Articles By Topic
By Topic: Chief Compliance Officers
-
From Vol. 6 No.19 (May 9, 2013)
ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority
On April 16, 2013, ACA Compliance Group hosted a webinar in which it discussed findings from its recent survey of hedge and private equity fund managers regarding annual compliance reviews, forensic testing, risk management, custody, safeguarding of client assets, fee calculations and resources dedicated to compliance. This article summarizes the survey findings and the practical takeaways from those findings as communicated by ACA in the course of the webinar.
Read Full Article … -
From Vol. 6 No.18 (May 2, 2013)
SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points
In a speech at the Regulatory Compliance Association’s Regulation, Operations and Compliance Symposium, held on April 18, 2013, SEC Commissioner Luis Aguilar described the challenges to be tackled by hedge fund managers and regulators in serving investor interests. In particular, Aguilar discussed the elements of a culture of compliance; how the SEC thinks about insider trading at hedge fund management companies; best practices in valuing assets; and internal dynamics at the SEC that may impact whether a hedge fund manager becomes an examination or enforcement target. This article highlights the salient points from Aguilar’s speech.
Read Full Article … -
From Vol. 6 No.10 (Mar. 7, 2013)
Ropes & Gray Partners Share Insights Gleaned from Successfully Navigating Presence Examinations with Hedge Fund Manager Clients
On October 9, 2012, the Office of Compliance Inspections and Examinations (OCIE) of the SEC announced that it was going to conduct “focused, risk-based examinations of investment advisers to private funds that recently registered with the [SEC]” (Presence Exams). See “OCIE Warns Newly-Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012). On February 12, 2013, three partners at Ropes & Gray LLP presented a webinar entitled “SEC Presence Exams – Issues for Hedge Fund Managers,” to share their experience on how OCIE has conducted Presence Exams; their perspectives on hot-button areas of SEC investigations; and their tips for navigating a Presence Exam successfully. This article summarizes the key points from the webinar. See also “SEC’s National Examination Program Publishes Official List of Priorities for 2013 Examinations of Hedge Fund Managers and Other Regulated Entities,” The Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013).
Read Full Article … -
From Vol. 5 No.35 (Sep. 13, 2012)
Are the General Counsel and Chief Compliance Officer of a Hedge Fund Manager Considered “Knowledgeable Employees” of the Manager?
Allowing employees to invest in a hedge fund manager’s funds can have both direct and indirect benefits for the manager and the employees, including aligning the interests of the employees with those of the manager and fund investors. However, because most hedge funds elect not to register as investment companies pursuant to the Investment Company Act of 1940 (Company Act), they typically must comply with the requirements of the exclusions from investment company registration found in Section 3(c)(1) (which basically prohibits more than 100 beneficial owners in the fund) and Section 3(c)(7) (which limits investors in the fund to “qualified purchasers”) of the Company Act. These exclusions can restrict employee investments in the manager’s funds. However, Rule 3c-5 under the Company Act permits “knowledgeable employees” of a fund and certain of its affiliates to acquire securities issued by the fund without being counted towards the 100-beneficial owner threshold for Section 3(c)(1) funds and without having to qualify as qualified purchasers with respect to Section 3(c)(7) funds. Investment and business personnel – portfolio managers, directors, officers and other senior business employees – typically fall squarely within the definition of knowledgeable employee, and in any case are often qualified purchasers as well. However, a recurring question at hedge fund managers – particularly in the so-called “back office” – is whether the general counsel (GC) and chief compliance officer (CCO) of the manager constitute knowledgeable employees of the manager. This question arises for at least three reasons. First, GCs and CCOs – at least those who believe in what they are doing and where they are doing it – often want to invest in the funds of their manager-employers. Second, investments by GCs and CCOs are good for the manager – they align employee incentives and fund investment goals. (Some argue that fund investments by the GC and CCO can result in lax compliance, for example, that a GC or CCO invested in the fund would be more inclined to permit insider trading to increase fund returns. We do not find that argument credible. Smart GCs and CCOs know that lax compliance diminishes long-term returns.) Third, many GCs and CCOs are close to being qualified purchasers, but are not quite there. Such GCs and CCOs would not be able to invest in 3(c)(7) funds unless they fit within the knowledgeable employee definition. In short, hedge fund investments by GCs and CCOs are usually a win-win. But do the federal securities laws and rules permit such investments? That is the fundamental question that this article seeks to answer. More specifically, this article discusses: the benefits to a hedge fund manager of employee investments in manager funds; the interaction between Sections 3(c)(1) and 3(c)(7) of the Company Act and the knowledgeable employee definition; the operation of Rule 3c-5 of the Company Act and who generally qualifies as a knowledgeable employee; categories of hedge fund manager employees that are typically considered knowledgeable employees; consequences of making an incorrect knowledgeable employee determination; whether in-house counsel and compliance staff constitute knowledgeable employees; whether “dual-hatted” GCs/CCOs constitute knowledgeable employees; factors bearing on the analysis; and how the size of the firm impacts the knowledgeable employee calculus.
