Sep. 19, 2019

AI for Fund Managers: Automating the Legal Department and Maintaining Privacy (Part Three of Three)

Artificial intelligence (AI) can be used to increase the effectiveness of in-house legal departments, allowing attorneys to focus more of their time on value-adding, strategic services. Leveraging AI in this way does, however, entail risks, so general counsels must ensure it is properly integrated. Fund managers must also reassess their compliance with applicable privacy laws given that AI may increase the types of data that they collect. This article, the third in a three-part series, evaluates how fund managers can automate their legal departments and what they should do to ensure that they maintain their data subjects’ privacy. The first article explored what AI is; how prevalent it is in the funds industry; how it can be used; how fund managers can determine what functions to automate and what obstacles may interfere with implementing AI solutions; and whether humans are still needed in the process. The second article analyzed what the U.S. government and others are doing to both promote AI and foster its responsible use; how fund managers should diligence and contract with third-party AI service providers; and what risks of bias exist. See “How Fund Managers Can Use Technology to Transform and Streamline Complex Legal Operations: One Manager’s Example” (Jul. 18, 2019).

Strategies and Tactics for Developing an Effective Tabletop Exercise (Part One of Two)

An incident response plan is a critical component of a cybersecurity program. A tabletop exercise can be used to test whether a response plan functions as desired and to identify gaps and other weaknesses in a firm’s cyber preparedness. The Hedge Fund Law Report and the Cybersecurity Law Report recently presented a seminar, entitled “Conducting an Effective Tabletop Exercise,” which delved into the appropriate development and conduct of tabletop exercises. Shaw Horton, Associate Editor of the Hedge Fund Law Report, moderated the panel, which featured Luke Dembosky, partner at Debevoise & Plimpton and former DOJ prosecutor; John “Four” Flynn, chief information security officer of Uber; and Jill Abitbol, Senior Editor of the Cybersecurity Law Report. This article, the first in a two-part series, addresses how fund managers can effectively develop tabletop exercises, including whether they should be conducted in-house or externally; who should participate; what role counsel should play; and how frequent and long they should be. The second article will outline ways advisers can successfully conduct tabletop exercises, including their content and scope; participant engagement; common errors; and follow-up. For further commentary from Dembosky on this subject, see “How Fund Managers Can Establish Effective Incident Response Plans” (Jul. 18, 2019). See also our three-part series on how fund managers should structure their cybersecurity programs: “Background and Best Practices” (Mar. 22, 2018); “CISO Hiring, Governance Structures and the Role of the CCO” (Apr. 5, 2018); and “Stakeholder Communication, Outsourcing, Co-Sourcing and Managing Third Parties” (Apr. 12, 2018).

SEC Chair Defends Regulation Best Interest and Investment Adviser Fiduciary Duty

In June 2019, the SEC adopted a package of rules and interpretations intended to enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers. While the SEC believes that the rulemaking package builds on its history of broker-dealer and investment adviser regulations and will benefit Main Street investors, there has been significant criticism from commentators – particularly regarding Regulation Best Interest and the Fiduciary Interpretation. SEC Chair Jay Clayton summarized the rulemaking package and addressed several of the most prevalent critiques in a recent speech. Clayton strongly defended the rules and interpretations, stating that some of the commentary had, in his view, “shown a lack of understanding of the law and legal obligations of financial professionals, both before and after adoption of our rulemaking package,” which solidified his view that the SEC’s actions were timely and appropriate. This article summarizes the key points from Clayton’s speech. For coverage of other speeches by Clayton, see “SEC Chair Offers Observations on Culture at Fund Managers and the SEC” (Jun. 28, 2018); and “SEC Chair Outlines Approach to Dodd-Frank Rulemaking and Expectations for Fund ‘Gatekeepers’” (Feb. 15, 2018). To further explore some of the items mentioned in Clayton’s speech, on Thursday, October 3, 2019, at 1:00 p.m. EDT, the Hedge Fund Law Report will host a complimentary webinar, entitled “Focus on Private Funds: A Fireside Chat With SEC Commissioner Hester M. Peirce.” During the program, Robin L. Barton, Senior Reporter for the Hedge Fund Law Report, and Commissioner Peirce will discuss various topics of interest to private fund managers, and Commissioner Peirce will also answer attendees’ questions during a Q&A session at the end of the webinar. To register for the webinar, click here.

NFA Bars CPO and Its Principal for Misleading Investors and Falsely Inflating Asset Values

The SEC is not the only regulator of which private fund advisers must be mindful. Advisers that trade futures, swaps and certain other derivatives may also fall under the watchful eye of the NFA. Taking aggressive action against fairly egregious misconduct, the NFA’s Business Conduct Committee (BCC) recently barred a commodity pool operator/commodity trading advisor and its principal from NFA membership for allegedly charging incentive fees on fictitiously valued assets; making misleading statements to pool participants, including promising to indemnify investors for trading losses notwithstanding the fact that they did not have the financial wherewithal to fulfill those obligations; and failing to cooperate with NFA examiners. This article discusses the relevant facts set forth in the BCC’s complaint and its decision. For coverage of another recent NFA proceeding, see “NFA Sanctions CPO and Principal for Performance Advertising Violations” (Jul. 11, 2019).

EY Study Examines the Evolution of the Legal Function

Legal departments are facing various challenges, including increasing workloads and regulatory demands; tight budgets; competition for talent; and the need to adapt to evolving technology. EY recently surveyed more than a thousand legal professionals from around the globe to find out how they and their organizations are addressing a potentially “seismic operational shift” in delivery of legal services. This article presents the key takeaways from EY’s survey report, as well as commentary from Cornelius Grossman, EY global law leader. For another recent study of the legal function, see “Forbes Insights and K&L Gates Examine How Financial Executives and GCs Are Responding to Technological Disruption” (May 9, 2019).