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    May 12, 2022

How to Convert a Private Fund Manager Into a Family Office

Managing a private fund requires a lot of time and money. It also opens the manager up to the scrutiny of the SEC and investors, both of which can be quite demanding. Even if the fund’s strategy is profitable, the intense pressure and competition may be enough to drive a manager from the business – and possibly into the creation of a family office instead. The Hedge Fund Law Report recently spoke to Daniel Bresler, partner at Seward & Kissel, about the issues to consider when converting a private fund manager into a family office. This article presents the discussion on family offices in the current environment; the pros and cons of converting a private fund manager into a family office; other factors to consider; the conversion process; and the role of regulators in that process. It also includes two checklists based on the firm’s white paper on this topic: one checklist on the winding-down process and another on the process of setting up the family office. Managers can download and use these checklists to guide the conversion process. For additional commentary from Bresler, see our two-part series on SEC examination and enforcement priorities: “Cybersecurity, Business Continuity and Conflicts of Interest” (Jul. 22. 2021); and “ESG, New Marketing Rule and Other Potential Focuses” (Jul. 29, 2021).

Deputy Director of SEC Division of Investment Management Discusses Pending Rulemaking

At the recent Investment Company Institute (ICI) Investment Management Conference, ICI’s GC Susan Olson interviewed Sarah G. ten Siethoff, Deputy Director of the SEC Division of Investment Management (IM), who shared her perspectives on SEC rulemaking that affects registered funds, including cross trade rules, the money market fund proposal, liquidity risk management, disclosure and digital engagement. They also discussed the tighter comment periods for proposed rules, the proposed public company climate risk disclosures, the impact of Ukraine-related sanctions and IM’s new Director. This article distills the key takeaways from their discussion. See our two-part series on the SEC’s proposed private fund rules: “General Observations” (Apr. 7, 2022); and “Rule‑Specific Concerns and Next Steps” (Apr. 14, 2022); as well as “SEC’s Proposed Short Sale Rules Increase Transparency Into Large Short Positions” (Mar. 31, 2022).

Navigating Use of Social Media Under the SEC’s New Marketing Rule

Use of social media by investment advisers has long been a minefield because of the prohibition on the use of “testimonials” by the SEC’s decades-old advertising rule. In December 2020, the SEC adopted a revamped marketing regime – the Marketing Rule (Rule) – that, among other things, eliminates the prohibition on testimonials and addresses how advisers may permissibly use social media. A recent Alternative Investment Management Association (AIMA) program examined how the new Rule applies to social media usage, including when social media activity is covered by the rule; third-party content; employee social media use; issues unique to social media; impact on unregistered advisers and dual-registrants; recordkeeping; and preparing for the compliance deadline. Suzan Rose, senior adviser to AIMA, moderated the discussion, which featured Juliet Mun Han, Senior Counsel in the Investment Adviser Regulation Office of the SEC Division of Investment Management; Michael W. McGrath, partner at K&L Gates; and Aaron J. Russ, associate at K&L Gates and former attorney in the SEC Division of Investment Management. Han and Russ were both on the SEC team that worked on the Rule. This article outlines the key takeaways from the presentation. See “ACA Compliance Testing Survey: New Marketing Rule Is a Hot Topic (Part Two of Two)” (Oct. 21, 2021); as well as our two-part series on the Rule: “Key Takeaways for Private Fund Managers” (Mar. 18, 2021); and “Next Steps for Legal and Compliance” (Mar. 25, 2021).

As Email Scams Surge, Training Lessons From 115 Million Phishing Messages (Part One of Two)

Eighty-three percent of companies suffered at least one successful phishing attack in 2021, up from 57 percent in 2020, according to a new Proofpoint report. Fund managers are not immune to these scams, as they find themselves increasingly facing social engineering attacks. This article, the first in a two-part series, presents the report’s key findings about the trickiest lures fund managers and other organizations may face. It also includes a Proofpoint leader’s insights on how companies can boost employee awareness, best assess cybersecurity training programs and address an overlooked third-party risk. The second article will describe the latest twists in social engineering techniques and how companies can gauge the success of their phish-prevention programs. See “Vulnerable Fund Managers are Targets of Cultural Engineering Cyber Attacks: How Can Your Firm Avoid Being Next?” (Nov. 5, 2020).

Fund Auditor and Partners Sanctioned for Audit Failures When Valuing Level 3 Assets and Lack of Independence

The SEC has brought an enforcement proceeding against an accounting firm and two of its partners, claiming that they had engaged in improper professional conduct by failing to satisfy auditing standards when auditing certain of an investment adviser’s private funds that held “Level 3” assets and to satisfy the independence requirement under the custody rule, Rule 206(4)‑2 under the Investment Advisers Act of 1940. As a result, the unnamed adviser improperly relied on the so‑called “audit exception” to the surprise annual examination requirement under the custody rule, which requires preparation of annual audited financial statements in accordance with generally accepted accounting principles by an independent auditor. This article analyzes the settlement order, which hews closely to the allegations the SEC made in the order commencing the enforcement proceeding. See “SEC Enforcement Action Accuses Fund Auditor and Partners of Widespread Failures Valuing Level 3 Assets and Lack of Independence” (Sep. 9, 2021).

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