The Hedge Fund Law Report

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By Topic: Examinations

  • From Vol. 11 No.37 (Sep. 20, 2018)

    The SEC Is Calling: How CCOs Can Stay Prepared for Initial Communications With OCIE Examiners (Part Two of Two)

    Interacting with SEC examiners can be a nerve-racking experience for even the most seasoned chief compliance officer (CCO). Serving as the key point persons during examinations, CCOs must think quickly on their feet to respond accurately to questions from examiners, while ensuring that they present themselves and their employers in the best light possible. This two-part series explores the initial interactions during examinations between examiners from the SEC’s Office of Compliance Inspections and Examinations (OCIE) and an adviser’s CCO, including a detailed discussion about OCIE’s fairly new practice of requesting the CCO to participate in a call to discuss the adviser’s business and compliance program (Interim Call) prior to coming onsite to the adviser’s office. This second article in the series examines how the SEC is using Interim Calls to meet multiple objectives; outlines the topics that are generally discussed during these calls; and provides guidance for how CCOs can prepare for them, including what documents and information they should review in advance and what materials should be on hand during these calls. The first article discussed the ways in which the SEC initiates the examination process and provided insight into the form and substance of initial calls between the examiners and the CCO, including analysis of who participates in them on behalf of each of the SEC and the adviser. See “How Studying SEC Enforcement Trends Can Help Hedge Fund Managers Prepare for SEC Examinations and Investigations” (Sep. 8, 2016); and “ALM General Counsel Summit Reveals How Hedge Fund Managers Can Prepare for SEC Examinations” (Nov. 19, 2015).

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  • From Vol. 11 No.36 (Sep. 13, 2018)

    The SEC Is Calling: What CCOs Should Expect During Initial Communications With OCIE Examiners (Part One of Two)

    SEC examiners begin many routine examinations of private fund managers with lengthy calls with the adviser’s chief compliance officer (CCO). In part designed to help the SEC obtain the greatest return on the investment of its limited resources, these calls provide SEC examiners with an opportunity to learn more about the relevant adviser’s business and compliance program earlier in the exam process. This two-part series examines the format and substance of these initial calls and provides guidance on how CCOs can prepare for these interactions with the examiners. This first article discusses the ways in which the SEC initiates the examination process and provides insight into the form and substance of these introductory calls between the examiners and the CCO, including who participates in them on behalf of each of the SEC and the adviser. The second article will examine how the SEC is using these calls to meet multiple objectives; outline the topics that are generally discussed during them; and explore how a CCO can prepare accordingly, including what documents and information he or she should review in advance and what materials should be on hand during these calls. See “Effects of Expanding SEC Investment Adviser Examinations” (Mar. 24, 2016); and our three-part series “What Do Hedge Fund Managers Need to Know to Prepare for, Handle and Survive SEC Examinations?”: Part One (Feb. 3, 2011); Part Two (Feb. 10, 2011); and Part Three (Feb. 18, 2011).

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  • From Vol. 11 No.32 (Aug. 9, 2018)

    The Impact of the New SEC-CFTC Memorandum of Understanding on Fund Managers

    Regulators in the U.S. and Europe have been gravitating toward greater harmonization. The European Securities and Markets Authority, for example, aims to achieve harmony across the myriad regulatory regimes of E.U. Member States. See “ESMA Requires Enhanced Supervisory Role and Tools for Harmonizing E.U. and Third-Country Regulations” (Jun. 22, 2017). In addition, in the U.S., the SEC and the CFTC recently approved a new Memorandum of Understanding (MOU) regarding coordination between the two agencies in areas of common regulatory interest and information sharing. The new MOU is intended to facilitate the discussion and coordination of regulatory action, as well as information exchange and data sharing. CFTC Chairman J. Christopher Giancarlo has claimed that increased harmonization will reduce complexity and lower costs for regulators and market participants, including fund managers. This article summarizes the MOU and discusses the validity of that claim, as well as other effects the agreement may have on fund managers. For more on regulatory convergence in Europe, see “ESMA Chair Calls for Stronger Supervisory Tools to Achieve Capital Markets Union” (Apr. 20, 2017); “FCA Director Lays Out Expectations for Cybersecurity of Financial Services Firms: Identification of Cyber Risks, Detection, Firm Preparedness and Information Sharing” (Sep. 29, 2016); and “ESMA Chair Calls for Increased Transparency and Regulatory Convergence As Interest Rates Rise” (Jan. 28, 2016).

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  • From Vol. 11 No.30 (Jul. 26, 2018)

    What Are the Key Takeaways for Fund Managers From the SEC’s Draft Strategic Plan for 2018‑2022?

    The SEC recently published its draft strategic plan (Strategic Plan) for fiscal years 2018‑2022. The plan highlights the SEC’s commitment to serving the long-term interests of retail investors; becoming more innovative, responsive and resilient to market developments and trends; and leveraging staff expertise, data and analytics to bolster performance. This article analyzes the Strategic Plan’s stated goals and the initiatives designed to pursue those goals; provides key takeaways for fund managers from the plan; and offers insight from lawyers with extensive SEC experience. For more on current SEC priorities, see “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018).

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  • From Vol. 11 No.30 (Jul. 26, 2018)

    Ropes & Gray Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment (Part Two of Two)

    Credit fund managers must be keenly aware of the conflicts of interest that often go hand-in-hand with their strategies. This was one of the principal findings of a recent report issued by Ropes & Gray, which surveyed 100 credit fund managers in cooperation with Debtwire. In a recent webinar, Ropes & Gray partners James R. Brown, Eva Ciko Carman, Alyson Brooke Gal and Jessica Taylor O’Mary explained the survey results and key takeaways from the Ropes & Gray Credit Funds Forum. Our two-part series summarizes the report’s findings and the webinar speakers’ insights. This second article examines a variety of conflicts of interest that frequently arise for credit managers, the forms of leverage these managers are using, the types of issues that investors subject to the Employee Retirement Income Security Act of 1974 raise for credit managers and specific issues that arise for these managers when being examined by the SEC. The first article discussed the types of credit strategies offered by the survey participants, challenges currently facing credit funds and the types of fund structures adopted by credit fund managers – including “season and sell” structures, treaty funds, business development companies and blockers – when engaging in a direct lending strategy. See our three-part series on conflicts arising out of simultaneous management of hedge funds and private equity funds: “Investment Conflicts” (May 7, 2015); “Operational Conflicts” (May 14, 2015); and “How to Mitigate Conflicts” (May 21, 2015).

