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    May 22, 2025

Grappling With a Key Person Event at a Hedge Fund (Part Two of Two)

Many hedge funds operate as heavily relationship-focused businesses in which the luring of new investors, the cultivation of investor relationships and daily trading and investing all fall within the purview of a single individual or a small number of people. With such authority comes huge responsibility and the need to envision, with meticulous care, what steps will be followed in the event that a key person at a fund dies, suffers a debilitating or long-term illness, leaves or otherwise ceases to have close involvement in operations. Hence, many hedge fund managers include key person provisions in their limited partnership agreements. Fund managers must not only carefully draft key person provisions that are comprehensive and sufficient but also ensure that they follow the terms of those provisions if a key person event should occur. This second article in our two-part series delves into the operational logistics of what happens when a key person event occurs. The first article explained what key person provisions are and in which documents they typically appear; the terms of such provisions, including which personnel they cover, what scenarios could trigger them and investor rights if they are triggered; why they are critical in the SEC’s eyes; and how they relate to succession planning. See “Key Person Provisions in Hedge Fund Documents: Structure, Consequences and Demand From Institutional Investors” (Sep. 17, 2009).

Dealing With Deficiencies: How to Ensure Smooth SEC Examinations and Prepare to Respond to Inevitable Deficiency Letters (Part One of Two)

As many as nine out of every ten SEC examinations result in the staff’s identifying deficiencies in a private fund manager’s business practices or compliance program. The question, then, is not how to prevent staff from the SEC’s Division of Examinations (Examinations) from finding deficiencies during an exam. Instead, fund managers should focus on how to best prepare for such a finding and effectively respond to a deficiency letter in a way that addresses exam staff’s concerns, is not overly burdensome to the business, assuages investors and does not arouse the ire of the SEC’s Division of Enforcement. This first article in a two-part series covers the exam and deficiency letter process; steps fund managers can take before an SEC exam to mitigate damage; and preliminary steps managers should take to prepare their response to a deficiency letter after an exam has ended. The second article will offer tips on ways to respond to Examinations staff upon receiving a deficiency letter; considerations when drafting a deficiency response letter; strategies for implementing the enumerated remedies; and guidance for how and whether to disclose either letter to investors. See our two-part series on the 30th anniversary of Examinations: “Its Creation and Evolution Over the Last 30 Years” (Apr. 10, 2025); and “Its Present State and Possible Future” (Apr. 24, 2025).

FINRA Requests Comment on Potential Changes to Workplace and Other Rules

FINRA Regulatory Notice 25‑07 (Notice), entitled “Supporting Modern Member Workplaces,” seeks input on how the agency can “further evolve its rules, guidance and processes to reflect modern business practices and markets; support innovation and new technologies; promote efficiency; and eliminate unnecessary regulatory burdens – all in the interest of supporting vibrant capital markets in which everyone can participate with confidence.” The Notice solicits comments on rules for branch offices and hybrid work; registration processes; associated persons’ qualifications; communications with customers and associated recordkeeping; certain compensation arrangements; fraud protections; and potential changes to FINRA systems. Comments, which will be made public, should be submitted by July 14, 2025. This article discusses the Notice, with commentary from W. Hardy Callcott, partner at Sidley Austin LLP. See “A Look at FINRA’s 2025 Oversight Report” (Mar. 13, 2025).

To Work Effectively, CCOs Need Authority, Autonomy and Information

Compliance professionals’ seniority within a company, their contact with top decision-makers and their access to necessary information are critical to success in their roles, as is the ability to influence the culture more broadly within an organization. During a panel hosted by the Practising Law Institute, entitled “Empowering Gatekeepers to Enhance Compliance Practices,” McDermott Will & Emery partner Anne Elkins Murray; Miller & Chevalier counsel Richard Gallena; and Booking Holdings vice president Sonia Rye discussed how empowering gatekeepers such as CCOs can enhance compliance. The panel was moderated by Robert Stern, partner at Weil, Gotshal & Manges. This article distills some of the insights shared by the panelists. See “Compliance 5.0: A Culture-Centered Approach” (Aug. 15, 2024).

SEC Continues to Target “AI Washing”

The SEC has been cracking down on false or exaggerated claims regarding use of artificial intelligence (AI), which it refers to as “AI washing.” For example, the SEC claimed that a registered investment adviser and related entities made false and misleading claims about the firms’ use of AI, both in connection with a securities offering and in promoting the investment advisory business. This article details the SEC’s charges and the terms of the settlement, with commentary from Amy Jane Longo, partner at Ropes & Gray, who believes this enforcement action may be a sign of more serious charges to come in future cases of AI washing. See “SEC Settlements Target ‘AI Washing’” (May 23, 2024).

Private Funds Lawyer Samuel Weber Joins Willkie

Private funds lawyer Samuel Weber has joined Willkie Farr & Gallagher as a partner in the asset management department. Based in New York, he advises fund sponsors on a wide range of strategic and operational matters, including the formation, marketing and management of private investment funds; portfolio investment activities; fund regulatory and compliance matters; and firm ownership and operational issues. For commentary from other Willkie partners, see “SEC Penalizes Fund Administrator for Missing Red Flags” (Jul. 18, 2024); and “A Guide to Article 8 and 9 Funds in Europe” (Apr. 11, 2024).

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Women to Watch: Contributions, Achievements and Observations of Outstanding Female Professionals

To mark International Women’s Day, women editors and reporters at ION Analytics interviewed outstanding women in the industries and jurisdictions we cover. In this part, Law Report Group editors Jill Abitbol, Robin L. Barton and Megan Zwiebel profile notable women in data privacy, cybersecurity, private funds and anti-corruption law, including Anne-Gabrielle Haie, Jessica Lee, Micaela McMurrough, Laura Perkins, Amanda Raad, Madelyn Calabrese, Ranah Esmaili and Genna Garver. Enjoy reading their inspiring remarks here.