Ropes & Gray’s Investment Management Update December 2021 – January 2022 – Finance and Banking

The following summarizes a number of recent legal developments
of note affecting the mutual fund/investment management
industry:

SEC Proposes Updates to Form PF

On January 26, 2022, the SEC issued a release proposing
amendments to Form PF (the “Proposal”). The Proposal
includes (i) new current reporting requirements for large hedge
fund advisers¹ and advisers to private equity funds,
obligating such advisers to report a number of specified events to
the SEC within one business day of their occurrence, (ii) a lowered
threshold for large private equity adviser reporting, (iii) certain
revised reporting questions for private equity funds and (iv)
enhanced large liquidity fund adviser reporting.

We provided a detailed summary and our commentary in a recent
Ropes & Gray Alert.

SEC’s Regulatory Agenda Criticized by Republican
Commissioners

In the spring and fall of each year, the SEC updates its
regulatory agenda. The items listed in the agenda “reflect
only the priorities of the Chair of the [SEC] and do not
necessarily reflect the view and priorities of any individual
Commissioner.” The SEC’s fall regulatory agenda, reflecting Chair
Gensler’s priorities, was published in December 2021. Within
days of publication, Commissioners Peirce and Roisman issued a
joint public statement titled Falling Further
Back – Statement on Chair Gensler’s Regulatory Agenda,
which included their criticisms of the agenda, including criticisms
relevant to the investment management community.

Rule 17a-7

With respect to Rule 17a-7 (the rule permitting certain cross
trades by registered investment companies), the commissioners’
joint statement said:

[T]he Agenda abandons the much-needed
effort to amend Investment Company Act Rule 17a-7, which governs
cross-trading by investment companies. In December 2020, with our
support, the Commission adopted a new rule addressing investment
company valuation practices. Commenters cautioned us that the
rule’s definition of “readily available market
quotations” risked disrupting investment companies’
ability to trade fixed income securities, which do not often have
readily available market quotations, with affiliated funds. To
assuage these concerns, the Division of Investment Management
issued a request for comment “on ways to enhance the
regulatory regime governing investment company cross trading.”
Commenters have been nearly unanimous in conveying the importance
of funds’ ability to trade fixed-income securities across
affiliated funds. Many commenters also have recommended conditions
to ensure the protection of fund investors. The Commission’s
Spring 2021 rulemaking agenda stated that the “Division [of
Investment Management] is considering recommending that the
Commission propose amendments to rule 17a-7[.]” Yet now,
despite the demonstrated need for such amendments, the Agenda
simply drops the planned rewrite of Rule 17a-7. As a consequence,
we will not fix a problem of which we are aware – the impending
inability of funds to cross-trade fixed-income securities – and we
will miss a chance to modernize an outdated rule.

Digital Assets

At present, the SEC effectively prohibits registered investment
companies from investing directly in digital assets, most notably,
cryptocurrencies. Chair Gensler has previously recognized the
variability of regulatory oversight of digital assets and cautioned
about its potential pitfalls. He testified in May 2021 before a
U.S. House of Representatives sub-committee that:

There are many challenges and gaps
for investor protection in these markets. Tokens currently on the
market that are securities may be offered, sold, and traded in
non-compliance with the federal securities laws. Furthermore, none
of the exchanges trading crypto tokens has registered yet as an
exchange with the SEC. Altogether, this has led to substantially
less investor protection than in our traditional securities
markets, and to correspondingly greater opportunities for fraud and
manipulation.

In their joint statement, Commissioners Peirce and Roisman
said:

The Agenda also comes up short on
furthering the investor protection prong of our mission by failing
to provide more clarity on digital assets. First, the Agenda makes
no mention of any regulation with respect to digital assets. In the
last several years, this sector has grown in size, complexity,
diversity, and investor interest. Rather than taking on the
difficult task of formulating rules to allow investors and
regulated entities to interact with digital assets, including
digital asset securities, the Agenda – through its silence on
crypto – signals that the market can expect continued questions
around the application of our securities laws to this area of
increasing investor interest. Such silence emboldens fraudsters and
hinders conscientious participants who want to comply with the
law.

