Jul. 6, 2023
Jul. 6, 2023
Final Form PF Amendments: Compliance Challenges and Implications (Part Two of Two)
Now, private fund advisers are required to file Form PF on a quarterly or annual basis, depending on the size and type of their hedge or private equity funds. That all changed when the SEC adopted final amendments to Form PF in May 2023 that will require large hedge fund advisers to file so-called “current” reports no later than 72 hours after designated events occur. The changes reflect a significant paradigm shift for hedge fund managers. This second article in a two-part series examines the compliance challenges posed by the current reports and the short‑ and long‑term implications of the new reporting requirements. The first article discussed the final changes to Form PF relevant to large hedge fund advisers, the SEC’s rationale for the amendments and the Commissioners’ views on the changes. See our two-part series on the originally proposed changes to Form PF: “Prompt Reporting of Certain Stress Events and Enhanced Reporting by Large Liquidity Fund Advisers” (Mar. 3, 2022); and “Practical Impact on Fund Managers and Reasons for Industry Backlash” (Mar. 10, 2022).
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Understanding and Mitigating Risks of Using ChatGPT and Other AI Systems
Large language models (LLMs) like ChatGPT and other forms of artificial intelligence (AI) have the power to revolutionize many critical tasks in the investment management space, including research, marketing, trading and compliance. Although they have made quantum leaps in their ability to digest information and generate reports and other content, they are imperfect systems that may pose significant risks to firms that use them. A recent ACA Group program examined the potential uses of ChatGPT and other LLMs, the associated risks, growing regulatory concerns and how firms can mitigate the risks of using LLMs. The program featured Raj Bakhru and Michael Abbriano, chief strategy officer and managing director at ACA Group, respectively; and Greg Slayton, director at ACA Aponix. This article distills their insights. See our three-part series on new AI rules: “NYC First to Mandate Audit” (Jul. 28, 2022); “States Require Notice and Records, Feds Urge Monitoring and Vetting” (Aug. 4, 2022); and “Five Compliance Takeaways” (Aug. 18, 2022).
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The Continuing Trend – and Potential Ramifications – of Increasing Private Fund Manager Obligations
In February 2022, the SEC proposed new rules (Proposal) under the Investment Advisers Act of 1940 (Advisers Act) that, if implemented, would be the most significant enhancement of disclosure obligations for private fund managers since the Dodd‑Frank Act. Citing investor protection and transparency concerns for limited partners as investors, the Proposal signals the Commission’s belief that existing general disclosure obligations under the Advisers Act are insufficient and that additional tools are needed in the fund manager enforcement and examination toolbox. This guest article by Proskauer attorneys Joshua M. Newville, Robert H. Sutton and Adam L. Denning analyzes the SEC’s shifting stance over time toward fund manager disclosure obligations; relevant provisions of the Proposal marking that shift; other recent forms of SEC rulemaking and guidance that evidence the agency’s new stance; and potential ways the SEC’s evolving approach could manifest in its enforcement efforts. See “Proposed Private Fund Rules: Overview of the Proposal and the Importance of Industry Comments” (Mar. 17, 2022); as well as our two‑part series on the Proposal: “General Observations” (Apr. 7, 2022); and “Rule‑Specific Concerns and Next Steps” (Apr. 14, 2022).
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AIMA Report Examines Alignment of Hedge Fund Manager and Investor Interests
The Alternative Investment Management Association (AIMA), in partnership with RSM International, issued its third report on how hedge fund managers align their interests with those of their investors. As in prior iterations of the report, this year’s report focuses on “skin in the game”; transparency; customized investment vehicles; and fee and expense provisions. It also explores how the consideration of environmental, social and governance criteria affect manager-investor alignment. This article discusses the report’s key findings, with commentary from Drew Nicol, associate director at AIMA. See “AIMA Survey Examines Evolution in the Ways That Managers Align With Investors” (Nov. 7, 2019); and “AIMA Survey Identifies Key Ways That Managers Align With Investors, Including Alternative Fee Structures, Skin in the Game and Customized Investment Solutions” (Sep. 22, 2016).
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Funds Burned by Suspension of Nickel Trading at Start of Ukraine War Lose Bid For Pre-Action Discovery Against Exchange
Russia is one of the world’s largest producers of nickel. When Russia invaded Ukraine in February 2022, the price of nickel began to skyrocket. On March 8, 2022, after prices more than doubled in overnight trading, the London Metal Exchange (LME) suspended nickel trading and, later that day, cancelled all nickel trades made on that day. Some firms adversely affected by the suspension and cancellation commenced judicial review proceedings to challenge the LME’s actions. Others, including five investment firms claiming nearly $100 million in losses, sought pre-action discovery from the LME and its affiliated clearinghouse. This article details the circumstances leading up to the LME’s actions; the ensuing disputes and challenges; and the investment firms’ unsuccessful efforts to obtain pre-action disclosure. See “Hedge Fund Manager Elliott Management Withdraws Petition Seeking Discovery from Absolute Return + Alpha Regarding Identity of Source of Leaked Investor Letter” (Sep. 10, 2010).
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K&L Gates Welcomes Back Lance Dial
Lance C. Dial has returned to K&L Gates LLP as a partner in the asset management and investment funds practice, having been an associate at the firm from 2005-2007. Based in the firm’s Boston office, Dial advises asset managers and broker-dealers in all areas of the business. He has worked with all product types, including private funds, mutual funds, exchange-traded funds, money market funds and bank-maintained collective pools. For insights from Dial, see “SEC Action and Commissioner Peirce’s Statement Shed Light on CCO Liability” (Aug. 25, 2022).
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