• April 20, 2017

    How Hedge Fund Managers Can Mitigate the Risks Associated with Employees Communicating Through Messaging Applications

    Supervising emails and other business communications has extended beyond the firm’s server for hedge fund managers’ whose employees frequently communicate, for both personal and business purposes, through text and messaging applications on their mobile devices. While employees can access the firm’s communication networks through SMS text messaging, webmail or proprietary instant message applications on company-issued or personal mobile devices, the devices also offer access to third-party instant message applications, such as iMessage, Snapchat and WhatsApp, whose communications may not be captured by firms’ servers. An inability to control or supervise employees’ text and messaging application activity—since they may reside on servers external to the manager—can present additional regulatory risks for registered managers required by recordkeeping rules to retain and archive such communications related to the business. This article reviews the recordkeeping requirements that apply to private fund managers’ employees’ use of texting and messaging applications; assesses the risks posed by uses of messaging apps that circumvent a firm’s infrastructure to document and record such communications; and discusses technology solutions to capture such messages and the best practices, policies and procedures designed to effectively address the risks presented. Read More »

  • April 20, 2017

    A Guide to Insider Trading Laws Across Jurisdictions: How Funds with Global Assets Can Implement Tactical and Compliant Policies and Procedures (Part Two of Two)

    All SEC registrants, including hedge funds, must have straightforward codes of conduct under which employees unambiguously pledge not to trade based on inside information. The foundation of these codes of conduct often is a set of well-defined written insider trading policies and procedures, with a schedule of training sessions for fund employees describing exactly what trading activities are prohibited layered on top. For domestic funds, these standard best practices are crucial steps to deterring violations of insider trading laws and offer a degree of prima facie protection to fund managers that find themselves under investigation for such violations. For hedge fund managers that invest globally, however, crafting and administering internal written policies and procedures to avert insider trading violations can be a more complex endeavor, because trading activity that is prohibited in one country may be permissible in another, and vice versa. As a result, a one-size-fits-all set of policies and procedures for all trading in international jurisdictions may result in rigid, overly conservative—and perhaps not sufficiently competitive—policies for activity in one country, or the converse—policies that don’t go far enough in another country. One set of policies that applies globally may well be the best practice, but each manager must carefully assess whether such an umbrella solution is favorable to employing multiple insider trading policies and procedures based on individual international operations and trading. This article, the second in a two-part series, examines insider trading laws in China and provides detailed guidance on best practices for developing insider trading policies and procedures designed to keep the firm in compliance with global regulations and competitive with local firms. The first part outlined the insider trading laws in the U.S., the EU, the U.K. and Canada. Read More »

  • April 20, 2017

    IRS Says Undistributed Income of Blocker Corporation Is Subject to Accumulated Earnings Tax

    Hedge fund managers often interpose special purpose entities such as corporate “blockers” and “feeder funds” at various points within their ownership chains so that investors can avoid incurring unrelated business taxable income, among other tax efficiency reasons. This well-accepted practice, however, does not mean that corporate blockers do not have their own tax pitfalls. In recent advice, the Internal Revenue Service indicated, among other things, that a corporate blocker that fails to observe corporate formalities or provide evidence sufficient to demonstrate the entity’s valid business purpose can be subject to a penalty tax known as the “accumulated earnings tax,” regardless of whether the corporate blocker pays income tax or has sufficient liquidity to make distributions to its sole shareholder. In this guest article, Venable partner Sung Hung Hwang provides a background on the accumulated earnings tax, reviews the IRS’s recent guidance on the use of corporate blockers and assesses how hedge fund managers and investors can apply its findings. Read More »

Legal Proceedings & Laws

  • April 20, 2017

    Recent SEC Complaint Confirms Aberrational Performance Inquiry Initiative Alive and Well

