• October 6, 2017

    Best Practices to Avoid Regulatory Scrutiny for Hedge Fund Managers Structuring an Outsourced Compliance Relationship (Part Two of Two)

    Both investors and regulators demand that hedge fund managers have a tailored, robust and evolving compliance program in place, but meeting this expectation can be costly. For managers with limited resources, outsourcing some or all of the chief compliance officer’s role and compliance functions to third-party consulting firms can be a more practicable way to meet compliance obligations. Over the last few years, however, the Securities and Exchange Commission has been scrutinizing more closely the use of third-party compliance services through more detailed Form ADV reporting and exam initiatives. Accordingly, managers either partially or fully outsourcing the CCO role or other compliance functions should be circumspect when engaging them and structuring the scope of their services in order to avoid the common weaknesses and risks of the practice the SEC looks for. This article, the second in a two-part series on best practices for outsourcing the CCO role, explores the advantages and disadvantages of outsourcing compliance, how to choose an appropriate compliance provider and structuring the outsourced compliance relationship. The first article in this series examined reasons why hedge fund managers outsource the CCO position and other compliance functions. Read More »

  • October 6, 2017

    Key Elements of a Comprehensive Hedge Fund Disaster Recovery Plan

    Hedge fund managers reasonably tend to focus the better part of their time and resources on fund performance, strategy execution, attracting and retaining top personnel, and developing robust business infrastructure, but increasingly, disaster recovery is—and should be—absorbing a growing share of hedge fund managers’ top of mind business concerns. According to the Identity Theft Resource Center, as of the first week of October, this year has seen over 1,000 data breaches across nearly all industries, including at international financial institutions, investment advisers, third-party service providers, like law firms, and notably, the Securities and Exchange Commission, which didn’t discover until August 2017 that a data breached in 2016 may have resulted in illicit trading. Nearly 200 million individuals (excluding the updated Yahoo breach statistics) have been affected or had personal information compromised by data breaches this year, and though the business costs of those breaches can only be speculative at this point, they surely reach the hundreds of millions. The personal and corporate costs of small and larger scale cybersecurity breaches are staggering, and in terms of disaster recovery planning, they’re only one component among numerous potential catastrophes, such as hurricanes, earthquakes, power outages, terrorist attacks and other emergencies, that could befall a hedge fund manager and, in fact, also have occurred this year. The need for hedge fund managers to have a comprehensive disaster recovery plan in place that outlines procedures the firm will employ to ensure critical data, business operations and investment activities are uninterrupted, functional and/or recoverable during and after a range of crisis situations has, perhaps, never been greater. This article explains the substance of disaster recovery plans and applicable regulatory requirements; and reviews key elements specific to hedge funds of developing DRPs, including business impact analyses, services restoration timelines, the frequency with which DRPs should be reevaluated and tested, and institutional investor expectations for DRPs. Read More »

  • October 6, 2017

    Best Practices for Private Equity Managers Entering into Joint Ventures with Investors (Part Two of Three)

    Large institutional investors with designated in-house teams tasked with evaluating investment opportunities and overseeing allocations have begun partnering with private equity managers to form joint ventures—vehicles into which they can channel their deep resources and experience to take on an even more active role in deploying significant assets. Joint ventures can be beneficial for both large institutional investors and private equity managers because the permanent agreement to purchase, manage and sell assets can result in faster execution timelines and reduced investment costs. As with any business relationship, private equity managers must scrupulously attend to the joint venture relationship, and perhaps the key to its long-term success is the agreement governing it. A well-crafted joint venture agreement clearly describes the nature of the parties’ partnership and the joint venture’s parameters, and delineates each party’s obligations and rights with respect to the venture. At the same time, an effective joint venture agreement is flexible enough to allow for changes in the market, the assets to be acquired, business plans or other factors that could arise. This article, the second in a three-part series on joint ventures, provides an overview of the legal structures commonly employed in joint venture agreements, reviews applicable regulatory obligations and assesses frequently negotiated and important terms that can help facilitate a smooth relationship in furtherance of the partnership’s investment goals. Part One of this series explored the reasons underlying the increase in private equity managers’ and institutional investors’ use of joint ventures to partner on investments in certain assets and the benefits of the vehicles to both; types of joint ventures; and best practices for managers to avoid conflicts of interest between a joint venture and other funds managed. The third article will examine exit provisions. Read More »

