As they continue to be scrutinized by the SEC and other regulators, hedge fund managers must ensure that their employees are properly trained and incentivized to avoid regulatory violations. See “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015). However, despite a manager’s best precautions, an employee’s actions may result in an adverse regulatory action or fine. In such situations, hedge fund managers may seek recourse against the employee responsible for the violation – to recoup losses to the hedge fund manager and to deter similar behavior by other employees. To determine industry best practices with respect to imposing fines on employees, the Hedge Fund Law Report spoke with employment counsel and also surveyed 15 general counsels and other “C-level” decision-makers at leading hedge fund managers. We present our findings in a two-part article series. This first part explores the options available to hedge fund managers for imposing penalties on their employees for regulatory violations and examines the limits of those options under employment law. The second part will examine how these options are put into practice, addressing the prevalence of these remedies in the industry and best practices for deployment. For more on hedge fund manager employment issues, see “New York Federal District Court, Applying ‘Faithless Servant’ Doctrine, Allows Morgan Stanley to Recoup Entire Compensation Paid to a Former Hedge Fund Portfolio Manager Who Admitted to Insider Trading” (Feb. 6, 2014); and our two-part series on “Structuring, Drafting and Enforcement Recommendations for Hedge Fund Managers Considering Employee Compensation Clawbacks”: Part One (Aug. 7, 2013); and Part Two (Aug. 15, 2013).