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  • From Vol. 11 No.29 (Jul. 19, 2018)

    Understanding the SEC’s National Exam Program: Recent Exam Trends and How Fund Managers Can Determine the Type of Exam OCIE Is Conducting (Part Two of Two)

    Much has been written about the types of examinations – i.e., routine/risk-based, sweep and cause – that the SEC’s Office of Compliance Inspections and Examinations (OCIE) conducts of registered investment advisers. Surprisingly, however, most advisers that are the subject of an exam will not know at the outset what type of exam the SEC is conducting, and in some cases, the adviser will never know. OCIE examiners do not typically disclose this information voluntarily, and if asked, they may refuse to answer. There are hints, however, along the way that chief compliance officers and their counsel can use to make an educated guess into the type of exam OCIE is conducting. While not critical, knowing this information can provide perspective into how the exam may proceed. This second article in our two-part series analyzes the types of exams OCIE conducts, recent trends in examinations, how the risk-based strategy translates into risk-based examinations and ways fund managers can determine the type of exam OCIE is conducting. The first article discussed the steps that the SEC has taken in recent years to increase the number of advisers it examines each year and explored how OCIE’s risk-based strategy informs which advisers are selected for examination. See “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016). See also our three-part series “What Do Hedge Fund Managers Need to Know to Prepare for, Handle and Survive SEC Examinations?”: Part One (Feb. 3, 2011); Part Two (Feb. 10, 2011); and Part Three (Feb. 18, 2011).

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  • From Vol. 11 No.29 (Jul. 19, 2018)

    How Investment Advisers Can Mitigate Common Advertising Risks

    A recent webinar hosted by Ascendant Compliance Management featured Adam DiPaolo, associate general counsel and senior consultant at Ascendant; Michael W. McGrath, partner at K&L Gates; and Antonella Puca, director at the CFA Institute. This article summarizes the portions of the program covering SEC rules and guidance applicable to investment adviser advertising, including performance advertising, backtesting, testimonials, social media and illustrative SEC enforcement proceedings. For additional commentary from K&L Gates and Ascendant, see our two-part coverage of a cybersecurity panel: “Overview of Laws and Threats Applicable to Investment Managers” (Apr. 23, 2015); and “Overview of Cybersecurity Risk Mitigation Frameworks and Techniques” (Apr. 30, 2015).

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  • From Vol. 11 No.28 (Jul. 12, 2018)

    Understanding the SEC’s National Exam Program: How OCIE Selects Advisers to Examine (Part One of Two)

    The SEC, like the roughly 26,000 registered entities whose activities it is charged with overseeing, must efficiently allocate its resources to accomplish its stated goals. Responsible for examining SEC registrants, the SEC’s Office of Compliance Inspections and Examinations (OCIE) is often forced to make difficult decisions about where to focus its time and efforts when carrying out its four pillars of promoting compliance; preventing fraud; identifying and monitoring risk; and informing policy. Recognizing that the enormous size of the registrant pool prevents it from conducting regular exams of each registered firm, OCIE has repeatedly stated that it employs a risk-based strategy when overseeing market participants within its jurisdiction. This two-part series examines how this risk-based strategy informs the SEC’s National Exam Program. Fund managers can benefit from understanding how the SEC carries out a risk-based examination program, as the strategy shapes both the selection of which advisers to examine and the exams themselves. This first article discusses the steps that the SEC has taken in recent years to increase the number of advisers it examines each year and explores how the risk-based strategy employed by OCIE informs which advisers are selected for examination. The second article will analyze the types of exams OCIE conducts, recent trends in examinations, how the risk-based strategy translates into risk-based examinations and ways fund managers can determine the type of exam OCIE is conducting. See “What Hedge Fund Managers Need to Know About Getting Through an SEC Examination (Part One of Two)” (Jun. 16, 2016).

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  • From Vol. 11 No.25 (Jun. 21, 2018)

    The Power of “No”: SEC Commissioner Peirce on Enforcement As Last Resort

    An article in a legal publication argued that SEC Commissioner Hester M. Peirce has a tendency to vote “no” on cases the SEC’s Division of Enforcement has recommended the SEC bring or settle in-house. Peirce responded to that article and explained “the why behind [her] no” in a recent speech. Peirce’s remarks provide insight into her view of the overarching philosophy of the SEC’s enforcement program; several factors that guide her consideration of enforcement recommendations; and certain practices that give her pause when reviewing enforcement actions. This article analyzes Peirce’s speech and provides key takeaways from it according to lawyers with SEC enforcement experience. For more on the SEC’s enforcement agenda, see our two-part series offering insight from former senior SEC attorneys: “Chair Clayton’s Priorities and the Current Enforcement Climate” (Dec. 7, 2017); and “The Current Regulatory Climate, Adviser Examinations and the Enforcement Referral Process” (Dec. 21, 2017).

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  • From Vol. 11 No.25 (Jun. 21, 2018)

    What Robo-Advisers Can Expect From SEC Examinations

    There are no compliance shortcuts available to robo-advisers; investment advisers that offer automated advice must fully comply with all the duties imposed by the Investment Advisers Act of 1940 and its rules, as well as the obligations pertaining to technology platforms. A recent ACA Compliance Group (ACA) program offered a view from the trenches as to what the SEC looks for when it examines robo-advisers. The program featured Burton J. Esrig, managing director at ACA Technology; Luis Garcia, principal consultant with ACA; and Susan I. Gault-Brown, partner at Morrison & Foerster. This article summarizes their insights. For coverage of ACA’s 2018 compliance survey, see our two-part series: “Compliance Programs and SEC Examination Priorities” (May 31, 2018); and “Electronic Communications, Personal Trading and Corruption Risk” (Jun. 14, 2018).

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  • From Vol. 11 No.23 (Jun. 7, 2018)

    Why Fund Managers Must Review Their Positions on Succession Planning and CCO Outsourcing (Part One of Three)

    The SEC proposed – and recently withdrew – a rule that would have required registered investment advisers to adopt and implement detailed business continuity and transition plans. Despite the rule’s withdrawal, however, the SEC has signaled that it will continue to scrutinize the robustness of advisers’ plans. To the extent that advisers’ business continuity and transition plans cover the departure of key personnel, they generally do so only with respect to founders; yet, from a business and regulatory perspective, they should also cover others, including chief compliance officers (CCOs). The proposed rule would have also required advisers to evaluate third-party service providers’ business continuity and transition plans, including those of outsourced CCOs. This article, the first in a three-part series, discusses the SEC’s proposed rule on business continuity and transition plans; the impact, if any, of the rule’s withdrawal; the importance of CCO succession planning; and the risks of using an outsourced CCO. The second article will examine CCO hiring and onboarding; whether managers should separate their compliance departments from their legal departments; and the risks of high CCO turnover. The third article will evaluate the risks of poor succession planning and provide a roadmap for developing a robust succession plan. See “Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds” (Sep. 14, 2017).

