• January 12, 2017

    Understanding the Practical, Operational and Legal Implications of Offering Managed Accounts to Investors Seeking to Avoid Drawbacks of Commingled Investment Vehicles (Part Two of Two)

    A 2016 risk mitigation report compiled for pension colossus CalSTRS’ Investment Committee enumerated the considerable and sundry advantages separately managed accounts offer institutional investors, including transparency; protection against manager style drift, fraud, misappropriation of assets, misrepresentation of performance and liquidity risks; minimization of the risk of losses associated with the failure of a counterparty; elimination of co-investment risks; reduction in the cost of third-party service providers; and more precise tracking of management fees and performance fees paid to managers. Reciting the benefits of managed accounts to institutional investors is akin to preaching to the converted; it’s hedge fund managers who’ve historically required proselytizing, because they’ve viewed managed accounts as operationally burdensome to set up, with a comparatively nominal upside and a potentially negative impact on the manager’s commingled fund. If managed accounts were offered in the past, it was often because the manager alternately needed to raise assets, or, as a one-off, sought to accommodate either a legacy client or a large institutional investor with a sizable allocation. But the current fundraising environment has caused managers to give managed accounts a fresh look in order to accommodate the preferences of investors—even those with smaller allocations—who want greater control over their assets, liquidity and fees. As managed accounts grow in popularity, managers should understand the legal and tax implications of various structures and the market for the terms most negotiated, with the goal that the manager and the investor customize a vehicle that yields benefits for both parties. This article, the second in a two-part series, outlines the standard structures of managed accounts, the current market of terms negotiated, and the benefits and drawbacks for managers offering the product. The first part highlighted current trends driving the proliferation of managed accounts, and certain operational, legal and regulatory considerations managers offering, or considering offering, SMAs should take into account. Read More »

  • January 12, 2017

    How Hedge Fund Managers Can Mitigate Risks Associated with Allowing Employees to Use Personal Mobile Devices for Work (Part One of Two)

    Whether they’re on the latest smartphone or tablet, Android, Blackberry or iPhone, mobile devices enable employees to be productive from anywhere, at any time. And employees want to use mobile devices while working on the go—to read work emails, view and share files, access the company intranet, check investment research and communicate with clients and colleagues. For the better part of the last two decades, and when mobile devices were rare, businesses provided company-owned mobile devices to employees whose responsibilities necessitated them. Now, the norm is that mobile devices are ubiquitous, most, if not all, employees require them professionally and personally, and all mobile devices are equipped to handle a variety of time-sensitive and business-critical functions. In short, by and large, employees do not want to be saddled with two phones. However, the increased use of personal mobile devices is not without risk, and firms must ensure they have appropriate policies and procedures in place governing acceptable usage for employees conducting business on personal mobile devices, and that sensitive and confidential company information stays secure. While the Blackberry, the traditionally-issued company mobile device, was easy to control and secure, the same cannot be said for today’s iPhones, Android phones or tablets—especially when they’re used professionally and personally—so policies and procedures must be comprehensive enough to foresee and encompass myriad security concerns inside and outside of a hedge fund. This article, the first in a two-part series, highlights some of the biggest challenges that hedge fund managers face in allowing employees to use personal mobile devices for work, including record retention, security, loss of the device and potential regulatory concerns. The second article will outline policies and procedures governing the use of personal mobile devices, technology solutions that address various regulatory and security concerns, and best practices for establishing robust policies and procedures governing the use of personal mobile devices. Read More »

  • January 12, 2017

    Stepping In Where Larger Prime Brokers Step Back: An Interview with Sam McIngvale, Apex Clearing’s Head of Strategy, About Its New Prime Brokerage Services

    Boutique and smaller hedge fund managers have been pigeonholed by prime brokers newly facing domestic and global regulatory requirements that force them to reassess their book of hedge fund clients. One industry report noted that in 2012, nearly 55% of new hedge funds worked with just one prime broker, but by 2015, that number had climbed to 71%, leaving these managers—considered by many prime brokers as not worth the risk they bring to the balance sheet for the revenue they generate—vulnerable in the event their only prime broker takes a hit or otherwise runs into trouble. To address this gap created by a shifting regulatory environment, Apex recently launched Prime Brokerage Solutions, specifically servicing smaller hedge funds whose custody, lending, financing, technology, operational support and risk management needs may be neglected. We spoke with Sam McIngvale, Apex Clearing’s head of strategy, to explain the product; why certain firms are able to offer services and products that other firms may not; guidelines for hedge fund managers performing due diligence on smaller prime brokers; terms to negotiate in advance of engaging a smaller prime broker; and what a smaller prime brokerage product offering actually looks like. Read More »

