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    Oct. 24, 2024

A Look at the State of the Industry on the 75th Anniversary of the First Hedge Fund’s Launch

Seventy-five years ago, the first hedge fund – A.W. Jones – was launched. Founded by journalist Alfred Winslow Jones in 1949 with the assistance of attorneys at Seward & Kissel, the investment fund launched with a mere $100,000 in capital and was unique at the time because it used a “hedged” strategy, making it a “hedged” fund. The Hedge Fund Law Report spoke with Patricia A. Poglinco, partner at Seward & Kissel and co‑head of the firm’s investment management group, and James Cofer, managing partner and head of the firm’s tax practice, about the launch of the first hedge fund, how the private fund space has evolved since then, current trends in the space and what future developments might occur. This article shares this discussion. For more insights from Poglinco, see “Navigating the New FinCEN Beneficial Ownership Reporting Regime” (Feb. 15, 2024); and “Compliance Issues Associated With Advisers’ Integration of ESG Criteria” (Mar. 31, 2022).

Dos and Don’ts for Employee Use of Generative AI

When the public started using ChatGPT, companies issued all-workforce warnings to halt or strictly limit employees’ use of it and other breakthrough generative artificial intelligence (Gen AI) tools. Many companies then handed out memos with dos and don’ts for using Gen AI on the job. Many software suppliers have since released Gen AI tools tailored to business use. With these enhancements, companies run the programs behind their systems’ firewalls – which allows security checks – and train Gen AI using only in‑house data, reducing the risks of proprietary data leaking into public searches. A lot of companies have now updated their rules to steer employees away from public third-party Gen AI tools, even for brainstorming. This article examines employers’ shift in Gen AI policies and practices, including training and risk assessment, and presents several dos and don’ts for employees’ Gen AI use. See “How to Apply Alt Data Best Practices to AI Systems” (Oct. 10, 2024).

Performance Advertising Is a Significant Pain Point Under the Marketing Rule

The SEC’s Marketing Rule – Rule 206(4)‑1 under the Investment Advisers Act of 1940 – came into effect in November 2022. A year later, Seward & Kissel conducted a study of more than 120 investment advisers to assess market participants’ perspectives on the practical effects of the Marketing Rule. The survey results suggest that the much-heralded modernization of the SEC’s rules for advertising and client solicitation has not resulted in significant changes in how advisers market their services but has created significant challenges, particularly with respect to performance advertising and client communications. This article discusses the study’s findings, with commentary from Seward & Kissel partner Paul M. Miller, who co-led the study with partner Daniel Bressler. See our two-part series on the Marketing Rule: “Key Takeaways for Private Fund Managers” (Mar. 18, 2021); and “Next Steps for Legal and Compliance” (Mar. 25, 2021).

SEC’s Grewal Discusses Enforcement’s Focus on Preventing False and Misleading ESG Claims

The SEC’s oft-repeated mission is to protect investors; maintain orderly and fair markets; and facilitate capital formation. The Commission has additional motives, however, including using the SEC Division of Enforcement’s (Division) robust enforcement efforts to restore declining public trust in the financial markets and foster a culture of compliance. The Division has directed its efforts at environmental, social and governance (ESG) matters, primarily by applying longstanding antifraud and investor protection provisions to allegedly false or misleading claims concerning ESG, according to Gurbir S. Grewal, then Director of the Division, in remarks at the Ohio State Law Journal Symposium. The Division’s stance toward ESG is a bit nuanced, however, as he stressed that “[t]he Commission is not an environmental regulator.” It is worth noting that Grewal, who left the SEC on October 11, 2024, gave his remarks in his official capacity as Director of the Division and that, accordingly, they did not necessarily reflect the views of the SEC, its commissioners or other members of its staff. This article synthesizes his observations. See “SEC Commissioner Uyeda and Enforcement Director Grewal Discuss Compliance Challenges and CCO Liability” (Dec. 7, 2023).

SEC Charges Cannabis Fund Adviser and Principal With Defrauding Investors

The SEC charged a fund adviser and its founder/principal with defrauding investors in funds focused on the cannabis industry. The defendants allegedly misrepresented how their funds would deploy capital and made Ponzi-like payments to investors when the funds did not generate sufficient income to pay promised returns. Additionally, the founder/principal allegedly misappropriated at least $668,000 from the funds he managed. The adviser has already settled with the SEC; the action against the founder/principal, who was forced out of the adviser in 2019, is pending. This article details the alleged fraudulent conduct, the SEC’s claims and the adviser’s settlement. See our four-part series on investing in cannabis: “Legal Background, Justice Department Guidance and State Legalization” (May 9, 2019); “Structuring Investments, Due Diligence, Offering Documents and the BSA” (May 16, 2019); “Implications of Federal Illegality and Residency Requirements” (May 30, 2019); and “International Investments, Public Perception, Valuation and Service Providers” (Jun. 6, 2019).

Lowenstein Sandler Adds Former GC/CCO to Investment Management Group

Courtney B. Posner, former GC and CCO at an alternative asset manager, has joined Lowenstein Sandler as a partner in its investment management group. Based in the firm’s New York City office, Posner has more than 17 years of experience in fund formation and structuring; regulatory compliance; and operational best practices in the investment management industry. For insights from other Lowenstein partners, see “Key Takeaways From the Latest Round of Form PF Amendments (Part Two of Two)” (Jun. 20, 2024); and “Driven by AI, Private Funds’ Use of Alternative Data Continues to Grow, Survey Finds” (Feb. 15, 2024).

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