Jun. 23, 2022

Sanctions 101: Their Impact on Private Fund Investors and Investments (Part Two of Three)

At a recent New York City Bar Association event, Deputy Attorney General Lisa Monaco emphasized the DOJ’s commitment to enforcing the sanctions imposed in response to Russia’s invasion of Ukraine, stressing the need for financial institutions, among others, to closely monitor and comply with those sanctions. Given the likelihood of aggressive sanctions enforcement – and the serious civil and criminal penalties for violations of sanctions – it is critical for private fund managers to ensure they comply with any sanctions that implicate their investors, investments or both. Although compliance with sanctions is not a new issue, it has become more prominent recently, observed Ira P. Kustin, partner at Paul Hastings, and fund managers are more aware of sanctions as an ongoing regulatory obligation than they were in the past. This article, the second in a three-part series, discusses 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. The first article reviewed how sanctions regimes work. The third article will explore what managers should do to ensure that they comply with sanctions and have sufficient protections in their fund documents. For additional insights from Kustin, see “How Fund Managers May Address End-of-Life Issues in Closed-End Funds” (Jan. 17, 2019).

One Year to Go: The State of Play in LIBOR Transition

As of December 31, 2021, two U.S. dollar (USD) London Interbank Offered Rate (LIBOR) rates ceased to be published. One year from now, the remaining USD LIBOR rates will follow suit, and the rate once hailed as “the world’s most important number” will cease to exist. Although much has been accomplished in the nearly five years since the planned demise of LIBOR was first announced, fund managers and their counterparties have substantial work remaining to do in the coming year as the final LIBOR end date approaches. In a guest article, Anne E. Beaumont, partner at Friedman Kaplan Seiler & Adelman, explains how the end of LIBOR began, how the transition away from LIBOR is going and what steps managers need to take next to ensure a smooth transition. For more from Beaumont on the LIBOR transition, see “How Advisers Can Prepare for OCIE Exams on the Transition From LIBOR” (Jul. 9, 2020); and “The SEC Weighs In on LIBOR Transition” (Aug. 8, 2019).

Failure to Disclose SEC Investigation May Support Fraud Claim

In a recent decision, the U.S. Court of Appeals for the Second Circuit (Court) held that failure to disclose the existence of an SEC investigation could constitute a material omission for purposes of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b‑5(b) thereunder. Class action plaintiffs had alleged that a company and two of its officers had disclosed in public filings that the company had identified deficiencies in its accounting controls but fraudulently failed to disclose that it was also under investigation by the SEC in connection with those deficiencies. Plaintiffs also alleged that defendants failed to disclose payments to the authors of favorable articles about the company. The U.S. District Court for the Western District of New York dismissed the entire complaint, but on appeal, the Court vacated that court’s decision with respect to the claims premised on failure to disclose the SEC investigation. Although the ruling pertains to disclosures by a public company, the principles underlying the decision are equally applicable to private fund managers. This article analyzes the relevant allegations from the class action complaint, the action’s procedural history and the Court’s reasoning. See “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?” (Jan. 22, 2015); and “Is a Hedge Fund Manager Required to Disclose the Existence or Substance of SEC Examination Deficiency Letters to Investors or Potential Investors?” (Jun. 1, 2011).

Behavioral Science in Compliance Programs: Concepts and Examples (Part One of Two)

People doing things they should not, and failing to do things they should, are the largest risks facing organizations today, according to Christian Hunt, founder of Human Risk, a behavioral science-led consultancy and training firm specializing in the deployment of behavioral science in the fields of ethics and compliance. Hunt stated that he believes traditional approaches to ethics and compliance often fail to consider behavioral drivers because they consider the way we would like people to behave, rather than the way they are likely to behave. The Hedge Fund Law Report recently spoke with Hunt about his passion for reshaping the way compliance practitioners think about the human factor in their program design and execution. This first part of our two-part article series covers the importance of considering behavioral science in compliance and how using concepts such as social proof and salience can enhance a compliance program. See “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017).

Modifications, Amended Returns and Push‑Out Elections As Cures for Imputed Underpayments From IRS Partnership Audits (Part Two of Two)

For fund managers forced to endure an IRS partnership audit, navigating that process is merely part of the battle. In situations when an imputed underpayment of taxes is identified by the IRS, fund managers are then forced to consider several options – ranging in difficulty, complexity and sensitivity for underlying limited partners – to cure the deficiency. That exercise has taken on greater importance amidst the IRS’ push to perform additional partnership audits through favorable rules introduced by the Bipartisan Budget Act of 2015 (BBA), as well as an increased budget from the Biden administration and more auditors. Those developments were covered in a recent program sponsored by Strafford CLE Webinars featuring Holland & Knight partners Mary A. McNulty and Lee S. Meyercord. This second article in a two-part series details potential issues managers confront with each option available to cure imputed underpayments unearthed in IRS partnership audits. The first article discussed the current status of IRS partnership audits; explained the BBA; identified provisions managers should include in their fund documents; and outlined pre-audit and audit processes. See our two-part series on BBA issues for private funds: “How Current Regulations Complicate IRS Audits of Partnerships” (Apr. 21, 2016); and “How Revised Regulations Facilitate IRS Audits of Partnerships” (Apr. 28, 2016).