Mar. 10, 2022

Practical Impact of the Proposed Form PF Amendments on Fund Managers and Reasons for Industry Backlash (Part Two of Two)

The SEC recently issued proposed amendments to Form PF (Proposal), which were met with substantial skepticism in the private funds industry. The broader concern is that the new disclosures and reporting prompted in the Proposal are inconsistent with the SEC’s purported interest in mitigating systemic risk and instead are for examination purposes. Further, the one‑business‑day filings required in the event of certain stress events would onerously burden fund managers, forcing them to direct administrative resources to the effort at the expense of monitoring other pressing compliance concerns. This two-part series examines the nuances of the Proposal and its practical impact on fund managers based on interviews with industry professionals. This second article analyzes the individual SEC Commissioners’ remarks – including the vigorous dissent by Hester M. Peirce – on the Proposal, while also raising a number of ways the practical application of the Proposal would materially impact fund managers. The first article detailed the features of the Proposal that are relevant for hedge fund managers. See “Report Describes the SEC’s Use of Form PF for Hedge Fund Manager Examination Targeting and Risk Management” (Oct. 10, 2014); and “SEC’s First Report on Initial Form PF Filings Offers Insight Into How the Agency Is Using the Collected Data for Examinations, Enforcement and Systemic Risk Monitoring” (Aug. 29, 2013).

SEC Resolves Additional Enforcement Proceedings Over Filing, Delivery and Content of Form CRS

It has been almost two years since investment advisers and broker-dealers with retail clients and customers were required to file and deliver their initial customer relationship summaries on Form CRS. In late 2021, the SEC began resolving enforcement proceedings against registrants that failed to file Form CRS when required to do so. The SEC has continued its crackdown on delinquent registrants, recently announcing settlements with six advisers and six broker-dealers. Unlike earlier enforcement actions, which focused on the filing and delivery deadlines, these latest actions also cited certain registrants for failing to comply strictly with the Form CRS language and content requirements. This article explores the circumstances giving rise to the latest enforcement proceedings and the terms of the settlements. These actions illustrate that the SEC will have little tolerance for untimely filings. See “Six Takeaways From the SEC’s FY 2021 Enforcement Results” (Jan. 27, 2022); and “Speeches Outline the Ethos, Direction and Priorities of the SEC’s Division of Enforcement Under Gurbir Grewal” (Jan. 13, 2022).

Limiting Data Breach Liability in Cloud Service Agreements

Data breach liability has become an increasingly important issue in cloud service agreement negotiations, as companies of all sizes continue to move significant amounts of their data to centralized, cloud solutions and away from on-premises solutions. Fund managers are not immune from this risk, as many fund managers have moved at least some of their technological infrastructure – e.g., data storage, trade execution, accounting systems, client-relationship-management systems and disaster recovery systems – to the cloud, thereby exposing themselves to the risks of data breaches at the cloud service provider. In this guest article, Shook Hardy & Bacon attorneys Amy Ragen and Josh Hansen discuss bases for breach liability in cloud-service relationships, along with key provisions and negotiation strategies cloud service providers and their customers use to limit that liability. See “Key Considerations for Fund Managers When Selecting and Negotiating With a Cloud Service Provider” (Sep. 21, 2017).

Hybrid Investments Counter Public Market Challenges, Says J.P. Morgan’s 2022 Global Alternatives Report

J.P. Morgan Asset Management’s (JPM) fourth annual Global Alternatives Outlook report discusses the current state of the economy and JPM’s perspectives on fundamental alternative investment classes, including hedge funds, private credit, private equity, real assets and real estate. This article highlights JPM’s views and predictions, with additional insights from David Lebovitz, Global Market Strategist at J.P. Morgan Asset Management. For coverage of prior JPM reports, see “JPM Global Alternatives Outlook Promotes Alternatives As Essential to ‘Alpha, Income and Diversification’” (Mar. 4, 2021); and “JPM Report Identifies Opportunities for Hedge Funds, PE and Other Alternative Investments” (Mar. 5, 2020).

Latest on Key Terms, Structuring Approaches and Trends in Secondary Transactions and Co‑Investments (Part One of Two)

After a brief respite early in the pandemic, the secondary market has resumed its robust activity and, as usual, innovations in terms and structures used by parties. Although manager-led transactions garner all the buzz as the popular form of a secondary transaction, there have also been unprecedented levels of investor-led transactions. Further, investors are extending their proactive investment efforts to the co‑investment sphere, in which managers are accommodating that investor demand as a way to bridge the higher deal valuations. Those and other developments were addressed in a recent Morgan Lewis webinar featuring attorneys Jarrod A. Huffman, Oliver Rochman, Joseph D. Zargari, Catherine L. Hunter and Michael E. Nissim. This first article in a two-part series outlines trends, key purchase agreement terms and other structuring considerations in secondary transactions and co‑investments. The second article will review recent regulatory developments in the U.K. and the E.U., as well as general industry trends in the Middle East. For additional commentary from Morgan Lewis attorneys, see our two-part coverage of a panel from the firm’s Private Fund Investors Roundtable: “Strong Hedge Fund Performance and Innovative Structures” (Jan. 20, 2022); and “Tax Issues, China, Trade and Sanctions” (Jan. 27, 2022).