Mar. 3, 2022

Proposed Form PF Amendments Would Require Prompt Reporting of Certain Stress Events and Enhanced Reporting by Large Liquidity Fund Advisers (Part One of Two)

The SEC recently voted, over a spirited dissent from Commissioner Hester M. Peirce, to propose amendments to Form PF (Proposal) in several broad areas. First, the Proposal would require large hedge fund advisers and all private equity advisers to file a report within one business day after the occurrence of certain stress events that could have an adverse impact on investors or the broader financial markets. In addition, the Proposal would revise and enhance reporting by large liquidity fund advisers. The comment period for the Proposal expires March 21, 2022. This first article in a two-part series details the SEC’s reasoning behind the Proposal, the proposed changes that will impact hedge fund managers and the topics under consideration during the comment period. The second article will break down the individual SEC Commissioners’ remarks on the Proposal; concerns in the private funds industry about the Proposal’s scope and practical impact; and the likelihood of it being enacted. See “The SEC’s 2021 Reg Flex Agendas: Key Items for Private Funds and the Rulemaking Process (Part Two of Two)” (Aug. 26, 2021); and “Former OCIE Official Discusses SEC’s Latest Reg Flex Agendas” (Sep. 24, 2020).

SEC’s Novel “Shadow Trading” Enforcement Action Gains Traction After Denial of Defendant’s Motion to Dismiss

The SEC’s groundbreaking “shadow trading” case gained traction in January 2022 when the court declined to dismiss – or even narrow – the charges in its ruling on the defendant’s motion to dismiss. The decision came in SEC v. Panuwat, a litigated enforcement action the SEC filed against a former biopharmaceutical company employee who the SEC alleged traded in advance of an announced acquisition of his company. The wrinkle in Panuwat that differentiates it from other cases brought under the misappropriation theory of insider trading is that the defendant did not trade the securities of a company to which he owed a duty of trust and confidence, one that was the source of the material nonpublic information or even one that was involved in the transaction. Instead, he traded securities of a third party that was a peer company to the acquisition target. Although the facts of Panuwat are somewhat unique, the court’s decision may nonetheless embolden the SEC to investigate and bring more shadow trading enforcement actions. In the meantime, in a guest article, Sidley attorneys Ranah Esmaili, Stephen L. Cohen, Barry Rashkover and Austin Schlatter discuss ways private fund managers should be thinking about how to appropriately address risks associated with this new type of insider trading case, including through their compliance programs. For additional commentary from Esmaili, see “SEC Focus on Private Fund Managers: Examination Trends, Priorities and Deficiencies (Part Two of Two)” (Dec. 16, 2021); “Ways CCOs Are Approaching ESG in Light of Growing SEC Scrutiny” (Dec. 9, 2021); and “NYC Bar Framework for CCO Liability: CCO and Regulator Perspectives (Part Two of Two)” (Jul. 22, 2021).

SEC Continues to Focus on the Presentation of Backtested Performance

The presentation of hypothetical or backtested performance results in marketing materials can be a minefield for advisers. The SEC continues to scrutinize advisers’ use of backtested results, including their policies and procedures governing that use. The SEC’s recently settled enforcement action against an SEC‑registered investment adviser is a reminder that the agency will take advisers to task over inadequate policies and procedures governing performance advertising – even when the advertisements in question may not be materially misleading. Although the alleged misconduct took place prior to the SEC’s adoption of its new marketing rule, which contains specific requirements for the presentation of backtested and other hypothetical performance results, the lessons from the settlement remain relevant. This article analyzes the alleged misconduct and the terms of the settlement, with commentary from Christine Lombardo, partner at Morgan Lewis. For coverage of the new marketing rule, see “Navigating the SEC’s New Marketing Rule” (Jul. 8, 2021); as well as our two-part series: “Key Takeaways for Private Fund Managers” (Mar. 18, 2021); and “Next Steps for Legal and Compliance” (Mar. 25, 2021).

Taking a Measured and Forward-Looking Approach to ESG Compliance

Between the global pandemic, social justice movements, extreme weather events, political upheaval and supply chain disruptions, the last 18 months have seen a fast-tracked focus by investors, consumers and the public on corporate sustainability and ethics. Adopting those environmental, social and governance (ESG) standards is challenging and fraught with risk, however, especially if done in a rush, according to three ESG experts who spoke on pitfalls and best practices in this emerging field during a recent program sponsored by Strafford CLE Webinars. Panelists Jonathan D. Brightbill, partner at Winston & Strawn; Brooke Hopkins, managing director at AlixPartners; and Sara K. Orr, partner at Kirkland & Ellis, all advised taking a proactive, data-forward approach now before regulatory mandates become the norm. This article outlines the primary points from the panelists’ discussion. See our two-part series on the Net Zero Asset Managers Initiative: “What It Is and What It Requires” (Feb. 3, 2022); and “How to Make the Commitment” (Feb. 10, 2022).

Gensler Discusses the SEC’s Cyber Priorities

SEC Chair Gary Gensler has asked his staff for recommendations on the reform and update of a range of cybersecurity-related rules and policies that affect SEC registrants, along with public companies, service providers and the SEC itself, he said at a recent forum at Northwestern’s Pritzker School of Law. This article shares the key takeaways from Gensler’s speech, with insights from the Hedge Fund Law Report’s previous coverage of the hot-button SEC cybersecurity issues that affect fund managers. See “Fireside Chat With SEC Chair Gensler: Three Key Disclosure Areas (Part One of Two)” (Nov. 18, 2021).