• March 23, 2017

    Best Practices for Hedge Fund Managers Conducting an Effective Annual Compliance Review (Part Two of Two)

    Advisers Act Rule 206(4)-7, commonly known as the Compliance Rule, requires registered investment advisers, including hedge funds, to review their compliance policies and procedures for effectiveness at least annually. The review should not be performed perfunctorily. At a minimum, an evaluation for effectiveness requires making a determination that policies and procedures result in prompt identification of violations and timely collection of the information necessary for managers to correct problems as they are identified; are written in plain language that articulates the goal of compliance and how it is supervised; and are, in fact, adequately supervised by responsible personnel at the firm. Despite the comprehensive mandate, the Office of Compliance Inspections and Examinations recently found that hedge fund managers’ adherence to the Compliance Rule has been inconsistent at best—Compliance Rule violations were listed among the top five compliance concerns identified in deficiency letters issued to managers. The consequences of violating the rule are almost always some degree of burdensome, ranging from the increased regulatory scrutiny that stems from deficiency letters and enforcement action to adverse impact on a firm’s bottom line should current and potential investors deem a manager’s regulatory issues too risky for investment. Accordingly, it is vital that hedge fund managers verify their compliance program meets regulatory guidelines and periodically ascertain whether the compliance program remains effective. This article, the second in a two-part series, addresses the steps hedge fund managers should take if compliance issues are uncovered and how to measure the effectiveness of a compliance review. The first part outlined best practices for hedge fund managers conducting an annual review, including when it should be conducted, how to prepare and who should be involved. Read More »

  • March 23, 2017

    Stepping in Where Banks Step Back: Trends, Considerations and Structures For Hedge Funds Pursuing Direct Lending Strategies (Part One of Two)

    In the years since the financial crisis and implementation of banking regulations aimed at limiting activities deemed to contribute to another crisis, banks have withdrawn from a range of lending operations. The intended or unintended consequence has been that many borrowers have been left without financing options. Responding to this gap in the market, hedge fund managers and other private fund managers have stepped in and started providing lending, taking on part of the role of traditional banks. This article, the first in a two-part series, will look at the current market for direct lending by hedge fund managers, where the demand for these products is coming from, how the supply of funds is keeping up with demand, what types of investors are interested in direct lending funds and which managers are best suited to offer these vehicles. The second article will look at key legal and business considerations for hedge fund managers launching a direct lending fund. Read More »

  • March 23, 2017

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

    For hedge funds with global reach—operating out of multiple international jurisdictions or trading securities on foreign exchanges—a sophisticated understanding of insider trading laws in each country in which they do business or invest is imperative. Although there has been some cooperation and coordination of securities laws among global regulators, insider trading laws internationally, particularly vis-à-vis U.S. insider trading laws, are more distinctive for their differences in philosophical approaches and enforcement than they are for their similarities. The issue is consequential for hedge fund managers for reasons apart from the obvious necessity to avoid the sanctions and reputational harm that come from criminal activity: To remain competitive in international jurisdictions, hedge fund managers’ insider trading policies and procedures in each locale should be robust enough to prevent or capture violative trading activity as defined in that country, but they should not necessarily be more rigorous than required. Parsing U.S. and foreign insider trading statutes and case law can be a complex endeavor, much less tailoring policies and procedures for each country with jurisdiction over a manager to the bounds deemed appropriate by law by local regulators and in practice by local competitors. This article, the first in a two-part series, examines insider trading laws in the U.S., the EU, the U.K. and Canada. The second article will discuss insider trading laws and prosecution in China and outline best practices for developing insider trading policies and procedures designed to keep firms compliant with global regulations and competitive with foreign managers. Read More »

Legal Proceedings & Laws

  • 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 »

  • February 23, 2017

    SEC Joins FTC in Scrutinizing Activist Investors’ Securities Acquisitions Reporting

    The Department of Justice isn’t the only regulator compelling activist investors to disclose their intent to change or influence control of issuers: The Securities and Exchange Commission recently entered into a collective settlement agreement with a group of individual and hedge fund investors who failed to timely, and in some cases altogether, report their acquisitions of securities above the Exchange Act’s passive-activist investing threshold. Over the last few years, the SEC’s beneficial ownership reporting rules have been less publicized than the Federal Trade Commission’s Hart-Scott-Rodino Act’s notification thresholds and waiting periods, but the SEC is no less concerned with alerting the market to potential activist campaigns that could affect securities prices: In aggregate, the activist group was fined approximately $420,000 for their reporting violations. This article reviews the beneficial ownership rules and the enforcement action’s allegations against the activist investors. Read More »