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  • From Vol. 11 No.21 (May 24, 2018)

    How Hedge Fund Managers Can Prepare for SEC Remote Examinations

    In an effort to reach more hedge fund managers and other registered investment advisers, the SEC is conducting more inspections and examinations, reassigning staff to handle increased workload and deploying additional resources, such as its National Exam Analytics Tool and the Office of Risk and Strategy. See “Effects of Expanding SEC Investment Adviser Examinations” (Mar. 24, 2016). Another tool in the SEC’s arsenal is its ability to review hedge fund managers and investment advisers remotely in lieu of conducting an onsite examination. This process broadens the SEC’s overall reach, but it also allows the regulator to focus on particular issues. Hedge fund managers must therefore remain wary of the unique risks inherent to remote exams. This two-part series discusses the SEC remote examination landscape. The first article outlines the reasons the SEC conducts remote examinations and delineates the differences between remote and in-person exams. The second article discusses the risks of a remote exam and best practices for a hedge fund manager in preparing for and enduring a remote exam. For more on preparing for SEC examinations, see “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016); and “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination” (Jan. 28, 2016).

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  • From Vol. 11 No.21 (May 24, 2018)

    Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers

    The most significant impact of SEC registration on a private fund adviser is that the adviser becomes subject to inspection by the SEC’s Office of Compliance Inspections and Examinations. The greatest risk arising from an examination is that the inspection staff decides to refer a finding from an inspection to the Division of Enforcement (Enforcement) for an investigation. Despite the severe collateral consequences that can befall a fund manager simply from the initiation of an investigation, divining whether the staff is contemplating an Enforcement referral is a surprisingly elusive proposition. In this guest article, Mark K. Schonfeld and Kenneth J. Burke, partner and then-associate, respectively, at Gibson Dunn & Crutcher, discuss the increasing risks of SEC examinations becoming enforcement investigations and practical strategies for fund managers to anticipate and mitigate those risks. See also our two-part series on “Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement”: Five Key Priorities for OCIE (Jan. 4, 2018); and Examination Process, Interview Preparation and Remediation Considerations (Jan. 18, 2018).

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  • From Vol. 11 No.18 (May 3, 2018)

    HFLR Cryptocurrency Webinar Examines Regulatory Developments, ICOs, Cryptocurrency Sweep, Custody and Other Compliance Issues

    Blockchain technology and the related cryptocurrency asset class are rapidly evolving and present traps for unwary fund managers. A recent webinar hosted by The Hedge Fund Law Report examined regulatory developments affecting cryptocurrencies; scrutiny of initial coin offerings; the recent SEC examination sweep of firms that trade cryptocurrencies; and custody and other compliance issues faced by advisers who hold digital currencies. The program was moderated by William V. de Cordova, Editor-in-Chief of The Hedge Fund Law Report, and featured Karl A. Cole‑Frieman, partner and co-founder of Cole‑Frieman & Mallon; and Lee A. Schneider, partner at McDermott Will & Emery. This article summarizes the key takeaways from the presentation. For further commentary from Cole-Frieman, see “How Blockchain Will Continue to Revolutionize the Private Funds Sector in 2018” (Jan. 4, 2018). See also our three-part series on blockchain and the financial services industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).

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  • From Vol. 11 No.18 (May 3, 2018)

    Ten Risk Areas for Private Funds in 2018

    A recent program presented by Proskauer Rose examined the key regulatory and litigation risks currently facing private fund managers. Unsurprisingly, near the top of the list were prominent issues on the regulatory radar, including cryptocurrency and blockchain; data privacy; and performance claims. A common theme among many of the risks covered in the presentation is that the law has not yet sufficiently developed to address current business practices. The program featured Proskauer partners Timothy W. Mungovan and Joshua M. Newville; counsel Anthony M. Drenzek; and associate Michael R. Hackett. This article explores the speakers’ insights. For coverage of the 2017 Proskauer presentation, see “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017).

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  • From Vol. 11 No.14 (Apr. 5, 2018)

    Former SEC Examiners Provide Perspective on 2018 OCIE Examination Priorities

    The SEC Office of Compliance Inspections and Examinations (OCIE) recently issued its 2018 National Exam Program Examination Priorities. A recent program presented by MyComplianceOffice (MCO) focused on the examination priorities concerning retail investors, cybersecurity and anti-money laundering. The program, moderated by MCO marketing executive Joe Boyhan, featured Victoria Hogan, president of NorthPoint, and Colleen Montemarano, a consultant at that firm, each of whom has more than six years of experience as an SEC examiner. This article summarizes their insights. For further coverage of OCIE exam priorities, see 2018 Examination Priorities; 2017 Examination Priorities; and 2016 Examination Priorities. For additional commentary from Hogan and Montemarano, see “Practical Guidance From Former SEC Examiners on Preparing for and Surviving SEC Examinations” (Sep. 1, 2016).

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  • From Vol. 11 No.12 (Mar. 22, 2018)

    How Fund Managers Should Structure Their Cybersecurity Programs: Background and Best Practices (Part One of Three)

    Nation-states, organizations, groups and individuals continue to employ increasingly sophisticated methods to target information systems and computer networks. Governments and regulators – including the SEC and the U.K. Financial Conduct Authority – are also intensifying their scrutiny of organizations’ cybersecurity programs. See our two-part series “Navigating FCA and SEC Cybersecurity Expectations”: Part One (Jan. 7, 2016); and Part Two (Jan. 14, 2016). As a result, it is becoming more expensive to combat and contain cyber-related attacks. Given that cybersecurity is an enterprise-wide risk, fund managers must, at a minimum, ensure that they comply with industry best practices, including adopting one or more cybersecurity frameworks and creating a culture of cybersecurity compliance. This article, the first in a three-part series, discusses the risks and costs associated with cybersecurity attacks; the global focus on cybersecurity; relevant findings observed by the Office of Compliance Inspections and Examinations during the examination of SEC registrants; and cybersecurity best practices. The second article will analyze the need for fund managers to hire a dedicated chief information security officer, review information security governance structures and explore the role of the chief compliance officer as a strategic partner. The third article will evaluate methods for facilitating communication between cybersecurity stakeholders; outsourcing and co-sourcing of cybersecurity functions; and best practices for employing and overseeing third-party cybersecurity vendors. See our two-part series on how fund managers can meet the cybersecurity challenge: “A Snapshot of the Regulatory Landscape” (Dec. 3, 2015); and “A Plan for Building a Cyber-Compliance Program” (Dec. 10, 2015).

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  • From Vol. 11 No.10 (Mar. 8, 2018)

    Retail Investors Top List of OCIE 2018 Exam Priorities

    The SEC Office of Compliance Inspections and Examinations (OCIE) recently issued its 2018 National Exam Program Examination Priorities. The priorities, which emphasize the protection of retail investors, are in line with what OCIE announced last year and include cybersecurity; anti-money laundering; market infrastructure; and the operations of FINRA and the Municipal Securities Rulemaking Board. In the press release announcing the 2018 priorities, SEC Chair Jay Clayton commended “OCIE’s dedication to maximizing the effectiveness of their resources with a keen eye toward asset verification, market infrastructure, and duties owed to retail investors.” This article analyzes the list of OCIE priorities, presenting the key points most relevant to private fund advisers. See also our coverage of OCIE’s 2017 Examination Priorities; and 2016 Examination Priorities.

