• December 1, 2016

    Key Considerations for Hedge Fund Managers Working with Outside Sales Consultants (Part One of Two)

    Hedge funds increasingly face headwinds in nearly all aspects of their operations—regulatory scrutiny, investment returns, shrinking profit margins, evolving business practices—but fundraising is perhaps the most challenging. One of the ways managers are adjusting to these challenges is by hiring outside sales consultants—oftentimes referred to as third party marketers, placement agents or finders—to help them raise assets. But utilizing outside consultants is not without risks, in part because there exists a sometimes perplexing bevy of rules and regulations to navigate surrounding the use of outside sales consultants at the federal, state and even local levels when soliciting investment dollars. This article, the first in a two-part series, explores why managers hire third party marketers and outlines the regulatory requirements and prohibitions these firms are subject to and that fund managers must also comply with. The second article will discuss how hedge fund managers select the right third party marketer for their needs and the current market for key terms in engagement contracts. Read More »

  • December 1, 2016

    Four Steps to Execute Effective Service Provider Due Diligence

    Third-party service providers are a vital component of any hedge fund manager’s ability to successfully execute both their day-to-day operations as well as their long-term business goals. Outsourced functions also help managers reduce the operational expenses investors are increasingly loathe to bear as well as allowing the adviser to focus on its core competency—managing investor's assets. For this reason, investors—as part of their due diligence on managers—and the SEC—via the recently proposed business continuity rule, risk alerts and guidance updates—have sharpened their focus on hedge fund managers’ third party due diligence practices. Against this backdrop MyComplianceOffice recently hosted a webinar with Jessica Ruby of David Landau & Associates, walking hedge fund managers through a step-by-step guide to identifying critical service providers, conducting effective due diligence on those vendors and ensuring the results of due diligence reviews are properly documented. This article highlights the key takeaways from that webinar. Read More »

  • November 18, 2016

    Trends and Practical Considerations for Negotiating and Implementing Investor Side Letters in the Current Environment (Part Three of Three)

    Side letters have become increasingly pervasive in the hedge fund and private equity fund industries, and if effectively negotiating customized terms with multiple individual investors is an art, monitoring and implementing those various agreements is a science, requiring a systematic process. Investors typically request side letters to modify or supplement the general terms applicable to all investors outlined in a private fund’s subscription documents or limited partnership agreements. The bespoke terms investors request can be as diverse as the reasons they request them—the former ranging from reduced management fees to priority notice of fund performance estimates to enhanced transparency concerning portfolio-level risks; the latter ranging from preferential treatment in exchange for a sizable commitment to compliance with regulatory obligations. Having a systematic process in place to record and maintain detailed and meticulous records of all side terms entered into, and monitor potential conflicts of interest—with fund governing documents, other side letters and the interests of remaining investors—before or as they arise, is nuanced and essential, and can determine whether managers and funds effectively discharge their fiduciary and regulatory obligations. This article, the last in a three-part series on effectively negotiating and managing investor side letters, discusses the monitoring and operational challenges of implementing numerous side letters, and includes insight from investors, fund managers and attorneys on best practices for ascertaining whether fund governing documents grant managers authority to agree to certain proffered terms; making adequate disclosures concerning the existence of side letters and terms to investors and regulators; and effectively monitoring, administrating and implementing multiple side letters over the long term. The first article in this series addressed the side letter terms investors most commonly request and why. The second article discussed the regulatory focus on hedge fund side letter terms and best practices for negotiating them. Read More »

Legal Proceedings & Laws

  • November 18, 2016

    FTC Issues Guidance Circumscribing Shareholder Activists’ Tactics; Separately Survey Shows Activists Remain Optimistic About Strategy’s Future

    On October 27, 2016, the Federal Trade Commission’s Premerger Notification Office issued informal email guidance that may have clouded, rather than clarified, the scope of the Hart-Scott-Rodino Antitrust Improvements Act’s “investment-only” pre-merger notification exemption for shareholder activists. The development is significant because shareholder activist strategies have surged over the last five years—activist hedge funds’ assets under management have nearly doubled, and activist campaigns are up 62%. Although the FTC’s regulatory guidance is not unexpected—its sister watchdog, the Department of Justice, decidedly weighed in earlier this year with its widely-publicized lawsuit and $11 million settlement with hedge fund activist ValueAct—that it deems a shareholder letter to management suggesting alternative merger transaction structures inconsistent with “passive” behavior may well be. The uncertainty raises a question as to whether the growth of shareholder activism over the last few years can, in fact, be sustained. Improbably when juxtaposed with regulators’ activism, Shareholder Activism Insight, a report recently published by Schulte Roth & Zabel, Activism Insight and FTI Consulting, says yes, and concludes that “not only should [hedge fund managers] expect activism to continue to thrive, [they] should expect it to become an ever-present activity in the marketplace seeking to unlock value and hold managements accountable.” This article analyzes the FTC’s informal guidance on what constitutes “passive” behavior consistent with “investment-only” intent, as well as summarizes the results of Schulte’s survey of shareholder activists. Read More »

  • November 10, 2016

    FINRA’s New Capital Acquisition Broker Rules Provide Hedge Fund Managers with Alternative to Broker-Dealer Registration

