• |

    May 19, 2022

Risk Alert Cites Compliance Issues Regarding Advisers’ Handling of MNPI

Insider trading remains a perennial focus for the SEC. The SEC Division of Examinations recently issued a risk alert (Risk Alert) flagging numerous deficiencies it has observed regarding investment advisers’ policies, procedures and practices for handling material nonpublic information (MNPI). The Risk Alert focuses on compliance with Section 204A of the Investment Advisers Act of 1940 and Rule 204A‑1 thereunder, which govern, respectively, policies and procedures for handling MNPI and reporting of personal securities transactions and holdings. This article discusses the key takeaways from the Risk Alert, with commentary from Ranah Esmaili, partner at Sidley Austin, and Philip Moustakis, counsel at Seward & Kissel. See our two-part series on current insider trading regulatory and enforcement environments: “SEC Information Gathering and Enforcement” (Jul. 8, 2021); and “Appropriate Policies and Procedures” (Jul. 15, 2021).

Evolving Practices Regarding Hybrid Structures, Co‑Investments, Separate Accounts, ESG Challenges and Expense Allocations

The hedge fund industry continues to evolve, with managers seeking new ways to generate alpha and investors seeking bespoke solutions and pushing managers to achieve environmental, social and governance (ESG) goals. A recent Sidley Austin program explored the growth in hybrid funds, co‑investments and separately managed accounts; challenges associated with ESG investing; and evolving approaches to expense pass-throughs. The program featured Sidley Austin partners Janelle Ibeling, James C. Munsell and Joseph E. Schwartz, as well as Maxine C. Alexis, managing director at HedgeMark International LLC. This article distills their insights. For additional commentary from Ibeling and Schwartz, see our two-part series on achieving performance compensation equilibrium: “Considerations on Hurdles, Benchmarks, High Water Marks and Clawbacks” (Jan. 9, 2020); and “Designated Investments, ‘1 or 30’ Structures, Caps and First Loss Arrangements” (Jan. 16, 2020).

SEC, CFTC and DOJ Charge Archegos and Principals in “Massive Market Manipulation Scheme”

In March 2021, Archegos Capital Management, LP (Archegos), the family office of Sung Kook (Bill) Hwang, collapsed in spectacular fashion, allegedly leaving its counterparties with more than $10 billion in losses. According to recent simultaneous SEC and CFTC enforcement actions, Archegos, Hwang and three employees engaged in a scheme to manipulate the prices of Archegos’ largest securities holdings by taking huge positions using total return security-based swaps with at least ten different counterparties, which had limited or no visibility into whether Archegos was entering into similar swaps with other counterparties. In addition, the SEC and CFTC alleged that, to increase or maintain Archegos’ trading limits with counterparties, or to secure favorable margin terms, the defendants misled the counterparties about both Archegos’ liquidity and the composition of its total portfolio. This article details the SEC and CFTC allegations; the settlements with two of the respondents; and the DOJ’s parallel criminal charges. See “SEC Proposes New Rules for Security-Based Swaps” (Feb. 17, 2022).

SEC’s Proposed Climate Risk Disclosure Rules: Five Key Elements (Part One of Two)

The SEC recently issued a widely anticipated proposal (Proposal) for rules (Rules) requiring public companies to disclose “information about a registrant’s climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition,” according to the Proposal. If adopted, the Rules would expand both the scope and specificity of climate-related disclosures for both U.S. public companies and foreign private issuers. A recent Sullivan & Cromwell (S&C) program examined the five key elements of the Proposal: the disclosure rules for greenhouse gas emissions; climate-related risk and impact; transition plans and climate-related metrics/targets; climate-related financial metrics; and governance. The program featured S&C partners Catherine M. Clarkin, Robert W. Downes, Sarah P. Payne and Marc Treviño, as well as senior policy advisor and counsel, and former SEC Chair, Jay Clayton. This article, the first in a two-part series, covers the five key elements of the Proposal. The second article will outline the broad implications of the Proposal; key challenges and timing; and the anticipated pushback. For coverage of other recent SEC rulemaking, 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).

How to Measure Whether Your Company Is Ready to Catch Lots of Phish (Part Two of Two)

In 2021, despite companies slipping twice as many phishing decoys into their employees’ email inboxes than in the prior year, attackers gained entry to a whopping 83% of companies, a new Proofpoint report found. Fund managers are frequently finding themselves on the receiving ends of these phishing and other social engineering attacks. This second article in a two-part series describes the latest twists in social engineering techniques; key brand-name lures; and ways fund managers and other organizations can gauge the success of their phish-prevention programs. It also includes charts that show training results by industry and department, based on 115 million emails. The first article provided four key suggestions for boosting employee training effectiveness, described a controversy about disciplining slow-to-adjust employees and highlighted an overlooked third-party risk. See “Beware of False Friends: A Hedge Fund Manager’s Guide to Social Engineering Fraud” (Mar. 8, 2018).

Most-Read Articles