Commissioner Roisman submitted his resignation from the SEC
(indicating his intent to step down by the end of January 2022)
approximately one week after Commissioner Peirce and he issued
their joint statement.

SEC Issues Holding Foreign Companies Accountable Act Rules

On December 2, 2021, the SEC issued a release (the “Release“) containing final rules and form
amendments (collectively, the “Rules”) to implement the
disclosure and submission requirements of the Holding Foreign
Companies Accountable Act (the “HFCA Act”), which became
law on December 18, 2020.² The Rules, which became
effective on January 10, 2022, provide for a process by which the
SEC will identify a “Commission-Identified Issuer,” most
of which are expected to be issuers based in China, and potentially
prohibit the trading of these issuers’ securities on a national
securities exchange or in the over-the-counter market.

• Commission-Identified Issuers are issuers that have filed an
  annual report containing an audit report issued by a foreign public
  accounting firm that the Public Company Accounting Oversight Board
  (the “PCAOB”) cannot inspect or investigate completely
  because of a position taken by an authority in the foreign
  jurisdiction (each such issuer, a “PCAOB-Identified
  Firm”).³




• The Rules provide that a Commission-Identified Issuer must
  submit documentation to the SEC establishing that the issuer is not
  owned or controlled by a governmental entity in the foreign
  jurisdiction. This requirement does not apply to a
  Commission-Identified Issuer that is so owned or controlled.




• If an issuer remains a Commission-Identified Issuer for three
  consecutive years, the SEC will prohibit the trading of that
  issuer’s securities on a national securities exchange or over
  the counter. The earliest such a prohibition can apply is in
  2024.




• Separately, additional disclosure requirements apply to any
  Commission-Identified Issuer that is a “foreign issuer,”
  as defined under Exchange Act Rule 3b-4 (each a
  “Commission-Identified Foreign Issuer”).

Designation as a Commission-Identified Issuer

The Release describes the process by which the SEC will
provisionally identify a registrant as a Commission-Identified
Issuer and by which a registrant that is provisionally identified
as such may contest the designation with the SEC. The SEC’s
provisional identification of an issuer as a Commission-Identified
Issuer will be conclusive if not contested by the issuer within 15
business days. The SEC will publicly disclose a list of
provisionally and conclusively identified Commission-Identified
Issuers on its website.

The SEC will begin to identify registrants as
Commission-Identified Issuers on its website after registrants file
their annual reports for 2021.

Submission Requirements and Disclosure Requirements

The Rules finalize amendments to Forms 10-K, 20-F, 40-F and
N-CSR⁴ to implement “submission requirements”
and “disclosure requirements.”

The earliest that the SEC can identify a Commission-Identified
Issuer will be after a registrant files its annual report for 2021
(in which the public accounting firm that audited the financial
statements is identified). This means that, if a registrant is
identified as a Commission-Identified Issuer based on its annual
report filing made in 2022 for the fiscal year ended December 31,
2021, the registrant will be required to comply with the submission
requirements (described below) and, if applicable, the disclosure
requirements (described below) in its annual report covering the
fiscal year ended December 31, 2022, that the registrant is
required to file in 2023. Thereafter, the applicable submission
requirements and disclosure requirements continue for every
year’s annual report covering a period in which the registrant
remains a Commission-Identified Issuer.

Submission Requirements. Once a registrant is identified as a
Commission-Identified Issuer, the registrant is required to submit
to the SEC through EDGAR, on or before the due date of each annual
report that covers a period in which it is a Commission-Identified
Issuer, documentation establishing that the issuer is not owned or
controlled by a governmental entity in the foreign jurisdiction of
the PCAOB-Identified Firm. Commission-Identified Issuers are
permitted to determine the appropriate documentation to submit in
response to the requirement, based on their organizational
structure and other registrant-specific factors. This submission
will be made publicly available on EDGAR. A Commission-Identified
Issuer that is owned or controlled by a foreign governmental entity
is not required to make this submission.