    The Securities and Exchange Commission’s Aberrational Performance Inquiry initiative continues to prove that it’s a valuable resource in helping the regulator verify the accuracy of hedge fund managers’ assets under management, returns and other marketing claims, according to a recent complaint the agency filed in federal court against an NY-based investment adviser. The SEC alleges that a hedge fund manager and one of its founders repeatedly conflated the firm’s AUM, misrepresented the firm’s ownership and use of a proprietary quantitative strategy and even embellished the “paper” returns that strategy purportedly generated in various correspondence with investors and prospective investors. In its press release announcing the case, the SEC credited the API initiative for uncovering the facts underlying the complaint. This article summarizes the SEC’s complaint. Read More »

  • April 6, 2017

    Enforcement Action Highlights Fair Value Concerns and Risks of Inflated Fees Resulting from Improperly Priced Assets

    The Securities and Exchange Commission remains focused on auditing the accuracy of hedge fund managers’ valuation practices, both compared to Generally Accepted Accounting Principles and managers’ own policies and procedures, according to a recent enforcement action. The firm’s use of estimated values from a pricing service to measure the fair value of municipal bond assets held by five of the eight private funds the firm advises, instead of using more observable Level 1 or Level 2 inputs, ultimately resulted in excessive management fee charges to the relevant funds and incorrect redemption calculations. This article summarizes the SEC’s allegations, and the lessons fund managers can glean from it. Read More »

  • March 9, 2017

    SEC Order a Reminder that Compliance Policies Must Be Tailored to Firm’s Business and Enforced, OCIE Will Return to Verify

    The Securities and Exchange Commission recently agreed to settle charges that a registered broker-dealer expanding its business to include a hedge fund failed to adequately enforce written policies and procedures (i) to prevent the misuse of material nonpublic information, and (ii) tailored to the unique flow of information between the firm’s tripartite broker-dealer, investment banking and hedge fund operations, and the CEO who controlled each, even after OCIE’s first warning. The enforcement action is instructive because it shows the potential ramifications for firms that fail to fully remediate deficiencies identified after an examination. Indeed, just last week, at the Investment Adviser Association’s 2017 Investment Adviser Compliance Conference, OCIE Chief Counsel Daniel S. Kahl warned, “If the exam team comes in and finds a deficiency, and you say you’re going to correct it, and you don’t, almost certainly there’s going to be enforcement. Resources are an issue [at the Commission], so we want you to do what you say you’re going to do.” This article summarizes the SEC’s action against the firm and its lessons for hedge fund managers. Read More »

Conferences & Seminars

  • April 20, 2017

    SEC Officials Discuss State of the Commission, Impact of Executive Orders and Current Examination Initiatives and Priorities

    Despite the unpredictability of the climate in Washington and the reverberations brought by a new presidential administration and changes in Congress, remarkably, within the SEC it’s been business as usual, as examinations of and enforcement against registered investment advisers have continued apace. During the recent Investment Adviser Association's annual conference, several panels hosted high-level officials with the SEC, including Acting Chairman Michael Piwowar, that discussed current goings-on at the Commission, the impact of the president’s several executive orders, the status of rules concerning investment advisers and the SEC’s examination and enforcement priorities. This article highlights the key takeaways most relevant to hedge fund managers on each of these topics. Read More »

  • April 6, 2017

    Top Regulatory and Litigation Risks for Private Funds in 2017

    Although President Trump’s administration pledged that it would swiftly “roll back” federal regulations, including those related to hedge funds, executing the reality and details of that promise has been decidedly more complicated. With the recent announcement that any overhaul of Dodd-Frank will be postponed in favor of other legislative priorities, hedge fund managers should continue to exercise diligence in fulfilling their existing regulatory obligations, and temper expectations, at least for now, that a slackened compliance environment is on the immediate horizon. A recent Proskauer Rose webinar, “The Top Ten Regulatory and Litigation Risks for Private Funds in 2017,” addressed the most pressing regulatory, compliance and litigation risks facing hedge fund managers given the uncertain regulatory future. Partners Tim Mungovan and Josh Newville, associates Michael Hackett and William Dalsen, and special regulatory counsel Anthony Drenzek discussed conflicts of interest, valuations, pay-to-play, fund restructuring, performance marketing and whistleblowers, among other regulatory and litigation risks. This article highlights the key points the panelists made on the areas of risk identified most relevant to hedge fund managers. Read More »

