Jul. 28, 2022

The SEC’s 2022 Reg Flex Agendas: Major Proposals and Ambitious Timelines

The SEC recently released its Spring 2022 “Reg Flex” short‑term and long‑term agendas, which spell out the agency’s priorities for the near future. The flurry of rulemaking at the start of 2022 fulfilled some of the items on SEC Chair Gensler’s first agendas released last summer, including proposed rulemaking relating to Form PF, security-based swaps, cybersecurity, beneficial ownership and climate-change-related disclosures. The new agendas are no less ambitious – and fund managers should probably expect similarly swift action as to both new rule proposals and finalization of prior proposals. This article provides an overview of the latest Reg Flex agendas, assesses the key takeaways for private fund managers and discusses criticism by Commissioner Hester M. Peirce. For our coverage of prior Reg Flex agendas, see our two-part series on the 2021 agendas: “Key Components and Driving Factors” (Aug. 19, 2021); and “Key Items for Private Funds and the Rulemaking Process” (Aug. 26, 2021); as well as “Former OCIE Official Discusses SEC’s Latest Reg Flex Agendas” (Sep. 24, 2020); “Key Takeaways for Private Fund Managers From SEC’s Latest Reg Flex Agenda” (Aug. 15, 2019); and “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018).

Compensation Rates and Digital Asset Manager Demand for Legal and Compliance Staff (Part Two of Two)

The private funds industry is facing intense regulatory scrutiny, while a potential economic crisis akin to the global financial crisis is looming. Despite that, compensation for in-house legal and compliance staff at fund managers is expected to remain strong, as is demand for staff at digital asset managers. In a recent interview with the Hedge Fund Law Report, David Claypoole, founder and president of Claypoole Executive Search, addressed the above and other themes relating to the market for in-house legal and compliance staff. This second article in a two-part series furnishes Claypoole’s thoughts on the rates of compensation for in-house personnel, along with trends with respect to legal and compliance staff at digital asset managers. The first article explored legal and compliance hiring trends, as well as ways in-house compensation is being structured. For additional insights from Claypoole, see “HFLR Webinar Explores Legal and Compliance Employment Trends, Including Compensation, Staffing, Diversity and the Pandemic’s Impact” (Oct. 15, 2020); and our two-part interview: “What is the Value of Legal and Compliance Staff?” (Mar. 12, 2015); and “Trends in Legal and Compliance Hiring and Staffing” (Mar. 19, 2015).

SEC Alleges Short Selling Violations by Firm Whose Compliance Staff Misinterpreted Rule 105

Rule 105 of Regulation M under the Securities Exchange Act of 1934 makes it unlawful for a person to purchase securities in a public offering if that person has sold those securities short within a specified period prior to the pricing of the offering. In a recently settled enforcement proceeding, the SEC alleged that an investment adviser violated Rule 105 on multiple occasions. What is most interesting about the settlement is that the adviser’s automated trade monitoring systems flagged the suspect transactions both before and after the firm purchased securities in the public offerings, but its compliance staff approved the purchases because they miscalculated the period during which purchases were prohibited. This enforcement action is a critical reminder that even the best compliance systems are only as good as the people who interpret and act on the reports generated by those systems. It also illustrates the potential benefits of self-reporting and cooperation with the SEC. This article details the alleged violations, the adviser’s remedial actions and the terms of the resolution. For discussion of short sale reporting requirements, see “SEC’s Proposed Short Sale Rules Increase Transparency Into Large Short Positions” (Mar. 31, 2022); and “SEC Sanctions Unregistered Fund Adviser for Regulation SHO Violations: (Sep. 30, 2021).

ESG Triggers, Liquidity Management and Other Ways the Russia/Ukraine War Is Affecting Hedge Fund Investments (Part Two of Two)

Even if fund managers do not actively invest directly into Russia, the war in Ukraine is factoring into their investment decisions. For example, questions have been raised about how the war fits into a firm’s environmental, social and governance (ESG) policies, including how far downstream managers need to evaluate to verify that there is no connection with Russia. To explore those issues, the European Fund and Asset Management Association hosted a webinar providing a market overview of the ramifications from Russia’s invasion that featured Simmons & Simmons partners Niamh Ryan, Augustin de Longeaux, Ian Rogers, Robert Turner and Catherine Weeks; managing associates Andrew Desmond and Tristram Lawton; and counsel Basil Woodd‑Walker. This second article in a two-part series examines potential ESG implications for asset managers; ways sanctions impact liquidity management; market interventions; and potential protections offered by investor treaties. The first article provided an overview of the scope of sanctions enacted by the U.S., E.U. and U.K. against Russia and key figures connected thereto, as well as how that is impacting fund managers’ actions with affected investors. 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).

New AI Rules: NYC First to Mandate Audit (Part One of Three)

After years of anticipation, a patchwork of artificial intelligence (AI) legal standards has arrived. This series looks at five regulatory developments in 2022 that address AI-enabled employment decision tools, now used by 75 percent of companies. Developments include recent federal guidance from the EEOC and DOJ; draft regulations in California; and laws in Maryland, Illinois and New York City. This first article in the series examines New York’s first-in-the-U.S. requirement that companies audit the AI they use for hiring, assessment and promotion. The article offers insights on the law’s provisions; highlights the imprecise drafting and apparent gaps that are inspiring laments comparable to lawyers’ woes under the California Consumer Privacy Act of 2018; and offers suggestions for entities’ compliance, with commentary from AI law practitioners at Baker McKenzie, Davis Wright Tremaine, Hogan Lovells and Jackson Lewis. See “The Current State and Future of AI Regulation” (May 14, 2020).