Read Full Article … -
From Vol. 5 No.23 (Jun. 8, 2012)
RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part Two of Two)
On April 16, 2012, the Regulatory Compliance Association held its Regulation and Risk Thought Leadership Symposium (RCA Symposium) in New York City at the Pierre Hotel. The RCA Symposium brought together leading practitioners and regulators in a series of panel discussions, each of which offered unique insight on various topics of relevance for hedge fund managers. This is the second article in a two-part series summarizing the highlights from the RCA Symposium. This second article discusses the sessions covering: the new paradigm of regulatory enforcement and white-collar prosecution; chief compliance officer and general counsel liability; and re-evaluation of the operating model for third party relationships. The first article discussed the sessions covering: fund governance issues; interpreting, preparing for and completing Form PF; and enterprise risk management for hedge fund managers. See “RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 22 (May 31, 2012).
Read Full Article … -
From Vol. 5 No.21 (May 24, 2012)
New York Court of Appeals Holds that the Chief Compliance Officer of a Hedge Fund Manager May be Fired for Internal Reporting
Even in the best of circumstances, administering the compliance program of a hedge fund manager presents intellectual, logistical and personal challenges for chief compliance officers (CCOs). However, the inherent difficulties of the job are compounded when senior management of a manager is not committed to a culture of compliance. Specifically, CCOs that discover conduct that merits reporting may be disinclined to report internally where they fear retaliation. See “Sullivan v. Harnisch and SEC Proposed Whistleblower Rules Bolster Internal Compliance Programs While Creating Catch-22 for Compliance Officers,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011). This disinclination may be compounded by a recent New York Court of Appeals decision generally holding that CCOs of New York-based hedge fund managers are not exempt from the “employment-at-will” doctrine and can be dismissed for internal reporting of suspected wrongdoing. Among other ramifications, this decision may further incentivize external reporting and whistleblowing – precisely the sort of incentives that the industry and individual managers have been working to mitigate. See “How Can Hedge Fund Managers Incentivize Employees to Report Compliance Issues Internally in Light of the SEC’s Whistleblower Bounty Program?,” The Hedge Fund Law Report, Vol. 5, No. 20 (May 17, 2012).
