Mar. 16, 2023

Updates to the NSCP’s Firm and CCO Liability Framework

CCOs of private fund managers face extraordinary pressure. Surveys conducted by the National Society for Compliance Professionals (NSCP) revealed that most respondents were very or somewhat concerned that personal liability would be imposed on them without recognition that they were acting in good faith in a high-volume, intense environment. Lack of sufficient resources and support from firm management have only heightened CCOs’ concerns. In response, the NSCP released a Firm and CCO Liability Framework (Original Framework) in January 2022. Just over a year later, the NSCP has released an updated version of the framework (Updated Framework) in response to feedback on the Original Framework. This article explores the response to the Original Framework; why and how the Updated Framework was created; the key changes made; and how CCOs and firms can use the new version. It also includes commentary from Brian L. Rubin, partner at Eversheds Sutherland and member of the NSCP’s Regulatory Advisory Committee, which worked on both frameworks. For discussion on the Original Framework, see “A Look at the NSCP’s Firm and CCO Liability Framework” (Feb. 24, 2022). See also “How CCOs Can Avoid Personal Liability for Organizations’ Compliance Failures” (Mar. 11, 2021).

Delaware Chancery Court Strikes Down Employee Restrictive Covenants in a Partnership Agreement

Restrictive provisions in employment contracts have been getting a lot of attention of late. For example, in January 2023, the Federal Trade Commission (FTC) released a proposed rule that would severely restrict the use of non‑compete clauses. The same month, the Delaware Chancery Court issued its decision in Ainslie v. Cantor Fitzgerald, L.P. (Ainslie). That decision is a cautionary tale for employers that might believe Delaware’s general pro-business slant makes it a friendly environment for the enforcement of non-competes and other restrictive covenants – including those imposed on employees via partnership agreements. In Ainslie, the court held that non‑competition and non‑solicitation restrictions, as well as a four-year forfeiture-for-competition provision, contained in a partnership agreement were unenforceable due to their unreasonable scope and duration. This guest article by Friedman Kaplan attorneys Lance J. Gotko, Asaf Reindel and Yaara Shchori Ben-Harush discusses the key holdings in Ainslie, as well as practical considerations for fund managers. For more on the FTC’s proposed rule, see “What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions” (Feb. 16, 2023).

SEC Division of Exams Finds Quantitative and Qualitative Deficiencies in Rule 606 Compliance

Private fund advisers need information about how broker-dealers handle their trade orders to ensure they are complying with their duty to seek best execution for their clients. Rule 606 of Regulation NMS, which took effect in August 2005, requires broker-dealers to issue reports on their routing of customer orders in National Market System securities and options. In 2018, the SEC amended Rule 606 to require enhanced disclosures. The SEC Division of Examinations (Division) recently issued a risk alert that describes the quantitative and qualitative deficiencies it found in examinations of broker-dealers’ compliance with the amended rule, particularly the provisions concerning payment for order flow and rebates. This article details the Division’s findings. See our three-part series on the SEC’s enhanced order routing disclosures: “How New Disclosures Shed Light on Rebates Paid to Broker-Dealers” (Mar. 28, 2019); “Understanding Rule 606(a) and Rule 606(b)(3) Reports” (Apr. 4, 2019); and “How Fund Managers Should Use These Additional Disclosures Going Forward” (Apr. 11, 2019).

A Roadmap to Valuation of Interests in Hedge Funds

It may be necessary to value an interest in a hedge fund for tax purposes or in connection with a business transaction or litigation. The approach used will depend on the context of the valuation and other considerations. A recent Marcum LLP program examined the unique considerations and common points of contention in valuing hedge fund interests. Marcum partner Elizabeth Ciccone moderated the discussion, which also featured partners Vladimir Korobov and Thomas Keane. This article distills their insights. See “Succession Planning Series: Selling a Hedge Fund Founder’s Interest to an Outside Investor (Part Two of Two)” (Jan. 16, 2014); and “Valuation and Confidentiality Concerns in Secondary Market Trading of Hedge Fund Interests” (Dec. 9, 2008).

A Look at FINRA’s 2023 Report on Examinations and Risk Monitoring

FINRA recently released its third annual combined examination and risk monitoring report (Report). As in prior iterations, the Report has sections devoted to firm operations; communications and sales; market integrity; and financial management. It also includes a new section highlighting financial crimes. Each topic in the Report includes a brief discussion of the relevant FINRA rules and rules under the Securities Exchange Act of 1934 and lists considerations concerning those rules, relevant examination findings and associated effective practices. This article reviews the Report, with commentary from Daren R. Domina, partner at Haynes and Boone, LLP. For coverage of previous FINRA reports, see “FINRA Reports on Examinations and Risk Monitoring” (Apr. 7, 2022); “FINRA Annual Report Highlights Exam Findings and Risk Monitoring Results” (Mar. 11, 2021); “FINRA Outlines Its 2020 Risk Monitoring and Exam Priorities” (Mar. 12, 2020); and “FINRA Exam Findings Report Covers Four Aspects of Its Supervisory Activities” (Jan. 30, 2020).

Simpson Thacher Adds Funds Lawyer to London Office

Simpson Thacher announced that Stephanie Biggs will join the firm as a partner in the London office, where she will co-lead the firm’s European financial services and funds regulatory team. Biggs advises private funds, asset managers and financial institutions on complex domestic and cross-border regulatory matters. For a look at the private funds space in the U.K., see “New FCA Consultation: the U.K. Version of the E.U.’s SFDR?” (Jan. 5, 2023); “U.K. Treasury Outlines Potential Changes to Make Funds Regime More Attractive” (Apr. 21, 2022); “Recent Developments in Fund Structuring and Marketing in the E.U., U.K. and Asia” (May 27, 2021); and “A New Dawn for U.K. Investment Vehicles?” (Aug. 27, 2020).