCOs can prepare policies and procedures, as well as training tactics, to ensure proper practices by their employees. The third article will provide tips for using third parties to capture and archive electronic communications; ways to mitigate risks associated with social media; and guidance on satisfying document requests. For more on electronic communications, see our three-part series: “Are Hedge Fund Managers Receiving the Message?” (Nov. 30, 2017); “Are Hedge Fund Managers Heeding the Message?” (Dec. 7, 2017); and “Are Hedge Fund Managers Controlling the Message?” (Dec. 14, 2017).

The New U.K. Investment Firms Prudential Regime: Top Ten Issues for Investment Managers

A significant change to the U.K. prudential framework for investment management firms will soon take effect as a result of the new U.K. Investment Firms Prudential Regime (IFPR). Although a purely U.S.‑based manager will not be affected by the IFPR, a U.S. manager’s U.K. sub‑advisory affiliate would likely be in scope. In a guest article, Leonard Ng and Qalid Mohamed, partner and associate, respectively, at Sidley Austin, enumerate ten key issues that U.K. investment managers should consider and address as they implement the new rules. Given that investment managers have varied business models, it will be important for each manager to take advice that is specific to its business model; however, the observations in this article provide fund managers with a good starting point. For additional commentary from Ng, see “FCA Details Shortcomings of ‘Host’ Authorized Fund Managers” (Aug. 26, 2021).

Debtwire/SRS Acquiom Study: Hedge Funds Largely Prepared for LIBOR’s End; SOFR the Likely Replacement Rate

The transition away from the London Interbank Offered Rate (LIBOR) is rapidly approaching. Reporting of all non‑U.S. currency rates and U.S. dollar (USD) one‑week and two‑month rates will cease this quarter, with reporting of all remaining USD rates ending over the next two years. In the second quarter of 2021, Debtwire, in cooperation with SRS Acquiom, interviewed 100 U.S. executives from hedge funds, investment banks, direct lending funds and distressed debt funds to gauge their firms’ preparedness for the LIBOR transition. The study found most respondents to be well-prepared for the transition and a strong preference for use of the Secured Overnight Financing Rate as the replacement for LIBOR. This article discusses the survey report, with insights from Anne E. Beaumont, partner at Friedman Kaplan Seiler & Adelman. For more from Beaumont on the LIBOR transition, see “How Advisers Can Prepare for OCIE Exams on the Transition From LIBOR” (Jul. 9, 2020); and “The SEC Weighs In on LIBOR Transition” (Aug. 8, 2019).

SEC Sanctions Adviser for Registration, Disclosure and Compliance Violations and Bars Its Inexperienced CCO

The SEC expects investment advisers to take their compliance duties seriously and to employ experienced compliance personnel. In a recently settled enforcement proceeding, someone who allegedly had no prior securities industry experience walked into a minefield when she became CCO of an improperly registered adviser, which for several years had been overbilling a client and making material misstatements in its marketing materials and disclosures. The SEC came down hard on the adviser, its founder and the CCO. This article details the SEC’s allegations and the terms of the settlement, with commentary from Andrew M. Calamari, partner at Finn Dixon & Herling and former Regional Director of the SEC’s New York office. See “SEC Fines and Bars CCO From the Funds Industry for Compliance Failures and Deceiving Examiners” (Mar. 11, 2021); and “How CCOs Can Avoid Personal Liability for Organizations’ Compliance Failures” (Mar. 11, 2021). See also our two-part series on the NYC Bar framework for CCO liability: “Components and Proposals” (Jul. 15, 2021); and “CCO and Regulator Perspectives” (Jul. 22, 2021).

Two Sides of the Same Coin: SEC Commissioners Gensler and Lee Advocate Further SEC Oversight of ESG Efforts (Part Two of Two)

The environment, social and governance (ESG) sector is not the first in which the SEC has been confronted with a realm of burgeoning popularity, forcing the agency to scramble to play catchup. It may be, however, one of the most heavily politicized contexts in which that has occurred, which has put the current SEC commissioners in a difficult position. The result has been a series of public remarks in which the Republican- and Democrat-appointed SEC commissioners – in their personal capacities, rather than on the SEC’s behalf – have asserted very different stances on what role the SEC should take in prescribing ESG measures. To understand some of the tension around ESG within the SEC and gauge where future regulations may land, this two-part series evaluates the points and counterpoints on the topic in recent speeches by the SEC commissioners. This second article synthesizes SEC Chair Gary Gensler’s and Commissioner Allison Herren Lee’s arguments for ESG factors to have a larger role in corporate governance efforts, including mandatory climate risk disclosure rules and directors’ decision-making practices. The first article presented forceful arguments by SEC Commissioners Hester M. Peirce and Elad L. Roisman against the SEC initiating prescriptive ESG regulations, including ten theses for why it is inappropriate. See “SEC Officials Clarify the Commission’s Stance on ESG Investing and the Role of Disclosure” (Oct. 15, 2020).