Jun. 20, 2024

Compliance Corner Q3‑2024: Regulatory Filings and Other Considerations Hedge Fund Managers Should Note in the Coming Quarter

This twenty-ninth installment of the Hedge Fund Law Report’s quarterly compliance update highlights upcoming filing deadlines and reporting requirements fund managers should be aware of during the third quarter of 2024. This guest article by ACA Group consultants Luis Garcia, Grazia Gatti and Dan Campbell also includes information on a recent joint proposal by the Financial Crimes Enforcement Network and SEC that would require investment advisers to adopt customer identification programs; amendments to Regulation S‑P that will require a data breach incident response plan and customer notification process; and a recent SEC enforcement action concerning an adviser’s failure to disclose conflicts of interest. For more from the ACA Group, see “Testing Is an Integral Component of Compliance Programs” (May 9, 2024).

Key Takeaways from the Latest Round of Form PF Amendments (Part Two of Two)

Among the many rulemakings that have come out of the SEC in the last few years are several targeting Form PF, including the most recent amendments (Amendments) from both the SEC and CFTC. The granular reporting on large hedge funds that will be required by the Amendments, together with the increased reporting under previous Form PF amendments, will further increase the burden on private fund managers and their compliance staffs. The Amendments and the adopting release were published in the Federal Register on March 12, 2024, and will take effect on March 12, 2025. This second article in our two-part series provides key takeaways from the Amendments and next steps for hedge fund managers. The first article outlined the specific provisions and requirements set forth in the Amendments. See our two-part series on the originally proposed amendments to Form PF: “Overview and Goals” (Sep. 15, 2022); and “Rationale, Commissioner Views and Need for Comments” (Sep. 22, 2022).

Parsing the DOL’s Amended Definition of Investment Advice Fiduciary and PTE 2020‑02

In April 2024, the U.S. Department of Labor released a final retirement security rule (Rule), updating the definition of “investment advice fiduciary” under the Employee Retirement Security Act of 1974 (ERISA) by defining when a person renders “investment advice for a fee or other compensation” with respect to an ERISA employee benefit plan. Concurrently with the Rule, the DOL adopted amendments to certain prohibited transaction exemptions (PTEs), including PTE 2020‑02, which permits an investment advice fiduciary to receive reasonable compensation for its services in certain circumstances. In a recent presentation, K&L Gates partners Ruth E. Delaney and Robert L. Sichel discussed the significant changes effected by the Rule and amended PTE 2020‑02. This article synthesizes the key takeaways from the program. See “Now That the DOL’s Fiduciary Rule Has Been Vacated by the Fifth Circuit, What Are the Implications for Fund Managers?” (Jun. 28, 2018).

Blind Reliance on Compliance Consultant Costs Webull Financial

Many financial services firms rely on compliance consultants for assistance with their compliance programs. Some outsource the CCO function entirely. As with any third-party service provider, however, a registered investment adviser or broker-dealer remains ultimately responsible for ensuring compliance with all applicable laws and regulations. An enforcement proceeding by the Massachusetts Securities Division (Division) against online brokerage Webull Financial LLC (Webull) shows the dangers of blind reliance on a compliance consultant. Webull’s unnamed compliance consultant allegedly provided reports and made regulatory findings with material inaccuracies that Webull failed to catch. This article parses the Division’s Consent Order against Webull, with commentary from Krista Zipfel, director at ACA Group (ACA). Zipfel noted that ACA does not comment on specific entities or enforcement matters; thus, her remarks addressed industry-wide compliance concerns. See our two-part series on the 2016 SEC risk alert on outsourced CCOs: Part One (Mar. 3, 2016); and Part Two (Mar. 10, 2016).

Evaluating the CFTC’s Actions in 2023 and the Outlook for 2024

In 2023, the CFTC issued a raft of rulemaking proposals, guidance and requests for comments that add up to a major overhaul of how the derivatives market is governed, albeit an as-yet-incomplete one. Longtime concerns such as separately margined accounts; political event markets; the efficacy of existing rules under the Dodd-Frank Act of 2010; swaps reporting and recordkeeping; international harmonization; artificial intelligence; cryptocurrencies; and decentralized finance were all on the agenda. Last year was also the busiest on record for the agency in terms of enforcement. To review the CFTC’s full 2023 agenda, its actions so far in 2024 and what might happen before the November 2024 U.S. elections, WilmerHale hosted a webinar that featured partners Matthew B. Kulkin, former director of the CFTC’s Division of Swap Dealer and Intermediary Oversight, Elizabeth L. Mitchell and Tiffany J. Smith, and special counsels Matthew Beville and Megan O’Flynn. This article summarizes the panelists’ thoughts. For additional commentary from WilmerHale attorneys, see our two-part series on prior CFTC activity: “Enforcement Actions” (Apr. 15, 2021); and “Regulatory Actions” (Apr. 29, 2021).

Former MFA Counsel Rachel Gerwin Joins Cleary Gottlieb’s New York Office

Cleary Gottlieb announced that Rachel (Grand) Gerwin has joined the firm as counsel in the New York office, focusing on regulatory matters related to private funds. Her practice will include advising private funds and other alternative asset managers on the regulatory aspects of capital raising, investor disclosure matters, fund formation, co-investments, joint ventures, shareholding arrangements, managed accounts and other structures. She will also advise SEC-registered investment advisers; exempt reporting advisers; and U.S. and non-U.S. asset managers on Investment Advisers Act of 1940 compliance matters and SEC examination issues, as well as cross-border marketing and governance considerations. For insights from other Cleary attorneys, see “Current and Former Enforcement Staffs’ Tips for Litigating Against the SEC” (Aug. 17, 2023).