May 25, 2023

Looking Beyond Blaszczak: Lessons for Hedge Fund Managers

Although the U.S. Court of Appeals for the Second Circuit’s most recent decision in U.S. v. Blaszczak (Blaszczak 2) generated significant attention for its holding that a government agency’s confidential information is not necessarily government “property” for purposes of criminal liability for Title 18 securities fraud, the more important lessons for hedge funds that engage political intelligence or any expert insights to inform their trading come from the earliest days of the case and the questions the Second Circuit left open. Firms that strengthened their compliance policies and procedures for conducting research on government actions when the Blaszczak investigation and eventual civil and criminal charges were announced should continue to stay the course, as Blaszczak 2 does not negate insider trading risk under Title 15 of the United States Code. Firms that did not, however, should take this opportunity to do so, as the concurring and dissenting opinions in Blaszczak 2 reveal unresolved tensions among the judiciary regarding the propriety and value of political intelligence firms for the financial markets. This guest article by Jenny R. Chou, partner at Wiggin and Dana, LLP, summarizes the history of the Blaszczak cases, identifies lessons from the litigation for hedge fund managers and posits several unanswered questions left in the wake of the latest decision. For more on Blaszczak 2, see “Second Circuit Holds That Certain Political Intelligence Is Not ‘Property’ Under Title 18” (Feb. 16, 2023).

Risk Alert Offers Insight on Exams of Newly Registered Advisers

Newly registered advisers have been an area of focus for the SEC Division of Examinations (Division) for each of the past ten years. A recent risk alert (Risk Alert) offers insight into what Division staff typically look for in their first examination of such advisers. The number of SEC-registered investment advisers has grown by more than 20% in the past five years, according to the Risk Alert. Those newly registered advisers may face unique compliance risks. Division staff use their examinations of those advisers as an “opportunity for engagement” with them. This article parses the Risk Alert, including the information the Division staff request and the areas of concern they have been finding in recent examinations of new registrants. See “Key Compliance Issues for Advisers and Funds Arising From the SEC’s 2022 Exam Priorities (Part One of Two)” (Jan. 19, 2023); and “Private Funds Top the SEC’s 2022 Exam Priorities” (Jun. 9, 2022).

Reconciling Disparate U.S. and U.K. Requirements for Preparing and Delivering Non‑Standard Track Records (Part Two of Two)

Historically, the SEC has expressed concerns about the use of hypothetical performance and other non-standard track records by private fund managers. Although that has changed with the introduction of the SEC’s new marketing rule under Rule 206(4)‑1 of the Investment Advisers Act of 1940, the road ahead is not smooth. Managers will remain subject to stringent rules about how and when non-standard track records can be used. Those obstacles become doubly daunting for any U.S. managers forced to simultaneously comply with the U.K.’s marketing regime in light of certain subtle, but meaningful, differences between the two regimes’ requirements. The Alternative Investment Management Association hosted a webinar featuring K&L Gates partners Michelle Moran and Michael W. McGrath, who has since moved to Dechert, about marketing issues relevant to managers subject to both U.S. and U.K. marketing rules. This second article in a two-part series outlines similarities and differences in the treatment of non-standard track records (e.g., hypothetical performance, predecessor performance, etc.) across the jurisdictions. The first article reviewed the key differences between the U.S. and U.K. marketing regimes and identified measures advisers can take to reconcile each regime’s requirements. See “Navigating the SEC’s New Marketing Rule” (Jul. 8, 2021).

Supreme Court: District Courts Have Jurisdiction to Hear Constitutional Challenges to ALJ Regimes

The administrative law regimes under federal securities and other laws have been under increasing scrutiny and subject to repeated challenges by respondents in administrative proceedings. Traditionally, a respondent in an administrative proceeding must exhaust administrative remedies before securing a hearing in federal court. On April 14, 2023, the U.S. Supreme Court (Court) ruled unanimously that U.S. district courts have jurisdiction in some circumstances to hear constitutional challenges to administrative proceedings prior to their conclusion, thus resolving a split between the Fifth and Ninth Circuits. This article details the administrative proceedings that were challenged, the Court’s reasoning and the concurring opinions, with commentary from Scott Mascianica, partner at Holland & Knight, and Philip Moustakis, partner at Seward & Kissel. For more commentary from Moustakis, see “Former SEC Enforcement Attorney Discusses Selective Disclosure Risks and Practical Solutions” (Aug. 27, 2020).

“Risk to Resilience”: CFTC Commissioner Romero Discusses Climate and Cybercrime Risk

Cybercrime is “an immediate threat before us that must be countered with strong and swift resolve,” said CFTC Commissioner Christy Goldsmith Romero on February 10, 2023, at the asset management derivatives forum presented by the Futures Industry Association and the Securities Industry and Financial Markets Association. Climate risk is also “an area of increasing substantial risk to the economy and a threat to financial stability,” she said, stressing the need for public-private collaboration to mitigate both types of risk. “Strengthening the resilience of our markets to cyber risk and climate risk are two of my highest priorities,” Romero announced in her remarks. This will entail broad engagement and collaboration between the public and private sectors. “Everyone has a responsibility when it comes to strengthening market resilience against cyber risk and climate risk. We know what is coming. We are all on the same boat together. If each of [us] does our part, together we will adapt to become more resilient,” she stressed. This article distills Romero’s observations on climate and cybercrime risk. She gave the standard disclaimer that the views she expressed were her own, not those of the CFTC, its other Commissioners or its staff. See “CFTC Consults on Climate Risk” (Jul. 7, 2022).