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  • From Vol. 11 No.3 (Jan. 18, 2018)

    Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement: Examination Process, Interview Preparation and Remediation Considerations (Part Two of Two)

    In a recent program, Davis Polk partners Leor Landa, Amelia T.R. Starr and James H.R. Windels, along with associate Marc J. Tobak, provided their views on how advisers can prepare for SEC examinations in light of the current regulatory environment. This second article in our two-part series provides guidance on the steps that advisers can take to minimize the potential that the SEC’s Office of Compliance Inspections and Examinations refers the adviser to the Division of Enforcement. The first article discussed five areas identified by the panelists that frequently pose significant risk to investment advisers during the examination process. For more on mitigating enforcement risk, see “Seven Recommendations to Assist Private Fund Managers in Navigating Heightened SEC Examination and Enforcement Activity” (Jul. 11, 2013); “How Can Hedge Fund Managers Understand Recent SEC Developments to Mitigate Enforcement Risk?” (Feb. 21, 2013); and “What Do Hedge Fund Managers Need to Know to Prepare for, Handle and Survive SEC Examinations? (Part Three of Three)” (Feb. 18, 2011). For further commentary from Davis Polk, see “Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities” (Jun. 14, 2012).

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  • From Vol. 11 No.3 (Jan. 18, 2018)

    ACA 2017 Fund Manager Compliance Survey Addresses SEC Exams and Practices Used to Mitigate Counterparty Risk (Part One of Two)

    Compliance-focused surveys provide an opportunity for private fund advisers to benchmark their policies, procedures and practices against their industry peers. The findings of the 2017 Alternative Fund Manager Compliance Survey conducted by ACA Compliance Group (ACA) were discussed in a recent webinar by Colleen Marencik and Brian Lattanzio, director and consultant, respectively, at ACA. This article, the first in a two-part series, examines the survey’s findings with respect to recent SEC examinations, along with hedge fund trading and counterparty issues, including best execution; soft dollars; principal transactions and cross trades; dark pools; and trade errors. The second article will discuss the survey’s findings regarding investment allocation practices by private equity and real estate managers, including co-investments; cross transactions; best execution and fees; conflicts of interest; and valuation. See also our two-part coverage of ACA’s April 2017 fund manager compliance survey: “Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Common Measures to Protect MNPI” (Jun. 1, 2017); and “Variety in Expense Allocation Practices and Business Continuity Measures” (Jun. 8, 2017).

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  • From Vol. 11 No.2 (Jan. 11, 2018)

    BakerHostetler Briefing Provides Regulatory Update: Insight on the SEC Under Chair Clayton, Examinations by OCIE and Implementation of MiFID II (Part One of Two)

    There has been considerable uncertainty regarding the direction that the SEC might take under Chair Jay Clayton. A recent BakerHostetler program discussed current SEC initiatives; the SEC’s approach to examinations of investment advisers; the Commission’s enforcement priorities; the impact of the recast Markets in Financial Instruments Directive (MiFID II) on U.S. managers and broker-dealers; and taxation of loan origination and cryptocurrencies. The program was moderated by Marc D. Powers, partner at BakerHostetler and national leader of the firm’s securities litigation, regulatory enforcement and hedge fund industry practices, and featured Walter Van Dorn, partner and head of BakerHostetler’s international capital markets practice; Jonathan A. Forman, counsel at BakerHostetler; Simcha B. David, partner at EisnerAmper; and Andrew N. Siegel, then-partner, chief compliance officer and chief regulatory counsel at Perella Weinberg Partners. The first article in this two-part series reviews recent regulatory initiatives undertaken by the SEC that affect investment advisers, along with the implementation of MiFID II and whether the change in leadership at the SEC will influence the examination environment. The second article will discuss hot topics in SEC enforcement, as well as the tax aspects of loan origination and cryptocurrencies. For more from Powers and Van Dorn, see “BakerHostetler Panel Analyzes Shifts in Enforcement Policies and Tactics As Industry Anticipates New Administration and SEC Chair (Part One of Two)” (Jan. 5, 2017); and “BakerHostetler Panel Analyzes SEC Use of Administrative Proceedings and Whistleblower Incentives, and Provides Guidance for Fund Managers Facing an Examination (Part Two of Two)” (Jan. 19, 2017).

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  • From Vol. 11 No.2 (Jan. 11, 2018)

    HFLR Program Parses OCIE’s Recent Advertising Risk Alert: Misleading Claims of GIPS Compliance, Past Specific Investment Recommendations and Results of SEC’s Touting Initiative (Part Two of Two)

    SEC commentary provides valuable insight to compliance personnel on the hot-button issues being prioritized by the Commission, as well as the sort of conduct that does, and does not, lead to a referral to the SEC’s Division of Enforcement. By staying informed of the SEC’s approach to certain issues, advisers can learn from the mistakes of similarly situated advisers. A recent webinar presented by The Hedge Fund Law Report discussed six deficiencies identified in a National Exam Program Risk Alert that violate Rule 206(4)-1 of the Investment Advisers Act of 1940 – the so-called “Advertising Rule” – as well as other compliance issues that frequently arise with respect to an adviser’s advertising practices. Kara Bingham, Associate Editor of The Hedge Fund Law Report, moderated the discussion, which featured Todd Kaplan, founder and principal of Cloudbreak Compliance Group; Christine M. Lombardo, partner at Morgan Lewis; and Richard F. Kerr, partner at K&L Gates. This article, the second in a two-part series, explores the disclosures required when presenting gross performance in a one-on-one presentation to prospective investors, the circumstances under which claims of compliance with voluntary performance disclosure standards may be deemed misleading, ways to avoid deficiencies when discussing past specific recommendations in advertisements and the results of the touting initiative conducted by the SEC’s Office of Compliance Inspections and Examinations. The first article discussed the broad view that the SEC takes when deciding which communications fall within the definition of an advertisement, as well as four examples of deficiencies frequently found in performance advertising. See “Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017).

