• July 21, 2016

    What Hedge Fund GCs and CCOs Need to Know About Political Contributions Regulations and Pay-to-Play Rules (Part One of Two)

    It’s been over 16 months since the first candidate for the 2016 presidential election threw his hat in the ring, but, for better or for worse, election season just now is kicking into high gear, with the Republican National Convention having started on July 18 and the Democratic National Convention scheduled to kick off July 25. Having made it to the Trump v. Clinton main event, the miasma of political fatigue is already thick. Nonetheless, hedge fund managers need to stay on high alert about a critical aspect of the impending federal and state elections that will undoubtedly affect them, no matter who ultimately makes their way to the White House in November: political campaign contributions. General campaign finance laws, as well as pay-to-play regulations promulgated by the Securities and Exchange Commission and various states, can seem a dizzying web of sometimes contradictory—oft-times arcane—rules governing the circumstances under which, and how much, business entities and individuals can contribute to federal and state election campaigns. And the consequences of running afoul of any of the federal and state political contribution and pay-to-play laws can be severe: ranging from forfeiture of management fees, to forced refunds to or redemption of investors, to administrative or civil prosecution by the SEC. The selection of Mike Pence as Donald Trump’s running mate last week aptly illustrates the point: The current sitting governor of Indiana is responsible for appointing board members to the Indiana Public Retirement System. Correctly interpreting and applying state and federal campaign finance laws is now critical for managers who manage, or seek to manage, Indiana pension funds and intend to donate to the Republican presidential ticket. Because the stakes can be high—both financially and politically—managers must consider how federal and state campaign finance laws impact how they conduct business, and understand and educate employees about the parameters of political contributions, federal and state restrictions and the strict penalties imposed for violating them. This article, the first in a two-part series, analyzes the relevant federal and state political contribution laws, along with the federal and state pay-to-play rules hedge fund managers should know when making, and allowing certain employees to make, political contributions this year. The second article in this series will discuss compliance best practices for hedge funds making, or with employees making, political contributions, and will also outline remedial actions available when a violation of campaign contribution and pay-to-play rules occurs. Read More »

  • July 21, 2016

    How Hedge Fund CCOs Can Create a Robust Compliance Program and Culture of Compliance Designed to Limit Their Own Liability

    In recent months, hedge fund chief compliance officers have paid close attention to the Securities and Exchange Commission’s growing body of administrative case law imposing personal liability for supervisory failures. While simultaneously insisting that targeting compliance officers does not top its current enforcement agenda, the regulator has reprehended at least four CCOs in the prior 10 months for violations of Rule 206(4)-7 of the Investment Advisers Act of 1940, alleging they were not up to the task of enforcing, or did not address red flags in, their firm’s compliance programs. Much can be gleaned from these cases, and from statements SEC officials have made about the enforcement actions. In a speech last year, Andrew Ceresney, director of the SEC’s Division of Enforcement, outlined the three areas where the Enforcement Division generally brings cases against CCOs. When CCOs have: directly engaged in misconduct unrelated to the compliance function; attempted to obstruct or mislead the SEC staff; or exhibited a wholesale failure to carry out their responsibilities as CCOs. With concerns over hedge fund CCO liability for compliance failures at their peak, Venable partners Don Andrews and Michael Manley spoke to The Hedge Fund LCD to discuss whether regulators are, in fact, targeting CCOs (despite public statements to the contrary), how CCOs can implement compliance policies and procedures and a culture of compliance to limit their own liability and what CCOs can do to protect themselves in the event their compliance recommendations are not heeded by senior management at their firms. Read More »

  • July 14, 2016

    Digging Deeper: Investor Due Diligence Extends Beyond Managers to Hedge Fund Service Providers

