Jul. 18, 2024

Dissecting the Fifth Circuit’s Vacatur of the Private Fund Adviser Rules and Its Implications

When the SEC released its suite of proposed rules for private fund advisers, the industry inundated the regulator with extensive comments on numerous elements of the proposal. Unfortunately, the August 2023 release of the final version of the private fund adviser rules (PFAR) did little to assuage the concerns raised by the commentors. As a result, several industry organizations sued the SEC in the U.S. Court of Appeals for the Fifth Circuit (Court), arguing, among other things, that the agency lacked the authority to issue the PFAR. As hedge fund managers were diligently working on becoming compliant with the PFAR by the compliance deadline, the Court vacated the entire package on June 5, 2024. The Hedge Fund Law Report spoke to Genna N. Garver, partner at Troutman Pepper, about the Court’s landmark decision. This article summarizes the decision and shares Garver’s perspective on it and its implications for the PFAR, as well as for other final and proposed SEC rules that impact hedge fund managers. For additional commentary from Garver, see “SEC Risk Alert Announces Exams of Firms’ Preparations for T+1 Settlement” (May 23, 2024); “Marketing Rule Risk Alert Forecasts Coming Exams” (Oct. 20, 2022); and “A Look at the NSCP’s Firm and CCO Liability Framework” (Feb. 24, 2022).

Compliance Program Implementation: Compliance Calendars and Testing

Once an adviser has established a compliance program with appropriate policies and procedures, it must implement that program effectively. An ACA Group presentation that is part of its ongoing “Building a Gold Standard Compliance Program” focused on two important elements of program implementation: compliance calendars and compliance testing. The program, which featured ACA Group’s Cari Hopfensperger, director, and Jaqueline Hummel, director of thought leadership, explored creating a compliance calendar; assigning responsibility for compliance; identifying common test areas; using trade blotters and other available information for testing; incorporating testing into the annual compliance review; and embedding compliance throughout an organization. This article synthesizes their insights. See our three-part series on tailoring a compliance program: “Why Fund Managers Should Customize” (Jul. 16, 2020); “What Fund Managers Should Consider” (Jul. 23, 2020); and “When Fund Managers Should Review and Update” (Jul. 30, 2020).

Advancing Diversity, Equity and Inclusion in the Alternative Investment Industry

There has been considerable backlash against efforts to address environmental, social and governance (ESG) issues in the asset management industry. Promoting diversity, equity and inclusion (DEI) is a key element of the “S” in ESG. DEI has also come under fire. For example, the U.S. Court of Appeals for the 11th Circuit granted a motion for an injunction pending appeal against a race-conscious grant program sponsored by the Fearless Fund. A PLI program examined the chilling effect of that decision on DEI efforts, ways to insulate DEI programs from similar challenges and other means of advancing DEI in the alternative investment industry. Ira P. Kustin, partner at Akin Gump, moderated the discussion, which featured William Burckart, co‑founder and co‑general partner of Colorful Capital; Chrishon McManus, senior counsel at Allspring Global Investments; Michelle Noyes, Head of Americas for the Alternative Investment Management Association; and Laura T. Schnaidt, founder of Women in Funds. This article distills their insights. See “SEC Releases First Report on Registrants’ D&I Policies and Practices” (Jun. 2, 2022).

Top Tips for Effective GC Succession Planning and Training

Succession planning is part of good corporate governance, and many firms expect their GCs to develop a succession plan for their role. However, the process can be complicated and require some sensitive navigation. To assist GCs in creating effective succession plans, BarkerGilmore hosted an expert panel moderated by Audrey Rubin, senior advisor at BarkerGilmore, which featured Jack Zemp, vice president, chief legal officer (Americas) and secretary of Allianz Partners; and Paulette Dodson, former GC and corporate secretary of Alight Solutions. The panelists discussed their respective approaches to succession planning, the benefits of succession planning and best practices around implementation. This article summarizes the key takeaways from the program. For additional insights offered by BarkerGilmore, see “Majority of In‑House Counsel Satisfied With Compensation, but Gender Gap Remains, Survey Finds” (Jul. 23, 2020); and “Survey Benchmarks Compliance Personnel Compensation by Company Type, Revenue, Gender, Education and Industry” (Aug. 29, 2019).

SEC Penalizes Fund Administrator for Missing Red Flags

The SEC has long viewed fund administrators, attorneys and auditors as “gatekeepers” that play an important role in preventing fraud and protecting investors. For example, the SEC took action against a fund administrator that allegedly missed multiple red flags during its 14‑month engagement as administrator of a hedge fund. Critically, the administrator agreed to offset trading losses incurred by the fund with a purported receivable from the fund’s manager without making any inquiries about the nature of the receivable. As a result, the investor account statements prepared by the administrator showed consistent positive performance and asset growth – even though the fund was actually losing money. As it happens, the administrator was involved at the very outset of what the SEC contends in a pending civil enforcement action against the fund’s manager and its principal is a Ponzi-like fraud that ran from 2018 until 2022. This article details the administrator’s alleged failures, the underlying fraud and the settlement with the SEC, with commentary from Adam S. Aderton, partner at Willkie Farr & Gallagher and former Co‑Chief of the Asset Management Unit of the SEC’s Division of Enforcement. See “Auditor and Engagement Partner Sanctioned for Inadequate Audit Procedures for Level 3 Assets” (Aug. 31, 2023); and “Gatekeepers and Service Providers Remain in the SEC’s Crosshairs” (Dec. 3, 2020).

Former GC and CCO Joins Crowell & Moring

Christopher Mendez, a former GC and CCO, has joined Crowell & Moring as senior counsel in the New York office. Mendez is an experienced alternative investment attorney whose expertise spans the broader investment management industry, including advising on complex fund formation and transactional matters, as well as SEC examinations and enforcement actions. See our three-part series on the first 100 days as GC/CCO: “Preparing for the Role and Setting the Tone” (Apr. 29, 2021); “Developing Knowledge and Forging Key Relationships” (May 6, 2021); and “Managing Daily Work, Performing Risk Assessments and Looking Ahead” (May 13, 2021).