Hedge Fund Law Report

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    Nov. 5, 2026

Custody Rule Proposal: Focus on Accommodating Digital Assets & Simplifying Compliance (Part One of Two)

On October 1, 2026, the SEC issued a rulemaking proposal (Proposal) with significant modifications to the custody regimes for investment advisers under Rule 206(4)‑2 under the Investment Advisers Act of 1940. The SEC desires to facilitate custody of digital assets, while addressing the limitations of the existing custody regime for traditional securities and simplifying compliance with the custody requirements. The Proposal is “another significant step toward bringing our regulatory frameworks into the modern era and fulfilling our commitment to cement the United States as the crypto capital of the world,” said SEC Chairman Paul S. Atkins in a statement accompanying the Proposal. This first article in a two-part series parses the elements of the Proposal relevant to private fund managers. The second article will consider the likely impact of key provisions of the Proposal on private fund managers; explore which provisions will be most challenging for the industry to adopt and why; and offer practical takeaways. See our two-part series on an SEC Crypto Roundtable on custody of digital assets: “Custody Challenges” (Jun. 5, 2025); and “Custody Models” (Jun. 19, 2025).

Limited Partners, Big Tax Questions: K Alain, Soroban and What Comes Next

On August 12, 2026, the Court of Appeals for the Fifth Circuit (Fifth Circuit) issued a substitute opinion in K Alain, L.L.L.P. v. Commissioner (K Alain), holding that, for purposes of the exclusion from self-employment tax under Section 1402(a)(13) of the Internal Revenue Code, a “limited partner” is a partner who plays no significant role in managing or running a business. In doing so, the Fifth Circuit retracted its January 2026 opinion in Sirius Solutions, L.L.L.P. v. Commissioner, which had tied the definition of “limited partner” more closely to state law limited liability status. Just over a month later, on September 17, 2026, the Court of Appeals for the Second Circuit unanimously affirmed the Tax Court’s decision in Soroban Capital Partners LP v. Commissioner (Soroban), holding that partners who run, manage or otherwise exercise managerial control over a partnership’s business do not qualify as “limited partners” for purposes of Section 1402(a)(13) and that their distributive shares are therefore subject to self-employment tax. This guest article by McDermott Will & Schulte attorneys David S. Griffel, David S. Wermuth and Lauren E. Exnicios examines the K Alain and Soroban decisions; discusses relevant cases pending in Tax Court and the Court of Appeals for the First Circuit; and presents key considerations for fund managers in light of these recent rulings and ongoing litigation. See “Soroban’s Functional Analysis Test Hits Sirius Roadblock” (Mar. 12, 2026); and “IRS Wins Round One Over Meaning of ‘Limited Partner’ for Self-Employment Income Purposes” (Feb. 15, 2024).

SEC Risk Alert Warns of Ongoing Annual Compliance Review Gaps

On September 14, 2026, the SEC issued a Risk Alert (Alert) stating that the staff of the Division of Examinations had found widespread failures and omissions with regard to investment advisers’ compliance with Rule 206(4)‑7, the Compliance Rule (Rule), under the Investment Advisers Act of 1940, specifically those elements of the Rule on annual compliance reviews. The Alert describes numerous shortcomings on the part of advisers, ranging from failure to conduct timely annual compliance reviews at all to failure to maintain proper documentation of such reviews when they have been conducted. The Alert reaffirms the SEC’s view that good-faith compliance reviews that have not been properly documented fall far short of legal requirements, legal and compliance experts interviewed by the Hedge Fund Law Report agreed. This article summarizes the Alert and offers practical takeaways for investment advisers and their compliance personnel. See “Common Pitfalls and Best Practices When Performing Annual Compliance Reviews” (Dec. 18, 2025).

Managing the AML Risks of Cross-Border Trading

There have been a number of instances of fraudsters purchasing U.S. listed stocks or commodities of foreign issuers and engaging in “ramp and dump” schemes that are difficult to detect and harder to prosecute, and U.S. enforcers have found the anti-money laundering (AML) laws to be their most effective tool to hold them to account. The practical consequence is that, even when the underlying market manipulation occurs largely overseas, U.S. regulators scrutinize whether domestic financial institutions recognized and addressed the associated AML risks. In this guest article, Mayer Brown partners Hiral Mehta and Michele Cerezo-Natal, with associate Findley Penn-Hughes, outline how AML guidance and enforcement have developed since 2020, set out the legal framework and offer practical steps for financial institutions, foreign issuers and their advisers. See “ACA Compliance Testing Survey: AI and AML Are Now Top Compliance Concerns” (Aug. 28, 2025).

SEC and DOJ Charge Private Fund Executives in Alleged Ponzi-Like Scheme

The SEC has settled a civil enforcement action against defendants who allegedly engaged in a multi-year “Ponzi-like” scheme. They ran a pair of private funds that focused on making and acquiring loans backed by real estate. When the funds became unprofitable, the defendants allegedly continued to make redemption payments and distributions to fund investors out of new capital they raised and from purported loans from affiliated entities, rather than from fund profits. Additionally, one defendant allegedly misappropriated money from those funds for his personal use. The defendants have settled the action, which is pending in the U.S. District Court for the Northern District of California (Court), subject to the Court’s approval. The defendants were also charged in a parallel criminal proceeding brought by the DOJ. This article examines the SEC allegations, the terms of the proposed final judgments against the defendants and the parallel criminal charges. See “SEC’s Latest Enforcement Results and Budget Request Affirm Focus on Fraud” (May 21, 2026).

Fried Frank Adds Asset Manager Partner to D.C. Office

David Solander has joined Fried Frank in Washington, D.C., as a partner in the firm’s asset management practice. He advises fund sponsors and asset managers on complex regulatory, compliance and operational matters across the global asset management industry, including hedge, private equity, real estate and venture capital fund managers. For insights from Solander, see “Are You Prepared for OCIE’s Sweep of Business Continuity Plans and Coronavirus Actions?” (Jul. 30, 2020).

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