Disclosure Requirements. Additional disclosure requirements
apply in the case of any Commission-Identified Foreign Issuer.
Specifically, a Commission-Identified Foreign Issuer is required to
make the following disclosures in its annual report.

• That, during the period covered by the annual report, a
  PCAOB-Identified Firm prepared the audit report for the
  issuer;




• The percentage of the shares of the issuer owned by
  governmental entities in the foreign jurisdiction in which the
  issuer is incorporated or otherwise organized;




• Whether governmental entities in the relevant foreign
  jurisdiction in which the PCAOB-Identified Firm is located have a
  controlling financial interest in the issuer;




• The name of each official of the Chinese Communist Party (the
  “CCP”) who is a member of the board of directors of the
  issuer or the operating entity with respect to the issuer; and




• Whether the articles of incorporation of the issuer (or
  equivalent organizing document) contain any charter of the CCP,
  including the text of any such charter.

Separately, the Rules make clear that a Commission-Identified
Foreign Issuer must look through a variable interest entity
(“VIE”) or any similar structure that results in
additional foreign entities being consolidated in the financial
statements of the registrant, as well as provide disclosure about
the operating company or companies in the relevant jurisdiction.
Thus, any Commission-Identified Foreign Issuer that uses a VIE or
other similar structure must provide the required disclosures for
itself and its consolidated foreign operating entities.

Trading Bans

The HFCA Act requires the SEC to prohibit the trading on a
national securities exchange or through any other method that is
within the jurisdiction of the SEC to regulate, including through
over-the-counter trading, the securities of certain
Commission-Identified Issuers (a “trading prohibition”).
Specifically, the HFCA Act requires the following:

• A Commission-Identified Issuer that is determined to be a
  Commission-Identified Issuer for three consecutive years will be
  subject to a trading ban (an “initial trading
  prohibition”).⁵




• The SEC will end the initial trading prohibition with respect
  to an issuer if the issuer certifies to the SEC that it “has
  retained a registered public accounting firm that the [PCAOB] has
  inspected” to the satisfaction of the SEC (the “Required
  Certification”).




• The SEC will impose an additional trading prohibition for a
  minimum of five years (a “subsequent trading
  prohibition”) if an issuer formerly subject to an initial
  trading prohibition is again determined to be a
  Commission-Identified Issuer.




• The SEC will end the subsequent trading prohibition if, after
  the end of the five-year period, the issuer makes the Required
  Certification to the SEC.

The Release describes the process by which the SEC will impose
and terminate trading prohibitions, which includes the
following:

• The SEC will publicly disclose on its website a list of
  Commission-Identified Issues, the number of consecutive years an
  issuer has been a Commission-Identified Issuer, and the application
  of any prior trading prohibition to an issuer.




• Each initial and subsequent trading prohibition will take
  effect on the fourth business day after the order imposing the
  trading prohibition is published by the SEC.




• To make the Required Certification necessary to terminate an
  initial or subsequent trading prohibition, an issuer must file
  financial statements that include an audit report signed by a
  non-PCAOB-Identified Firm.




• Once the SEC receives a Required Certification from an issuer
  subject to a trading prohibition and verifies that the issuer has
  in fact filed financial statements that include an audit report
  signed by a non-PCAOB-Identified Firm, it will publish an order
  terminating the trading prohibition as soon as practical.




• The termination of a trading prohibition will take effect on
  the next business day after the order terminating the trading
  prohibition is published by the SEC.