Legal Proceedings & Laws

  • January 12, 2017

    Former New York Pension Official and Two Brokers Charged in Pay-to-Play Scheme Involving Cocaine and Prostitutes—Compliance and Supervisory Lessons Abound

    On December 21, 2016, the Securities and Exchange Commission charged Navnoor S. Kang, Gregg Z. Schonhorn and Deborah D. Kelley with a titillating pay-to-play scheme, replete with allegations involving sex, drugs, rock ‘n roll, and luxurious travel to boot, supplied by registered brokers Schonhorn and Kelley to Kang, then Director of Fixed Income for the New York State Common Retirement Fund, in an effort to win a chunk of the trading business from the $50 billion in fund assets Kang managed. Apart from the obvious off-color appeal of the factual allegations, the SEC’s case calls attention to the not-so-unlikely fallout when managers fail to effectuate adequate supervisory and hiring practices—an area at the top of the SEC’s 2017 agenda—and neglect to follow up on red flags that an employee may be flouting firm compliance policies. The case serves as an admonition for all investment advisers, not just fiduciaries to pension assets. This article summarizes the SEC’s complaint against Kang, Schonhorn and Kelley. Read More »

  • January 5, 2017

    SEC Enforcement Action Zeroes In On Disclosure, Consent Challenges Of Co-Investments Amid Their Popularity

    Demand for private equity co-investments has skyrocketed alongside the overall success of the industry in the last few years. A report published by online PE fund marketplace Palico in the summer of 2016 found that nine out of 10 investors surveyed reported that returns from their co-investments matched or outperformed their private equity fund investments, which across the industry had already done well—FY 2015 was a banner year for PE firms post-financial crisis. Indeed, more than two-fifths of investors said their co-investments squarely beat their fund investments. Offering co-investment rights can be a decisive means for managers to secure large commitments in today’s fundraising environment—more than 55% of investors surveyed said that, all other things being equal, they are more likely to commit to a fund offering co-investments than one that doesn’t. And yet, despite what can be significant upside for investors, co-investments are not without challenges for managers, especially in terms of the disclosure and consent issues they can pose for managers consummating conflicted transactions. This article reviews the allegations the Securities and Exchange Commission made in an enforcement proceeding against PE fund adviser New Silk Route Advisors, L.P., settled on December 14, 2016. The enforcement action shows the SEC’s attention to the comparatively more complex fiduciary concerns co-investments can raise, even for diligent managers. Read More »

Summary & Synthesis

January 5, 2017

FCA Report Highlights Ways Group and Human Behavior Can Hamstring Effectiveness of Compliance Regimes and Offers Strategies to Counteract

On paper, compliance seems straightforward enough: create rules and regulations, design disincentives to discourage violations and enforce them. But human nature, with all of its attendant quirks, can make the compliance function far more complex in practice. To wit: The insider trading scheme that nets an individual a few thousand dollars in profits despite the risk of many times that in fines, penalties, legal fees and lost income. Or the employee who affirms in his annual compliance affidavit that he has adhered to all firm rules, though his misconduct almost certainly will be ultimately uncovered. Firms also behave in facially irrational and unaccountable ways. The conduct at issue in countless enforcement actions often can be attributed to a fundamental miscalculation of the probability of getting caught, or some other factor, especially in light of heightened regulatory scrutiny and the very real monetary and reputational damages that stem from it. In its recent paper, “Behaviour and Compliance in Organisations,” the FCA explores certain aspects of rule breaking that fall outside the parameters of the conventional wisdom about malfeasance, with the goal that regulators and firms better understand both individual and firm-wide motivations driving compliance violations. The paper also analyzes how behavioral biases; moral, cultural and societal norms; social context; and group behavior can make employees and firms more susceptible to rule breaking. This article summarizes the FCA's recommendations to help firms create and implement more comprehensive and integrated strategies for managing internal compliance programs, and understand premises that may influence regulatory enforcement. Read More »

