Mar. 14, 2024

Form PF Current Reports: Reporting Trigger Events (Part Two of Two)

Form PF was originally adopted in 2011 to provide the SEC and the Financial Stability Oversight Committee with key information about private funds’ basic operations and strategies in an effort to establish a baseline picture of the industry for assessing systemic risk. Fund managers’ initial aggravation at having to gather and report certain information was softened by the fact that Form PF only had to be filed on a quarterly or annual basis. After amendments to Form PF took effect in December 2023, however, that regular filing paradigm shifted dramatically to include what amounts to a real-time reporting standard functionally. In addition to the routine Form PF filings, large hedge fund advisers are now required to file so-called “current” Form PF reports no later than 72 hours after designated events occur – and often while in the midst of dealing with those events. Moreover, “the new Form PF reporting requirements arrived during a period that has seen some of the most dramatic changes in the Investment Advisers Act of 1940 regime. It’s yet another straw on the camel’s back in terms of compliance obligations,” observed Akin partner Brian Daly. “Given the massive amount of transformation over the past 24 months – and what we expect to come in the next six months – there’s serious worry that this new filing process, which, in a vacuum, might be relatively straightforward, gets lost in the shuffle.” This article, the second in a two-part series, examines how fund managers are determining whether a Form PF reporting obligation has arisen and ensuring that a complete and accurate current report is filed in a timely manner, if required. The first article discussed the challenges hedge fund managers face in monitoring for current events and the approaches managers have taken. See our two-part series on the Amendments: “Enhanced Reporting for Large Hedge Fund Advisers” (Jun. 22, 2023); and “Compliance Challenges and Implications” (Jul. 6, 2023).

Opportunities for Private Fund Managers in CMBS Repurchase Litigation

Following the 2008 financial crisis, many investment advisers – including advisers to private funds – pursued “repurchase” litigation claims in connection with residential mortgage-backed securities (RMBS) securitization trusts. Such claims compel the sponsor of a securitization trust to repurchase assets it sold to the trust, with the proceeds flowing to investors through the trust’s waterfall. The following decade of litigation clarified the scope of the repurchase remedy, often in plaintiffs’ favor. Now, with increasing dislocation in the commercial real estate market, a similar but more targeted opportunity may exist in connection with commercial mortgage-backed securities (CMBS) trusts. This guest article by MoloLamken partner Justin M. Ellis explains the repurchase remedy, describes how its scope was clarified in the context of RMBS litigation and outlines the opportunity in CMBS trusts. For insights from other MoloLamken attorneys, see “Agency Power and Adjudication: The Government Seeks Supreme Court Review of Jarkesy v. SEC” (Jun. 8, 2023).

ACA Regulatory Outlook for 2024

“The SEC remains aggressive on rules, on exams, on enforcement,” but the pace of rulemaking has slowed somewhat due to legal challenges, said ACA Group (ACA) global advisory leader Carlo di Florio at the firm’s recent 2024 Regulatory Outlook program. Di Florio and his ACA colleagues covered top-of-mind regulatory issues for investment advisers and broker-dealers, including the new private fund rules; artificial intelligence; custody; off-channel communications; anti-money laundering compliance; Regulation Best Interest and other compliance concerns for broker-dealers; new regulatory requirements affecting registrants; cybersecurity; marketing; environmental, social and governance investment factors; U.K. developments; and compliance technology. This article synthesizes the key takeaways from the program. See “No Longer a Slap on the Wrist: SEC Penalties and Sentences on the Rise” (Feb. 15, 2024).

FINRA Bars CCO/Registered Representative for False Attestation and Off-Channel Communications

Jeffrey K. Kirkpatrick was the CCO of investment adviser Hamilton Investment Counsel, LLC (HIC) and a registered representative of LPL Financial, LLC, the broker-dealer that held HIC’s client accounts. Kirkpatrick allegedly failed to enforce HIC’s policies regarding employees’ outside business activities (OBAs), thereby missing a potential opportunity to discover a fraud being perpetrated by another HIC principal through one of those OBAs. Last year, Kirkpatrick settled an SEC administrative proceeding in which the SEC asserted that he knew or should have known that HIC’s compliance program was inadequately implemented but failed to do anything about it. FINRA then brought a follow-on proceeding against Kirkpatrick arising out of his approval of a wire transfer requested by the principal, who later defrauded clients, and his off-channel communications with that principal. Kirkpatrick settled the FINRA proceeding, accepting a four-month suspension and $10,000 fine. This article details the facts underlying the FINRA proceeding, the alleged violations and the terms of the resolution. For discussion of the SEC proceeding against Kirkpatrick, see “SEC Action and Commissioner Peirce’s Statement Shed Light on CCO Liability” (Aug. 25, 2022).

SEC Charges Recidivist Adviser in Abusive Short Selling Scheme

SEC rules applicable to short selling are intended to prevent abusive trading practices. The SEC commenced a civil enforcement action against a hedge fund adviser and its principal for engaging in naked short sales, mismarking trades and making other misrepresentations to executing broker-dealers in a fraudulent scheme to profit from trading in the securities of at least ten issuers. This marks the second time the SEC has charged this adviser with improper short sale practices. This article details the SEC’s allegations. See “First Circuit Upholds SEC Injunction Against Short‑Selling Priest” (Jun. 8, 2023).