REGULATORY PRIORITIES CORNER

The following brief updates exemplify certain trends and areas
of current focus of relevant regulatory authorities:

Chair Gensler on Cybersecurity and Privacy Practices

On January 24, 2022, at Northwestern Pritzker School of
Law’s Annual Securities Regulation Institute, SEC Chair Gary
Gensler delivered an address titled “Cybersecurity and
Securities Laws.” Chair Gensler stated that he had asked the
SEC staff to make recommendations for the SEC’s consideration
regarding strengthening registered funds, investment advisers and
broker-dealers’ “cybersecurity hygiene and incident
reporting, taking into consideration guidance issued by [the
Cybersecurity and Infrastructure Security Agency (CISA)] and
others.” Such reforms, he stated, “could reduce the risk
that these registrants couldn’t maintain critical operational
capability during a significant cybersecurity incident” and
that these registrants “could give clients and investors
better information with which to make decisions, create incentives
to improve cyber hygiene, and provide the [SEC] with more insight
into intermediaries’ cyber risks.”

Chair Gensler also reported that he had asked the SEC staff to
consider recommendations around how the SEC might further address
cybersecurity risk that comes from service providers, noting the
critical role that those service providers often play within the
financial sector. He explained that measures in this area could
include requiring certain registrants to identify service providers
that could pose such risks or holding certain registrants
accountable for service providers’ cybersecurity measures with
respect to protecting against inappropriate access and investor
information.

Chair Gensler also spoke regarding data privacy practices by
registered funds, investment advisers and broker-dealers. He noted
that the SEC had adopted Regulation S-P, which required those
registered entities to protect customer records and information, in
the wake of the enactment of the Gramm-Leach-Bliley Act of 1999.
More than 20 years since Regulation S-P was adopted (“an
eternity in the cybersecurity world”), he said, there may be
opportunities to modernize and expand Regulation S-P. Chair Gensler
reported that he had asked the SEC staff for recommendations about
how customers and clients “receive notifications about cyber
events when their data has been accessed, such as their personally
identifiable information” and that those recommendations could
include a proposal to amend the timing and substance of the
notifications currently required under Regulation S-P.

Staff Statement Regarding Form CRS Disclosures

The SEC’s Standards of Conduct Implementation Committee (the
“Committee”) is comprised of staff from the Division of
Trading and Markets, the Division of Investment Management, the
Division of Examinations and the Office of Investor Education and
Advocacy. On December 17, 2021, the Committee published its Staff Statement Regarding Form CRS
Disclosures (the “Statement”). Most of the
Statement is devoted to categorizing and describing “areas
where compliance improvements appear to be needed.” The
following summarizes the Committee’s observations. As noted in
the Statement, firms may wish to review their relationship
summaries in light of the Statement’s observations to
“confirm they address each item consistent with the form’s
instructions.”

Use of Technical Language, Including
Disclaimers. Firms must avoid legal jargon and highly
technical business terms unless they are clearly explained.
Additionally, firms are not permitted to include disclosures in
their relationship summaries other than the disclosures that are
required or permitted. Disclaimers and hedging language are neither
required nor permitted.

Omission of Required Information. Firms must
generally include all required headings, conversation starters and
prescribed language. Firms may only omit or modify a required
disclosure or conversation starter in limited circumstances, where
it is inapplicable to the firm’s business or the specific
wording required by the form’s instructions would be inaccurate
with respect to the firm.

Reliance on Proposed, Rather than Final,
Instructions. Some firms’ relationship summaries
omitted required information, modified prescribed language, or
failed to follow the prescribed order or formatting requirements
because firms appeared to rely on the proposed instructions to Form
CRS (or portions thereof). Firms should confirm the disclosures in
their relationship summaries comply with the adopted final
instructions to Form CRS.

Lack of Specific References to More Detailed
Information. Firms must include specific references to
more detailed information in the relationship summary sections
describing the firm’s services, fees and costs and conflicts of
interests. At a minimum, these references must include the same or
equivalent information to that required by Form ADV, Part 2A and
Regulation Best Interest, as applicable. Some relationship
summaries did not include these required references.