Legal Proceedings & Laws

  • September 22, 2017

    SEC Enforcement Actions Highlight Personal Liability Risk for Hedge Fund Executives

    The Securities and Exchange Commission recently settled a pair of related enforcement actions in a case that had been ongoing since March 2015, involving two now-defunct affiliated investment advisers’ Form ADV misstatements and failures to keep separate books and records. The SEC held the registrants’ in-house chief operating officer and outsourced chief compliance officer responsible for the violations, and their cases remind hedge fund managers that the Office of Compliance Inspections and Examination’s Outsourced CCO Initiative is still ongoing. Specifically, if a firm’s CCO is outsourced, the SEC will evaluate—and perhaps with more depth—the pervasiveness of its culture of compliance, the openness of communication between management and the CCO, and whether the CCO is empowered to effectuate policies and procedures in accordance with the goals of the Advisers Act. This article summarizes the SEC’s allegations against the affiliated investment advisers’ COO and outsourced CCO. Read More »

  • September 8, 2017

    SEC Caps Off Summer With Another Enforcement Action Pointing Up Primacy of Managers’ Transparency to Investors

    On August 14, 2017, the Securities and Exchange Commission entered into a settlement agreement with a registered investment adviser and its chief executive officer and manager in connection with their alleged failure to adequately disclose the firm’s methodology for calculating management fees and expenses related to the advisory services it provided to four funds, and for failing to disclose or obtain investor consent to a conflicted transaction. The enforcement action is just the latest in a spate of orders the SEC has issued this summer impressing upon private fund managers that unmitigated transparency is material and integral to any advisory activities that impact investor interests. This article summarizes the SEC’s allegations. Read More »

  • September 8, 2017

    SEC Rules Real Estate Transaction Between Manager’s Funds Resulted in Breach of Fiduciary Duty, Though Price Arguably Reasonable

    Recently, a New York-based private fund adviser settled the Securities and Exchange Commission’s negligence-based fraud charges against it stemming from the manager’s failure to cause one of the funds it advised to reimburse a second fund it advised for certain development expenses the second fund incurred prior to its sale of a real estate investment to the first fund. The omission resulted in a breach of the firm’s fiduciary duties to the first fund, though the price the second fund paid to the first was based on the highest of the independent appraisals of the property’s value. This article summarizes the SEC’s allegations. Read More »

Conferences & Seminars

  • September 22, 2017

    Keys to Managing a Global Compliance Program, From Staffing to Culture

    Countless obstacles can present themselves when managing a global compliance program, including when interfacing with multiple regulators across jurisdictions, observing diverse registration and filing requirements and allocating resources across regions, among other complex matters. A firm does not need to have a large global reach before its compliance team faces many of the same labyrinthine legal and regulatory issues that their larger peers face. Simply having investors or participating in the capital markets of jurisdictions outside of the U.S. can leave a manager exposed to the legal, regulatory and compliance challenges more commonly considered within the purview of a large multinational firm. For large and smaller hedge fund managers alike, effectively managing these challenges can mean the difference between a thriving compliance culture—and attending efficiencies and fundraising advantages—and one in which even the smallest issues ignite regulatory and/or legal conflagrations. ACA Compliance Group recently hosted the webinar, “Managing a Global Compliance Program,” during which partner Alan Halfenger and consultant Matthew Girandola, and Allianz Global Investors’ managing director and global regulatory counsel David Owen offered managers of all sizes guidance on establishing an effective multi-jurisdictional compliance program. This article summarizes their insights. Read More »

  • September 8, 2017

    Key Aspects of A Fund Wind Down, From Communication Strategies to Liquidation

    So far, the year 2017 has shown signs of an overall stabilization of the hedge fund industry: inflows have topped outflows on a relatively consistent basis, and various hedge fund indexes have demonstrated positive monthly returns. Despite these favorable indicators, fund wind-downs continue in numbers well above long-term averages. In order to avoid, or at least minimize, unintended externalities during a process already fraught with potential landmines, a hedge fund manager winding down a fund must carefully contemplate a variety of factors, including: wind-down requirements memorialized in fund documents; a plan to effectively communicate the process to investors and employees; and management of the disposition of assets, with a focus on harder-to-value assets, among other issues. Dechert partner Karl Paulson Egbert and associate Daniel Clausen recently hosted a webinar addressing the myriad consequential and seemingly inconsequential considerations attendant to competently winding down a hedge fund. This article summarizes the key insights from their presentation. Read More »