  • February 9, 2017

    Truth or Consequences: CCO Accountability for Accurate Regulatory Filings Highlighted in SEC Enforcement Action

    Chief compliance officers currently preparing Forms ADV in anticipation of this year’s March 31st deadline take note: answering a question incorrectly can end careers, or at least that’s one way to interpret a recently settled order filed by the Securities and Exchange Commission. The agency alleged that the chief compliance officer of an exempt reporting adviser filed multiple Forms ADV with false statements. Not incidentally, early last year the Commission sued the exempt reporting adviser and its principal in federal district court alleging, among other things, that they perpetrated a $5 million Ponzi-like fraud on investors. But the order does not allege that the CCO was involved in that fraud. Nor does the SEC allege for most of the false Form ADV statements that the CCO actually knew they were false. Nonetheless, the CCO was fined, suspended and ultimately prohibited from ever acting in a managerial or compliance capacity in the securities industry. At a minimum, the enforcement action counsels that CCOs can face liability for violations solely related to performing the compliance function, perhaps even when made unknowingly, and thus should take steps to confirm that responses to Form ADV are accurate. This article reviews the SEC’s allegations. Read More »

Conferences & Seminars

  • March 23, 2017

    Advisers Grapple With Implications of Fiduciary Rule’s ‘Investment Advice’ Ambiguity

    The U.S. Department of Labor’s proposal to delay the implementation of its so-called Fiduciary Rule by 60 days was just the latest skirmish in the years-long battle over the regulation. “What’s going on?” asked Kathy Ireland, associate general counsel for the Investment Advisor Association, during the “Compliance with the DOL Fiduciary Rule for Institutional Advisers” panel at the annual Investment Adviser Compliance Conference earlier this month. During the discussion, which Ireland moderated, panelists Stuart Cohen, managing director at Nuveen Asset Management, Kimberly M. Collins, vice president and senior counsel at MFS Investment Management, and David C. Kaleda, a principal at Groom Law Group, probed how investment advisors should interpret the new rule’s definition of “investment advice fiduciary,” among other facets of the rule that could impact their practices. This article summarizes the panelists’ insights on how the proposed fiduciary standard’s treatment of factors including the independent fiduciary exemption; the definition of a “recommendation”; sales and marketing materials; the “hire me” concept; and model portfolio and “daisy-chain” issues might impact hedge funds. Read More »

  • March 23, 2017

    State Regulations Gain Relevance For Smaller Funds As Assets Dip

    Securities and Exchange Commission registration is not generally considered a model of ease and simplicity, but its rigors can pale in comparison to the state registration process, which can demand more time and introduce unfamiliar requirements not present at the federal level. For managers at perhaps the most stressful stages of a hedge fund’s lifecycle—those whose assets under management have declined and are no longer required to register with the SEC, or alternatively, start-up managers, whose assets are under the threshold requirement for SEC registration—the additional complexity state registration can present could add confusion to circumstances already pressurized. In order to help managers who are on either side of the spectrum, NRS recently hosted a webinar entitled, “State-Registered Investment Advisers: A Compliance Tutorial for Working with State Regulators.” Senior consultant Rob Stirling and consultant Jessica Crawford discussed the state registration process, various state rules and how they differ, the most common deficiencies at the state level and ways to adequately address those deficiencies. This article summarizes their guidance. Read More »

  • March 9, 2017

    How Hedge Funds Can Effectively Navigate SEC Investigations and Enforcement Actions: Pepper Hamilton Panel Discusses Best Practices

    In light of the Securities and Exchange Commission’s principal focus on registered investment advisers, and the potential consequences they face if violations are uncovered, it’s imperative that managers take investigations and enforcement proceedings seriously and respond to the Commission’s notices promptly and appropriately. Pepper Hamilton recently hosted a webinar to discuss the current investigation and enforcement environment, and strategies hedge fund managers can employ to effectively navigate both. Panelists Jay Dubow, a partner at Pepper Hamilton; Michael Lowman, a partner at Jenner & Block; Scott McBride, a partner at Lowenstein Sandler; and Kurt Wolfe, an associate at Allen & Overy, addressed key developments and recent SEC enforcement trends, typical triggers for an investigation or enforcement action, best practices for responding to SEC investigations and enforcement actions as well as potential changes to the regulatory landscape. This article highlights their key points. 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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