Shortcomings in Descriptions of Relationships and
Services, Fees, Costs, Conflicts and Standard of Conduct.
Some relationship summaries did not include required information or
included impermissible, extraneous or unresponsive disclosures.
These shortcomings were most commonly observed in the following
disclosures:

• Monitoring. Some relationship summaries did not explain how
  frequently the firm evaluates client investments or whether the
  firm imposes any material limitations on its monitoring
  services.




• Investment Authority. Some relationship summaries did not
  include a description of the firm’s investment authority that
  would allow retail investors to understand who-the firm or the
  retail investor-ultimately makes the investment decision regarding
  the purchase or sale of investments in the types of accounts and
  services offered.




• Limited Investment Offerings. Some relationship summaries did
  not expressly state whether the firm has any product limitations,
  while others acknowledged limitations but did not describe such
  limitations, as required.




• Principal Fees and Costs. Some relationship summaries included
  only vague fee descriptions and/or did not appear to sufficiently
  address the frequency with which those fees are assessed and
  billed.




• Wrap Fee Program Offerings and Fees. Some firms’
  relationship summaries did not describe the services included as
  part of the wrap fee program. Other relationship summaries did not
  appear to adequately describe the fees and costs of the
  programs.




• Extraneous Disclosures Regarding Standards of Conduct. Some
  firms referred to themselves as “fiduciaries” or stated
  that they are subject to a “fiduciary duty” when
  describing the applicable standard of conduct instead of using the
  prescribed language in Item 3 of Form CRS.




• Firm and Financial Professional Compensation Arrangements and
  Conflicts of Interests. Some relationship summaries did not explain
  the incentives created by a particular conflict of interest or used
  vague phrasing to suggest the firm “may” have a
  particular conflict. Other relationship summaries explained how the
  firm addresses or mitigates its conflicts, rather than focusing on
  disclosing the conflicts.

Modification and/or Supplementation of the Disciplinary
History Disclosure. Firms omitted or modified headings or
the conversation starters and/or provided extraneous language
explaining their response (beyond the permissible yes or no
response) in their relationship summaries. Other firms, when
responding to the disciplinary history heading, added descriptive
or other qualitative or quantitative language that could obfuscate
or otherwise minimize the disciplinary history.

Issues with Prominently Displaying Relationship Summary
on Firm Website. In some instances, the SEC staff was
unable to locate a relationship summary on a firm’s website or
was able to locate the relationship summary only after an extensive
search of the firm’s website.

Issues with Description of Affiliate
Relationships. Affiliated firms that decide to prepare a
single relationship summary must present the brokerage and
investment advisory information with equal prominence, and clearly
distinguish and facilitate comparison of the two types of services.
Some firms were unable to clearly articulate affiliated structures
in their relationship summaries.

Use of Marketing Language. Some firms’
relationship summaries included marketing language, touted the
firms’ abilities, or used superlatives or similar
descriptors.

Boilerplate. Some relationship summaries were
not tailored to the particular firm’s services, fees,
relationships or conflicts. Instead, boilerplate language used in
these relationship summaries seems to have been based on one or
more widely shared relationship summary templates without
appropriate modification.

SEC Staff Issues Statement on LIBOR Transition – Key
Considerations for Market Participants

The publication of the one-week and two-month U.S. dollar LIBOR
maturities and non-U.S. dollar maturities ceased after December 31,
2021, and the publication of remaining U.S. dollar LIBOR maturities
will end after June 30, 2023.

On December 7, 2021, the SEC staff published a statement (the “Statement”) to
remind investment professionals of their “obligations when
recommending LIBOR-linked securities and to remind companies and
issuers of asset-backed securities of their disclosure obligations
related to the LIBOR transition.” The Statement included a
section titled “Registered Investment Advisers and
Funds,” which is summarized below.

• The Statement said that investment advisers should consider (i)
  whether any LIBOR-linked investments they have recommended that
  clients purchase or continue to hold remain in the best interest of
  those clients and (ii) whether those investments or related
  contracts have robust fallback language providing for an
  alternative rate when LIBOR is no longer published or ceases to be
  representative of its underlying market.