Read Full Article … -
From Vol. 5 No.20 (May 17, 2012)
FSA Imposes Fine and Statutory Ban on Compliance Officer of Investment Advisory Firm for Failure to Safeguard Client Assets
Serving as the compliance officer of a hedge fund manager is becoming increasingly challenging, particularly considering the growing list of regulatory responsibilities being imposed on such compliance officers and the ominous prospect of personal liability for the failings of a manager’s compliance program. The U.S. Securities and Exchange Commission (SEC) has made it clear that compliance officers can be held personally liable for the failings of their firms’ compliance programs in certain circumstances, as evidenced by the SEC’s enforcement action brought against Wunderlich Securities, Inc. However, the exact scope of such personal liability continues to be a moving target. See “Scope of Supervisory Liability of Senior Legal and Compliance Professionals at Hedge Fund Managers Remains Uncertain after SEC Dismissal of Urban Action,” The Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012). Like the SEC, the U.K.’s Financial Services Authority (FSA) is also flexing its muscles in this area, as it recently levied fines against an advisory firm and its compliance officer and imposed a statutory ban on the compliance officer for his and the firm’s failure to safeguard client assets. The statutory ban prohibits the compliance officer from serving as a compliance officer in the future and from having responsibility for client assets. The FSA action is noteworthy in at least two respects, both described in this article. More generally, this article discusses the factual allegations, compliance violations and sanctions imposed against the firm and the compliance officer.
Read Full Article … -
From Vol. 5 No.19 (May 10, 2012)
Benefits, Challenges and Recommendations for Persons Simultaneously Serving as General Counsel and Chief Compliance Officer of a Hedge Fund Manager
As a result of law, regulation, investor pressure or the gravitational pull of best practices – or a combination of these forces – more and more hedge fund managers feel the need to have a general counsel (GC) and a chief compliance officer (CCO). For managers with both titles on the organization chart, the question inevitably arises: Should different people serve in the different roles, or should one person serve in both roles? There are advantages and disadvantages to both approaches. A so-called “dual-hatted” employee serving as both GC and CCO is typically less expensive from a compensation perspective, but the volume of work at a larger or more complex manager may be more than one person can handle. But the analysis extends well beyond compensation and quantity of work. The decision to dual-hat implicates attorney-client privilege issues, examination preparedness, the reliability of internal controls, the effectiveness of marketing and investor relations and other issues. At a fundamental level, the decision will inform the scope and depth of the manager’s “culture of compliance” – and it is not necessarily the case that a hedge fund manager with a dual-hatted GC/CCO has an inferior culture of compliance. The analysis is more refined, and often turns on the structure and strategy of the manager, and effectiveness and ethics at the individual level. The goal of this article is to help hedge fund managers think through the issues raised by dual-hatting. For managers considering dual-hatting, this article provides a roadmap to the relevant questions. For managers that have already made a decision with respect to dual-hatting – whether for or against – this article highlights relevant issues and strategies for addressing them. In particular, this article discusses: the roles and responsibilities of the GC and CCO; the benefits and costs of having one employee wear both hats; recommendations for hedge fund managers that wish to employ such arrangements; and alternative solutions for hedge fund managers that choose not to use such arrangements. This article also includes specific compensation ranges for hedge fund manager GCs, CCOs and dual-hatted employees.
Read Full Article … -
From Vol. 5 No.7 (Feb. 16, 2012)
Enforcement Session at SEC’s Compliance Outreach Program National Seminar Highlights Regulatory Focus on Valuation, Conflicts of Interest and Compliance Shortcomings at Hedge Fund Managers
On January 31, 2012, the SEC hosted its annual “Compliance Outreach Program National Seminar” (Seminar). (The program was previously called “CCOutreach,” but it has been “rebranded,” as the SEC explained in a press release, to be more inclusive of all senior personnel at firms.) The Seminar included five sessions. One of those sessions – and the focus of this article – was entitled “Enforcement-Related Matters” (Session). The purpose of the Session was to inform fund industry participants about the SEC’s recent risk analytic initiatives and to provide insight into the SEC’s areas of focus and enforcement priorities. The Session was conducted by: Rosalind Tyson, Regional Director of the SEC’s Los Angeles Regional Office; Barbara Chretien-Dar, Assistant Director of the SEC’s Division of Investment Management; and Bruce Karpati and Robert Kaplan, Co-Chiefs of the Asset Management Unit of the SEC’s Division of Enforcement. The Session provided valuable insight into the SEC’s current regulatory priorities, which are or are likely to become areas of focus for investors. This insight, in turn, can help hedge funds managers deploy limited compliance resources to address the areas of greatest concern for both regulators and investors. Specifically, the Session: (1) explained how and when risk-based examinations are initiated and their potential progression to investigations; (2) identified the main current focus areas for enforcement staff; and (3) discussed enforcement actions based on these main focus areas. This article discusses each of the foregoing topics in detail.
