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    Feb. 17, 2022

SEC Proposes New Rules for Security-Based Swaps

The SEC recently released proposed rules (Proposed Rules) intended to prevent fraud, manipulation and deception in connection with security-based swaps (SBSs) and undue influence over the CCOs of SBS dealers and major SBS participants. The Proposed Rules would also require any person with a large SBS position to publicly report certain information related to the position. In the press release announcing the Proposed Rules, SEC Chair Gary Gensler noted some of the swap-related risks that, at least partly, motivated the proposal. The Hedge Fund Law Report spoke to Fabien Carruzzo, partner at Kramer Levin, about the drivers and main goals of the Proposed Rules; concerns they may raise for hedge fund managers that engage in SBS transactions; the validity of concerns raised by Commissioner Hester M. Peirce; and the importance of submitting comments on the proposal – the deadline for which is barely a month away. For additional insights from Carruzzo, see “Implications of the SEC‑European Central Bank MOU on Security‑Based Swaps” (Oct. 14, 2021).

Compliance Takeaways From the Latest GDPR Enforcement Statistics

Violations of the E.U.’s General Data Protection Regulation (GDPR) are growing more expensive and not just for the largest tech companies. In 2021, European regulators tripled their total fine amounts for violations of the landmark data privacy law over the prior year, according to two recent quantitative reviews of enforcement. The statistics compiled by Cooley and DLA Piper tally the most common violations under the law, revealing European data protection authorities share concern for transparency and the legitimacy of companies’ processing but differ in their approach to punishment and sanctions. With commentary from the reports’ authors at DLA Piper and Cooley, this article discusses the findings, interpretations of the trends and GDPR compliance consequences. It also includes comments made during a Cooley webinar. See our two-part series on the GDPR: “Impact” (Feb. 21, 2019); and “Compliance” (Feb. 28, 2019).

JPMorgan Fined $200 Million for Failure to Maintain Electronic Communication Records

Maintaining records of communications is a fundamental compliance obligation, which has become increasingly challenging as the number of available messaging apps and other forms of electronic communications multiplies. J.P. Morgan Securities LLC and two affiliates ran afoul of those requirements when they failed to record thousands of electronic communications made by employees through unapproved channels. The misconduct was compounded by the fact that many communications involved senior employees who were responsible for ensuring that employees complied with the firm’s electronic communications policies, resulting in charges of failure to supervise. The firms’ parallel settlements with the SEC and CFTC resulted in $200 million in civil penalties and the imposition of a compliance consultant. In a break with longstanding practice in many SEC and CFTC resolutions – but consistent with the new policy announced by the SEC Division of Enforcement – the respondents have acknowledged that they violated the federal securities and commodities laws and regulations. This article reviews the applicable SEC and CFTC recordkeeping rules and details the alleged misconduct and terms of the settlements. See “Implications of Enforcement’s New Policy Requiring Admissions in Certain Settlements” (Dec. 9, 2021).

FCA Fines U.K. Affiliate of U.S. Manager That Replaced Successful Traders With Algorithms

In December 2020, the SEC entered a settled enforcement order against an alternative investment management firm that allegedly failed to disclose to investors that it had transferred top-performing traders from its flagship fund to a proprietary fund and replaced those traders with what the SEC claimed was a “replication algorithm” that underperformed the live traders. In what appears to be a follow-on action, the U.K. Financial Conduct Authority (FCA) recently imposed a significant penalty on the firm’s U.K. affiliate for its alleged violation of Principle 8 of the FCA’s Principles for Businesses, which requires supervised firms to manage conflicts of interest fairly. This article analyzes the FCA decision, with thoughts from Reed Smith partner Tim Dolan and Morgan Lewis partner William Yonge. For more on the SEC action, see “Manager Learns $170M Lesson: Replacing Successful Traders With Algorithms May Result in Significant Penalties Unless Properly Disclosed” (Jan. 28, 2021).

Results of EY’s 2021 Global Alternative Investment Fund Survey of Managers and Investors (Part Two of Two)

For the 15th year, EY conducted its annual global alternative investment fund survey. In the third quarter of 2021, it interviewed 210 hedge fund and private equity fund managers and 54 institutional investors to gather their perspectives on a wide range of topics and trends relevant to the private fund space. This second article in a two-part series explores EY’s findings on talent management and the evolving work environment; diversity, equity and inclusion; and responsible investing. The first article covered alternative investment fund performance; strategy and allocation preferences; evolving product offerings; special purpose acquisition companies; digital assets; outsourcing; and other evolving trends. For the results of similar surveys, see “Most Hedge Fund Managers Met or Exceeded Targets Last Year, According to Recent Global Hedge Fund Study (Part One of Two)” (May 13, 2021); “JPM Global Alternatives Outlook Promotes Alternatives As Essential to ‘Alpha, Income and Diversification’” (Mar. 4, 2021); and “AIMA HFM Survey Finds Broad Investor Satisfaction With Hedge Fund Performance” (Feb. 25, 2021).

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