• |

    Mar. 9, 2023

Ongoing SEC Sweep Targets Advisers’ Off‑Channel Electronic Communication Recordkeeping Practices

In recent months, multiple private fund managers have received document request lists from the SEC related to electronic communications. That SEC sweep follows on the heels of a September 2022 announcement by the SEC’s Division of Enforcement that 16 broker-dealers had been fined a total of $1.1 billion for failing to properly retain off-channel communications. Those concerted SEC efforts are targeting a unique vulnerability of fund managers, given the prolonged period of remote work prompted by the coronavirus pandemic and the inherent technological difficulties of monitoring off-channel communications via WhatsApp and other mediums. The result is that even fund managers with thorough, robust practices may fall victim to the strict liability that accompanies those recordkeeping violations. To help fund managers prepare for SEC scrutiny, the Private Equity Law Report reviewed the latest SEC document request list - a copy of which is linked in this article - and interviewed several industry experts about the scope of the SEC’s sweep, its interplay with the previous broker-dealer sweep, important facets of the ongoing sweep and useful tips for how managers can prepare for unwanted scrutiny. This article summarizes key takeaways on the topic. See our three-part series on electronic communications: “Current Technological Landscape and Relevant Regulatory Measures” (Jul. 13, 2021); “Useful Training Techniques and Policies and Procedures to Adopt” (Jul. 20, 2021); and “Using Third Parties for Compliance, Mitigating Social Media Risks and Fulfilling Document Requests” (Jul. 27, 2021).

Real Estate Fund Sponsors Under the Advisers Act: To Register or Not? That Is the Question

Amidst a proliferating wave of new and proposed regulations applicable to registered investment advisers, the ability to operate all or a portion of an investment management business without an obligation to register under the Investment Advisers Act of 1940 (Advisers Act) may look increasingly attractive. In particular, the proposed private fund adviser rules call into question many concepts and provisions that have been standard in the private funds world for years and represent a philosophical shift by the SEC in attempting to prohibit certain commercial terms, regardless of investor sophistication and the extent of disclosure by a fund manager. Despite the regulatory environment, most PE, private credit and hedge fund managers have no choice but to remain registered as investment advisers and abide by all corresponding regulations. Certain real estate-focused managers, however, may have the flexibility to not register under the Advisers Act. In addition, some multi-strategy investment managers that are already registered may have the ability to exclude their real estate business from Advisers Act requirements applicable to their other product lines. In a guest article, DLA Piper partners John D. Reiss, Bradley E. Phipps and Brooke R. Kerendian explore relevant considerations for stand-alone real estate managers determining whether to register under the Advisers Act, as well as for multi-strategy sponsors that wish to consider excluding their real estate business from Advisers Act requirements. For additional insights from Reiss, see “Launching a Real Estate Fund: Key Strategies, Structures and Terms (Part One of Two)” (May 5, 2020).

The Impact of New York City’s New Wage Transparency Law on Private Fund Manager Hiring

On November 1, 2022, a new wage transparency law took effect in New York City that requires employers to include a good faith range of salaries in all advertisements for a job, promotion or transfer opportunity that can or will be performed in New York City. Given the concentration of private fund managers in New York City, the new law will certainly affect their hiring practices in what is an already challenging employment environment. To better understand the new law and its implications for fund managers’ hiring efforts, the Private Equity Law Report spoke to Martin Schmelkin, a partner at Schulte Roth & Zabel LLP  who specializes in representing fund managers in employment matters. This article presents Schmelkin’s thoughts on the law’s scope, requirements and implications. For coverage of another New York City compensation-related law, see “Four Steps NYC-Based Fund Managers Should Take in Light of Newly Enacted Law Prohibiting Compensation History Queries When Interviewing Prospective Employees” (May 11, 2017).

Institutional Investors Lament Lack of ESG Data Received From Fund Managers and the Shortage of Thematic Sustainability Strategies

A recent ACA Group (ACA) program examined institutional investors’ needs and expectations as to environmental, social and governance (ESG) investing and sustainable investing, as well as significant gaps that exist between that demand and what is currently available in the marketplace. The conversation revealed that not only do institutional investors want fund managers to generate more ESG data, but they also want significant improvements in the type of ESG data already provided to better facilitate portfolio monitoring. The discussion was moderated by Dan Carreno, associate director of client development at ACA, and featured Pooja Eppanapally, investment manager at Women of the World Endowment; Nancie Lynch, executive director at Richard and Nancy Marriott Family Foundations; Aaron Brachman, managing director at Washington Wealth Group of Steward Partners, and Luke Wilcox, partner and head of ACA Ethos. This article reviews the discussion and highlights key insights from the program. For coverage of other issues concerning institutional investors, see “The Use of Direct Investments and Co‑Investments to Lure Non‑U.S. Institutional Investors” (Sep. 13, 2022) and “Unique Considerations for Institutional Investors to Achieve 2020 GIPS Compliance” (Mar. 31, 2020).

SEC Sanctions Adviser and CCO for Multiple Compliance Shortcomings, Including Use of Off‑the‑Shelf Policies

Advisers must take seriously their duties to adopt appropriately tailored compliance policies and procedures, as well as codes of ethics. To that end, the use of boilerplate documents is sure to draw SEC scrutiny. In a recent settled enforcement proceeding against an adviser as well as its founder and CCO, the SEC asserted the adviser used inappropriate off-the-shelf policies that were not tailored to its own business and clients; failed to conduct annual compliance reviews; adopted an inadequate code of ethics; and failed to file and post Form CRS by the applicable deadlines. The SEC also claimed the CCO was responsible for all of the firm’s compliance failures. This article details the SEC’s allegations and the terms of the settlement. See “SEC Action and Commissioner Peirce’s Statement Shed Light on CCO Liability” (Oct. 4, 2022); and our two-part series “Thirteen Questions an Adviser’s Principals Should Ask Compliance” Part One (Mar. 29, 2022) and Part Two (Apr. 5, 2022).

Kirkland & Ellis Welcomes Fund Formation Lawyer John Senior in New York

John Senior has joined the New York office of Kirkland & Ellis as a partner in its investment funds group. He has expertise counseling sponsors on the organization and operation of their private funds, as well as advising both sponsors and investors in strategic secondary transactions. See “Latest on Key Terms, Structuring Approaches and Trends in Secondary Transactions and Co‑Investments (Part One of Two)” (Jan. 11, 2022); and “Trends and Developments in Secondary Fund Formation Platforms” (Dec. 7, 2021).

Most-Read Articles