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  • From Vol. 11 No.1 (Jan. 4, 2018)

    HFLR Program Parses OCIE’s Recent Advertising Risk Alert: Identifying Advertisements and Common Deficiencies in Performance Advertising (Part One of Two)

    On September 14, 2017, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert that highlighted six common deficiencies under Rule 206(4)-1 of the Investment Advisers Act of 1940 – the so-called “Advertising Rule” – identified by OCIE during examinations of SEC-registered investment advisers. A recent webinar presented by The Hedge Fund Law Report discussed in detail each of the deficiencies, along with other compliance issues that frequently arise with respect to an adviser’s advertising practices. Kara Bingham, Associate Editor of The Hedge Fund Law Report, moderated the discussion, which featured Todd Kaplan, founder and principal of Cloudbreak Compliance Group; Christine M. Lombardo, partner at Morgan Lewis; and Richard F. Kerr, partner at K&L Gates. This article, the first in a two-part series, discusses the broad view the SEC takes when deciding which communications fall within the definition of an advertisement, as well as four examples of deficiencies frequently found in performance advertising. The second article will explore the disclosures required when presenting gross performance in one-on-one presentations to prospective investors, circumstances under which claims of compliance with voluntary performance disclosure standards may be deemed misleading, ways to avoid deficiencies when discussing past specific recommendations in advertisements and the results of the touting initiative conducted by OCIE. See our three-part series on advertising compliance: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

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  • From Vol. 11 No.1 (Jan. 4, 2018)

    HFA Briefing Covers U.S. and Global Regulatory Climate Relating to Liquidity, Enforcement, Examinations and Cybersecurity

    A recent 2017 global regulatory briefing sponsored by Bloomberg and the Hedge Fund Association (HFA) offered insight into the global regulatory climate, including liquidity management, cross-border enforcement, NFA exams abroad and cybersecurity. Greg Babyak, Bloomberg’s head of government and regulatory affairs, delivered opening remarks focused on the Trump administration and the current U.S. regulatory climate. Lisa Roitman, Bloomberg business development and marketing strategist, moderated the subsequent panel discussion, which featured Louis P. Berardocco, Senior Manager of Examinations Compliance at the NFA; Ryan Hill, Supervisory Special Agent at the Department of Homeland Security; Edward Y. Kim, partner at Krieger Kim & Lewin; Jude Scott, Chief Executive Officer of Cayman Finance; and Robert Taylor, Head of Global Asset Management Regulatory Strategy at the U.K. Financial Conduct Authority. This article summarizes the key takeaways from the program. For coverage of another HFA global regulatory briefing, see “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Views on Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016).

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  • From Vol. 11 No.1 (Jan. 4, 2018)

    Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement: Five Key Priorities for OCIE (Part One of Two)

    Although there has been much talk of deregulation under the Trump administration, investment advisers remain subject to close SEC scrutiny. A recent program presented by Davis Polk discussed the current SEC examination and enforcement climate affecting advisers, including an overview of five key examination priorities, and offered guidance on preparing for and handling routine examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (OCIE), all with a view toward minimizing the risk of a referral to the SEC’s Division of Enforcement (Enforcement Division). The program featured Davis Polk partners Leor Landa, Amelia T.R. Starr and James H.R. Windels, along with associate Marc J. Tobak. This two-part series summarizes the panel’s insights. This first article discusses five areas identified by the panelists on which OCIE frequently focuses during the examination of investment advisers. The second article will provide guidance on the steps that advisers can take to minimize the likelihood that OCIE will refer certain issues to the Enforcement Division. For more on the current regulatory environment, see our two-part series providing commentary from former senior SEC attorneys: “Chair Clayton’s Priorities and the Current Enforcement Climate” (Dec. 7, 2017); and “Current Regulatory Climate, Adviser Examinations and the Enforcement Referral Process” (Dec. 21, 2017). For coverage of prior Davis Polk programs, see our two-part series on activist hedge funds: “Filing Obligations and Other Operational Considerations” (May 5, 2016); and “Settlement, Prospects, Shareholder Engagement and Proxy Access Considerations” (May 12, 2016).

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  • From Vol. 10 No.50 (Dec. 21, 2017)

    Former Senior SEC Attorneys Offer Insight on the Current Regulatory Climate, Adviser Examinations and the Enforcement Referral Process (Part Two of Two)

    President Trump’s executive order on “core principles” enumerated broad regulatory fundamentals pursuant to which the Department of the Treasury provided recommendations on regulation within the investment management industry. See “Reading the Regulatory Tea Leaves: Recent White House and Congressional Action and Insights From SIFMA and FINRA Conferences” (Jul. 20, 2017). While the SEC may follow these recommendations, it is likely that fund managers will continue to face increased examinations and the risk of enforcement action from the agency. These issues, along with practices fund managers can adopt to potentially avoid having routine SEC examinations turn into enforcement actions, were among those discussed at a recent program hosted by Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA). Moderated by Simpson Thacher partner Olga Gutman, the program featured partners David W. Blass, former Chief Counsel and Associate Director in the SEC Division of Trading and Markets, and Michael J. Osnato, Jr., former Chief of the Complex Financial Instruments Unit of the SEC Division of Enforcement. This two-part series summarizes the panelists’ insights garnered from their experience at the SEC. This second article explores the SEC’s regulatory agenda, and the examination and enforcement referral process. The first article discussed the “zero-tolerance” approach under former Chair Mary Jo White, the direction Chair Jay Clayton intends to take the Commission and the SEC’s enforcement agenda. For more from Simpson Thacher, see “Regulators From the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part Two of Four)” (Dec. 18, 2014). For coverage of a prior program hosted by MLA, see our two-part series on SEC examinations: “What Hedge Fund Managers Need to Know” (Jun. 16, 2016); and “Fees, Conflicts, Investment Allocations and Other Hot Topics” (Jun. 30, 2016).

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  • From Vol. 10 No.49 (Dec. 14, 2017)

    SEC Signals Aggressive Stance on Individual Responsibility, Including Potential CCO Liability, in FY 2017 Annual Report

    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).

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  • From Vol. 10 No.48 (Dec. 7, 2017)

    Are Hedge Fund Managers Heeding the Message? Information Request List Provides Insight Into SEC Expectations on the Use of Electronic Communications by Advisers and Employees (Part Two of Three)

    Investment advisers frequently use SEC document request lists – either released by the SEC’s Office of Compliance Inspections and Examinations (OCIE) or disseminated by examinees or third parties – to test their ability to efficiently produce documents that may be requested during an actual SEC examination. A document entitled “Information Request List” (Request List), rumored as being used by the SEC to request records in connection with adviser examinations focused on the use of electronic communications by advisers and their employees, has made its way into the public domain. Despite a lack of official confirmation, industry experts that routinely assist clients with SEC examinations agree that the Request List’s substance and form closely resemble those of information requests routinely sent by OCIE. This second article in our three-part series explores the various components of the Request List and analyzes the implications and consequences of certain requests therein. The first article provided background on sweep exams, with particular focus on the putative electronic messaging examination and the potential drivers of SEC focus in this area. The third article will examine best practices for advisers when designing their electronic communications policies, taking into account the items requested in the Request List, as well as how advisers can proactively prepare for future scrutiny in this area. For more on preparing for SEC examinations, see “Mock Audits Are Essential Preparatory Tools for Fund Principals in the Current Regulatory Environment” (Sep. 28, 2017); and “What Hedge Fund Managers Can Expect From SEC Remote Examinations (Part One of Two)” (May 2, 2016).