  • July 28, 2017

    Business Continuity Plans: Regulatory Expectations and Key Elements for Hedge Fund Managers

    Developing a business continuity plan is already required of registered investment advisers but the Securities and Exchange Commission is elevating its scrutiny of firms’ resilience and recovery strategies following its June 2016 proposal of a new rule explicitly requiring that registered investment advisers adopt and implement written business continuity plans amid heightened risks of terrorist and cybersecurity attacks and severe weather globally, and more quotidian internal technological glitches. Regulators, and also investors, want managers to demonstrate that they can effectively and reliably manage investors’ assets regardless of the contingency—internal or external—that threatens operations. Eze Castle Integration recently hosted a webinar that highlighted top considerations and best practices for hedge fund managers developing a robust business continuity plan. This article summarizes the webinar’s key points. Read More »


  • October 6, 2017

    Seward & Kissel Study Shows Side Letter Usage Rising Among Newer Managers

    Side letter agreements supplementing or modifying the standard terms of a fund’s offering memorandum, subscription agreement or constitutional documents to grant preferential treatment to an individual investor, generally as a precondition of a large investment, often provide a revelatory view into the current market dynamics of the hedge fund industry. In its most recent Hedge Fund Side Letter Study, Seward & Kissel LLP found that the hedge fund industry’s use of side letters has dramatically increased among newer asset managers, funds of funds are the most common side letter investors, and fee discounts and most favored nations clauses are the most frequently negotiated side letter terms. This article summarizes these and other key findings from the study. Read More »

  • September 22, 2017

    Latest OCIE Alert Warns Advisers of Common Weaknesses in Oversight of Performance Advertising

    Advertising a fund’s performance is a key aspect of soliciting new investors. Among the myriad considerations investors take into account when determining whether to invest with a hedge fund, performance is routinely cited as one of the most unambiguous key factors influencing both the initial decision to invest and the decision to remain in a hedge fund. Performance reporting, however—a potential minefield of regulatory nuances that can flummox even the most thorough of hedge fund compliance programs—is not as straightforward, which the Securities and Exchange Commission has spilled considerable ink in releases, guidance and enforcement actions emphasizing. Recently, the SEC’s Office of Compliance Inspections and Examinations released a Risk Alert that provides insight into the most frequent advertising violations OCIE staff encounter. This article summarizes that Risk Alert’s findings. Read More »

  • September 8, 2017

    Hedge Fund Briefings: Alternative Managers Show Uneven Attitudes Toward Compliance; Martoma Insider Trading Conviction Upheld; NYDFS Cybersecurity Rules Now in Effect; and District Court Rules LinkedIn Must Allow Web Scraping of Public Data

    Hedge fund managers face ongoing scrutiny by both investors and regulators about their compliance programs, and according to the fourth annual “C-Suite Survey” by Cipperman Compliance Services, 43% of alternative managers do not believe their compliance programs would adequately survive the scrutiny of a regulatory exam. News on the compliance front is particularly cheerless for New York hedge fund managers and those in Connecticut subject to the jurisdiction of the U.S. Court of Appeals for the Second Circuit. August 28 was the first compliance deadline for the new rule promulgated by the New York Department of Financial Services imposing standards and rules mandating corporate cybersecurity. Just a few days before, on August 23, the Second Circuit made it easier for the government to establish tippee liability in an insider trading case and upheld the conviction of Mathew Martoma, who was sentenced to nine years’ imprisonment in 2014. Separately, a U.S. federal judge ruled on August 14 that LinkedIn cannot block third-party web scrapers from extracting data from publicly-available profiles. The case could have wide-ranging implications for hedge fund managers looking to make investment decisions by trawling internet platforms to harness the infinite amounts of data about companies, products, consumer spending trends and other useful information they’ve compiled. This article summarizes the relevant aspects of each of these items. Read More »

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