• The Statement said that registered funds and business
  development companies should remain mindful of their disclosure
  obligations with respect to LIBOR. If a fund invests a significant
  portion of its assets in LIBOR-linked investments, it should
  disclose any principal risks related to the potential cessation of
  LIBOR, as well as the anticipated effects on the investments,
  including effects concerning volatility, value or liquidity.




• Because some valuation measurements use LIBOR as an input, the
  Statement reported, these measurements are likely to be affected by
  the transition to an alternative reference rate. Therefore,
  investment advisers, funds and fund boards should be mindful of any
  valuation risk and impacts to valuation inputs and assumptions
  arising from LIBOR’s discontinuation.




• The Statement reminded investment advisers and funds that the
  transition away from LIBOR introduces operational complexities that
  may require market participants (including investment advisers,
  funds and their key service providers) to make significant changes
  to their operational processes and IT systems. Therefore, according
  to the Statement, prior coordination with market participants
  regarding changes to the terms of each LIBOR-linked investment held
  will be essential to navigate the transition.

SEC Staff Issues Risk Alert on Advisers that Manage Private
Funds

On January 27, 2022, the SEC Division of Examinations (the
“Division”) released a Risk Alert titled Observations from
Examinations of Private Fund Advisers (the “Alert”),
which details certain compliance issues observed by the Division
staff in examinations of registered investment advisers that manage
private funds (“private fund advisers”).⁶ The
observations in the Alert were drawn from over five years of
examinations of private fund advisers by the Division staff and are
intended to assist private fund advisers in reviewing and enhancing
their compliance programs and also to provide investors with
information concerning private fund adviser deficiencies. The
following is a summary of the compliance issues detailed in the
Alert.

Conduct Inconsistent with Disclosures

Limited Partner Advisory Committees (“LPACs”)

• Advisers did not follow practices described in fund disclosures
  regarding the use of LPACs, including by:
  

  • Failing to bring conflicts to the LPACs for review and consent
    despite fund disclosures to the contrary.

  
  

  • Failing to obtain consent from the LPAC for conflicted
    transactions until after the transaction had occurred despite
    disclosures to the contrary.

  
  

  • Obtaining consent from the LPAC for conflicted transactions
    after providing incomplete information.

Post-Commitment Period Fund-Level Management Fees

• Advisers did not follow practices described in fund disclosures
  regarding the calculating of management fees, resulting in
  investors paying more in management fees than they were required to
  pay under the terms of the limited partnership agreement (the
  “LPA”). For example, advisers did not reduce the cost
  basis of investments when calculating their management fee after
  selling, writing off, writing down or otherwise disposing of a
  portion of an investment.




• Advisers used broad, undefined terms in the LPA (such as
  “impaired,” “permanently impaired,”
  “written down” or “permanently written down”)
  but did not implement policies and procedures to apply these terms
  consistently when calculating management fees.

LPA Liquidation and Fund Extension Terms

• Advisers extended the terms of funds without obtaining required
  approvals and/or complying with LPA liquidation provisions. Such
  practices resulted in excess management fees being charged.

Investment Strategy

• Advisers did not comply with investment limitations in fund
  disclosures, including by:
  

  • Implementing investment strategies that diverged materially
    from what was described in fund disclosures; or

  
  

  • Causing funds to exceed leverage limitations described in fund
    disclosures.

Recycling Practices

• Advisers did not accurately describe “recycling
  practices” (contractual provisions that allow a fund to add
  realized investment proceeds back to the capital commitments of
  investors) or omitted material information relating to recycling
  practices from disclosures.

Adviser Personnel

• Advisers failed to adhere to the LPA “key person”
  process after the departure of adviser principals.




• Advisers did not provide accurate information to investors
  reflecting the status of key previously employed portfolio
  managers.

Performance and Marketing Disclosures

Track Record Information

• Advisers provided inaccurate or misleading disclosures about
  how benchmarks were used or how the portfolio for a track record
  was constructed.




