May 23, 2024

Impact of Amendments to QPAM Exemption on ERISA Funds

Pension plans commonly invest in hedge funds. Managers that accept investments from pension plans, however, may need to comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). For example, if a benefit plan investor owns more than 25 percent of any class of a fund’s equity securities, the fund could be deemed a “plan asset fund” subject to ERISA – including its prohibition against transactions with “parties in interest.” Thus, many managers of plan asset funds rely on an exemption from ERISA’s prohibited transaction rules for “qualified professional asset managers” (QPAM). On April 3, 2024, the U.S. Department of Labor made some fairly significant amendments to the QPAM exemption (Amendments), which take effect June 17, 2024. The Hedge Fund Law Report spoke to Bradley C. Fay, partner at Seward & Kissel, about those changes. This article summarizes the Amendments and shares Fay’s perspective on them, as well as the steps fund managers impacted by the changes should take to comply with the new requirements. For a look at pension plan investing, see “Family Offices, Endowments and Foundations Drive Interest in Hedge Funds, According to New Study” (Mar. 17, 2022).

High Level Takeaways and Observations About the Potential Impact of the Final Private Fund Rules

The SEC adopted final rules for private fund advisers (Rules) in 2023 that introduce significant reporting and disclosure requirements on private fund managers. Since the Rules were issued, everyone has been focused on the details of what steps managers will need to take to become compliant. It can be helpful, however, to step back and consider some of the macro-level ramifications and takeaways from the Rules, including what they say about the direction of the industry and future avenues of SEC scrutiny. To help managers gain a broad perspective about the Rules alongside other coverage that delves into key details, the Hedge Fund Law Report interviewed a number of experts who shared insights and high-level observations about the potential impact of the Rules going forward. This article summarizes relevant feedback from those conversations, including the probable growth in the use of service providers, shifting of expenses to limited partners (LPs), potential pathway for retailization and likely manifestation of SEC exam scrutiny. See our two-part series on the Rules: “Overview and Key Changes From the Proposal” (Sep. 28, 2023); and “Key Compliance Challenges and Next Steps” (Oct. 12, 2023).

SEC Risk Alert Announces Exams of Firms’ Preparations for T+1 Settlement

On February 15, 2023, the SEC adopted final rules (Rules) shortening the standard settlement time for securities transactions from the current two business days after the trade date to one business day after the trade date (T+1). The Rules also shorten the process for confirming and affirming trade information and facilitate so-called “straight-through processing” of securities transactions. The Rules take effect for most broker-dealer transactions on May 28, 2024. In anticipation of that date, the SEC Division of Examinations (Exams) issued a Risk Alert reminding registrants it will continue to assess their preparedness for the change through examinations and outreach and detailing the information Exams will request. “As May 28, 2024, nears, it is critical that Registrants and other market participants prepare for the shortened settlement cycle and understand the impacts of T+1 and the [Rules] to identify necessary changes and critical dependencies in order to successfully manage this transition,” Exams advised. This article discusses the Risk Alert, with commentary from Genna Garver, partner at Troutman Pepper, and Charles A. Sommers, partner at Sidley Austin LLP. See “SEC Adopts Final Rules on Trade Clearance and Settlement” (May 11, 2023).

SEC Settlements Target “AI Washing”

Even as the SEC considers new rules to address evolving market practices and technological innovations, it continues to use its existing enforcement tools to pursue misconduct in fast-developing areas. Recently settled enforcement actions are a shot across the bow of investment advisers that claim to use artificial intelligence (AI) to enhance their investment processes. Both firms allegedly claimed to use AI in their operations when, in fact, they did not. “We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies,” said SEC Chair Gary Gensler in the press release announcing the resolutions. “Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.” This article parses the settlements, with insights from Amy Jane Longo, partner at Ropes & Gray, and Christian D. H. Schultz, partner at Arnold & Porter. See our four-part AI compliance playbook: “Traditional Risk Controls for Cutting‑Edge Algorithms” (Sep. 29, 2022); “Seven Questions to Ask Before Regulators or Reporters Do” (Oct. 6, 2022); “Understanding Algorithm Audits” (Oct. 13, 2022); and “Adapting the Three Lines Framework for AI Innovations” (Oct. 20, 2022).

Key Developments & Considerations in ESG Regulations for Asset Managers Navigating Global Compliance Duties

Environmental, social and governance (ESG) issues and considerations have become increasingly important to societies generally, investors, asset managers and, as a result, regulators and legislators across the globe. As more ESG rules are adopted in various jurisdictions, it may be challenging for global asset managers to comply with co‑existing obligations in different regions. To assist asset managers in considering their obligations in the ESG space, Sidley Austin hosted a panel in its Private Funds 2024 event, which featured firm partners Leonard Ng, Dominic James and Christian E. Pilhofer, as well as managing director and CCO of CVC Credit Anna Spector. This article summarizes the key takeaways from the program. For additional insights from Ng, see “FCA Identifies Regulatory Priorities for Alternative Investment Managers” (Oct. 13, 2022); and “FCA Details Shortcomings of ‘Host’ Authorized Fund Managers” (Aug. 26, 2021).

Funds Lawyer Joshua Cohen Joins Norton Rose in Chicago

Norton Rose Fulbright announced that investment funds lawyer Joshua Cohen has joined the firm in the Chicago office as a partner. Cohen has extensive experience advising clients in the formation, structuring and maintenance of open- and closed-end private funds, including hedge funds, private equity funds, credit funds, hybrid funds, fund of funds vehicles, liquid alternative mutual funds and scalable platforms for fund sponsors. For insights from other Norton Rose attorneys, see “Canadian ‘Alternative Funds’ Proposal Would Offer Hedge Fund Managers Access to Retail Investor Market” (Jun. 22, 2017).