Feb. 3, 2022

Net Zero Asset Managers Initiative: What It Is and What It Requires (Part One of Two)

Environmental, social and governance (ESG) investing is a growing trend in the private funds industry, and a lot of the focus has been on the “E” element of ESG. To that end, the Net Zero Asset Managers Initiative (Initiative), which was launched in December 2020, is an international group of asset managers committed to the goal of net zero greenhouse gas emissions by 2050 or sooner by supporting investing aligned with that net zero emissions goal. To date, 220 asset managers with $57 trillion in assets under management have committed to the Initiative – but what does that commitment actually entail? This article, the first in a two-part series, provides an overview of the Initiative, including who can participate in it, what asset managers should consider when deciding whether to commit to the Initiative and what that commitment requires managers to do. The second article will discuss applying the commitment to new funds versus existing funds, explain the role a firm’s CEO should play in the process, spell out the steps that managers should take to comply with the Initiative’s requirements and include a checklist that managers can use to guide the process. See “Manager and Investor Interest in ESG Is Growing, According to Recent Global Hedge Fund Study (Part Two of Two)” (May 20, 2021).

Compliance Corner Q1‑2022: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

Forgetting one’s loved ones on February 14 – Valentine’s Day in the U.S. – can have serious personal consequences. For hedge fund managers, that date is also an important one to remember, as several regulatory reports are due on February 14, 2022, with the failure to file those reports potentially carrying serious professional consequences. This nineteenth installment of the Hedge Fund Law Report’s quarterly compliance update, authored by ACA Group consultants Joey Martinez and Dan Campbell, highlights upcoming filing deadlines and reporting requirements that hedge fund managers should be aware of during the first quarter of 2022. This article also reviews SEC Chair Gary Gensler’s prepared remarks at the Institutional Limited Partners Association Summit concerning his views on the private funds industry and the greater attention being paid by the SEC to digital assets and related platforms, including certain public statements made by the SEC during the fourth quarter of 2021. See “How ILPA’s Model NDA Could Change Preliminary Due Diligence Practices” (Jun. 10, 2021).

Conflicts From Managing Multiple Funds and Other Current Challenges to Effective Compliance at Hedge Funds (Part Two of Two)

With the SEC issuing a steady stream of statements promising enhanced scrutiny and new regulations, compliance professionals at private funds are scrambling to keep up. In addition to the Commission’s sharpened focus on environmental, social and governance (ESG) investing, market trends have also created new versions of familiar conflicts that compliance teams must address, even as a continued remote work environment for many firms forces compliance professionals to go above and beyond to oversee employees. Those and other issues were addressed in a Practising Law Institute panel moderated by Gibson Dunn partner Mark K. Schonfeld, which featured Eric M. Albert, CCO and legal counsel at Holocene Advisors, LP; Kenneth J. Burke, head of compliance and senior counsel at Vista Credit Partners Management, LLC; and Igor Rozenblit, founder and partner at Iron Road Partners and former Co‑Head of the SEC’s Private Funds Unit. This second article in a two-part series summarizes key takeaways from the discussion on current compliance challenges involving ESG investing and conflicts related to business expansion, as well as early goals for incoming CCOs. The first article covered the discussion of two recent enforcement actions involving insider trading and material nonpublic information and their implications for hedge fund managers. For additional insights from Rozenblit, see “Barbash, Breslow and Rozenblit Discuss Hedge Fund Allocations, Restructurings and Advisory Boards” (Apr. 7, 2016).

Operational Due Diligence on Managers That Hold Digital Assets

In a recent Toolbox memorandum (Memo), the Standards Board for Alternative Investments (SBAI) pointed out that digital assets “operate using different infrastructure than more traditional asset classes” and, as a result, present different risks for investors and managers. The Memo discusses operational due diligence on managers that invest in digital assets with respect to investment mandates, custody, trading, valuation, asset verification, conflicts of interest, regulatory risk, anti-money laundering and other risks, with reference to the relevant SBAI Alternative Investment Standards. This article explores the key takeaways from the Memo, with commentary from Karl Cole‑Frieman, partner at Cole‑Frieman & Mallon, and Genna N. Garver, partner at Troutman Pepper. For more recent guidance from SBAI, see “SBAI Issues Culture and Diversity Strategies Framework” (Nov. 18, 2021); our two-part series “Navigating Indemnification and Exculpation Provisions in Fund Documents”: Part One (Aug. 26, 2021); and Part Two (Sep. 9, 2021); as well as our two-part series on the SBAI Responsible Investment Policy Framework: “Four Ways to Incorporate Into Investment Strategies” (Apr. 15, 2021); and “Three Key Considerations for Fund Managers” (Apr. 22, 2021).

IFI Global Survey Identifies Trends in Offshore Domiciliation and Fund Structuring Among U.S. Managers

Offshore funds are a key component of most private fund structures, providing non‑U.S. investors the opportunity to invest without becoming subject to U.S. tax authorities and providing U.S tax-exempt investors a shield against unrelated business taxable income. Although the Cayman Islands continues to be the most popular jurisdiction for offshore funds, other locations are becoming more popular as managers look for investors in various geographies. Beyond domiciles, managers hoping to market to European investors also need to consider how they will meet regulatory standards, such as by operating through a third-party management company or by performing functions in-house. IFI Global recently hosted a webinar to discuss the results of its survey of U.S. alternative investment managers and lawyers on overseas fund structuring issues, trends and forthcoming developments of note. The program was hosted by IFI Global CEO Simon Osborn and featured Lynne M. Carreiro, senior vice president at Greyline Partners; Miles J. Edwards, GC and CCO at Bruderman Brothers; Debra Franzese, partner at Seward & Kissel; Wouter Plantenga, ICS head of group client services at JTC; and Cyril Schopfer, director of client coverage at RBC Investor & Treasury Services. This article outlines the key insights and relevant takeaways from the survey and the panelists’ corresponding discussion. See “The New E.U. Cross‑Border Distribution of Funds Rules” (Aug. 5, 2021).