Oct. 12, 2023

Final Private Fund Rules: Key Compliance Challenges and Next Steps (Part Two of Two)

When the SEC proposed rules for private funds in February 2022, Commissioner Hester M. Peirce called it a “sea change” for the industry. The final version of the rules (Rules), released on August 23, 2023, walks back or eliminates some of the provisions that most concerned industry stakeholders and includes a much-needed grandfathering provision, albeit for limited provisions. Fund managers may have initially breathed a collective sigh of relief, but, upon further reflection, it is clear the Rules will still fundamentally change many aspects of hedge fund operations. Although fund managers have until September 14, 2024, or March 14, 2025 – depending on the Rule and the manager’s size – to comply, the compliance challenges the Rules pose are daunting. This second article in a two-part series discusses the compliance challenges posed by the Rules and the next steps for CCOs. The first article parsed the Rules and how they differ from the Proposal. Future articles will dive into the details of each of the Rules, as well as what measures hedge fund managers must take to comply with them. For a look at other final rules released by the SEC in 2023, see “SEC Adopts Final Rules to Address Security-Based Swaps Fraud and Undue Influence Over Certain CCOs” (Aug. 31, 2023); as well as our two-part series on the final Form PF amendments: “Enhanced Reporting for Large Hedge Fund Advisers” (Jun. 22, 2023); and “Compliance Challenges and Implications” (Jul. 6, 2023).

New Law Modernizes Luxembourg Funds and Their Managers

On July 11, 2023, the Luxembourg Parliament voted for the bill of law 8183 (Modernization Law), providing a smarter regulatory framework for all non‑UCITS hedge funds and their Luxembourg managers subject to certain Luxembourg laws. The Modernization Law, which came into effect on July 28, 2023, is a game changer, providing options for managers to hit the retail market with a lighter regulatory framework. This guest article by Alexandrine Armstrong-Cerfontaine, partner at Goodwin Procter, reviews the changes made by the Modernization Law and discusses their impact on hedge fund managers. It does not, however, cover the Modernization Law’s tidy-ups, drafting clarifications, corrections and alignments to European legislation. For insights from other Goodwin attorneys, see “New FCA Consultation: the U.K. Version of the E.U.’s SFDR?” (Jan. 5, 2023).

Compliance Challenges in Records Management

Although records have always been key to successfully navigating business requirements, audits, investigations and enforcement actions, their importance has escalated in recent years. Thanks to emerging technologies, enforcement actions and guidance from U.S. regulators, records management has become increasingly top-of-mind for compliance practitioners, information technology leaders and legal teams alike. The Hedge Fund Law Report asked James Koukios, partner at Morrison & Foerster, about all things records, including off-channel communications, ephemeral messaging applications and best practices companies may want to consider. See “SEC and CFTC Continue to Penalize Firms for Electronic Communications Recordkeeping Violations” (Aug. 17, 2023); as well as our two-part roadmap to maintaining books and records: “Compliance With Applicable Regulations” (Nov. 2, 2017); and “Document Retention and SEC Expectations” (Nov. 9, 2017).

SEC Asset Management Conference Panel Addresses Private Fund Regulation, Private Credit and Responsible Investing

On May 19, 2023, the SEC Division of Investment Management hosted an inaugural conference on emerging trends in asset management. One panel analyzed the key concerns associated with regulation of private funds, the burgeoning private credit industry, the impact of private funds on corporate conduct, protection of retail investors and whether further regulation of environmental, social and governance investing is required. Sarah G. ten Siethoff, Deputy Director of the SEC Division of Investment Management, moderated the discussion, which featured Elisabeth de Fontenay, professor of law at Duke University; and Cathy Hwang, Barron F. Black research professor of law at the University of Virginia. This article distills their insights. See “SEC Investment Management Attorneys Offer a Roadmap to SEC Rulemaking and Public Comments” (Sep. 8, 2022).

CFTC Cites Commodity Trading Firm for Lacking Supervisory Procedures to Detect and Deter Disruptive Trading

Supervision of employees is a fundamental compliance obligation. In a settled administrative proceeding, the CFTC alleged that a commodity trading firm had failed to supervise an employee who placed an unusually large trade during the final minutes of trading on the last trading day of the year, causing a spike in the price of that commodity. This article describes the circumstances and trading that gave rise to the proceeding and the alleged compliance failures. See “CFTC Enforcement Report Reflects Strong Focus on Digital Assets” (Dec. 22, 2022).