Apr. 7, 2022

SEC Proposed Private Fund Rules: General Observations (Part One of Two)

When the SEC released proposed private fund reforms (Proposal) in February 2022, it launched an offensive attacking various ways in which the private funds industry currently operates. “In many ways, the Proposal reflects some of the most significant changes we’ve seen in the private funds space since Dodd-Frank, when everybody had to register,” observed Schulte Roth partner Benjamin Kozinn. “There are a lot of details to be unpacked, but as you read the Proposal, you start realizing there’s more than meets the eye in terms of the potential unintended effects of what the SEC is proposing.” The deadline for comments on the Proposal is less than three weeks away. This first article in a two-part series provides general observations on the Proposal and what it says about the SEC’s view of the private funds space. The second article will lay out specific industry concerns for each of the proposed rules and discuss the next steps for the SEC and private fund managers. For a summary of the rules and rule amendments in the Proposal, see “Overview of the Proposal and the Importance of Industry Comments” (March 17, 2022).

Cyber Insurance Litigation Trends Amid Rising Ransomware Attacks

As ransomware attacks have increased, many affected businesses have turned to their insurance carriers to offset the staggering monetary impact caused by those incidents. The growing number of attacks and claims has brought with it a rise in resulting litigation, with courts across the country considering issues of first impression regarding the scope of coverage for ransomware attacks under different types of policies. In a guest article, Cohen Ziffer attorneys Alexander Sugzda and Cindy Jordano discuss how courts have recently addressed coverage for losses suffered by policyholders after a ransomware attack and practical considerations for companies to ensure their policies provide broad coverage for this type of incident. This article should be required reading for all fund managers, who should ensure their ransomware coverage is sufficient given the sizeable target for ransomware and other cyber attacks the private funds industry presents. See “How to Prevent and Handle Disputes Over Ransomware Insurance Claims” (Mar. 25, 2021). See also our two-part series for fund managers to address a ransomware attack: “First Steps to Take When Responding” (Mar. 17, 2022); and “Necessary Precautions, Compliance Considerations and Risks to Mitigate” (Mar. 24, 2022).

FINRA Reports on Examinations and Risk Monitoring

FINRA recently released its annual combined examination and risk monitoring report (Report). The Report has sections devoted to firm operations; communications and sales; market integrity; and financial management. Each topic in the Report includes a brief discussion of the relevant FINRA rules and rules under the Securities Exchange Act of 1934 and lists considerations concerning those rules, relevant examination findings and associated effective practices. This article explores FINRA’s principal findings and recommendations in the Report. For coverage of previous FINRA reports, see “FINRA Annual Report Highlights Exam Findings and Risk Monitoring Results” (Mar. 11, 2021); “FINRA Outlines Its 2020 Risk Monitoring and Exam Priorities” (Mar. 12, 2020); “FINRA Exam Findings Report Covers Four Aspects of Its Supervisory Activities” (Jan. 30, 2020); and “FINRA Report Highlights Common Broker-Dealer Compliance Shortcomings” (Jan. 24, 2019).

AIMA Study Finds Strong Demand for Hedge Fund Personnel

There is intense hiring demand and increasing competition for talent in the hedge fund industry, according to a recent study by the Alternative Investment Management Association (AIMA). In 2021, AIMA surveyed senior-level hedge fund manager personnel about their firms’ anticipated hiring needs; employee recruiting and retention; staff devoted to responsible investing; development of quantitative capabilities and use of alternative data; diversity, equity and inclusion efforts; and the impact of the hybrid work environment. This article analyzes AIMA’s findings, with commentary from Drew Nicol, associate director, research and communications, at AIMA. See “Hedge Fund Industry Remains Agile and Resilient, According to Recent KPMG/AIMA Survey” (Oct. 8, 2020).

Broad Range of Terminology and Products in the ESG Landscape Hampers Investors and Regulators (Part One of Two)

Early in the rise of the environmental, social and governance (ESG) sector, there was a window in which it could have been easily regulated and intentionally steered. Instead, the free market has caused rapid evolutions in, among other things, fund managers’ ESG marketing efforts and disclosures. Now regulators are struggling to outpace the industry, leading to more confusion as all the market participants try to chart a path forward. Those and other issues were addressed in a Practising Law Institute panel moderated by Perkins Coie partner Gwendolyn A. Williamson and featuring Annette Capretta, associate general counsel at Investment Company Institute; Sharanya Mitchell, head of regulatory and international legal at Cohen & Steers; and Alexandra Russo, thematic equity and sustainability specialist at Allianz Global Investors. This first article in a two-part series examines recent market conditions and ways ESG strategies’ performance during the pandemic is affecting the space, as well as issues from the lack of standardization in ESG terminology. The second article will describe challenges with tracking ESG investing outcomes; the role of third-party ESG rating agencies; the SEC’s focus on fund names and terminology; and the Biden administration’s prioritization of ESG matters. For insights from another Perkins Coie partner, see our three-part series on electronic communications: “Current Technological Landscape and Relevant Regulatory Measures” (Oct. 28, 2021); “Useful Training Techniques and Policies and Procedures to Adopt” (Nov. 4, 2021); and “Using Third Parties for Compliance, Mitigating Social Media Risks and Fulfilling Documents Requests” (Nov. 11, 2021).