Apr. 27, 2023

The SEC’s Proposed Safeguarding Rule: Significant Implications for Private Fund Managers

On February 15, 2023, the SEC proposed new Rule 223‑1 (Safeguarding Rule) under the Investment Advisers Act of 1940, which would replace the current custody rule and make related changes to the recordkeeping rule governing investment adviser books and records, as well as Form ADV (collectively, the Proposal). Although the Proposal’s treatment of digital assets has garnered most of the public’s attention, the Safeguarding Rule’s potential impact on all investment advisers is far-reaching and would substantially increase legal and operational costs and burdens. This guest article by Greenberg Traurig attorneys Ryan F. Helmrich and Nathan M. Iacovino discusses the full scope of the Safeguarding Rule; outlines the Proposal’s new requirements and potential impact on investment advisers; and identifies issues of key importance on which hedge fund managers should submit comments. The deadline for comments on the Proposal is May 8, 2023. For insights from other Greenberg Traurig attorneys, see “Ransomware and Sanctions in the Time of War” (Aug. 18, 2022).

SEC 2023 Exam Priorities: Key Takeaways for Private Fund Managers (Part Two of Two)

On February 7, 2023, the SEC Division of Examinations (Division) released its examination priorities for the 2023 fiscal year (Priorities). The Priorities not only identify private fund advisers as a significant focus area but also single out six types of private funds considered high risk. In addition, advisers must be aware of other focus areas applicable to all registered investment advisers, including marketing; environmental, social and governance investing; electronic communications; and operational resiliency. This second article in our two-part series discusses the creation and use of the Priorities and provides key takeaways for private fund managers from former Division officials. The first article summarized elements of the Priorities of particular interest to private fund managers. See “Key Compliance Issues for Advisers and Funds Arising From the SEC’s 2022 Exam Priorities (Part One of Two)” (Jan. 19, 2023).

Taking Compliance Policies From Dense and Dry to Effective and Engaging

Compliance professionals can only dream of the day when a new policy is received like a surprise Beyoncé album drop or a code of conduct garners the web traffic of a Taylor Swift concert ticket pre-sale. Until such time, in-house policy shops aim for the quiet din of acceptance, the soft click of an attestation and maybe even the sigh of relief from an employee who does not have to wade through pages of “defined terms” before getting to the policy itself. “We do want to be realistic with expectations. . . .but we can do better. We can really put human beings at the center of our policies and how we help them. And we can make things they’re never going to love – but they also don’t need to hate the policies,” said Adam Balfour, vice president and general counsel for corporate compliance and vice president for global risk management at Bridgestone Americas. Balfour presented on the importance of employee-centric, palatable policies at the 21st Annual Compliance & Ethics Institute hosted by the Society of Corporate Compliance and Ethics, with Lisa R. Fine, senior counsel and director of compliance at Pearson, an education and technology company. See “Leveraging Policies and Culture: A Recipe for Success” (Jun. 3, 2021).

FCA Seeks Input on Updating Asset Management Regulation

When the U.K. left the European Union (E.U.), it temporarily transferred E.U. financial services legislation into U.K. law, leaving for future consideration which E.U. laws to adopt permanently. In December 2022, His Majesty’s Treasury concluded its Future Regulatory Framework review, which sought to ensure the country’s “regulatory framework for financial services continues to be coherent, agile and internationally respected,” according to the recent discussion paper (Discussion Paper) issued by the U.K. Financial Conduct Authority (FCA). The FCA is seeking views on updating U.K. asset management regulation, including certain rules affecting alternative investment fund managers. This article discusses the key takeaways from the Discussion Paper. Comments on the paper are due by May 22, 2023. See “New FCA Consultation: the U.K. Version of the E.U.’s SFDR?” (Jan. 5, 2023).

CFTC Charges Hedge Fund Adviser With Manipulating Market to Trigger Payouts on FX Swaps

The CFTC recently accused a commodity pool operator and hedge fund adviser, as well as their founder and principal, of engaging in a fraudulent scheme to manipulate the U.S. dollar-South African rand exchange rate to secure $30 million in payments under two “one touch” binary options held by the funds they managed. The founder allegedly caused the funds that held the options to sell hundreds of millions of dollars in exchange for rands to drive the exchange rate down to the barrier level that would trigger payment by the counterparty to each option. The CFTC also accused the defendants of supervisory failures associated with the alleged fraud. This article details the CFTC’s complaint. See “CFTC Enforcement Report Reflects Strong Focus on Digital Assets” (Dec. 22, 2022); as well as our two-part review of CFTC activity: “Enforcement Actions” (Apr. 15, 2021); and “Regulatory Actions” (Apr. 29, 2021).

Former SEC Commissioner Allison Herren Lee Joins Whistleblower Law Firm

Allison Herren Lee, a former SEC Commissioner, has joined whistleblower law firm Kohn, Kohn & Colapinto as counsel. Lee’s practice focuses on representing whistleblowers reporting securities, commodities, banking and capital markets law violations, including a focus on environmental, social and governance (ESG). For coverage of a speech Lee made on ESG while at the SEC, see “Acting SEC Chair Outlines Commission’s Approach to ESG” (Apr. 1, 2021).