• Advisers only marketed a favorable or cherry-picked track
  record of one fund or a subset.




• Advisers did not disclose material information about the
  material impact of leverage on fund performance.




• Advisers utilized stale performance information in
  presentations to potential investors.




• Advisers utilized track records that did not accurately reflect
  fees and expenses.

Performance Calculations

• Advisers presented inaccurate performance calculations to
  investors.




• Advisers used inaccurate underlying data when calculating track
  records. This incorrect underlying data included:
  

  • Data from incorrect time periods.

  
  

  • Mischaracterization of return of capital distributions as
    dividends from portfolio companies.

  
  

  • Use of projected rather than actual performance.

Predecessor Performance

• Advisers did not maintain books and records supporting
  predecessor performance at other advisers.




• Advisers marketed incomplete predecessor track records.




• Advisers marketed performance that persons at the adviser were
  not primarily responsible for achieving at the prior adviser.

Awards or Other Claims

• Advisers marketed awards received but failed to make full
  disclosures about the awards, such as:
  

  • The criteria for obtaining them.

  
  

  • The amount of any fee paid by the adviser to receive them.

  
  

  • Any amounts paid to the grantor of the awards for the
    adviser’s right to promote its receipt of the awards.




• Advisers incorrectly claimed their investments were
  “supported” or “overseen” by the SEC or the
  U.S. government.

Due Diligence

Investigation into Underlying Investments or Funds

• Advisers failed to perform reasonable investigations of
  investments (including of the compliance and internal controls of
  the underlying investments or private funds in which they invested)
  in accordance with the advisers’ policies and procedures.




• Advisers failed to perform adequate due diligence on important
  service providers, including alternative data providers and
  placement agents.

Policies and Procedures Regarding Due Diligence

• Advisers did not maintain reasonably designed policies and
  procedures regarding the due diligence of investments. For example,
  Advisers outlined due diligence processes in fund disclosures, but
  did not maintain due diligence policies and procedures that were
  tailored to their advisory business.

Hedge Clauses

• Advisers included potentially misleading hedge clauses in
  documents that purported to waive or limit their Advisers Act
  fiduciary duty except for certain exceptions (such as a
  non-appealable judicial finding of gross negligence, willful
  misconduct or fraud).

ROPES & GRAY ALERTS AND PODCASTS SINCE OUR
OCTOBER–NOVEMBER UPDATE

SEC Proposes Updates to Form PF

February 3, 2022

On January 26, 2022, the SEC issued a release proposing amendments
to Form PF (the “Proposal”). The Proposal includes (i)
new current reporting requirements for large hedge fund advisers
and advisers to private equity funds, obligating such advisers to
report a number of specified events to the SEC within one business
day of their occurrence, (ii) a lowered threshold for large private
equity adviser reporting, (iii) certain revised reporting questions
for private equity funds and (iv) enhanced large liquidity fund
adviser reporting.

Podcast: Private Fund Regulatory Update: Recent
Developments Regarding Management Fee Calculation and Electronic
Communications

January 24, 2022

In this Ropes & Gray podcast, asset management partners Joel
Wattenbarger and Jason Brown discussed the regulatory consequences
of recent enforcement actions involving management fee calculation
and offset issues, and their respective electronic communication
recordkeeping requirements. The Private Fund Regulatory Update is a
series of podcasts discussing key issues of interest and updates in
the regulatory and compliance space, focusing in particular on
private fund managers.

Podcast: How Would an ESG-Friendly DOL Final Rule
Change the Investment Marketplace for ERISA Plans?

January 18, 2022

In this latest installment of Ropes & Gray’s podcast series
addressing emerging issues for fiduciaries of 401(k) and 403(b)
plans to consider as part of their litigation risk management
strategy, ERISA and benefits partner Josh Lichtenstein, counsel
Sharon Remmer, and associate Jon Reinstein continued the discussion
from our prior episode about the Department of Labor’s proposed
regulation pertaining to ERISA investment duties and environmental,
social, and governance (“ESG”) considerations by focusing
on (i) how the rule might change the market for retirement plan
investing and (ii) what impact it could have on plan investment
committees and asset managers who manage plan assets.