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  • From Vol. 10 No.47 (Nov. 30, 2017)

    Are Hedge Fund Managers Receiving the Message? SEC Takes Steps to Drill Down on Electronic Communications (Part One of Three)

    Earlier in 2017, the SEC’s Office of Compliance Inspections and Examinations examined a handful of investment advisers, focusing on the forms of electronic communications used by those advisers and their employees. Many speculate that these exams were part of a new sweep exam focused on electronic messaging. Meanwhile, an official-seeming information request list (Request List) became public, although the SEC has not formally confirmed the existence of an electronic communications sweep exam nor the authenticity of the Request List. This three-part series is designed to assist compliance professionals with managing the ever-evolving electronic communication technologies that many adviser employees are already using, or desire to use, in their daily business practices. Given the widespread belief that these electronic communication-focused exams are part of a sweep exam, this first article provides background on sweep exams, with particular focus on this electronic messaging exam and the potential drivers of SEC focus in this area. The second article will break down the various components of the Request List and analyze the implications and consequences of certain requests. The third article will examine best practices for advisers when designing their electronic communications policies, taking into account the items requested in the Request List, as well as how advisers that are not the subject of the electronic communications exam can nonetheless proactively prepare for future scrutiny in this area. For more on electronic communications, see “ACA 2015 Compliance Survey Covers Expert Networks, Fund Expenses and Electronic Communications (Part Two of Two)” (Oct. 8, 2015); and “Survey Highlights Compliance Professionals’ Attitudes and Practices Concerning Electronic Communications Compliance” (Feb. 9, 2012).

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  • From Vol. 10 No.47 (Nov. 30, 2017)

    Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?

    The SEC has taken recent enforcement action against Deerfield Capital Management (Deerfield), Artis Capital Management (Artis) and R.T. Jones Capital Equities Management (R.T. Jones) for failing to maintain policies and procedures tailored to the risks of their respective operations. Although the areas of deficiency in question vary widely, the respondents all found themselves in trouble for allegedly failing to maintain and enforce “reasonably designed” policies and procedures. Despite expectations that the SEC, under new leadership, would reduce the “broken windows” approach to enforcement, some believe these three cases foreshadow the deployment of the dramatically expanded resources available to the SEC’s Office of Compliance Inspections and Examinations for investment adviser examinations in a broad effort to ensure that firms maintain appropriately tailored policies and procedures, as well as oversee employees in sensitive areas of their operations. As SEC Chair Jay Clayton recently told The Hedge Fund Law Report, “looking at firms’ policies and procedures will continue to be a priority for the Commission.” To help readers understand this trend, adopt best practices and insulate themselves against similar enforcement actions, the HFLR has interviewed legal professionals with expertise in regulatory enforcement matters. This article presents the insights from those interviews, along with Clayton’s further thoughts on the matter. For analysis of the Deerfield, Artis and R.T. Jones cases, respectively, see “Hedge Fund Manager Deerfield Fined $4.7 Million for Failing to Adopt Insider Trading Compliance Policies Tailored to the Firm’s Specific Risks” (Sep. 21, 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).

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  • From Vol. 10 No.44 (Nov. 9, 2017)

    ACA Offers Roadmap to Maintaining Books and Records: Document Retention and SEC Expectations (Part Two of Two)

    Investment advisers are faced with the ongoing challenge of ensuring compliance with the numerous rules and regulations governing their books and records. A recent ACA Compliance Group (ACA) program offered a comprehensive overview of the documents and records that investment advisers are required to maintain, focusing on ways advisers can ensure that those records be complete, accessible and in the proper form in the event of an SEC examination. The program featured Beth Manzi, chief operating officer of private fund administrator PEF Services LLC, and Theodore E. Eichenlaub, partner at ACA. This second article in our two-part series considers the electronic storage of records, document destruction, testing of compliance programs and SEC examinations. The first article discussed the regulatory background surrounding the maintenance of adviser-specific records, including corporate and accounting documents; marketing documents; and emails. For additional insights from ACA, see our two-part series “A Roadmap for Advisers to Comply With Marketing and Advertising Regulations”: Part One (Aug. 3, 2017); and Part Two (Aug. 10, 2017).

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  • From Vol. 10 No.41 (Oct. 19, 2017)

    Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination (Part Three of Three)

    Section 208(a) of the Investment Advisers Act of 1940, as well as prior statements made by the SEC, make it clear that an investment adviser is prohibited from using its registration status to suggest that the Commission has approved, recommended or sponsored the adviser. The fact remains, however, that being an SEC registered investment adviser (RIA) carries weight in the industry if for no other reason than registration with the Commission is a threshold issue for some investors. This final article in our three-part series outlining the steps that exempt reporting advisers (ERAs) must take to transition to RIA status reviews the key regulatory filings that RIAs must file examines amendments that ERAs may need to make to their fund documents in anticipation of their change in registration status and provides insight into what newly registered advisers should expect from the SEC examination process. The first article discussed the circumstances under which an ERA would be required to register as an RIA, along with considerations for ERAs augmenting their compliance programs. The second article outlined key policies and procedures that ERAs should consider when drafting their compliance manuals. For more on the examination of RIAs, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017).

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  • From Vol. 10 No.41 (Oct. 19, 2017)

    OCIE Associate Director Outlines Coordinated Compliance Effort Under Trump Administration

    Under the administration of President Trump, enforcement priorities at the highest levels of the SEC and its Office of Compliance Inspections and Examinations (OCIE) share many features with priorities under previous administrations, but subtle differences come into play in the important realms of cybersecurity and private equity. See “Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues” (Feb. 23, 2017). The Commission maintains its hardline stance against failures of disclosure and conflicts of interest, and it continues to pursue former Chair Mary Jo White’s “broken windows” approach. Finally, the recent Supreme Court ruling in Kokesh v. SEC lends new urgency to regulatory investigations and enforcement actions. These points were addressed in a panel discussion at the recent Eleventh Annual Hedge Fund General Counsel and Compliance Officer Summit 2017, hosted by Corporate Counsel and ALM. Moderated by Paul Hastings partner Tram Nguyen, the panel featured Kevin Kelcourse, Associate Director of OCIE; Irshad Karim, counsel and chief compliance officer of Lion Point Capital; and Bruce Karpati, managing director and global chief compliance officer of Kohlberg Kravis Roberts & Co. and former Chief of the SEC’s Asset Management Unit. This article summarizes the key points conveyed by the panelists. For further commentary from Kelcourse, see “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them” (Feb. 5, 2015); and “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?” (Jan. 22, 2015).

