Among Proskauer partner Robert Plaze’s many achievements during his lengthy tenure in the SEC’s Division of Investment Management is the critical role he played in the development of the 2003 and 2009 amendments to Rule 206(4)‑2 under the Investment Advisers Act of 1940, the so-called “Custody Rule.” Plaze recently marshalled his experience with and expertise on the Custody Rule into a paper summarizing SEC regulatory requirements for investment advisers that have custody of their clients’ assets – or that want to avoid having custody. The Hedge Fund Law Report recently interviewed Plaze in connection with the release of that paper. This second article in our two‑part series addresses the challenges of complying with the Custody Rule; common custody violations, including inadvertent custody and lack of auditor independence; and Plaze’s tips for complying with the rule. The first article outlined the history of the Custody Rule, including the 2003 and 2009 amendments, as well as Plaze’s view on possible future amendments to the rule. See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?” (Jan. 20, 2010). Read full article …

The desire to better align investor and manager interests has resulted in the increased use of various kinds of alternative compensation structures. For example, a recent report from the Alternative Investment Management Association found that 92% of hedge fund managers surveyed employ a high water mark (HWM) when calculating performance fees and 37% use a hurdle rate, while only 16% provide for deferred compensation or investor clawbacks of fees in years with negative performance. See “AIMA Survey Examines Evolution in the Ways That Managers Align With Investors” (Nov. 7, 2019). In a two-part guest series, Sidley Austin attorneys Janelle Ibeling, Joseph Schwartz and Andrew Krebsbach explore several alternative compensation structures and highlight certain challenges and questions of which fund managers and industry practitioners should be aware. This article reviews designated investments, “1 or 30” structures, caps and first loss arrangements. The first article analyzed hurdles, benchmarks, HWMs and clawbacks. For additional commentary from Schwartz, see “CFTC Proposes Rule to Clarify Registration Obligations of Foreign CPOs and CTAs” (Sep. 1, 2016). Read full article …

The Alternative Credit Council (ACC), an affiliate of the Alternative Investment Management Association, in partnership with Dechert, recently released a report (Report) based on in-depth interviews with leading figures in the private credit industry and a survey of 60 private credit managers representing $260 billion of deployed private credit capital and an additional $116 billion in dry powder. A recent ACC/Dechert program presented the central findings of their research, with insights from representatives from private credit firms. Jiří Krόl, global head of the ACC, moderated the discussion, which featured Benjamin Fanger, founder and managing partner of ShoreVest Partners; Joseph Glatt, general counsel of Apollo Capital Management, L.P.; Richard Horowitz, partner at Dechert; Olga Kosters, head of private debt secondaries at Tikehau Capital; and Elissa Von Broembsen‑Kluever, partner and managing director at Omni Partners LLP. This two-part series summarizes the key takeaways from the presentation, with relevant information from the Report. This first article outlines the drivers of private credit’s growth; issues relating to transparency and benchmarks; fee considerations; and responsible investing factors. The second article will explore the overall outlook for private credit. See “Current Trends and Issues in Hedge Fund Direct Lending” (Aug. 15, 2019); and “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016). Read full article …

The SEC routinely takes advisers to task for failing to have written policies and procedures for actions such as allocating trading costs or fees and expenses, although merely having those policies and procedures is insufficient. Advisers must also ensure that their policies and procedures do not conflict with the terms of individual client agreements, and advisers must actually implement and comply with those policies and procedures. In a recent enforcement action, the SEC asserted that, although an investment adviser had disclosed its written policy for allocating trading costs, it failed to follow that policy when it conflicted with restrictions specified in individual clients’ investment management agreements. As a result, the SEC claimed that the adviser violated Rule 206(4)‑7, the so-called “compliance rule.” Any hedge fund adviser that allocates trades across multiple funds or separately managed accounts could easily face the same issues as the adviser in this action. Moreover, the general lessons on the interplay between an adviser’s policies and procedures and investor agreements are applicable to all hedge fund advisers. This article summarizes how the adviser’s failure to craft policies and procedures that took into account restrictions and requirements in individual clients’ agreements and to comply with its own specified practices resulted in the violation alleged in the settlement order. See “Best Practices for Hedge Fund Managers to Mitigate the Conflicts Arising From Managed Accounts: Dealing With Trade and Expense Allocations (Part Three of Three)” (Aug. 1, 2019); “SEC Fines Fund Manager for Failing to Equitably Allocate Fees and Expenses to Its Affiliate Funds and Co‑Investors” (Jun. 6, 2019); and “Proper Disclosure of Fee and Expense Allocations Is Crucial for Managers to Avoid SEC Enforcement Action” (Sep. 1, 2016). Read full article …

The CFTC Division of Enforcement (Division) recently released its second annual report (Report) covering the fiscal year that recently ended (FY 2019). The Report reiterates the Division’s focus on preserving market integrity, protecting customers, promoting individual accountability and fostering cooperation with other enforcement authorities; provides an overview of enforcement activity for FY 2019 and the results of the CFTC’s whistleblower program; and discusses key enforcement trends and areas of enforcement focus. This article distills the key takeaways from the Report. See “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017). Read full article …

Gibson Dunn announced that Michelle Kirschner has joined the firm’s London office as a partner. Focused on noncontentious financial services regulation, Kirschner represents a wide range of financial institutions, including hedge fund managers, private equity sponsors, integrated investment banks and corporate finance boutiques. She has extensive experience advising clients on areas such as systems and controls; market abuse; conduct risk; and regulatory change management and compliance, including the recast E.U. Markets in Financial Instruments Directive; the Market Abuse Regulation; and the Senior Managers and Certification Regime. See “ACA Panel Reviews Effects of Impending MiFID II on U.S. Advisers” (Dec. 7, 2017); and “ESMA Strives to Prepare Markets As MiFID II, MiFIR and Brexit Approach” (Oct. 12, 2017). Read full article …