Jun. 16, 2022

Sanctions 101: How Sanctions Regimes Work (Part One of Three)

The government’s ability to impose sanctions has existed for decades. For example, in the past, the U.S. government has imposed sanctions relating to Cuba, Iran, North Korea, Sudan and Venezuela. In fact, the more recent sanctions imposed in response to Russia’s invasion of Ukraine are not the first sanctions the U.S. has imposed relating to Russia. Thus, the latest round of sanctions imposed against various Russian individuals, entities, activities and sectors is not a novel development, but the breadth of the sanctions and the global coordination in imposing them does distinguish them from prior iterations. What does that mean for private fund managers? This first article in a three-part series explains how sanctions regimes work. The second article will discuss how sanctions can impact a private fund manager’s investors and investments – including what to do if an investor or investment is subject to sanctions – while the third article will explore what managers should do to ensure they comply with sanctions and have sufficient protections in their fund documents. See our two-part series on navigating sanctions regimes: “U.S. and U.K.” (Feb. 11, 2021); and “The E.U. and Hot Sanctions Arenas” (Feb. 18, 2021).

Private Fund Developments in Europe, Asia and Latin America

A recent program at Sidley Austin’s Private Funds 2022 event examined the evolving political, regulatory and business environments in Europe, Asia and Latin America and how they are affecting the private funds industry. The panelists covered, among other things, the E.U.’s recast Alternative Investment Fund Managers Directive; funds distribution along with environmental, social and governance (ESG) investing in the E.U.; investment vehicles and ESG in Singapore and Hong Kong; economic liberalization and the changing tax regime in India; and fund structuring, fundraising, tax reform and key risks in Latin America. The program featured Sidley Austin partners Leonard Ng, Alyssa A. Grikscheit, Han Ming Ho and Prabhat K. Mehta. This article highlights their key points. See “IFI Global Survey Identifies Trends in Offshore Domiciliation and Fund Structuring Among U.S. Managers” (Feb. 3, 2022). For more from Ng, see “The New U.K. Investment Firms Prudential Regime: Top Ten Issues for Investment Managers” (Oct. 28, 2021).

Misleading ESG Claims Can Result in Significant SEC Penalties

The SEC has been paying close attention to regulated firms’ claims about their incorporation of environmental, social and governance (ESG) factors in the investment process. Given the relative infancy of ESG investing and the rush by advisers to climb aboard the ESG bandwagon, the area is fraught with inconsistent data and a lack of uniform definitions or standards. Nevertheless, the well-worn adage that advisers must say what they do and do what they say is applicable to the ESG arena. The seven-figure fine that the SEC recently imposed on an investment adviser confirms that the SEC will not give advisers any leeway on their ESG claims. The adviser’s prospectuses and investor communications with respect to certain funds allegedly gave the false impression that the funds performed an ESG quality review of every fund investment. This article details the adviser’s alleged misrepresentations and the terms of the settlement, with commentary from William Chignell, chief commercial officer, ESG ratings & advisory, at Apex Group. See our two-part coverage of the SEC’s proposed climate risk disclosure rules: “Five Key Elements” (May 19, 2022); and “Implications, Challenges, Timing and Pushback” (May 26, 2022); as well as “SEC Compliance and Enforcement Expectations for Private Funds Under Chair Gensler” (Oct. 7, 2021); and “Former SEC Enforcement Director Discusses Fund Manager Risks and Enforcement’s Priorities (Part Two of Two)” (Oct. 7, 2021).

Preparing for CPRA Compliance: Jurisdictional Focus or a More Holistic Approach?

With less than a year before the California Privacy Rights Act of 2020 (CPRA) becomes effective in 2023, it is critical for fund managers to carefully assess and update their privacy compliance programs to minimize risks. The CPRA is the most restrictive U.S. data protection law, with severe restrictions on consumer profiles, its own enforcement agency and substantial penalties. Even managers that have implemented compliance programs for the the California Consumer Privacy Act of 2018 will need to consider how to enhance those programs to meet CPRA requirements. This article distills insights offered at the Privacy + Security Forum Spring Academy by speakers from Dentons, Exterro and Managed Privacy Canada on the CPRA and other state privacy law developments, as well as the enforcement landscape. For more on privacy, see “Navigating the Intersection of Blockchain and Data Privacy Laws” (Jun. 2, 2022).

Synopsis of the IRS Partnership Audit Process and How It Can Be Addressed in Fund Documents (Part One of Two)

The IRS recently bolstered its workforce, budget and regulatory flexibility to perform audits of partnership vehicles, which will shine a brighter light on the tax practices of hedge funds, private equity and other asset managers. Those reforms were due, in part, to changes to the IRS partnership audit rules introduced by the Bipartisan Budget Act of 2015 (BBA). Strafford CLE Webinars (Strafford) recently hosted a webinar examining the IRS partnership audit rules, which featured Adrienne M. Baker, partner at Dechert, along with Mary A. McNulty and Lee S. Meyercord, partners at Holland & Knight. This first article in a two-part series outlines the current status of IRS partnership audits; provides an overview of the BBA; explores provisions managers should consider including in fund documents; and examines pre-audit and audit processes. The second article will identify potential issues managers face when selecting from the range of options available to cure imputed underpayments unearthed in IRS partnership audits. For coverage of a previous Strafford program, see “What Fund Managers Should Consider When Negotiating SaaS Agreements” (Dec. 20, 2018).