Dec. 22, 2022

SEC Oversight Proposal: A Solution in Search of a Problem? (Part Two of Two)

According to the SEC, as the asset management industry has grown and clients’ needs have become more complex, “many advisers have engaged third-party service providers to perform certain functions or services, many of which are necessary for an adviser to provide its advisory services in compliance with the Federal securities laws.” Examples of outsourced functions include providing investment guidelines, portfolio management, models related to investment advice, indexes or trading services. Although outsourcing can benefit advisers and their clients, the SEC warned that clients could be significantly harmed when an adviser outsources a function or service without appropriate oversight. In response to that perceived concern, the SEC issued a proposal (Proposal) that would impose a comprehensive due diligence, monitoring and recordkeeping framework on advisers that outsource so-called “covered functions.” The deadline for comments on the Proposal is December 27, 2022. This article, the second in a two-part series, identifies key issues with the Proposal and a key takeaway for hedge fund managers. The first article detailed the Proposal, including the SEC’s rationale for it and the views of several Commissioners. See “IOSCO Issues Seven Key Outsourcing Principles” (Dec. 16, 2021); and “NFA Issues New Rules On Use of Third Parties to Perform Members’ Regulatory Functions” (May 27, 2021).

Why Managers Should Trademark Their Fund Names

Fund names become valuable commercial assets when they are successfully registered as trademarks. It is a common misconception that, once a fund vehicle is formed, the owner can exclusively use the fund name with respect to financial services and prevent third parties from using the same name. The mere formation of a fund vehicle in a particular legal name, however, does not provide the fund manager with trademark protection and should not be taken as an indication that the fund name is available for use and registration as a trademark. For example, a third party may have already used and/or registered a similar or identical fund name as a trademark, which could pose threats to a manager’s use of its chosen fund name and its ability to protect that name. A fund name will serve to identify and distinguish a manager’s fund and attract investors. Without trademark protection comes risk – if a manager does not secure trademark protection, its rights against third parties will be limited. This guest article by Ogier partner Sophie Peat explains the trademarking process in general and its nuances in the context of private fund names, including environmental, social and governance related funds. Note that each jurisdiction has its own regulations and procedures for trademarks. See “Hedge Fund Names: What a Hedge Fund Manager Should Do Before It Starts Using a Name” (Mar. 16, 2012).

CFTC Enforcement Report Reflects Strong Focus on Digital Assets

The SEC is not the only regulator with a keen focus on digital assets. The CFTC recently released a report of its enforcement activity in its 2021-2022 fiscal year (FY2022). Of the 82 enforcement actions the agency brought in FY2022, 31 involved digital assets. A significant number also concerned recordkeeping and supervisory failures. This article distills the enforcement report, with commentary from former CFTC attorneys David Slovick, partner at Barnes & Thornburg, and Elizabeth Lan Davis, partner at Davis Wright Tremaine LLP. See our two-part review of CFTC activity: “Enforcement Actions” (Apr. 15, 2021); and “Regulatory Actions” (Apr. 29, 2021); as well as “CFTC Enforcement Division Aims to Foster ‘True Culture of Compliance,’ According to Report” (Jan. 16, 2020).

Hong Kong SFC Sanctions Licensee and CCO for Compliance Failures Associated With Short Sale Violations

From February 2017 through July 2019, a Hong Kong-based entity licensed to engage in asset management regulated activities failed to provide more than 150 regulatory and public notices of short positions achieved through equity swaps referencing a U.K. public company, in violation of the E.U. short selling regulation. After resolving an enforcement proceeding by the U.K. Financial Conduct Authority, the entity was the subject of disciplinary action by the Hong Kong Securities and Futures Commission (SFC), which cited it for having inadequate compliance procedures and internal controls, as well as failing to provide immediate notice to the SFC of its violation of the E.U. regulation. The SFC also held its CCO accountable for those failures. This article details the SFC’s follow-on disciplinary proceeding; the alleged violations of the SFC’s Code of Conduct; and the sanctions imposed. For discussion of the U.K. action, see “FCA Resolves First Enforcement Action Under E.U. Short Sale Disclosure Rules” (Nov. 5, 2020).

Former SEC Asset Management Unit Chief Joins Quinn Emanuel

C. Dabney O’Riordan has joined Quinn Emanuel as a partner and will be based in Los Angeles and Washington, D.C. O’Riordan most recently served as Chief of the SEC’s Asset Management Unit, which is comprised of approximately 60 lawyers, industry experts and regional managers specializing in federal securities law governing hedge funds, private equity funds and other investment vehicles. Thus, she is an expert in enforcement, regulatory and compliance oversight of asset managers. For insights from O’Riordan, see “Present and Former SEC Officials Discuss Commission Oversight of Private Funds” (Apr. 29, 2021).