Read Full Article … -
From Vol. 5 No.6 (Feb. 9, 2012)
Survey Highlights Compliance Professionals’ Attitudes and Practices Concerning Electronic Communications Compliance
Electronic communications compliance has become more important for hedge fund managers in recent years as the amount of business done electronically and the amount of regulatory focus on electronic communications compliance have grown significantly. At the same time, compliance professionals have struggled to keep up with ever-changing circumstances that make electronic communications compliance, including the capture and archiving of electronic communications, even more difficult. In May 2011, Smarsh, Inc. published a report (Report) that detailed the findings of a survey of compliance professionals at various types of financial institutions, including investment advisers and broker-dealers, designed to identify trends in and opinions about electronic communications compliance. The survey comprised 29 questions which were asked of 223 individuals with direct compliance supervisory responsibilities, including C-level management personnel, chief compliance officers and compliance staff members. This article summarizes some of the key findings of the Report and lessons for hedge fund managers. See also “Does Social Media Have a Place in the Hedge Fund Industry?,” above, in this issue of The Hedge Fund Law Report.
Read Full Article … -
From Vol. 4 No.43 (Dec. 1, 2011)
Recent FSA Settlement Helps Define the Scope of Potential Liability of the Chief Compliance Officer of a U.K. Hedge Fund Manager
In the heightened global regulatory climate, chief compliance officers of hedge fund managers are rightfully concerned about being held liable for their own acts or omissions, or for those of other employees of the management company. See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager’s Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011). A recent investigation and settlement by the U.K. FSA helps to define the scope of potential CCO liability and the standard of care applicable to CCOs presented with “red flags.” See also “To Whom Should the Chief Compliance Officer of a Hedge Fund Manager Report?,” The Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011).
Read Full Article … -
From Vol. 4 No.22 (Jul. 1, 2011)
To Whom Should the Chief Compliance Officer of a Hedge Fund Manager Report?
As we and others reported, at an open meeting held on June 22, 2011, the SEC delayed the date by which many hedge fund managers will have to register as investment advisers. The new registration deadline is March 30, 2012. See “SEC Delays Registration Deadline for Hedge Fund Advisers, and Clarifies the Scope and Limits of Registration Exemptions for Private Fund Advisers, Foreign Private Advisers and Family Offices,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011). One of the consequences of registration is that registered hedge fund managers will have to designate a chief compliance officer (CCO) to administer their compliance policies and procedures. See “Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011). The rule requiring registered investment advisers to designate a CCO – SEC Rule 206(4)-7 – provides that the CCO of a registered hedge fund manager “should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.” However, the rule does not prescribe any specific institutional designs that would be sufficient to confer the required “seniority and authority” on a CCO. That is, the rule requires a CCO to have authority, but it does not tell hedge fund managers what specific steps to take to ensure that the CCO has such authority. Accordingly, hedge fund managers confronted with a new registration requirement are facing the question that is the title of this article: to whom should the CCO of a hedge fund manager report? The answer to this question has important consequences for the effectiveness of a CCO within a hedge fund management company and for the CCO’s professional security, and is by no means intuitive. Industry practice varies considerably on the topic, though sources interviewed by The Hedge Fund Law Report voiced agreement on certain fundamental principles. This article offers insight on the appropriate design of CCO reporting lines within a hedge fund management company. At a general level, this article addresses two questions: How can CCO reporting lines be structured to protect the management company? And: How can CCO reporting lines be structured to protect the CCO? To address those general questions, this article analyzes: what “reporting” means in the hedge fund context; the benefits and burdens to a hedge fund management company of the typical CCO reporting lines; related industry precedents for CCO reporting; how reporting lines can be structured to protect the CCO; terms that should be included in CCO employment agreements, compliance manuals and codes of ethics to protect the CCO; and the pros and cons of whistleblowing under the recently finalized rule. This article concludes with a ten-step roadmap for reporting that can serve as a template for hedge fund manager CCOs that discover violations or potential violations, regardless of how their reporting lines are structured.
