Mar. 2, 2023

Parsing the Significance of the SEC’s FAQ on the Presentation of Gross and Net Performance

On November 4, 2022, the SEC’s new marketing rule (Marketing Rule) became the law of the land for registered investment advisers, including private fund managers. During the preceding 18 months, industry insiders made repeated pleas for additional guidance on the Marketing Rule and clarification of certain requirements. The SEC, however, did not respond to such requests until January 11, 2023, when it updated its Marketing Compliance Frequently Asked Questions (FAQ) to address a narrow issue on the presentation of gross and net performance. To better understand the FAQ, the Hedge Fund Law Report spoke with Christopher S. Avellaneda, partner at Schulte Roth & Zabel LLP. This article summarizes the FAQ and shares Avellaneda’s perspective on the FAQ and its implications for how private fund managers present their funds’ performance in advertisements. See our two-part series on the Marketing Rule: “Key Takeaways for Private Fund Managers” (Mar. 18, 2021); and “Next Steps for Legal and Compliance” (Mar. 25, 2021); as well as “The New Marketing Rule: Key Elements and SEC Commissioner Concerns” (Mar. 4, 2021).

SEC Modernizes Broker-Dealer Electronic Recordkeeping Rules

In November 2021, the SEC proposed amendments to the recordkeeping requirements for broker-dealers contained in Rule 17a‑4 under the Securities Exchange Act of 1934 (Exchange Act) and for security-based swap dealers and major security-based swap participants contained in Rule 18a‑6 under the Exchange Act. On October 12, 2022, the SEC adopted final rule amendments largely in line with its original proposal. The amendments, which were designed to make the rules more “technology neutral,” add a new “audit-trail” format for storing electronic records; and update both technical and non-technical requirements for electronic recordkeeping systems. The amendments took effect on January 3, 2023; the compliance date is May 3, 2023. This article synthesizes the critical elements of the amended rules, with commentary from W. Hardy Callcott, partner at Sidley Austin LLP. See “JPMorgan Fined $200 Million for Failure to Maintain Electronic Communication Records” (Feb. 17, 2022).

Ransomware Evolution: Government Efforts and Cyber Insurance (Part Two of Two)

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

Use of Alternative Data Continues to Grow, Says New Survey

Nearly nine-in-ten alternative asset managers said they now use alternative data or plan to use it in the coming year, and a solid majority increased their use of alternative data in 2021 and 2022 when compared with 2020, according to the third annual alternative data survey by Lowenstein Sandler. This year’s survey asked more than 100 alternative investment managers about their current and anticipated uptake of alternative data; data sourcing and vendors; policies; key concerns; demand for different categories of data; and its use in responsible investing. This article distills the survey results, with additional insights from Lowenstein Sandler partners Boris Liberman and Scott H. Moss and counsel George Danenhauer, the study’s authors. For coverage of two previous Lowenstein Sandler studies, see “Survey Finds Widespread and Growing Use of Alternative Data” (Jan. 27, 2022); and “Survey Finds Widespread and Increasing Use of Alternative Data by Hedge Funds” (Oct. 17, 2019).

Prevalence of ESG Strategies Among Shari’a‑Compliant Funds and Attendant Issues

Environmental, social and governance (ESG) factors continue to merit attention in the private funds space and more generally in investment-making decisions. ESG investing is not without its opponents, however, as some U.S. institutional investors are pushing back on certain aspects of ESG investing. Further, the SEC is focusing on enforcement and rulemaking activity around ESG investing, with an emphasis on greenwashing. Nonetheless, one byproduct of any cautiousness as to ESG investing could be an increased interest in Shari’a-compliant funds or other products that may embody many features of ESG investing without simultaneously running afoul of any regulations or rules. This guest article by Morgan Lewis attorneys Amanjit K. Fagura and Alishia K. Sullivan explores recent ESG trends; the interplay of ESG investing and Shari’a compliance; risks and considerations associated with forming ESG Shari’a-compliant funds; and how those risks have affected fund launches to date. For more on Shari’a compliant funds, see “The “New-Age” Sukuk Market: How Investors Can Profit While Safeguarding Against Legal Risk” (Sep. 22, 2011).