Dec. 16, 2021

Essential Technology Contract Elements

Managing a fund manager’s technology contracts, which affect most business units, is more difficult than ever. Agreements now govern thousands of digital and automated tasks performed across hundreds of device types, each with security risks. In addition, moving operations to the cloud may entail several smaller specialized contracts instead of a comprehensive IT or data-center contract because traditional IT contracts do not fit the cloud model, which uses a service contract rather than the familiar software licenses. Proliferating laws and regulations raise the stakes. This checklist offers fund managers a convenient guide to technology contract terms. See “Negotiating Reps, Warranties and Remedies in Technology Contracts” (Sep. 23, 2021); and our two-part series on drafting privacy and security provisions in vendor agreements: “Assessing the Risks” (Apr. 1, 2021); and “Negotiating Critical Provisions and Responding to Incidents” (Apr. 8, 2021).

Risk Alert Stresses Need for Robust Policies and Disclosures on Fee Calculations

The SEC Division of Examinations recently issued a risk alert on its observations regarding investment advisers’ fee calculations. Although the alert focuses on advisers’ practices with respect to retail clients, it contains important reminders for private fund advisers, including the need for clear policies, procedures and controls governing fee and billing practices, as well as robust disclosures. This article analyzes the alert, with commentary from Victoria Hogan, president of NorthPoint Compliance and former SEC examiner; and Michael J. Osnato, Jr., partner at Simpson Thacher and former Chief of the Complex Financial Instruments Unit of the SEC Division of Enforcement. See “Practical Lessons From OCIE’s Risk Alert on Compliance Issues for Private Fund Managers (Part Two of Two)” (Dec. 3, 2020).

IOSCO Issues Seven Key Outsourcing Principles

Supplementing its prior work on outsourcing, the International Organization of Securities Commissions (IOSCO) recently issued a final report (Report) that sets forth seven key principles (Principles) that regulated entities should apply when outsourcing critical tasks or functions. The Principles cover due diligence and monitoring; outsourcing contracts; information security and disaster recovery; data security; concentration risk; regulatory access to information; and termination of outsourcing arrangements. This article explores the Report and the applicability of the Principles, with input from Avi Gesser, partner at Debevoise & Plimpton; and David Slovick, partner at Barnes & Thornburg. For other recent IOSCO work, see “IOSCO Issues Final Guidance on AI and Machine Learning” (Oct. 7, 2021); and our two-part coverage of IOSCO’s environmental, social and governance consultation report: “Risk of Greenwashing and Regulatory Approaches” (Aug. 5, 2021); and “Investor Education, Impediments and Recommendations” (Aug. 19, 2021).

Recent Experiences With SEC Examinations and Enforcement: Disclosures, Conflicts and Trading Issues (Part Two of Two)

The SEC’s mission is to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. That mission does not change with new administrations or new Chairs, but specific focus areas or strategies may evolve with a changing of the guard. Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA), recently hosted a seminar that explored how SEC examination and enforcement efforts are shaping up under Chair Gary Gensler. The program featured Scott H. Moss and Eileen Overbaugh, partners at Lowenstein Sandler. This second article in a two-part series presents their perspectives on the use of the word “may” in disclosures; conflicts of interest-related issues; cross-trades and principal transactions; insider trading; responsible investing; and exams of new advisers. The first article distilled their insights on cybersecurity, business continuity plans, branch offices and disclosures. For coverage of another MLA seminar, see “Anticipating SEC and CFTC Enforcement Priorities Under the Biden Administration” (Mar. 18, 2021).

SEC Focus on Private Fund Managers: Examination Trends, Priorities and Deficiencies (Part Two of Two)

Although recent SEC enforcement actions have not centered on the private funds industry, the Commission is no less focused on scrutinizing manager practices. In light of that, it is invaluable to receive insights directly from staff personnel about areas the agency is focusing on, including fees and expenses; liquidity preferences; environmental, social and governance issues; and conflicts of interests. As the agency drills down on those areas, fund managers should be aware of interesting wrinkles in how it is conducting its examinations, such as the types of individuals it seeks to question and the scope of documents being requested. Those trends were addressed in a recent session hosted by the Practising Law Institute (PLI), moderated by Gibson Dunn partner Barry R. Goldsmith and featuring Marc E. Elovitz, partner at Schulte Roth; Ranah Esmaili, partner at Sidley Austin; Ken C. Joseph, managing director at Kroll, LLC; and Maurya C. Keating, Associate Regional Director of the SEC’s New York Regional Office. This second article in a two-part series reviews the discussion on SEC examination trends, priorities and deficiency letters. The first article outlined the portions of the program on recent enforcement actions targeting alternative data and so-called “shadow trading.” See our two-part coverage of another recent PLI panel: “Complications of Using Standard Form Provisions and Managing Administrative Burdens of Side Letters” (Sep. 9, 2021); and “Trends in Hot‑Button Terms in Side Letter Negotiations, Including MFNs and ESG Considerations” (Sep. 16, 2021).

The HFLR Will Resume Regular Publication in January

Please note that the Hedge Fund Law Report will not publish during the upcoming holiday weeks and will resume its normal weekly publication schedule during the week starting January 3, 2022. Have a safe and happy holiday season.