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    Oct. 27, 2022

If a Recession Occurs, How Can Private Fund Managers Be Prepared?

Predictions by an investment funds lawyer as to the timing and severity of an economic downturn seem ill advised, as the views of experts both actual and self-appointed on the topic seem to shift weekly. Nevertheless, there are reasons for managers of private funds to take steps to prepare for a potentially significant economic shift. Even in the absence of an actual recession, private fund managers can actively take steps now to prepare for adverse economic conditions with varying degrees of severity and, in doing so, can also potentially benefit from a related ability to address market volatility and the impact of shifting market forces on a fund’s private portfolio companies, publicly traded securities and other holdings. It is worth noting that these issues are important for both investment advisers in the U.S., as well as those outside the U.S. but with enough assets under management attributable to U.S. investors to require either registration under the Investment Advisers Act of 1940 or status as an exempt reporting adviser. In a guest article, Paul Hastings partners Ira P. Kustin and Alex Cota focus on the legal, regulatory and practical issues that managers can address now rather than presenting any commentary on investment strategies to be implemented under those conditions, considering the numerous potential pitfalls – and potentially as many opportunities – for private funds posed by an economic slowdown. For additional insights from Kustin, see our three-part series on suspending withdrawal or redemption requests: “The 2008 Crisis Versus the 2020 Pandemic” (May 21, 2020); “Key Steps in the Process” (May 28, 2020); and “When and How to Lift the Suspension” (Jun. 4, 2020).

SEC and CFTC Penalize Broker-Dealers $1.8 Billion for Electronic Communications Recordkeeping Violations

In 2021, the SEC and CFTC imposed a massive $200‑million penalty on JPMorgan for failing to maintain records of electronic communications that its employees conducted on personal devices. That resolution appears to have been the tip of the iceberg; the agencies have now resolved enforcement proceedings against more than a dozen registrants involving substantially similar violations. As in the JPMorgan resolution, the respondents have admitted to the facts alleged by the SEC and CFTC and to violating SEC and CFTC recordkeeping and supervision requirements. This article analyzes the alleged violations and the terms of the settlements. See “JPMorgan Fined $200 Million for Failure to Maintain Electronic Communication Records” (Feb. 17, 2022).

Report Examines Appetite for Separately Managed Accounts and Key Terms

Separately managed accounts (SMAs) offer investors added control and transparency, along with the ability to deviate from a fund manager’s flagship strategy. Seward & Kissel recently issued its second annual Snapshot Report on SMAs. The report explores which managers offer SMAs; which investors choose SMAs; strategy preferences; and fees and other key SMA terms. This article explores the principal findings of the study, with further thoughts from Seward & Kissel partner Nicholas R. Miller. See “Evolving Practices Regarding Hybrid Structures, Co‑Investments, Separate Accounts, ESG Challenges and Expense Allocations” (May 19, 2022); “Morgan Lewis Attorneys Discuss Strong Hedge Fund Performance and Innovative Structures (Part One of Two)” (Jan. 20, 2022); and “The Evolving Use of Managed Account Platforms and Platform Providers” (Nov. 11, 2021).

Adviser and Principal Sanctioned for Violations Associated With Representative’s Cherry Picking Scheme

In the eyes of the SEC, the failure to adhere to compliance policies and procedures is just as – if not more – problematic than not having policies and procedures at all. For several years, an investment adviser representative (IAR) allegedly ran a cherry picking scheme and made unsuitable investments for his clients while employed by an investment adviser. In a recently settled enforcement proceeding, the SEC charged the IAR with fraud in connection with the cherry picking scheme. It also claimed that the adviser and its CEO failed to enforce the firm’s policies and procedures regarding allocation of block trades and supervision. Although the enforcement action does not involve private funds, it provides valuable compliance lessons for all advisers regarding enforcement of policies and procedures and supervision of personnel. The proceeding is also notable because it originated from the Analysis and Detection Center of the SEC Division of Enforcement’s Market Abuse Unit. This article details the cherry picking scheme; the alleged compliance and supervisory violations; and the terms of the settlement order against the adviser and its CEO and the final judgment against the IAR. See “Advisers Must Adopt and Implement Appropriate Trade Allocation Policies and Monitor Employee Trading” (Oct. 6, 2022); as well as our three-part series on the duty to supervise: “Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers” (Sep. 6, 2018); “Conduct Proper Trade and Electronic Communications Surveillance” (Sep. 13, 2018); and “Respond to Red Flags; Implement Reasonable Policies and Procedures; and Conduct Adequate Training” (Sep. 20, 2018).

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