Read Full Article … -
From Vol. 4 No.18 (Jun. 1, 2011)
Is a Hedge Fund Manager Required to Disclose the Existence or Substance of SEC Examination Deficiency Letters to Investors or Potential Investors?
Following an examination of a registered hedge fund manager by the SEC staff, the staff typically issues a deficiency letter to the manager listing compliance shortcomings identified by the staff during the examination. See “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations? (Part Three of Three),” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011). Quickly, comprehensively and conclusively remedying compliance shortcomings identified in a deficiency letter should be a first order of business for any hedge fund manager – that is the easy part, a point that few would dispute. However, considerably more ambiguity surrounds the question of whether and to what extent hedge fund managers must disclose to investors and potential investors various aspects of SEC examinations – including their existence, scope, focus and outcome. More particularly, hedge fund managers that receive deficiency letters routinely ask: must we disclose the fact of receipt of this deficiency letter or its contents to investors or potential investors? And does the answer depend on whether potential investors have requested information about or contained in a deficiency letter in due diligence or in a request for proposal (RFP)? The answers to these questions generally have been governed by a “materiality” standard – the same standard that, at a certain level of generality, governs all disclosure questions. The consensus guidance has been: disclose whatever is material. But this is more of a reframing of the question than an answer. The practical question in this context is how to assess materiality in the interest of disclosing adequately, avoiding anti-fraud or breach of fiduciary duty claims and ensuring best investor relations practices. A recently issued SEC order (Order) settling administrative proceedings against a registered investment adviser provides limited guidance on the foregoing questions. This article describes the facts recited in the Order, the SEC’s legal analysis and how that analysis can inform decision-making of hedge fund managers considering whether and to what extent to disclose the existence or substance of deficiency letters to investors or potential investors. This analysis has particular relevance for hedge fund managers seeking to grow institutional assets under management by responding to RFPs.
Read Full Article … -
From Vol. 4 No.10 (Mar. 18, 2011)
Sullivan v. Harnisch and SEC Proposed Whistleblower Rules Bolster Internal Compliance Programs While Creating Catch-22 for Compliance Officers
Congress’s passage of the Dodd-Frank Act in July 2010 raised many concerns that its whistleblower program would harm hedge fund internal compliance programs by giving incentives for employees to bypass internal compliance and instead report wrongdoing directly to the SEC for a whistleblower award. But the recent case Sullivan v. Harnisch has bolstered internal compliance programs by confirming that a hedge fund can require its compliance officer to internally report fraud, and even validly fire him in retaliation (under New York law). See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager’s Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011). Similarly, the SEC has proposed new rules making legal, audit and compliance employees effectively ineligible for a whistleblower award unless they first report internally and their employer fails to respond properly, without clarifying whether there is a federal remedy for retaliation. These developments will certainly bolster hedge fund internal compliance programs, but leave key employees in a Catch-22 of being required to report wrongdoing internally while having no legal remedy for retaliatory firing. In a guest article, Samuel J. Lieberman and Jennifer Rossan, Of Counsel and Partner, respectively, in the Litigation Group at Sadis & Goldberg LLP, detail: the facts, holding, context and implications of Sullivan v. Harnisch; the mechanics and consequences of the proposed whistleblower rule for hedge fund compliance, legal and audit employees; case law interpreting a relevant provision under the False Claims Act; the dynamics of the Catch-22 created by Sullivan and the proposed whistleblower rule; and how that Catch-22 will impact internal compliance programs at hedge fund managers.
Read Full Article … -
From Vol. 4 No.7 (Feb. 25, 2011)
Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?
