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Implications of SEC attempt to curb indemnification for private fund managers

The SEC spent 2022 making multiple and sweeping proposals to amend rules under the Advisers Act, many of which have the ability to significantly re-shape market standards for private funds.  Here, we focus on the SEC’s proposal to undo a common protection for private fund advisers – the ability to rely, as against the private fund or its investors, on exculpatory and indemnification provisions for a breach of fiduciary duty, willful misfeasance, recklessness, or simple negligence in providing services to the private fund.  This prohibition would relate not just to liability under the Advisers Act, but to all causes of action.

On May 25, the Securities and Exchange Commission issued proposed rules under the Investment Advisers Act of 1940 for advisers to private funds that consider environmental, social or governance factors (“ESG”) as part of one or more significant investment strategies. The proposed rules would require advisers employing ESG strategies to…

On May 9th, the U.S. Securities and Exchange Commission (“SEC”) announced that it will reopen the public comment period on its proposed rules relating to private fund advisers. The comment period will now remain open until 30 days after the publication of this announcement in the Federal Register.

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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.

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…

President Biden has signaled a shift to a more assertive SEC Enforcement program with the nomination, and expected confirmation, of Gary Gensler as the next Chair of the SEC.  Mr. Gensler previously served as the Chairman of the CFTC from 2009 to 2014, where he established a reputation as a forceful regulator. This reputation suggests that we should expect a significant increase in enforcement actions against private fund managers.

Under former Chairman Clayton, private fund advisers benefited indirectly from the SEC’s focus on ”Main Street” investors.  More of the SEC’s limited resources were devoted to addressing retail fraud, leaving fewer resources available to focus on private funds.  As former Enforcement Director Stephanie Avakian explained recently, the SEC relied more heavily on exams by OCIE (recently renamed the “Division of Examinations”)  – through deficiency notices and remediation, rather than enforcement actions – to address perceived private fund compliance violations.  Whether the SEC returns to the more assertive “broken windows” approach to regulation under prior administrations remains to be seen.

On June 23rd, the staff of the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations issued a new risk alert entitled “Observations from Examinations of Investment Advisers Managing Private Funds.” As discussed in the client alert below, the report highlights many practices which have been the subject…