The chief compliance officer of a small fund manager is likely the individual responsible for reviewing and approving all advertisements, while a larger adviser may employ a team of individuals dedicated to this function. In either case, mere familiarity with the applicable rules is not enough to ensure that the reviewer will identify content that poses risks from a regulatory perspective. Rather, an effective compliance reviewer must understand all aspects of the adviser’s business, its investment strategies and instruments traded, as well as possess a general understanding of how the markets operate. Certain categories of content, because of the very nature of the information being presented, pose greater risks from a regulatory perspective and thus warrant special attention by compliance officers. This second article in our three-part series discusses five of these high-risk areas, provides guidance to compliance officers on what to look for when encountering high-risk content and suggests ways for presenting this information that meet the needs of both the business-development and compliance teams. The first article in the series outlined what documents fall within the advertisement definition and described ten best practices that managers should consider implementing when designing or evaluating their advertising review procedures. The third article will explore six different testing mechanisms firms can employ to verify compliance with their advertising procedures. See “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017); and “K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three)” (Jan. 8, 2015). Read full article …

While members of the financial services industry anticipate that the administration of Donald J. Trump will remove what they see as the burdensome regulations adopted following the 2008 financial crisis, U.S. fund managers that operate on a global scale should not expect a similar reprieve outside U.S. borders. See “Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds” (Sep. 4, 2017). In a recent interview with the Hedge Fund Law Report, Garth Ebanks, Deputy Head of the Investments and Securities Division at the Cayman Islands Monetary Authority (the Authority), discussed the approach that the Authority and the Cayman Islands Government are taking on an array of regulatory initiatives. In this second article in our two-part series, Ebanks discusses the steps being taken by the Authority to ensure that Cayman vehicles are well positioned to obtain a marketing passport under the Alternative Investment Fund Managers Directive; three important regulatory initiatives being pursued by the Authority; the new Cayman Islands whistleblower law; and how the Cayman Islands has remained competitive as an offshore funds jurisdiction despite an onslaught of competition. The first article provided Ebanks’ thoughts into how managers are using the much-anticipated Cayman Islands limited liability company structure; how the Authority approaches the regulation of different types of private funds and other fund governance issues; and common deficiencies by private funds identified by the Authority concerning anti-money laundering and other applicable supervisory regulations. For additional commentary from Ebanks, see “U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration” (Nov. 17, 2016). Read full article …

Private fund managers rely on third parties for a variety of critical services. Identifying and managing those relationships in a systematic way is essential to minimizing enterprise risk and ensuring compliance with regulatory requirements. A recent MyComplianceOffice (MCO) presentation provided a framework for developing a program for managing third-party relationships. Although the primary focus of the program was on the broader financial services industry, the principles discussed are relevant to outsourcing decisions made by fund managers and their dealings with administrators, technology vendors, research firms and other key third parties. The program was hosted by Joe Boyhan of MCO and featured Linda Tuck Chapman, president of Ontala. This article summarizes the key takeaways from the presentation. For coverage of other MCO programs, see “Reading the Regulatory Tea Leaves: Recent White House and Congressional Action and Insights From SIFMA and FINRA Conferences” (Jul. 20, 2017); and “What the Record Number of 2016 SEC and FINRA Enforcement Actions Indicates About the Regulators’ Possible Enforcement Focus for 2017” (Dec. 15, 2016). Read full article …