  • April 6, 2017

    IAA Panel Outlines Regulatory Guidance and Industry Best Practice for Implementing an Effective Business Continuity Plan

    Recognizing the substantial impact having a business continuity plan can have on investment advisers in the event of disaster, and the potential risks to investors if such a plan is not in place, in June of 2016, the Securities and Exchange Commission proposed a rule requiring all registered advisers to adopt and implement written “business continuity and transition plans.” At present, the future of the proposed rule is uncertain, but as with most potential business and technology risks, advisers should not bet the firm a severe market disruption will not occur; rather they should inoculate themselves against the foreseeable risks and craft a BCP that can mitigate the effect of a business disruption and minimize the impact on the business and investors. During the “Business Continuity and Transition Plans” panel at the annual Investment Adviser Compliance Conference held in March, moderator Kay Gordon, a partner at Drinker Biddle & Reath LLP, and panelists Andrea Ottomanelli Magovern, senior counsel in the SEC’s Division of Investment Management; Mark Egert, head of U.S. Compliance, Global Investment Management and Chief Compliance Officer at J.P. Morgan Investment Management; and Kevin Ehrlich, manager of U.S. Regulatory Affairs and CCO at Western Asset Management Company, discussed existing business continuity planning regulations, challenges implementing the proposed rule presents for advisers, the rule’s future prospects, the role CCOs should play in the BCP planning process and potential scenarios during which an adviser would invoke the BCP. This article summarizes the most important takeaways for hedge fund managers from the panel. Read More »


  • March 23, 2017

    New Hedge Funds Following Trends of Past Years Regarding Structures, Fees and Terms, According to Seward & Kissel Study

    Hedge funds faced challenges in launching new funds and raising assets in 2016, and though the industry anticipated a shift, the challenges appear to be settling into multi-year trends. Managers, though, ever resilient, are finding new ways to adapt, according to Seward & Kissel’s recently released annual New Hedge Fund Study, which explored the investment strategies, fee and incentive terms, liquidity terms, fund structures and founders and seed capital raised by U.S.-based emerging managers that launched funds in 2016. Read More »

  • March 9, 2017

    Credit Suisse Survey Reveals Appetite and Trends for Hedge Fund Investors in 2017

    Last year was tough for hedge fund managers: Nearly every relevant media outlet predicted the decline of the industry, returns were down and the traditional “2 and 20” was declared dead. Despite the gloomy prognostications, global hedge fund allocations have actually reached an all-time high water mark over $3 trillion. Against this seemingly conflicting backdrop, Credit Suisse recently released “Shifting Tides: The 2017 Credit Suisse Global Survey of Hedge Fund Investor Appetite and Activity,” a survey which takes the pulse of over 320 institutional investors on topics ranging from attitudes toward industry growth, preferred strategies, regional interest, investment structures and fees, among others, to see exactly where hedge fund investors’ appetites and allocations stand for FY 2017. This article reviews the key takeaways from the survey. Read More »

  • February 23, 2017

    OCIE Risk Alert Highlights Most Common Compliance Deficiencies for Investment Advisers

    The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations investment adviser exams have kept apace with the rapidly increasing numbers of private fund manager registrants: In fiscal year 2016, the regulator hit a new record, completing over 2,400 examinations across all program areas, a more than 20% increase over 2015’s record exam statistics. Although private fund managers now have become accustomed to complying with the SEC’s regulations and submitting to both routine and surprise exams, OCIE has noted that they’re still deficient in certain common areas. In a recent risk alert, OCIE identified five compliance topics most frequently identified in deficiency letters and related to the compliance rule, regulatory filings, custody, codes of ethics, and books and records. This article highlights the Risk Alert’s findings and includes advice from Barbara Niederkofler, a partner at Akin Gump Strauss Hauer & Feld; Steven Nadel, a partner at Seward & Kissel; and Scott Moss, a partner at Lowenstein Sandler, on the exam areas where managers are weakest and best practices for strengthening compliance with the applicable rules. Read More »

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