Apr. 28, 2022

SEC Proposes Comprehensive Changes to Beneficial Ownership Rules (Part Two of Two)

Since the beginning of 2022, the SEC has been very active in proposing new rulemaking. For example, the regulator has proposed changes to Form PF; extensive private fund reforms; and cybersecurity risk management rules. In addition, in February 2022, the SEC proposed a modernization of the beneficial ownership reporting regime under Section 13(d) of the Securities Exchange Act of 1934 and Regulation S‑T. This second article in our two-part series explores the proposed amendments to Rules 13d‑3, 13d‑5 and 13d‑6, with insights from Eleazer Klein and Adriana Schwartz, partners at Schulte Roth. The first article reviewed the proposed changes to various filing deadlines and the SEC’s rationale for the changes. See “Does a Hedge Fund That Has Delegated Securities Investment and Voting Authority to an Adviser Remain the Beneficial Owner?” (Mar. 4, 2021).

Compliance Corner Q2‑2022: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

Not since Dodd-Frank have private fund managers seen as much regulatory attention as they have over the past quarter. In the past few months, the SEC has proposed amendments to Form PF that affect large hedge fund advisers and advisers to private equity funds; released a risk alert highlighting deficiencies uncovered in the examination of private fund managers; and proposed new rules and rule amendments to address “concerns that arise out of the opacity that is prevalent in the private fund structure.” That volume of rule proposals can present significant challenges for CCOs trying to balance their time between preparing for those potential regulations and also managing compliance programs to align with both the current regulatory attention being directed toward private fund managers and the upcoming compliance date for the new marketing rule. This twentieth installment of the Hedge Fund Law Report’s quarterly compliance update, authored by ACA Group’s Dan Campbell, highlights upcoming filing deadlines and reporting requirements that fund managers should be aware of during the second quarter. The article also analyzes the SEC’s 2022 Examination Priorities, proposed cybersecurity risk management requirements for registered advisers and proposed rule amendments to beneficial ownership reporting. 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); as well as our two-part series on the proposed private fund rules: “General Observations” (Apr. 7, 2022); and “Rule‑Specific Concerns and Next Steps” (Apr. 14, 2022). See also “SEC Risk Alert Reflects Growing Concerns About and Focus on Private Funds” (Feb. 24, 2022).

FINRA Clarifies Stance on CCO Supervisory Liability

One of the things that keeps CCOs up at night is the prospect of being held personally accountable for a firm’s compliance failures. CCO liability has also been the subject of considerable debate within the SEC, and FINRA recently weighed in on the subject in recently released Regulatory Notice 22‑10 (Notice). The Notice outlines the circumstances in which a CCO may be held liable for violating FINRA Rule 3110 (Rule), which sets forth a firm’s supervisory obligations, including the factors mitigating for and against formal charges under the Rule. This article discusses the key takeaways from the Notice, with commentary from W. Hardy Callcott and Lara C. Thyagarajan, partners at Sidley Austin. See “A Look at the NSCP’s Firm and CCO Liability Framework” (Feb. 24, 2022); and our two-part series on the NYC Bar framework for CCO liability: “Components and Proposals” (Jul. 15, 2021); and “CCO and Regulator Perspectives” (Jul. 22, 2021). See also “How CCOs Can Avoid Personal Liability for Organizations’ Compliance Failures” (Mar. 11, 2021).

FCA Imposes Significant Penalties on Asset Manager and Director for Poor Conflicts Management

Although enforcement actions by the U.K. Financial Conduct Authority (FCA) are relatively uncommon, the FCA recently took aim at an asset manager and one of its senior executives for allegedly failing to manage several conflicts of interest in accordance with FCA standards of conduct and the firm’s own policies. The alleged conflicts involved providing financing to an entity with which the firm had an existing business relationship, cross trades and investment of client assets into firm-sponsored vehicles. This article details the facts and circumstances giving rise to the enforcement proceedings and the alleged violations of FCA principles for businesses and approved persons. See “FCA Fines U.K. Affiliate of U.S. Manager That Replaced Successful Traders With Algorithms” (Feb. 17, 2022); and “Overview of Global Regulatory Enforcement on Conflicts, Fees, AML and Operational Resiliency in Key Jurisdictions (Part Two of Two)” (Nov. 11, 2021).

Quarterly Reporting Requirements and Prescriptive Prohibited Activities in the SEC’s Proposed Amendments to the Advisers Act (Part Two of Two)

Notwithstanding the array of rules that fund managers must operate under pursuant to the Investment Advisers Act of 1940 (Advisers Act) and other regulations, many of the norms and mores in the private funds industry have been established via negotiations between investors and fund managers. The SEC recently proposed new and amended rules for private fund advisers under the Advisers Act, however, that would prescribe new requirements and upend established practices (e.g., barring certain established practices even if fully and properly disclosed). Notably, some of the proposed changes are so sweeping that even investors are raising concerns about their appropriateness. Morgan Lewis addressed the SEC’s spate of proposed industry reforms in a recent webinar featuring partners Courtney C. Nowell, Christine M. Lombardo, Joseph D. Zargari and Jedd H. Wider. This second article in a two-part series denotes potential problems raised by the proposed Advisers Act reforms that prohibit certain activities and types of preferential treatment of investors, in addition to creating expansive new quarterly reporting requirements. The first article outlined Advisers Act amendments related to audit requirements and annual compliance reviews, as well as key features of the SEC’s proposed changes to Form PF. For additional insights from Morgan Lewis partners, see our two-part series on a panel at the Morgan Lewis Private Fund Investors Roundtable: “Strong Hedge Fund Performance and Innovative Structures” (Jan. 20, 2022); and “Tax Issues, China, Trade and Sanctions” (Jan. 27, 2022).