    As the type of due diligence investors perform on hedge fund managers has evolved in recent years, so too has its scope. Investors now are widening the aperture of their focus to include not just hedge fund managers, but also the service providers who support them. At first blush, such expanded due diligence may seem excessive, but the development makes sense. A hedge fund’s operational risks can be external as well as internal, and service providers—including administrators, auditors, custodians, prime brokers and outside legal counsel—buttress nearly every aspect of a fund’s operations. Any due diligence review of a hedge fund should include a parallel assessment of the key third parties providing services essential to the fund’s operation to determine whether they are, in fact, equipped to adequately provide those services. Just as a service provider can help facilitate the successful functioning of a fund, its vulnerabilities can leave the fund exposed. (Re: Due Diligence on Fund Managers, see “Surviving Investor Due Diligence: What Hedge Fund Managers Need to Know About Investors’ Priorities and Responding to Due Diligence Requests”) This article identifies the key service providers investors include in their operational due diligence reviews, and examines how investors are conduct due diligence on third parties and key risk factors and red flags that may arise during the review. Read More »

Legal Proceedings

  • July 14, 2016

    Enforcement Action Counsels Hedge Fund Managers to Overcome Operational Deficiencies in Fee Billing by Effectively Leveraging Internal, External Resources

    The Securities and Exchange Commission’s focus on fees right now is unrelenting, and hedge fund managers are well aware that they must create and maintain policies and procedures designed to adequately address fee and expense allocations. A recent enforcement action puts an exclamation point on the commandment that fees must be properly disclosed and consented to by fund investors, lest they become conflicts of interest. The action also provides an opportunity to examine the need for adequate resource allocation to the compliance function, the mechanics of how managers can create internal fee and billing processes that consistently implement their policies and procedures, and finally how to leverage an effective partnership between in-house resources and outside consultants to ensure compliance. This article summarizes the key elements of the enforcement action and, along with insight from Morgan Lewis partner Jack O’Brien, provides guidance on how hedge fund managers can best integrate an outside compliance consultant’s recommendations while ensuring proper oversight of internal fee and billing systems. Read More »

  • June 30, 2016

    SEC’s Focus on Cybersecurity Continues to Gather Steam

    The Securities and Exchange Commission has gone one step further in staking out its regulatory territory in protecting the privacy of investors’ confidential and personally identifiable information, and ensuring that registered broker-dealers and investment advisers have adequate cybersecurity policies and procedures in place. The regulator now is scrutinizing the resilience of adopted policies and procedures and the efficacy of their implementation, controls, and ongoing testing and monitoring. This article examines the SEC’s enforcement action against Morgan Stanley and extracts lessons on how firms can ensure their cybersecurity practices are tailored to their unique and particular risks, and also tested and monitored on a regular basis. Read More »

Summary & Synthesis

July 21, 2016

Determining A Hedge Fund’s Performance: Complications and Consequences

Returns drive allocations. Recent surveys confirm what most already know: a hedge fund's performance is the key factor investors use in determining where to allocate their money. And it’s not just the potential upside of investor allocations—with performance claims and cherry-picking squarely in the regulatory crosshairs of late, one can be relatively certain that during an examination the Securities and Exchange Commission will want to fully understand the methodology behind performance calculations. Given the importance of a single, seemingly straightforward number, it’s important to recognize that calculating it can be anything but uncomplicated, with a wide array of factors ultimately coming into play in deciding how a firm determines the figure that, above all else, will define it. These issues were the subject of a recent webinar hosted by ACA Compliance Group entitled “Investment Performance Challenges & Case Study Solutions for Alternative Managers.” During the course of the presentation Charlie Stout and James Hendricksen, partner and senior principal consultant, respectively, addressed, among other topics, certain key aspects of fee structures and internal policies and procedures hedge fund managers should consider in order to comply with the latest regulatory expectations for performance claims. Read More »

July 14, 2016

Fees, Terms and Regulation Among Topics Discussed at Dechert Panel

Much is in flux in the hedge fund industry right now. Whether the change is driven by pressure from regulators or pressure from investors—regarding fees, fund structure, strategy or any of myriad of other matters under scrutiny—or from major macro events like the recent United Kingdom vote to leave the European Union, one thing is perfectly clear: Hedge funds are going to need good lawyers. During a webinar last month, Dechert partners Karl J. Egbert, Matthew K. Kerfoot, Timothy Spangler and David Vaughn, along with DMS Governance’s John D’Agostino, discussed evolving trends and structures for hedge fund managers in 2016. As with most change, there’s plenty of pain to go around—but also plenty of opportunity, and the feeling that things may not be as dire as they seem. This article summarizes the key insights from the panelists on the most prevalent changes facing hedge fund managers in 2016 Read More »


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