Feb. 16, 2023

The SEC’s Fall 2022 Reg Flex Agenda: It Could Be a Very Busy Spring

On January 4, 2023, the SEC released its Fall 2022 “Reg Flex” agenda (Agenda), which spells out the agency’s priorities for the near future. It prominently features proposed rulemakings from 2022 that will impact private fund managers, including those relating to private fund reform; Form PF; security-based swaps; cybersecurity; beneficial ownership; short sales; and environmental, social and governance investment-related disclosures – all of which are listed as at the final rule stage. “I support this agenda as it reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets,” said SEC Chair Gary Gensler upon the release of the Agenda. This article summarizes the Agenda and identifies the key items for private fund managers, with insights from Stacey Song, partner at Cooley LLP and former Senior Counsel in the Private Funds Branch of the Division of Investment Management at the SEC. See our two-part series on the 2021 agenda: “Key Components and Driving Factors” (Aug. 19, 2021); and “Key Items for Private Funds and the Rulemaking Process” (Aug. 26, 2021); as well as our coverage of the 2020 agenda; 2019 agenda; and 2018 agenda.

What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions

The use of non-compete provisions and other restrictive covenants, such as client, investor and employee non-solicitation covenants, has long been an important tool used by hedge funds and other asset managers to protect confidential information and trade secrets; valuable client relationships; and goodwill. Such covenants, proponents argue, create incentives for employers to invest in key employees and to promote stability in relationships between investors and their advisors. Increasingly vocal detractors, on the other hand, assert that such covenants stymie employee mobility and depress wages. Although non‑compete agreements have been subject to increasing scrutiny at the state level in recent years, particularly as to non-management employees, federal regulation of restrictive covenants has been extremely limited. On January 5, 2023, however, the Federal Trade Commission (FTC) announced its intention to effect a sea change in this area, issuing a Notice of Proposed Rulemaking (Proposed Rule) that, if implemented, would prohibit the use of non‑compete clauses with employees in virtually all circumstances. The FTC is accepting comments on the Proposed Rule, including potential alternative rules, through March 20, 2023. This guest article by Dechert attorneys J. Ian Downes and Jeffrey W. Rubin discusses the FTC’s Proposed Rule; the backdrop against which it was raised; the challenges to enactment of the Proposed Rule in its current form; and the steps that asset managers should consider now in the face of legal headwinds that, at the very least, seem likely to lead to increasing scrutiny of the use of restrictive covenants. For additional insights from Downes and Rubin, see “Legal and Practical Impact on Fund Managers of New Federal Law Ending Forced Arbitration of Sexual Harassment and Assault Claims” (Jul. 14, 2022).

Second Circuit Holds That Certain Political Intelligence Is Not “Property” Under Title 18

The insider trading saga involving David B. Blaszczak, government employee Christopher M. Worrall and three analysts at Deerfield Management Company, L.P. continues. In 2018, all five were convicted of insider trading, wire fraud and other charges under Title 18 of the United States Code for trading on nonpublic information about pending changes to Medicare reimbursement rates. Three of the defendants appealed all the way to the U.S. Supreme Court, which, at the government’s request, remanded the case to the Second Circuit for reconsideration in light of the Supreme Court’s 2019 decision in Kelly v. U.S. On remand, the government conceded that such information is not “property,” and the Second Circuit agreed that all substantive Title 18 fraud charges should be dismissed. This article presents these latest critical developments, with commentary from David I. Miller, Greenberg Traurig shareholder and former Assistant U.S. Attorney for the Southern District of New York. For more on political intelligence, see “Mitigating Insider Trading Risks: Expert Networks, Political Intelligence, Meetings With Management, Data Rooms, Information Barriers and Office Sharing (Part Two of Two)” (Oct. 11, 2018); “Self-Evaluation Policies Are Insufficient for Political Intelligence Firms to Avoid MNPI Violations” (Dec. 17, 2015); and “How Can Hedge Fund Managers Identify and Mitigate Insider Trading Risks Associated with Gathering and Using Political Intelligence?” (Jul. 11, 2013).

SEC Sanctions Goldman Sachs for Failing to Follow ESG Policies and Procedures

Taking into account environmental, social and governance (ESG) factors in the investment process involves certain unique challenges, including inconsistent terminology, disparate methodologies and insufficient data. Nevertheless, a fundamental compliance rule continues to hold true for advisers that venture into ESG territory: “Say what you do, and do what you say.” Goldman Sachs Asset Management, L.P. (GSAM) recently ran afoul of that dictate on both counts. In a recently settled enforcement proceeding, the SEC claimed that GSAM failed to adopt appropriate policies and procedures for governing certain ESG products. Moreover, after it did adopt ESG policies and procedures, it failed to follow them. “Today’s action reinforces that investment advisers must develop and adhere to their policies and procedures over their investment processes, including ESG research, to ensure investors receive the advisory services they would expect to receive from an ESG investment,” said Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit in the SEC’s press release. This article details the alleged compliance shortcomings and the terms of the settlement. See How the SEC’s Recent ESG Proposals May Impact Private Funds” (Sep. 22, 2022); “A Roadmap to Proposed ESG Disclosures on Form ADV” (Jul. 14, 2022); and “Misleading ESG Claims Can Result in Significant SEC Penalties” (Jun. 16, 2022).

Ransomware Evolution: Growing Threats and Response Considerations (Part One of Two)

The scope and sophistication of ransomware attacks have grown dramatically in recent years, with attacks on critical infrastructure (e.g., Colonial Pipeline) prompting a strong government response. To assist companies and other entities in navigating these challenging waters, in part one of this two-part series, we distill insights offered by speakers at a Strafford webinar on the evolving ransomware threat landscape (including ransomware as a service, the ransom payment calculus and incident response) and discuss challenges and considerations related to responding to an attack. Part two will cover the government’s efforts at addressing ransomware and other cyber risks, and the role of cyber insurance. The program featured Shardul Desai, partner at Holland & Knight; Rachel V. Rose, principal at Rachel V. Rose – Attorney at Law, PLLC; and Elizabeth (Beth) Burgin Waller, principal at Woods Rogers. See our two-part series: “First Steps Fund Managers Should Take When Responding to a Ransomware Attack” (Mar. 17, 2022); and “Necessary Precautions, Compliance Considerations and Risks to Mitigate From a Ransomware Attack” (Mar. 24, 2022).

Philip A. Fortino Returns to Debevoise From SEC

After serving at the SEC for eight years, Philip A. Fortino has rejoined Debevoise & Plimpton’s New York office as counsel and a member of the firm’s white collar and regulatory defense group. Fortino will advise clients facing major investigations or enforcement actions by the SEC and other federal regulators, as well as state attorney general offices and securities regulators.  For analyses from other Debevoise attorneys, see “Examining the Burdens and Benefits of a Remote Regulatory Environment” (Mar. 24, 2022); “IOSCO Issues Seven Key Outsourcing Principles” (Dec. 16, 2021); and “Debevoise Attorneys Discuss E.U. Sustainability Disclosure and Taxonomy Regulations” (Jul. 30, 2020).