Nov. 10, 2022

Private Fund Reform Proposal Comments: General Concerns (Part One of Three)

On February 9, 2022, the SEC released proposed private fund reforms (Proposal) that would force a dramatic shift in the management and operation of private funds. Unsurprisingly, individuals and members of the private funds industry submitted hundreds of comment letters during an extended comment period. To understand the potential impact of the Proposal, the Hedge Fund Law Report reviewed a targeted cross-section of the comment letters to analyze common concerns and issues they raised. This three-part series presents key takeaways from select comment letters submitted on the Proposal in anticipation of final rules and amendments by April 2023, according to the SEC’s latest “Reg Flex” agenda. This first article summarizes general concerns raised in the comment letters about the SEC’s authority to make the proposed changes, as well as the scope, intent and impact of the Proposal. The second article will discuss three requests made by commenters; the third article will present concerns about specific requirements in the Proposal, particularly the bans on certain practices and providing preferential treatment to certain investors. See our two-part series on the Proposal: “General Observations” (Apr. 7, 2022); and “Rule‑Specific Concerns and Next Steps” (Apr. 14, 2022); as well as “Overview of the Proposal and the Importance of Industry Comments” (Mar. 17, 2022).

Deputy AG Announces Changes to DOJ Corporate Criminal Enforcement Policies, Stressing Individual Accountability

In October 2021, Deputy Attorney General Lisa O. Monaco issued a memorandum to the DOJ, revising the agency’s criminal enforcement policies and practices with respect to corporations, other legal entities and organizations. Her memo focused on the need to consider a defendant’s entire criminal history in resolving matters; the need for entities to identify culpable individuals and provide non-privileged information to the DOJ to secure cooperation credit; and updates to the standards for corporate monitors. In September 2022, Monaco issued further revisions to the DOJ’s corporate criminal enforcement regime, focusing on individual accountability; corporate accountability, including recidivism, voluntary disclosure and compliance programs; imposition of monitors; and transparency. This article discusses the latest revisions to that regime and Monaco’s speech announcing those policy changes. See “Can Compliance Certifications Empower CCOs” (Jul. 14, 2022).

Legal and Compliance Challenges for Global Asset Managers From Disparate ESG Regulations in the U.S. and Europe

Just as climate change and other facets of the environmental, social and governance (ESG) regime are global matters, so too are the regulatory developments surrounding private fund investing in the area. As Europe is a first mover in the area, U.S. managers with ESG aspirations need to stay abreast of new regulations coming out of the E.U. and build in compliance practices accordingly. Those efforts will not only make their funds viable to European investors but also help keep fund managers ahead of queries and concerns from the SEC. Those were among the topics addressed by an expert panel at the Practising Law Institute’s Global Asset Management 2020 program, which explored themes and trends emerging for global asset managers since the pandemic, as well as regulatory developments in the U.S. and E.U. affecting ESG investing. The panel featured Julien Bourgeois, partner at Dechert, and Bruce Karpati, partner and global CCO at KKR. This article provides relevant takeaways from the presentation. For further commentary from Bourgeois, see “U.S. Treasury Initiates Survey of Foreign Securities Holdings” (Feb. 24, 2022); and from Karpati, see “OCIE Associate Director Outlines Coordinated Compliance Effort Under Trump Administration” (Oct. 19, 2017).

Exempt Reporting Advisers Not Exempt From SEC Scrutiny for Fee Calculation Errors

Although exempt reporting advisers are not subject to the full panoply of recordkeeping and reporting requirements of the Investment Advisers Act of 1940, they are still subject to its anti-fraud provisions and to examination by the SEC. For example, an exempt reporting adviser to venture capital funds recently came under SEC scrutiny for failing to calculate management fees in accordance with the terms of its funds’ governing documents, resulting in substantial fee overcharges. This article details the facts that gave rise to the enforcement proceeding, the adviser’s alleged violations and the terms of the SEC settlement order. See our three-part series on steps an exempt reporting adviser must take to transition to SEC-registered investment adviser status: “Registration Triggers and Building a Compliance Department” (Oct. 5, 2017); “Adopting Compliance Policies and Procedures” (Oct. 12, 2017); and “Registered Investment Adviser Status: Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination” (Oct. 19, 2017).

New Pressures Shift Best Practices for Ransomware Crisis Communications

“A lot of incident response plans that we see, or practice, have been structured around personal information,” said Latham & Watkins partner Jennifer Archie. In contrast, ransomware tends to involve “business continuity, disruption of commercial relationships [and] employee data.” Communications risks are growing around ransomware – the COVID-19 pandemic continued to shift the cultural dynamics around staying silent, Latham partner Antony Kim noted during a Privacy + Security Forum Fall Academy workshop. The SEC has joined the Federal Trade Commission in acting to enforce companies’ proper wording about risks during their post-incident statements and notifications. Many companies have not prepared for the communications challenges a ransomware attack brings, Kim noted. General incident response principles apply to companies’ ransomware public relations: identify the public risks to address, alert the designated communications leaders, tailor the existing playbook plan for the current attack’s wrinkles and share the refreshed plan with the other response leaders, noted Katie Clark, Edelman senior vice president for crisis and reputation risk. With ransomware in the public eye so often over the past few years, incident response teams have multiple case studies showing nuanced ransomware risks to incorporate into their plans. See “Ransomware and Sanctions in the Time of War” (Aug. 18, 2022).

WilmerHale Expands Futures and Derivatives Practice in Washington, D.C.

WilmerHale recently announced its hiring of Matthew Kulkin, a former Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight, as a partner in the firm’s securities and financial services department. His clients include asset managers, banks, broker-dealers, energy companies, financial market utilities, insurance companies, non-bank financial institutions and trading venues. See our two-part series “WilmerHale Attorneys Review Recent CFTC Enforcement Actions”: Part One (Apr. 15, 2021); and Part Two (Apr. 29, 2021).