Proskauer’s Private Investment Funds Group recently released its 2019 Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds. This yearly publication provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge funds space, as well as certain recommended practices that advisers should consider when preparing for 2020.

An increasingly sophisticated and active OCIE division, innovative market disruptors, a maturing credit cycle, and a philosophical change in how the private fund industry views and utilizes litigation are likely to lead to increased regulatory scrutiny and litigation risk for advisers (and their funds) in 2019.  With that backdrop, we are pleased to present our Top Ten Regulatory and Litigation Risks for Private Funds in 2019.

Proskauer’s Private Investment Funds Group today released its 2018 Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds.  This yearly publication provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge

On Friday, the WSJ published an article detailing how companies are monetizing smartphone location data by selling it to hedge fund clients.  The data vendor featured in the WSJ article obtains geolocation data from about 1,000 apps that fund managers use to predict trends involving public companies.  However, as we’ve noted, the use of alternative data collection for investment research purposes may give rise to a host of potential issues under relevant laws.

With the public equity markets at an all-time high and private equity fund raising setting new records, it might seem counterintuitive to forecast litigation and regulatory risks.  The opposite is true.  Disputes typically follow capital, and the steeper the growth curve, the greater the risk of litigation and regulatory scrutiny.  With that backdrop, we are pleased to present our Top Ten Regulatory and Litigation Risks for Private Funds in 2018.

1. Regulatory Scrutiny Involving Cryptocurrencies and ICOs

Cryptocurrencies and other instruments based on blockchain technology – such as Initial Coin Offerings (ICOs) – are in the regulators’ sights.  The SEC has asserted jurisdiction over products structured as ICOs and is pursuing violations of the anti-fraud provisions and registration violations involving ICOs and cryptocurrencies.  A number of enforcement attorneys in the SEC’s new Cyber Unit are focused on ICO and cryptocurrency investigations, with more cases in the pipeline.  In addition, the CFTC has declared virtual currencies to be “commodities” subject to its oversight under the Commodity Exchange Act and has brought a number of actions under the anti-fraud provisions of the CEA against industry participants.  Fund managers with investments in or exposure to these areas should prepare for questions about disclosures and increasing regulatory scrutiny and spillover relating to those investments. 

Proskauer’s Private Investment Funds Group recently released its 2017 Annual Review and Outlook for Hedge Funds, Private Equity Funds and Other Private Funds.  This yearly publication provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge

Proskauer partners Jeff NeuburgerRobert LeonardJosh Newville and Jonathan Richman recently invited hedge fund executives to discuss the complex regulatory and compliance issues raised by the use of alternative data.   Jeff, Robert and Josh also contributed an article to the Hedge Fund Law Report on Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping.

Fund managers have been capitalizing on methods to refine and analyze big data to assist investment decisions.  What types of alternative data are being used to gain new insights?  Sources include: e-commerce receipts and credit-card transaction data; sensors from internet-connected machines or smart devices; and online data collected via “screen scraping” (or “web scraping” or “spidering”).

Yet alternative data does not come without risks.  For example, data collected as a result of web scraping may be considered material nonpublic information (MNPI).  If that data were collected in a manner considered deceptive, then trading on that information might implicate the anti-fraud provisions of the securities laws.  Circumventing security protocols or disguising a scraper’s identity on a site (where required), among other behaviors, could be viewed as misrepresentations or “deceptive devices” under Section 10(b) of the Securities Exchange Act.d

On October 17, 2016, Marc Wyatt, the Director of the SEC’s Office of Compliance, Inspection and Examinations, gave a keynote address to the National Society of Compliance Professionals titled: Inside the National Exam Program in 2016.  In addition to discussing his general perspective concerning the program, he provided some key statistics that help put OCIE’s exam program in context:

  • OCIE has examination responsibility for over 28,000 registrants, including more than 12,000 investment advisers, approximately 11,000 mutual funds and exchange-traded funds, and over 4,000 broker-dealers.
  • OCIE has a total staff of approximately 1000 individuals.
  • OCIE completed 2,400 total exams in FY 2016.
  • Typically, about 10% of OCIE exams are referred to Enforcement.
  • FINRA and the SEC have historically examined 50% of BDs each year.
  • OCIE has historically examined approximately 10% of registered investment advisers per year.
  • Over the past two years, over 2,000 new investment advisers have registered with the SEC.
  • OCIE has about 450 staff members focused on Investment Adviser/Investment Company (IA/IC) exams.
  • The Private Funds Unit within OCIE currently has four exam managers, and primarily targets the New York, Boston, Chicago and San Francisco areas, each region having a high concentration of registered investment advisers to private funds.
  • There are approximately 4500 private fund advisers registered with the SEC.
  • Jennifer Duggins, co-head of the Private Funds Unit, recently noted that this unit’s goal was to double the number of examiners assigned to the unit from its current staff of 12-14 to a target of 25-30 examiners.