The Capital Commitment

Proskauer on Private Fund Litigation

Insider Trading, MNPI and Related Internal Controls: A Renewed Focus by SEC

Over the past few years, the SEC has brought fewer insider trading and Material Non-Public Information (MNPI)-related cases compared to historical numbers. We expect to see a reversal of that trend in 2022.

The SEC has provided some hints of its renewed focus on insider trading. First, even though the overall number of insider trading cases was down last year, the SEC brought two “first of kind” cases involving MNPI. The SEC successfully defeated a motion to dismiss its first “shadow trading” insider trading case – charging an individual with trading in the securities of an issuer based on MNPI he had obtained regarding another issuer. And the SEC brought its first case against an alternative data provider when it charged App Annie and its founder with making fraudulent misrepresentations in connection with its use of confidential information. Continue Reading

Increased Regulatory Focus on Privacy and Cybersecurity for Private Funds in 2022

2021 continued the trend of increased regulatory focus on privacy and cybersecurity for private investment funds in the U.S. and abroad. There are no signs of the trend leveling off any time soon.

One of the topics that captured our attention last year was the rise of ransomware. As previously shared, ransomware has evolved from merely encrypting files/disabling networks in solicitation of ransom, to sophisticated attacks penetrating data systems and debilitating entities.  Thus, while money continues to be an obvious motivator for these attacks, increasingly so is the pursuit of intellectual property and data.  Regulatory agencies have responded to combat the increase in attacks. For example, in October 2020, OFAC issued an Advisory declaring that any payment made to a sanctioned entity on OFAC’s list would be a violation of federal sanctions regulations and the paying entity would be strictly liable. Importantly, this means that the intent of the victim, and the knowledge as to whether the entity is on OFAC’s list, is no defense. While OFAC intends to decrease ransomware attack compliance through the issuance of its list of sanctioned entities, the nature of ransomware makes it difficult for the victim of an attack to be able to identify what entity is actually being paid.  This ambiguity may cause victims of ransomware attacks to unintentionally violate OFAC’s sanctions and be held strictly liable despite the publication of a list of sanctioned entities. Continue Reading

Economic Sanctions and Asset Seizures: An Important Focus for the Biden Administration

Sanctions continue to be a dynamic area of regulation and enforcement. In its first year, the Biden Administration has already undertaken a number of different sanctions initiatives. The three examples below highlight the range of strategies employed and their potential ramifications for private investment funds. Continue Reading

DOJ Task Force KleptoCapture to Target Russian Oligarchs

Over the past week, the U.S., UK, and EU imposed sweeping sanctions rolled out by the US, in response to Russia’s invasion of Ukraine, outlined here. Also last week, the Department of Justice announced the launch of Task Force KleptoCapture to enforce these sanctions and seize assets belonging to sanctioned individuals and other criminal actors. Attorney General Merrick B. Garland made clear that the U.S. “will leave no stone unturned in our efforts to investigate, arrest, and prosecute those whose criminal acts enable the Russian government to continue this unjust war.”

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Regulatory Shake-Out on Digital Assets: An Industry Waits for Additional Guidance

A threshold question in many cryptocurrency inquiries is whether the digital assets qualify as securities under the federal securities laws. If so, then they are subject to a full suite of federal securities regulations. If not, they still may be subject to AML and other DOJ regulations regarding currencies, as well as the Commodity Futures Trading Commission’s (CFTC) authority to prosecute manipulation in the spot market for commodities. Without uniform legislation providing guidance on this question, regulators and courts have generally applied the Howey test to determine whether the digital assets at issue are investment contracts and therefore securities. Rulings in litigated matters this year may serve as catalysts to drive legislative action providing further guidance to the industry. Continue Reading

ESG: Practical Points For Where Market Practice and Legal Trends Collide

If 2021 was the year in which regulators and investors enthusiastically embraced environmental, social and governance (“ESG”) considerations, by creating new legal and regulatory frameworks, then 2022 will be the year for asset managers to identify and confront the practical challenges of integrating legal requirements and stakeholder expectations into investment policy and performance. Continue Reading

Treating “Like for Like”: SPAC Disclosure, Marketing and Gatekeeping in 2022

We reported last year that unprecedented SPAC deal volume signaled an increased risk for disputes given their unique structure, including risks associated with disclosure requirements, material non-public information, valuation, and conflicts of interest. Our assessment proved prescient, as the SEC began to flex its enforcement muscles vis-à-vis SPACs as the year progressed, and took specific notice of potential asymmetries between SPACs and traditional IPOs that may form the basis for disputes in 2022. Continue Reading

SEC Proposes Advisers Act Reforms Focusing on Private Fund Investor Protections

On February 9, 2022, the U.S. Securities and Exchange Commission (the “SEC”) proposed new rules and amendments to existing rules under the U.S. Investment Advisers Act of 1940 that would have notable practical implications for private fund advisers, in many cases regardless of the adviser’s registration status. The Proposed Rules include prohibitions or mandates regarding certain practices and private fund terms that historically have been addressed through negotiations between advisers and private fund investors and/or disclosure of the adviser’s practices to private fund investors. In particular, several of the proposals represent a significant deviation from the traditional paradigm of the Advisers Act as a disclosure-based regime with respect to conflicts of interest. With the Proposed Rules, the SEC’s stated goal is to enhance both the regulation of private fund advisers and the protection of private fund investors by increasing transparency, competition and efficiency. The SEC’s proposal is the latest in a wave of recently proposed reforms in the private funds space.

Please read the full article for more details on this timely development.

Decentralized Finance: The Next Frontier of SEC Enforcement

The SEC’s push to regulate the next generation of blockchain-based applications will likely give rise to disputes and enforcement actions, particularly in the developing decentralized finance (DeFi) space. Although DeFi has the potential to enhance or replace traditional financial products by speeding execution and reducing transaction costs using blockchain technology, the SEC presumes that actors in this space are generally offering “securities” subject to its jurisdiction.   Continue Reading

Top Ten Regulatory and Litigation Risks for Private Funds in 2022

Last year, we wrote, “The regulatory and litigation risks for private funds are greater than at any time since the financial crisis in 2008.” That statement is even more true today. The Wall Street Journal recently published separate front-page stories on an SEC initiative to oversee large private companies and the explosive growth of the private credit industry (suggesting a more active phase of regulatory oversight). Growth itself is not necessarily a risk, but disputes – and regulators – tend to follow capital.

Private funds are now an integral part of the global economy and, as a consequence, are affected by it. Currently, there are massive structural changes occurring simultaneously across industries and the economy as a whole. For example: cryptocurrencies could threaten legacy payment systems and currencies; the electrification of the auto industry may lead to obsolescence of the internal combustion engine; and climate change will increase the ESG groundswell. These changes are not merely disruptive; they are transformative. Continue Reading

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