Podcast: Perspectives on the 2021 Secondaries
Market and What May Lie Ahead in 2022

January 12, 2022

In this Ropes & Gray podcast, asset management partners Emily
Brown, Isabel Dische, Adam Dobson, Lindsey Goldstein and Vincent
Ip, and tax partner Dan Kolb shared key trends and developments
from the 2021 secondaries market and what secondary buyers, sellers
and fund sponsors can expect in 2022.

Upcoming Deadline for Form SHC – Holdings of
Foreign Securities

January 10, 2022

Recently, the Department of the Treasury released the final
instructions for the reporting requirements of the Treasury
International Capital Benchmark Form SHC (“Form SHC”) for
the 2021 calendar year. Form SHC is filed every five years with the
Federal Reserve Bank of New York. Data as of December 31, 2021 must
be submitted no later than March 4, 2022.

SEC Proposes Money Market Funds Reforms

January 10, 2022

On December 15, 2021, the SEC issued a release proposing amendments
to certain rules that govern money market funds under the 1940 Act.
The proposed changes to Rule 2a-7, new reporting requirements and
form changes (the “Proposals”) are intended to address
problems experienced by certain money market funds in connection
with the economic shock at the onset of the COVID-19 pandemic. This
Alert provides both an overview and a detailed discussion of the
changes the Proposals would effect if adopted in their current
form.

Private Fund Cybersecurity Requirements Changing
Significantly in 2022

January 5, 2022

Private funds that are excluded from the definition of
“investment company” under sections 3(c)(1) or 3(c)(7) of
the 1940 Act will face significantly stricter cybersecurity
requirements under the FTC’s revised Safeguards Rule, which
comes into full effect as of December 9, 2022. The FTC’s
updated Safeguards Rule breaks new ground for the FTC by requiring
specific security controls and accountability measures for consumer
information expressly modeled on the New York Department of
Financial Services’ cybersecurity rule. For private fund
entities covered by the Safeguards Rule, these changes will require
prompt review, since many of the newly required controls will take
time to implement. Among other things, the Safeguards Rule will now
require multifactor authentication for any individual accessing
information systems that store customer information (or
compensating controls), encryption of all customer information both
in transit and at rest (again with the option of alternative
compensating controls), and updates to record retention procedures
for customer information.

Footnotes

1. Form PF defines a large hedge fund adviser to mean an
adviser that, collectively with its related persons, has at least
$1.5 billion in hedge fund assets under management. Form PF
Instruction 3 (p. 2).

2. Pub. L. No. 116-222, 134 Stat. 1063 (Dec. 18,
2020).

3. More specifically, a PCAOB-Identified Firm is a
registered public accounting firm that has a branch or office that
(i) is located in a foreign jurisdiction and (ii) the PCAOB has
determined that it is unable to inspect or investigate completely
because of a position taken by an authority in the foreign
jurisdiction.

4. The Release notes, based on recent Form N-CEN filings,
no registered investment company reported retaining a foreign
public accounting firm for the preparation of the company’s
financial statements. Therefore, the Release states, based on this
data and SEC staff’s experience, no registered investment
companies will be directly affected by the Rules’
requirements.

5. As noted above, the earliest that SEC can identify
Commission-Identified Issuers will be after registrants file their
annual reports for 2021 in 2022. The earliest an initial trading
prohibition would apply is 2024, after an issuer has been a
Commission-Identified Issuer for three consecutive years (2022,
2023 and 2024).

6. The Alert cites the Division’s prior risk alerts
Observations from Examinations of Investment
Advisers Managing Private Funds (June 23, 2020) and The Five Most Frequent Compliance Topics
(Feb. 17, 2017) (for all advisers).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.