Mar. 17, 2022

Proposed Private Fund Rules: Overview of the Proposal and the Importance of Industry Comments

The SEC’s intention to focus on the private funds space was made very clear in statements by Chair Gary Gensler and an item in the fall 2021 “Reg Flex” agenda. The SEC wasted no time acting on that stated priority. First, in January 2022, it released proposed changes to Form PF. Then, on February 9, 2022, the SEC released proposed private fund reforms (Proposal) that Commissioner Hester M. Peirce called a “sea change” for the industry. For example, the proposed new rules would, among other things, require private fund advisers to provide investors with quarterly reports and obtain annual audits of each private fund, while barring advisers from engaging in certain activities or practices and providing preferential treatment to certain investors. This article explains the types of funds impacted by the Proposal; provides an overview of the seven rules and rule amendments contained in the Proposal; and discusses the importance of comments on the Proposal by private fund managers. Future articles on the Proposal will identify the key areas of concern for hedge and private equity fund managers. See our two-part series on the proposed Form PF amendments: “Prompt Reporting of Certain Stress Events and Enhanced Reporting by Large Liquidity Fund Advisers” (Mar. 3, 2022); and “Practical Impact on Fund Managers and Reasons for Industry Backlash” (Mar. 10, 2022).

SEC, CFTC and DOJ Take Action Against Alleged $1‑Billion Valuation Fraud

Valuation is a perennial priority for the SEC and an issue for other regulators, too. The SEC and the CFTC recently filed parallel civil enforcement complaints against the founder of an investment adviser in the U.S. District Court for the Southern District of New York, claiming that he perpetrated a massive valuation fraud by manipulating the models used by a pricing service to value over-the-counter swaps held by a private fund and a mutual fund advised by the adviser he founded and controlled. The regulators also assert that he misled investors about his control over the valuation process and engaged in efforts to conceal the fraud by falsifying records provided to fund auditors and the SEC. This article details the alleged fraud, the alleged violations, the relief the regulators are seeking and the parallel criminal indictment. See “SEC Sanctions and Bars Adviser’s Principal and Three Employees for Fraudulent Valuation Practices” (Dec. 2, 2021); and “Manipulating Fund Valuations Can Bring Penalties From Multiple Regulators” (Sep. 5, 2019).

Family Offices, Endowments and Foundations Drive Interest in Hedge Funds, According to New Study

A recent survey conducted by With Intelligence, in cooperation with the Alternative Investment Management Association, examined the perspectives of family offices, endowments, foundations and pension funds toward investments in hedge funds, private equity (PE), private credit, real estate and real assets. The survey covered the respondents’ intentions with respect to allocations to each type of alternative investment and the key drivers of their decisions, with a focus on hedge fund allocations. Notably, the survey found that, in the coming year, a majority of the family offices, endowments and foundations surveyed are likely to increase allocations to hedge funds and PE. This article discusses the survey’s principal findings. For another recent investor survey, see our coverage of EY’s 2021 Global Alternative Fund Survey: Part One (Feb. 10, 2022); and Part Two (Feb. 17, 2022).

First Steps Fund Managers Should Take When Responding to a Ransomware Attack (Part One of Two)

As the scale, sophistication and prevalence of ransomware attacks continue to grow and affect organizations of all shapes and sizes, it is increasingly important for hedge fund managers to prepare for an inevitable attack and understand any compliance obligations that may arise from the incident. Those issues were addressed in a recent Arnold & Porter roundtable, which was moderated by Arnold & Porter partner Ronald D. Lee and featured Aaron Sherman, director of incident response at Coveware, Inc.; Dan Raymond, focus group leader on breach response and information security products at Beazley Group; as well as Arnold & Porter attorneys Marcus A. Asner, Kenneth L. Chernof and Tal R. Machnes. This first article in a two-part series outlines initial action steps fund managers should take upon being targeted in a ransomware attack; tips for deciding whether to work with law enforcement and pay the ransom; and measures for preserving attorney-client privilege when responding to the incident. The second article will identify mandatory reporting requirements; litigation and enforcement risks arising from ransomware attacks; protective measures to take before an attack; and important compliance considerations. For additional insights from Arnold & Porter attorneys, see our two-part series on an SEC risk alert: “Why the SEC Distinguishes ESG From Other Strategies and How to Prepare for a Potential Exam” (Jun. 24, 2021); and “Inadequate Controls, Policies and Procedures Concern SEC As Do ESG Practices Inconsistent With Disclosures” (Jul. 8, 2021).

New U.K. LTAF, Updated E.U. Marketing Regulations and Trends in the Middle Eastern Private Funds Industry (Part Two of Two)

With Brexit in the rearview mirror, the U.K. and the E.U. are charting their own paths forward for bolstering the private funds industry. The U.K. has authorized a long-term asset fund meant to support the growth of hybrid funds and facilitate investment therein by pension schemes. Alternatively, the E.U. has updated its marketing rules, both for traditional funds and for reporting in connection with environmental, social and governance funds. This two-part series summarizes relevant takeaways from a recent panel featuring Morgan Lewis attorneys Simon Currie and Ayman A. Khaleq. This second article reviews recent regulatory developments in the U.K. and the E.U., as well as general industry trends in the Middle East. The first article explored trends, key purchase agreement terms and other structuring considerations in secondary transactions and co‑investments. See our two-part series: “Current Status of Brexit and Overcoming Cross‑Border Marketing Obstacles It Introduces” (Nov. 4, 2021); and “Various Areas of Regulatory Divergence Between the U.K. and E.U. Caused by Brexit” (Nov. 18, 2021).