Feb. 25, 2021

Recent Amendments to the Securities Exchange Act Pose New Risks for Private Fund Managers

With the recent passage of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA), Congress sought to restore the SEC’s power to seek disgorgement of ill-gotten gains from violations of securities laws. The NDAA amends the Securities Exchange Act of 1934 to grant the SEC explicit authority to seek disgorgement and to extend the statute of limitations to seek disgorgement for certain violations. A response to the decisions by the U.S. Supreme Court in Kokesh v. SEC and Liu v. SEC, which imposed significant restrictions on the SEC’s ability to seek disgorgement, those amendments could significantly increase the financial exposure of defendants in securities investigations and may shift the SEC’s enforcement priorities. In a guest article, MoloLamken partners Justin V. Shur and Eric Nitz, as well as associate Elizabeth K. Clarke, summarize those changes; assess their impact on private fund managers and others regulated by the SEC; and consider how Kokesh and Liu may yet restrain the SEC’s ability to seek disgorgement even following the NDAA. See “How the SEC May Circumvent the Five-Year Statute of Limitations on Disgorgement Under Kokesh v. SEC” (Jul. 20, 2017).

Former CFTC Enforcement Director Discusses Whistleblowers, Trends, the New Administration and the Pandemic (Part Two of Two)

From 2017 to 2020, James McDonald served as Director of the CFTC’s Division of Enforcement (Division), where he had overall responsibility for all aspects of the CFTC’s enforcement program, including its investigations and litigations; market surveillance activity; and whistleblower office. During his time at the CFTC, McDonald was responsible for creating the first task forces within the Division focused on manipulation and spoofing; insider trading; foreign corruption; anti-money laundering and the Bank Secrecy Act; and digital assets. He also coordinated the CFTC’s enforcement activities with the SEC, DOJ and numerous international regulators. In January 2021, McDonald joined Sullivan & Cromwell as a member of the firm’s new securities and commodities investigation and enforcement practice. The Hedge Fund Law Report recently spoke to McDonald in connection with his move. In this second article in our two‑part series, McDonald discusses the CFTC’s whistleblower program; trends and private funds; the new administration; and the impact of the coronavirus pandemic. The first article explored McDonald’s new position, his experience at the CFTC and the relationship between regulatory agencies. For coverage of a speech McDonald gave while at the CFTC, see “Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement” (Oct. 19, 2017).

Risk Alert on Compliance: Inadequate Annual Reviews, Poorly Implemented Policies and Other Key Takeaways (Part Two of Two)

The SEC’s Division of Examinations (Division) recently sought to elevate CCOs’ practices by issuing a risk alert on notable compliance issues identified by staff members during examinations of private fund managers (Risk Alert). At first glance, many practitioners considered the examiners’ observations to be rather routine or fundamental. That perception should only serve to bolster the importance of the Risk Alert, however, as it emphasizes that many firms are failing at many of the most basic compliance tasks they may be taking for granted. To evaluate important details and key takeaways from the Risk Alert, the Hedge Fund Law Report interviewed several practitioners for their insights on the items addressed in the Risk Alert. This second article in a two-part series highlights concerns in the Risk Alert about inadequate annual compliance reviews and ill-tailored policies and procedures, along with high-level takeaways to consider. The first article summarized the Division staff’s observations about fund managers’ limited compliance resources, primitive technology and poor empowerment of CCOs. See our coverage of Division risk alerts on the coronavirus pandemic; private fund managers; the transition from LIBOR; Regulation Best Interest and Form CRS; electronic messaging; the cash solicitation rule; best execution; fees and expenses; the advertising rule; compliance topics; custody; cybersecurity; business continuity and disaster recovery plans; and social media.

Supreme Court Directs Second Circuit to Take a Fresh Look at Insider Trading Prosecution

In 2018, David B. Blaszczak, government employee Christopher M. Worrall and three analysts at Deerfield Management Company, L.P. were convicted of insider trading, wire fraud and other charges under Title 18 of the U.S. Code. In late 2019, the U.S. Court of Appeals for the Second Circuit held in U.S. v. Blaszczak that government information may constitute “property” for purposes of Title 18 fraud statutes and that the “personal benefit” test for insider trading liability did not apply to Title 18 securities fraud. Three of the defendants appealed to the U.S. Supreme Court, which declined to reach the merits of the appeal. Instead, at the government’s request, it vacated the Second Circuit decision and remanded the case to that court for reconsideration in light of the Supreme Court’s May 2020 decision in Kelly v. United States, which addressed what constitutes government property under the Title 18 fraud and conversion statutes. This article analyzes the facts giving rise to the prosecutions, the Second Circuit’s reasoning, the defendants’ principal arguments on appeal and the Kelly decision. See “SEC Insider Trading Action Highlights Red Flags Hedge Fund Managers Must Heed When Employing Political Intelligence Consultants” (Jun. 8, 2017).

AIMA HFM Survey Finds Broad Investor Satisfaction With Hedge Fund Performance

At first seen as a source of pure alpha, hedge funds have evolved and now position themselves as a source of favorable risk-adjusted returns. A recent industry study conducted by the Alternative Investment Management Association (AIMA) and HFM found that investors are very satisfied with how hedge funds and other alternative investments performed during the past year, which saw unprecedented market turbulence resulting from the ongoing coronavirus pandemic. The study’s report, which incorporates the views of both investors and alternative asset managers, covers performance, investor priorities, fees, allocation preferences and marketing. This article outlines the key takeaways from the study, with additional commentary from Tom Kehoe, AIMA’s managing director and global head of research and communications. For coverage of another recent survey from AIMA, see “Hedge Fund Industry Remains Agile and Resilient, According to Recent KPMG/AIMA Survey” (Oct. 8, 2020).