December 16, 2016

K&L Gates Investment Management Conference Forecasts 2017 Examination Priorities for the SEC, NFA and FINRA

The beginning of any new year tends to rouse a degree of apprehension for hedge fund managers anticipating regulators’ annual examination priorities, but this year may be particularly fraught with uncertainty: Conjecture about what impact President-elect Trump’s administration will have on financial regulators’ agendas is projected in relief against the backdrop of a 2016 that was already encumbered by heightened regulatory oversight and enforcement. Though reports so far broadly indicate that investment professionals—and the markets—have responded favorably to the prospects of a Trump administration, what it may mean for one of managers’ most immediate points of contact with regulatory agencies—investment adviser examinations—is far from determinate. The private fund industry, including both hedge funds and private equity funds, has experienced tremendous growth on all fronts. Regulators, in turn, have dramatically increased the resources they allocate to policing the industry. During K&L Gates’ Eleventh Annual Investment Management Conference, the firm’s experts discussed what all of these issues may mean for the 2017 examination priorities of the Securities and Exchange Commission, the National Futures Association and FINRA. This article summarizes their insights on the scope of regulatory focus in the coming year on a range of issues for private funds managers, including risk management, mitigating conflicts of interest, business continuity, fees and expenses allocation and disclosure, cybersecurity and regulations like the Department of Labor’s Fiduciary Rule. Read More »


  • January 5, 2017

    Briefs: Platinum Partners: From Kickbacks to Ponzi Scheme; FCA Insider Trading Case; Deutsche Bank’s Dark Pools Face Fines; Texas Teachers New Hedge Fund Fee Structure; SEC Hires

    Last year ended with a raft of regulatory civil and criminal actions that capped off a tough enforcement year. The Platinum Partners fiasco—the hedge fund industry’s most recent cautionary tale—started as a seemingly simple pay-to-play case some months ago, but has now unraveled into a full-scale fraud replete with an alleged Ponzi-like scheme and dubious asset valuations buttressing what now looks to be the hollow success of the firm over the past decade and a half. Former BlackRock PM Mark Lyttleton was sentenced to one year in prison after he pled guilty in the FCA’s insider trading case against him alleging that he used information gleaned at work to trade on his personal accounts. Deutsche Bank’s troubles with various regulators continued with the announcement that it was fined $40 million by three different regulators, including the Securities and Exchange Commission, who charged the investment bank mismanaged its dark pools. But the new year may have ushered in hope on the shoulders of California’s new alternative fee disclosure law, which many say heralds a new normal in transparency and disclosure of alternative investments fees and expenses. For its part, the Teachers Retirement System of Texas has adopted an alternative fee structure, introduced by Albourne Partners, to better align investors’ and managers’ incentives surrounding fees. Finally, 4Q16’s wave of political resignations at the SEC may be cresting (for now) with a few notable hires. This article summarizes the relevant aspects of each of these items. Read More »

  • December 16, 2016

    Briefs: Supreme Court Decision; HR 6427; Ceresney Discusses Hedge Funds and the FCPA; SEC Set for Big Staffing Changes

    A new administration in Washington D.C. typically ushers in a new regime, and the pending Trump presidency is no different, except this past year in politics and for the financial markets has been textured by tumult. Since the election decided the next resident of 1600 Pennsylvania Avenue, numerous key members of the SEC, mostly notably Chair Mary Jo White—whose priorities have dictated the direction the SEC has taken with regards to areas of focus, enforcement and long-term initiatives—have announced their resignation. Their departures, and eventual replacements, could fundamentally alter the regulatory landscape for hedge funds for years to come. At the very least, the turnover injects uncertainty. On the other hand, some things will remain certain. Regulators will continue to police the boundaries of violations of securities laws and improper business practices in order to protect investors. One of the soon-to-be-departed members of the SEC, Andrew Ceresney, recently delivered a speech discussing, among other things, the recent Och-Ziff settlement, the SEC’s first case enforcing the FCPA against a hedge fund. And with the changing of the guard in Washington, the likelihood that H.R. 6427, a bill which, among other things, expands the Accredited Investor definition, will be passed, is nearer to reality. And finally, for the first time in over 20 years, the Supreme Court ruled on insider trading, broadly interpreting what constitutes a “personal benefit” sufficient to sustain liability. This article summarizes the relevant aspects of each of those events. Read More »

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