Employee compensation clawbacks can help hedge fund managers deter bad acts, preserve reputation and demonstrate a commitment to compliance. However, compensation clawbacks are only effective if properly structured, carefully drafted and consistently enforced. This is the second article in a two-part series designed to help hedge fund managers think through the pros and cons of implementing compensation clawbacks. In particular, this article starts by exploring some of the cons, including those relating to federal employment and tax law; state wage, labor and tax law; whistleblower issues; and logistical concerns. This article then identifies four best practices for structuring and implementing clawbacks, and concludes with an appendix including three sample clawback provisions provided by sources and actually used by hedge fund managers, and one definition of “cause” used in connection with a clawback provision. The first installment in this series provided an overview of employee clawbacks at hedge fund managers; discussed the types of employees, misconduct and triggering events covered by clawbacks; and highlighted the benefits of implementing clawbacks. See “Structuring, Drafting and Enforcement Recommendations for Hedge Fund Managers Considering Employee Compensation Clawbacks (Part One of Two)
,” Hedge Fund Law Report, Vol. 6, No. 31 (Aug. 7, 2013).