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  • From Vol. 10 No.38 (Sep. 28, 2017)

    Survey Finds Compliance Programs and Cybersecurity Preparedness of Alternative Asset Managers to be Inadequate Relative to Traditional Asset Managers and Broker-Dealers

    Cipperman Compliance Services (CCS) recently issued the results of its 2017 C‑Suite Survey. CCS asked financial services executives seven questions about the role of their firms’ chief compliance officers; attitudes toward compliance; and the sophistication of their firms’ compliance programs and cybersecurity preparedness. Based upon the responses of executives from alternative asset managers, the survey suggests that their compliance programs are less likely to withstand SEC scrutiny and their firms are less prepared on cybersecurity matters, relative to traditional asset manager and broker-dealer participants. This article analyzes CCS’ findings and provides commentary on those findings from CCS’ president, Rob Prucnal. For coverage of CCS’ 2016 survey, see “Survey Reveals Compliance Weaknesses of Hedge Fund Managers Relative to Other Financial Services Firms, Including CCO Qualifications and Frequency of Annual Compliance Reviews” (Sep. 15, 2016). For additional compliance insights from CCS founder Todd Cipperman, see “Pay to Play, Revenue Sharing and Wrap Fees Remain on the SEC’s Radar” (Apr. 20, 2017); and our three-part series on the simultaneous management of hedge funds and alternative mutual funds following the same strategy: “Investment Allocation Conflicts” (Apr. 2, 2015); “Operational Conflicts” (Apr. 9, 2015); and “How to Mitigate Conflicts” (Apr. 16, 2015).

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  • From Vol. 10 No.36 (Sep. 14, 2017)

    Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds

    While the election of Donald J. Trump as U.S. president in November 2016 has proved one of the most divisive events in modern political history, many observers shared a consensus that the new administration could adopt a pro-business, anti-regulation stance, to the benefit of the financial industry and investment funds. With the recent appointments of Jay Clayton as SEC Chair and Dalia Blass as Director of the Division of Investment Management, the contours of the new regulatory regime are finally becoming discernable. Chair Clayton provided further clarity by publicly outlining his guiding principles in a recent address. See “SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017). To help readers understand the current regulatory environment, and the implications of recent and ongoing changes to private fund regulation, The Hedge Fund Law Report has interviewed Seward & Kissel partners Patricia Poglinco and Robert Van Grover about an array of issues, including the SEC’s rulemaking agenda in 2017 and beyond; the fate of the Financial CHOICE Act of 2017; the Commission’s willingness to revisit and reexamine its policies and rules; the reliance on whistleblowers for enforcement purposes; the methodology that regulators will use to root out irregular trading patterns and activities; and the state of cybersecurity defenses and enforcement. These are among the issues that Poglinco, Van Grover and their colleagues will explore in greater depth at the upcoming “Private Funds Forum” co-hosted by Seward & Kissel and Bloomberg BNA to be held on September 27, 2017. For a prior interview with Poglinco and Van Grover, see “How Studying SEC Enforcement Trends Can Help Hedge Fund Managers Prepare for SEC Examinations and Investigations” (Sep. 8, 2016).

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  • From Vol. 10 No.36 (Sep. 14, 2017)

    FCA Director Outlines Regulator’s New Approach to Investigations in Post-Crisis Era

    As the financial meltdown of 2008 recedes further into the past, the necessity of retaining and acting upon the lessons of that debacle remains undiminished. The Financial Conduct Authority (FCA), which is responsible for the orderly and stable functioning of the U.K.’s financial markets – and by extension plays a crucial role in maintaining global economic stability – cannot accomplish its tasks if investment funds and other financial firms misconstrue the regulator’s role. One of the most common misperceptions is that any inquiry made by the FCA’s investigators is either part of, or a prelude to, an enforcement action and protracted litigation. As the FCA’s role evolves from crisis-response mode into that of a risk monitor with as vast a responsibility as it has ever had, carrying out highly selective enforcement actions where appropriate, fund managers and other market participants must grasp what the FCA currently does and understand the purpose and tenor of FCA investigations. All these points came across in a recent speech delivered by Jamie Symington, the FCA’s Director of Investigations, at the Legal Week Banking Litigation and Regulation Forum. This article summarizes Symington’s remarks. For a summary of a recent FCA discussion paper, see “FCA Outlines Priorities of Liquidity and Fair Practices for Open-End Funds Investing in Illiquid Assets” (Mar. 16, 2017). See also “FCA Details Three of Its 2017 Priorities: Competition in the Asset Management Market, Liquidity Management and Custodians” (May 4, 2017).

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  • From Vol. 10 No.35 (Sep. 7, 2017)

    CIMA Regulator Discusses Key Issues for Advisers That Manage Cayman Funds: AML, Fund Governance and the Cayman LLC (Part One of Two)

    Offshore funds play an integral role in most private fund structures. Foreign investors appreciate the anonymity that these vehicles provide from U.S. tax authorities, while U.S. tax-exempt investors often prefer offshore corporate vehicles to shield them from receiving Unrelated Business Taxable Income. As the preferred offshore fund venue, the views and actions of the regulators in the Cayman Islands significantly impact most U.S. managers. 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), provided his insights on the most salient issues from the perspective of a local Cayman regulator. This first article in our two-part series provides 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. In the second installment, Ebanks will discuss 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. For additional commentary from Ebanks, see our two-part series highlighting the views of U.S., U.K. and offshore regulators: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016). For more on offshore funds, see “Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?” (Feb. 4, 2010).

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  • From Vol. 10 No.33 (Aug. 24, 2017)

    SEC Review of Cybersecurity Finds Gains Since 2014, but Cites Gaps in Training and Compliance

    The private funds industry is at risk of potentially devastating cyber breaches. Despite being fiduciaries responsible for investing vast amounts of assets, many advisers have only recently developed cybersecurity training, procedures and protocols, and in some cases their defenses remain quite rudimentary, leaving them vulnerable to deceptive practices. In a recent risk alert, the SEC praised recent progress made by firms in the asset management space while identifying a number of critical areas where preparedness still falls short. In particular, the alert cited 12 robust practices that advisers should consider for adoption at their own firms. The presence of persistent gaps in preparedness, and the SEC’s principles-based approach to regulating cybersecurity, make it all the more imperative for advisers to increase their investments in and oversight of internal cybersecurity procedures and preparedness. Doing so will enable advisers to meet their compliance obligations and to shield investors from catastrophic losses of money and personally identifiable information. To help readers understand these issues, this article presents the key points from the risk alert, together with insights from legal practitioners with cybersecurity expertise. For more on the SEC’s approach to cybersecurity, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017). For more on cybersecurity generally, see “Surveys Show Cyber Risk Remains High for Investment Advisers and Other Financial Services Firms Despite Preventative Measures” (Jul. 20, 2017); and “Navigating the Intersection of ERISA Fiduciary Duties and Cybersecurity Data Breach Protections” (Jun. 29, 2017).