It is widely understood that trading on information about pending government actions obtained through political intelligence firms can give rise to insider trading charges. A recent SEC settlement order with Deerfield Management Company, L.P. (Deerfield) makes clear that a fund manager’s generic policies and procedures to prevent trading on material nonpublic information (MNPI) may not pass muster if the manager makes use of political intelligence firms. In 2012 and 2013, two Deerfield analysts generated profits of nearly $4 million for Deerfield funds by trading on MNPI provided by a political intelligence consultant. See “SEC Insider Trading Action Highlights Red Flags Hedge Fund Managers Must Heed When Employing Political Intelligence Consultants” (Jun. 8, 2017). The SEC asserted that Deerfield’s policies and procedures were not reasonably designed to prevent the misuse of MNPI obtained from political intelligence firms. This article examines the events that gave rise to the SEC action; the alleged deficiencies in Deerfield’s policies and procedures; and the terms of the settlement. For an action involving alleged deficient policies and procedures at a political intelligence firm, see “Self-Evaluation Policies Are Insufficient for Political Intelligence Firms to Avoid MNPI Violations” (Dec. 17, 2015). For more on political intelligence and the risks of insider trading, see “How Can Hedge Fund Managers Identify and Mitigate Insider Trading Risks Associated With Gathering and Using Political Intelligence?” (Jul. 11, 2013); and “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls” (Apr. 5, 2012). Read full article …

Operating an asset management business remains a resource-intensive endeavor, particularly as fund fees have come under pressure from investors. See “Investor Pressure Drives New Performance Compensation Models and Increased Disclosure Obligations for Managers” (Jun. 29, 2017). Some managers have sought to reduce their operational costs by moving at least some of their technological infrastructure – e.g., data storage, trade execution, accounting systems, client-relationship-management systems and disaster recovery services – to the cloud. While hosting these services in the cloud offers cost-effective and convenient technology solutions, fund managers must be cognizant of the potential cybersecurity risks associated with relying upon a cloud solution, including the legal risks that may be lurking in the standard service level agreements with cloud service providers. Considerations of potential risks and liabilities associated with engaging a cloud service provider, along with tips on how to conduct due diligence on a cloud vendor, were addressed at PLI’s Eighteenth Annual Institute on Privacy and Data Security Law. The panel featured Matthew Kelly, vice president and senior corporate counsel at cloud computing company ServiceNow, Inc. This article offers Kelly’s insights as to what an investment manager should and should not expect from cloud service providers, along with key provisions to understand in their service level agreements. For background on how private fund managers are using cloud computing, see “Can Emerging Hedge Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2016); and “Greenwich Associates Report Argues That Hedge Fund Managers Can Use the Cloud to Obtain Greater Computing Power at Lower Cost With Acceptable Risk” (Jun. 6, 2014). Read full article …

The SEC recently released an order instituting administrative cease-and-desist proceedings against an investment adviser, following claims by the Commission that the adviser allowed its representatives to breach their fiduciary duty toward its clients. The conflicts of interest alleged by the SEC in this matter are serious, involving deliberate promotion and marketing of certain classes of shares whose value did not surpass that of other classes of shares that clients could have purchased for a markedly lower price and without having to pay certain marketing fees. This enforcement action affirms the SEC’s continuing commitment to stamping out conflicts of interest, as set forth in the influential 2015 “Conflicts, Conflicts Everywhere” speech delivered by Julie M. Riewe, then Co-Chief of the SEC’s Division of Asset Management. See “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit” (Mar. 12, 2015). To help readers understand the enforcement action and the issues involved, this article analyzes the SEC’s cease-and-desist order and includes insights from legal practitioners at the forefront of interactions between the financial sector and the regulators. For another enforcement action involving inappropriate recommendations of certain mutual fund shares, see “$97 Million SEC Settlement Highlights Perils of Inaccurate Disclosures and the Agency’s Continued Focus on Conflicts of Interest and Client Overcharges” (May 25, 2017). Read full article …

Goodwin has added Alexandrine Armstrong-Cerfontaine as an investment funds and private equity partner in its London office. Armstrong-Cerfontaine advises private equity sponsors and companies on fund formation, syndicated financings, leveraged financings and restructurings. Many of the transactions Armstrong-Cerfontaine works on have a Luxembourg component. See “Luxembourg Fund Structures Evolve to Meet the Needs of the Private Fund Industry” (Oct. 13, 2016). For additional insights from Goodwin attorneys, see “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers” (Jun. 13, 2014). Read full article …