While the convenience of communicating through electronic messaging is undeniable, also irrefutable are the regulatory and legal risks posed to investment advisers, particularly when their employees use unapproved electronic messaging platforms. Compliance officers must walk a fine line between adopting policies and controls adequately tailored to mitigate the relevant risks posed by electronic communications and imposing overly restrictive measures that would hamper employees’ ability to efficiently and productively conduct business. This final article in our three-part series examines six core components that advisers should consider including in their electronic communication policies, taking into account the records requested in the “Information Request List” (Request List) purportedly being used by the SEC in connection with electronic communication-focused examinations of investment advisers, as well as six steps that advisers can take to proactively prepare for future scrutiny. The first article provided background on sweep exams, with particular focus on the ostensible electronic messaging exam and the potential drivers of SEC focus in this area. The second article explored the various components of the Request List and analyzed the implications and consequences of certain requests. For more on designing risk-based policies and procedures, see “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017); “General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action” (Nov. 3, 2016); and “Investment Adviser Penalized for Weak Cyber Policies; OCIE Issues Investor Alert” (Oct. 1, 2015). Read full article …

In the nine weeks since the October 5, 2017, exposé in The New York Times regarding Harvey Weinstein and his reported settlements with various women, allegations of harassment have spread like wildfire throughout the country. From Hollywood to Capitol Hill, corporate America, investment managers and beyond, hardly a day goes by without new allegations emerging against additional male power figures. For the individuals and entities accused, the significant legal and financial risks are only part of the exposure; harassment allegations can ruin reputations and damage businesses long before claims ever get to a judge, jury or arbitrator. Now is the time for investment managers to act. In a guest article, Akin Gump partners Richard J. Rabin and Esther G. Lander, along with senior practice attorney Kelly L. Brown, outline the steps that investment managers should take to ensure compliance with applicable law and prevent future claims of harassment, including reviewing their equal employment opportunity policies, practices and training, and assessing and addressing any shortcomings in their office environments. For additional insight from Rabin on employment law issues, see “Four Steps NYC-Based Fund Managers Should Take in Light of Newly Enacted Law Prohibiting Compensation History Queries When Interviewing Prospective Employees” (May 11, 2017); “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017); and “Steps Hedge Fund Managers Can Take in Light of NY Attorney General’s View That Certain Non-Compete Clauses Are Unconscionable” (Sep. 22, 2016). Read full article …

Although the Trump administration has sought to create a more business-friendly environment, the implications of the White House’s rhetoric for private funds remain nuanced and complex. Nearly a decade after the financial crisis of 2008, sensitivity to potential securities laws violations runs so high that the SEC continues to refine its approach to examinations and enforcement in the financial sector. Corporate executives who may not have had direct responsibility for enforcing internal compliance policies are finding their roles, and potential liability, in flux. When violations occur, chief compliance officers may find themselves on the hook even if they have tried to warn management of compliance deficiencies and failures and even if they had no analogous liability in the past. These stiffer standards and toughened scrutiny arise from the SEC’s continuing concern with protecting retail investors who may lack the sophistication that large institutional investors can employ when assessing new products. Given that evolving technologies pose unprecedented compliance vulnerabilities, the SEC is also heavily focused on cybersecurity, taking a global perspective that encompasses firms and activities far beyond the agency’s theoretical jurisdiction. All these themes came across in the annual report for fiscal year 2017 issued by the SEC’s Division of Enforcement. This article analyzes the report, along with insights from legal professionals with expertise in SEC enforcement matters. For analysis of the SEC’s stance under the new administration, see “SEC Urges Advisers Relying Upon Unibanco No-Action Letters to Submit Certain Documentation” (Apr. 20, 2017); and “Acting SEC Chair Emphasizes Agency Will Protect the ‘Forgotten Investor’” (Mar. 2, 2017). Read full article …

Properly compensating employees is a perpetual issue for fund managers, as they must allocate management fee and performance compensation pools, balancing business and tax considerations while incentivizing and retaining key employees. A recent program sponsored by the New York Alternative Investment Roundtable provided a primer on how private fund managers can use management fee streams and performance fees to incentivize and compensate their partners and employees in a tax-efficient manner. Timothy Frazier, vice president of TriNet, hosted the presentation, which featured Gregory Kastner, senior tax manager for Baker Tilly Virchow Krause, who presented insights from the client alert he wrote on structuring employee compensation plans. This article summarizes the portions of the presentation most relevant to private fund managers. For more on hedge fund compensation, see our two-part series on deferred compensation plans: “Structuring Plans to Retain Top Talent” (Jun. 22, 2017); and “Practical Considerations: Vesting Schedules, Deferral Amounts and Compliance With Section 409A” (Jun. 29, 2017); as well as our two-part interview with David Claypoole: “How Have Industry Developments Affected the Value of Legal and Compliance Staff?” (Feb. 2, 2017): and “Will Industry Deregulation Affect the Value of Legal and Compliance Staff?” (Feb. 16, 2017). Read full article …

In the continuing search for uncorrelated alpha, private fund managers are looking beyond traditional asset classes. A recent presentation at Sadis & Goldberg’s 10th Annual Alternative Investment Management Seminar offered an overview of the business, legal and regulatory considerations of investing in blockchain, cannabis and litigation finance. The program featured Andrew Chang, chief operating officer of blockchain technology firm Paxos and bitcoin exchange itBit; and Sadis & Goldberg partners Steven Huttler and Yehuda M. Braunstein. This article highlights the portions of the presentation most relevant to fund managers exploring investments in these asset classes. For additional insights from Huttler and Braunstein, see “Sadis & Goldberg Seminar Highlights the Ample Fundraising and Co-Investment Opportunities in the Private Equity Industry, Along With Attendant Deal Flow and Fee Structure Issues” (Dec. 8, 2016). Read full article …

Investors are more confident about the ability of hedge funds to outperform other types of investments than they were five years ago, according to the 11th annual Global Hedge Fund and Investor Survey published by Ernst & Young (EY). Conversely, hedge fund managers face significant barriers to entry and competition from specialty managers. The 2017 survey explores – among other things – fund managers’ strategic priorities; investor allocation plans; offering of non-traditional products; evolution of hedge funds’ front-office and investment functions, including separate accounts, customized fund terms, alternative fee structures and use of big data; and key industry risks. This first article in a two-part series summarizes the survey’s findings in these areas. The second article will detail the survey’s results with respect to issues affecting operational efficiency, along with the challenges of attracting, developing and retaining talent, and will offer key takeaways for fund managers revealed by the survey. For coverage of EY’s 2016 survey, see “Industry Risks; Customized and Non-Traditional Products; Investor Allocation Preferences; Fees; and Hedge Fund Growth Priorities” (Dec. 1, 2016); and “Marketing Strategies, Talent Management, Prime Brokerage and Operational Matters” (Dec. 8, 2016). Read full article …