    Increased scrutiny and censure of private funds performing routine capital raising and financing activities appurtenant to their primary investment business, but without the requisite broker-dealer registration, have long pushed for a solution that appeased both regulators and private fund managers in the industry. With this in mind, FINRA proposed, and the SEC recently approved, a modified broker-dealer status, called a Capital Acquisition Broker, that allows private funds to register for a less burdensome broker-dealer designation that takes into account the limited activities they participate in. While some managers will still find the option’s potential benefits outweighed by the not inconsequential compliance obligations, the new rules could prove appealing to certain managers. This article, with exclusive insight from Jeffrey Blackwood, partner, and Brian O’Neill, senior attorney, at Bradley, Kevin Scanlan, partner at Kramer Levin Naftalis & Frankel and Lawrence Stadulis, partner at Stradley Ronon Stevens & Young, summarizes the new rule and analyzes what considerations managers should take into account in determining if the new CAB designation is a viable alternative for their firm. Read More »

Summary & Synthesis

December 1, 2016

Regulators in Key Jurisdictions Discuss Cooperation, Continued Focus on AIFMD Passports, Liquidity and Conflicts of Interest

The hedge fund industry is rigorously regulated in the jurisdictions in which it operates worldwide, and new regulations are being introduced regularly. Managers, particularly those who operate globally, must remain up to date on the most current applicable regulations in the jurisdictions where the management company is located, the fund operates and investors are located. In the U.S., hedge fund managers are subject to the rules promulgated by the Securities and Exchange Commission. The Cayman Islands, a key offshore jurisdiction for many hedge funds globally, has its own investing regulations overseen by the Cayman Islands Monetary Authority. And for hedge funds in the U.K., asset managers must comply with the regulations set forth by the Financial Conduct Authority. While some regulations are unique to each jurisdiction, regulators in these key jurisdictions coordinate to address common issues, such as anti-money laundering regulations and reporting guidelines designed to increase hedge fund transparency for investors. During the Global Regulatory Briefing panel at Hedgeopolis 2016, industry experts Robert Taylor, Head of the Investment Management Department at the U.K. FCA, Jennifer Duggins, senior specialized examiner and co-head of the SEC’s Private Funds Unit, and Garth Ebanks, deputy head of investments and securities at the CIMA, discussed cooperation among international regulators, along with certain top-of-mind areas of focus for each national regulator, including AIFMD passporting, conflicts of interest, liquidity, risk assessments and the JOBS Act here in the U.S. This article highlights the key points discussed by the panelists on the foregoing topics. Read More »

December 1, 2016

Adapt or Die: EY Survey Shows Managers Must Diversify to Meet Evolving Investor Demands (Part One of Two)

The ever-increasing sophistication of investors has catalyzed a changing landscape for hedge fund managers and, coupled with the fierce competition for capital investments in today’s economy, has resulted in an environment that is forcing managers to diversify and adapt in order to thrive. In its 10th annual Global Hedge Fund and Investor survey, EY measured the impact of this evolution on the business of hedge funds—in particular, on managers’ strategic priorities and product demand, cost management, prime brokerage relationships, talent management and the future of the industry—and found that the effects are real, sometimes unexpected, and, because of narrowing margins, for the most part give investors the advantage vis à vis smaller and midsize managers, even when they meet investor imperatives. But adapting to today’s evolving demands is the best way for managers to stand out tomorrow. As one pension and endowment investor surveyed put it, “Investors are demanding more and paying less. Adapt or lose out.” This article series summarizes the results of EY’s survey, key trends and takeaways to help managers meet the challenges of the new order. Read More »


  • October 27, 2016

    Briefs: Marc Wyatt and Andrew Donohue Speeches Highlight Examination Process, Future of the CCO; SEC Issues Whistleblower Risk Alert

    On October 19, at the 2016 National Society of Compliance Professionals National Conference, Marc Wyatt, Director of the Office of Compliance Inspections and Examinations, and Andrew Donohue, Chief of Staff of the SEC, delivered the keynote address, and the closing remarks, respectively. A few days later, the SEC released a Risk Alert enumerating provisions in investment advisers’ documents that might restrict potential whistleblowers, in violation of Rule 21F-17. This article summarizes the salient points for hedge fund managers from each speech, as well as the Risk Alert. Read More »

  • October 20, 2016

    As Whistleblower Programs Evolve, Managers Can’t Ignore Risks

    Securities whistleblowing has become a big business since its introduction under the 2010 Dodd-Frank Act. The Securities and Exchange Commission and Commodity Futures Trading Commission have handed out, to-date, nearly $120 million to roughly 40 whistleblowers, with hundreds of applications for awards still outstanding. And yet, in spite of the attention the SEC and CFTC are paying to whistleblowers, the hedge fund industry is meeting the whistleblower issue—which can encompass internal reporting and redress procedures, cooperation with regulators after a report has been made and implementation of anti-retaliation practices—with what appears to be a yawn. This article discusses the status of whistleblower programs and, with exclusive insight from Sean McKessy, Phillips & Cohen partner and former Chief of the SEC’s Office of the Whistleblower, and David Meister, Skadden partner and former Enforcement Director of the CFTC, addresses why hedge fund managers should bridge the gap between regulators’ prioritization of whistleblower complaints and firms’ reported ambivalence. Read More »

People Moves