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    Dec. 06, 2018

Conflicts of Interest Questionnaires: Why Fund Managers Need Them, and What They Should Cover (Part One of Two)

A conflict of interest occurs when an individual or a firm has an incentive to serve one interest at the expense of another interest or obligation. The source of these conflicts is often an investment adviser’s own employees. For example, if an employee’s close relative owns a company in which the adviser invests client funds, it could create a conflict of interest. Investment advisers owe a fiduciary duty to their clients that obligates them to either eliminate any conflicts of interest or mitigate and disclose them. To fulfill this duty, advisers must know about any existing or potential conflicts of interest created by employees’ outside business activities or relationships. Advisers can use conflicts of interest questionnaires to gather information from employees on common situations and relationships that may give rise to a conflict. This two-part series details the fundamentals of conflicts of interest questionnaires. This first article explains why investment advisers should use conflicts of interest questionnaires and describes the areas the questionnaires should cover. The second article will discuss how to use conflicts questionnaires, including who should be required to complete them, when they should be completed and how advisers should use the information gathered on these forms. See “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit” (Mar. 12, 2015); and “Identifying and Addressing the Primary Conflicts of Interest in the Hedge Fund Management Business” (Jan. 17, 2013).

France Welcomes Foreign Asset Managers With Softened Tax Treatment of Carried Interest

In light of the ongoing changes in Europe resulting from, inter alia, Brexit, the French government has shown a strong commitment to removing certain French tax pitfalls for foreign asset managers looking for an alternative entrance into the European market. A parliamentary amendment to the French 2019 Draft Finance Act, initially adopted by the National Assembly (the Holroyd Amendment), was recently voted on by the Senate. The Holroyd Amendment is expected to enable foreign private fund managers relocating to France to benefit from a 30-percent tax rate on carried interest they already hold in foreign funds. In a guest article, Sabina Comis and Pierre-Emmanuel Floc’h, partner and associate at Dechert, respectively, discuss the actions taken by the French government – namely, the lowering of the tax rate on incentive compensation – to lure foreign fund managers to France in the wake of Brexit, as well as which fund managers will be eligible to benefit from this new tax regime. For more on French law affecting private fund managers, see “Advise Technologies Program Provides Guidance for Non-E.U. Hedge Fund Managers Registering Under E.U. Private Placement Regimes (Part One of Two)” (Dec. 3, 2015); and “What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs” (Nov. 12, 2015). For additional commentary from Dechert partners, see “How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect” (Apr. 6, 2017).

SEC Enforcement Division Annual Report Emphasizes Continuing Focus on Retail Investors, Individual Accountability, Cyber Misconduct and Digital Assets

The SEC’s Division of Enforcement (Division) recently announced its enforcement-related accomplishments for its fiscal year (FY) 2018, which included 821 enforcement proceedings and orders totaling nearly $4 billion in penalties and disgorgement, of which $794 million was returned to affected investors. The Division’s 2018 Annual Report (Report), its second annual report of this type, provides details of those actions and recoveries. The Report includes a detailed introductory message from Division Co‑Directors Stephanie Avakian and Steven Peikin; presents data on the Division’s enforcement efforts in FY 2018; and discusses the Division’s implementation of each of its five core principles. This article summarizes the key takeaways from the Report. For coverage of the Division’s 2017 report, see “Securities Docket Webinar Analyzes 2017 SEC Enforcement Activities, Along With Disgorgement and Whistleblower Developments (Part One of Two)” (Feb. 22, 2018); and “SEC Signals Aggressive Stance on Individual Responsibility, Including Potential CCO Liability, in FY 2017 Annual Report” (Dec. 14, 2017).

Failure by Fund Manager to Disclose Updated Valuation Data in Connection With an Offer to Purchase LP Interests Results in SEC Sanctions

A recent SEC enforcement action is a reminder that fund advisers must be scrupulous in their valuation and disclosure practices, even when winding down a fund. A private equity adviser proposed to liquidate one of its funds through an in-kind distribution using the fund’s year-end net asset value for the prior year, but it later abandoned that proposal. The adviser then learned of a possible material increase in the valuations of the fund’s two remaining portfolio companies. The SEC claimed that, in conjunction with a subsequent offer to purchase the investors’ remaining interests in the fund at the prior year’s valuation, the adviser failed to disclose the new valuation information. This article details the alleged misconduct and the terms of the SEC settlement order. See our two-part series on winding down funds: “How Managers Make the Decision and Communicate It to Investors and Service Providers” (Mar. 2, 2017); and “Navigating Illiquid Assets, Unanticipated Windfalls and Fees and Expenses During Liquidation” (Mar. 16, 2017).

Ernst & Young Survey Explores Changes in Employee Talent Pool; Use of Technology and Outsourcing; Expense Management; Alternative Fee Arrangements; and Future Risks to the Industry (Part Two of Two)

Technology continues to reshape the alternative investment industry, affecting not only how fund managers conduct business, but also the people that advisers hire as more diverse skillsets are needed to implement technological advancements. These points were explored in the 12th annual Global Alternative Fund Survey conducted by Ernst & Young. This second article in our two-part series discusses changes in the employee talent pool; fees and expenses, including expense management, alternative fee arrangements, use of technology and outsourcing; and respondents’ perspectives on industry risks. The first article summarized the survey’s key findings on manager priorities, investor allocation plans, private fund offerings, separately managed accounts, growing use of technology by managers and interest in cryptocurrencies. For more on talent acquisition, see “An Introduction to Quantitative Investing: Special Risks and Considerations (Part Three of Three)” (Sep. 6, 2018).

Former SEC Deputy Director of Trading and Markets Gary Goldsholle Rejoins Steptoe

Steptoe & Johnson LLP has expanded its financial services; public policy; and blockchain and cryptocurrency practices with the addition of Gary Goldsholle as partner in its Washington, D.C., office. Goldsholle advises clients on legal, regulatory and policy issues across the financial services industry, including the equities, fixed income and derivatives markets, as well as the emerging cryptocurrency markets. For insight from another Steptoe partner, see “What Is a Chief Risk Officer, and Should Hedge Fund Managers Have One?” (Aug. 5, 2009).

Blue River Partners Expands New York Office With Addition of Roy Genzmann and Steve Kansky

Dallas-based Blue River Partners, LLC, an outsourced service provider to the alternative asset management industry, is expanding its New York presence with a new office in Manhattan and the addition of several senior executives, including Roy Genzmann and Steve Kansky. Genzmann is serving as managing director for fund administration, operations and outsourced chief financial officer services, while Kansky is managing director in the regulatory compliance group.