The Dodd-Frank Act (Dodd-Frank) will require hedge fund managers to appoint a chief compliance officer (CCO) for two reasons – an explicit reason and an implicit reason. Explicitly, Dodd-Frank will require registration (by July 21, 2011) by hedge fund managers with assets under management in the U.S.: (1) of at least $150 million that manage solely private funds; or (2) between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle (for example, a managed account). Registered hedge fund managers will be subject to SEC Rule 206(4)-7, which requires, among other things, registered investment advisers to “designate” (note: not “hire”) a CCO to administer their compliance policies and procedures. Implicitly, Dodd-Frank is not only the cause of major regulatory change, but also the effect of a changed regulatory mindset. Post-Dodd-Frank, there is more regulation – considerably more – and more vigorous enforcement of new and existing regulation. Much of that regulation applies with equal force to registered and unregistered hedge fund managers. Most notably, insider trading and anti-fraud rules apply to hedge fund managers regardless of their registration status. See “How Can Hedge Fund Managers Avoid Insider Trading Violations When Using Expert Networks? (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011). Recognizing this, even hedge fund managers beneath the relevant AUM thresholds are considering the appointment of a CCO (if they do not already have one). For hedge fund managers considering the appointment of a CCO – and even for managers that currently have a CCO but are reevaluating how they staff the role – there are three basic approaches: (1) hire a new internal person to serve exclusively as CCO; (2) add the CCO title and duties to the existing portfolio of a current internal person, such as the general counsel (GC), chief operating officer (COO) or chief financial officer (CFO); or (3) outsource the role to a third-party compliance consulting or similar firm. Which of these approaches makes sense, individually or in combination, depends on the size, strategy, complexity, resources, history and culture of the management company, among other factors. In short, deciding who to designate as your CCO is a complex decision, and an increasingly important one. The CCO is often the last bastion before a major compliance or operational failure, and as recent events demonstrate, those sorts of failures typically pose more franchise risk than bad investment calls. See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager's Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011). The basic purpose of this article is to identify the pros and cons of each of the three foregoing approaches to designating a CCO. To do so, this article discusses: what Rule 206(4)-7 specifically requires and does not require; the relative benefits and burdens of hiring a dedicated CCO, assigning the role to an existing person and outsourcing the role; hybrid approaches that incorporate the best elements of outsourcing and internal work; counterintuitive insights with respect to the demand for compliance professionals in the current environment; and – perhaps most importantly to anyone in, considering or hiring for a CCO role – specific compensation numbers for compliance professionals at hedge fund managers, employees at hedge fund managers who add a CCO role to other roles and dedicated CCOs, and the “market” for fees payable to outsourced CCO firms. (We thank David Claypoole, Founder and President of Parks Legal Placement LLC, for providing this detailed insight on CCO compensation numbers.)
Read Full Article … -
From Vol. 4 No.2 (Jan. 14, 2011)
Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager's Principal, CEO or CIO?
On December 29, 2010, the First Department of the New York State Appellate Division reversed a trial court order and dismissed a breach of implied contract claim brought by Joseph Sullivan, the Chief Compliance Officer of hedge fund manager Peconic Partners LLC, against his former employer and its CEO, William F. Harnisch. Sullivan had accused Harnisch of terminating his at-will employment in retaliation for his investigation into Harnisch's alleged "front running" scheme. In dismissing this claim, the Appellate Division recognized that the Peconic Code of Ethics, which Sullivan was required to follow, required "on pains of termination" that he investigate that alleged violation. Nonetheless, the Appellate Division found that this language did not create a contractual promise not to terminate Sullivan, and that no recognized exception to the employment-at-will doctrine otherwise protected him from termination without cause. We detail the background of the action and the court's pertinent legal analysis. Also, we provide a critical analysis of the opinion, discuss its implications for whistleblower law and practice and identify a key provision that must be included in hedge fund manager compliance manuals and codes of ethics in order to protect the chief compliance officer.
Read Full Article …