Telling people that if they do not take certain steps, something bad will befall them may not be sufficient to motivate them to take action. Instead, a real-life example of someone similar suffering from the forewarned harm may be required to get an individual to take the threat seriously. Case in point: although hedge fund managers have been repeatedly warned by the SEC, other governmental agencies and industry experts that they are attractive targets for cyber criminals, many managers still have not devoted sufficient time and resources to building effective cybersecurity programs. Perhaps those managers will beef up their cybersecurity now that one of their own has been forced to close after being hacked by cyber criminals who used a fake Zoom invite to gain access to the fund manager’s email system. This two-part series provides 11 lessons that fund managers should learn from the incident that cost the Australian hedge fund manager $800,000 and a major investor – and compelled it to close up shop. This first article describes the incident and explains the first three lessons. The second article will lay out the remaining eight lessons. For a look at a similar attack against three British private equity firms, see “Vulnerable Fund Managers Are Targets of Cultural Engineering Cyber Attacks: How Can Your Firm Avoid Being Next?” (Nov. 5, 2020). Read full article …

The private funds industry continues to feel the effects of various factors that have impacted it over the past year, such as the coronavirus pandemic, as well as the blurring of the lines between hedge funds and private equity. As fund managers come to terms with those changes, they must ensure that their legal and compliance departments are prepared – and sufficiently staffed – to meet the challenges that lie in the road ahead. To examine these issues and their impact on the market for legal and compliance staff, the Hedge Fund Law Report recently spoke with David Claypoole, founder of Claypoole Executive Search. In this second article in a two-part series, Claypoole explores recent changes to the SEC and their potential impact on the industry; the regulator’s and industry’s performance during the coronavirus pandemic; and trends in compensation of and demand for legal and compliance personnel. The first article set forth his insights on the factors driving increased demand for in-house staff; the anticipated effects of the Biden administration on the private funds industry; the likelihood of increased regulatory scrutiny of fund managers; and the need to ensure that legal and compliance staff has adequate resources. For further commentary from Claypoole, see our two-part series on the market for in-house compensation at hedge fund managers: “What Is the Value of Legal and Compliance Staff?” (Mar. 12, 2015); and “Trends in Legal and Compliance Hiring and Staffing” (Mar. 19, 2015). Read full article …

As of 2018, carried interest holders seeking preferential tax rates for long-term capital gains have become subject to extended holding period requirements and additional compliance requirements. Among the significant tax reforms contained in the Tax Cuts and Jobs Act, Section 1061 of the U.S. Internal Revenue Code introduced a three-year holding period for long-term capital gains realized by service-provider partners in lieu of the one-year holding period that otherwise generally applies. Proposed regulations under Section 1061 were issued in August 2020 (Proposed Regulations), and final regulations were published on January 19, 2021 (Final Regulations). The Section 1061 rules introduce even greater complexity into an already complex tax regime relevant to partnerships – and additional hurdles for fund managers and their service professionals that seek tax benefits from the partnership structure. In a guest article, the first in a two-part series, Allen & Overy attorneys Dave Lewis, Caroline Lapidus and Shoshana Schorr provide the legal and legislative backdrop to the Final Regulations; compare the Proposed Regulations to the final version; and explain the Section 1061 recharacterization amount. The second article will discuss the capital interest exception; the so-called “Look-Through Rule”; related person transfers; and reporting and compliance considerations, and it will consider possible future changes to the law under the Biden administration. See our four-part series on taxation of carried interests for senior-level fund managers: Part One (Mar. 7, 2019); Part Two (Mar. 14, 2019); Part Three (Mar. 21, 2019); and Part Four (Mar. 28, 2019); as well as our two-part series on internal compensation arrangements for investment professionals: “Carried Interest and Deferred Compensation” (Mar. 15, 2018); and “Hedge Fund Compensation and Non-Competes” (Mar. 22, 2018). Read full article …

Despite the challenges posed by the coronavirus pandemic, the SEC had a very active and productive 2020, issuing proposed and final rules; publishing guidance and risk alerts; and continuing robust examination and enforcement efforts, according to the speakers at ACA Compliance Group’s (ACA) annual “Compliance Year in Review.” Carlo di Florio, ACA partner and global chief services officer, led the discussion, which featured ACA directors Michael Abbriano and Michelina Cuccia, along with senior principal consultant Ian Rivera. This two-part series distills the key observations from the program. This first article delves into the unique challenges posed by the coronavirus pandemic and explores the SEC’s issuance of proposed and final rules, guidance and risk alerts that affect private fund managers. The second article will cover examination trends, priorities and initiatives, as well as notable enforcement activity. For coverage of ACA’s 2019 review see “ACA Program Reviews 2019’s Key Compliance Trends and Issues” (Jan. 9, 2020). Read full article …

Valuation, which is inextricably tied to investment adviser performance and compensation, is a perennial target of SEC scrutiny. The recent SEC settlement order (Order) against a pricing service suggests that advisers should evaluate the policies, procedures and controls of the pricing services they use to ensure that they are supplied with prices that reflect current fair market value. For example, the service allegedly lacked policies and procedures reasonably designed to ensure that it provided accurate pricing for securities that it valued using single broker quotes. This article details the pricing service’s alleged compliance violations and the Order’s terms, and it provides lessons for investment advisers. See “Is the Use of an Independent Valuation Firm Superior to a Manager’s Internal Valuation Process?” (Apr. 23, 2015); and “DLA Piper Hedge Fund Valuation Webinar Covers Fair Value Methodologies, Valuation Services, Valuing Illiquid Positions and Handling Valuation Inquiries During SEC Examinations” (Aug. 7, 2013). Read full article …

Steptoe & Johnson announced that Erica Gerson, a former Associate Director at FINRA, has rejoined the firm as a partner in its Washington, D.C., office. As co‑leader of the firm’s enforcement team in the financial services group, Gerson’s practice focuses on representing broker-dealers, investment advisers, insurance companies and individuals in regulatory inquiries, examinations and enforcement matters before FINRA, the SEC and other regulators, as well as in commercial disputes. For commentary from another Steptoe partner, see our four-part series on investing in cannabis: “Legal Background, Justice Department Guidance and State Legalization” (May 9, 2019); “Structuring Investments, Due Diligence, Offering Documents and the BSA” (May 16, 2019); “Implications of Federal Illegality and Residency Requirements” (May 30, 2019); and “International Investments, Public Perception, Valuation and Service Providers” (Jun. 6, 2019). Read full article …