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  • From Vol. 10 No.29 (Jul. 20, 2017)

    What Fund Managers Can Learn From “Tipper X”: Best Practices for Navigating the Evolving Insider Trading Landscape (Part Two of Two)

    Fund managers must continually adapt to an evolving landscape as regulators become more aggressive in pursuing insider trading. See “How Can Hedge Fund Managers Apply the Law of Insider Trading to Address Hedge Fund Industry-Specific Insider Trading Risks? (Part Two of Two)” (Aug. 15, 2013); and “When Does Talking to Corporate Insiders or Advisors Cross the Line Into Tipper or Tippee Liability Under the Misappropriation Theory of Insider Trading?” (Jan. 10, 2013). The Hedge Fund Law Report recently spoke with Tom Hardin, the founder of Tipper X Advisors LLC, who provided his unique perspective on insider trading based on his experience as a former insider trader and one of the most prolific informants in securities fraud history. This second article in our two-part series presents Hardin’s insights on how fund managers should react to developments in insider trading enforcement, including changes in examination and enforcement methods; recent insider trading decisions such as U.S. v. Newman and Salman v. U.S.; the Trump administration’s pro-business, anti-regulation stance; and the recent performance of the hedge fund industry. The first article explored how private fund compliance staff can prevent and detect insider trading activity, train employees, ensure prudent email use, prevent employees from rationalizing their insider trading and restructure employee compensation to avoid incentivizing risky behavior. For more on insider trading, see “ACA 2017 Fund Manager Compliance Survey Shows Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Illustrates Common Measures to Protect MNPI (Part One of Two)” (Jun. 1, 2017); and “SEC Continues to Focus on Insider Trading and Fund Valuation” (Jun. 30, 2016).

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  • From Vol. 10 No.28 (Jul. 13, 2017)

    SEC Chair’s Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era

    Amid widespread speculation about the direction and tone of securities enforcement in the young administration of President Trump, SEC Chair Jay Clayton has formally requested $1.602 billion to finance the SEC’s operations in fiscal year 2018. In Clayton’s view, the SEC’s vital role as an overseer of fair and orderly market functions, fosterer of capital formation and protector of investors from fraud and misconduct more than justifies the desired allocation. The SEC’s efforts to keep up with technology-driven changes necessitate a full recognition of the transformations that are underway and the allocation of resources to adapt and respond to them, he has argued, adding that it is with the best interests of investors and the market in mind that he is seeking this funding from Congress. All these themes came across in Clayton’s recent testimony to the Senate Appropriations Subcommittee, which also provides valuable insight to fund managers as to the SEC’s priorities and upcoming initiatives. This article summarizes the key takeaways from Clayton’s remarks, which illustrate the SEC’s expected continued focus on enforcement and increased examinations of registered investment advisers in the coming fiscal year. For additional analysis of SEC priorities and goals, see “Former SEC Senior Counsel Offers Insight on SEC Enforcement Focus and Priorities” (Sep. 1, 2016). For a summary of a recent speech by former SEC Chair Mary Jo White, see “Outgoing SEC Chair Outlines New Model for Enforcement Priorities in 2017 and Beyond” (Jan. 12, 2017).

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  • From Vol. 10 No.22 (Jun. 1, 2017)

    Financial CHOICE Act of 2017 Proposes Sweeping Reforms, but May Allow Regulators to Maintain Status Quo in Some Areas

    The Financial CHOICE Act of 2017 (CHOICE Act) has emerged as one of the most sweeping and controversial pieces of economic legislation during the first months of the Trump administration. The bill could dramatically affect the private funds sector by eliminating registration requirements for private equity advisers; changing the private placement regime; promoting dialogue between the industry and regulators; and requiring the SEC to be more transparent and streamline its enforcement process. It is important to remember, however, that continuing negotiations leave the bill’s fate uncertain in the House and Senate, and the magnitude of any reform can be shaped by the SEC’s discretion over how final rules will work. To assist readers in understanding the legislation’s potential impact on the funds sector, this article analyzes the CHOICE Act and provides insights from practitioners at the forefront of interactions between the industry and the regulators. For analysis of other recent initiatives and rulemaking under the Trump administration, see “Fund Managers Must Address Investors’ Fee and Liquidity Concerns to Maintain Strong Performance in 2017, While Also Preparing for Trump Administration Regulations” (Mar. 30, 2017); and “Ways the Trump Administration’s Policies May Affect Private Fund Advisers” (Mar. 2, 2017).

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  • From Vol. 10 No.22 (Jun. 1, 2017)

    ACA 2017 Fund Manager Compliance Survey Shows Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Illustrates Common Measures to Protect MNPI (Part One of Two)

    The findings of the 2017 Alternative Fund Manager Compliance Survey by ACA Compliance Group (ACA) were discussed in a recent webinar by Danielle Joseph and Tessa Carbone, director and principal consultant, respectively, at ACA. This article, the first in a two-part series, covers the portions of the Survey that consider the frequency of SEC examinations and the topics they cover, as well as the pervasiveness of adviser efforts to protect material nonpublic information, including through the use of restricted lists and expert networks. The second installment will discuss common fee and expense-allocation practices by managers, along with manager efforts to comply with the recent business-continuity and transition-planning requirements promulgated by the SEC. See our two-part coverage of ACA’s 2016 Compliance Survey: “SEC Exams; Compliance Staffing and Budgeting; Annual and Ongoing Compliance Reviews; and AML/Sanctions Compliance” (Jan. 19, 2017); and “Custody; Fee Policies and Arrangements; Safeguarding of Assets; and Personal Trading” (Feb. 2, 2017).

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  • From Vol. 10 No.20 (May 18, 2017)

    SEC Officials Discuss Cybersecurity Examination Priorities and Provide Guidance on When to Disclose Cyber Events (Part Two of Two)

    Reasoning that the variety of entities that it regulates precludes the SEC from dictating a single workable cybersecurity solution, the agency generally takes a principles-based approach to cybersecurity regulation. This leaves registrants to wonder if their procedures and safeguards will withstand scrutiny during an SEC examination. This was addressed during the recent IAPP Global Privacy Summit at a presentation featuring Stephanie Avakian, Acting Director of the SEC Division of Enforcement, Shamoil Shipchandler, SEC Regional Director for the Fort Worth Regional Office, and Jay Johnson, partner at Jones Day. This second article in our two-part series discusses the SEC’s cybersecurity examination process and provides guidance on disclosing cyber incidents. The first article highlighted the agency’s cybersecurity-related enforcement actions and coordination with law enforcement and state regulators. For more on managing cyber risks, see “Cyber Insurance Coverage, Pre-Breach Mitigation Efforts and Post-Breach Response Plans Can Reduce Harm to Fund Managers From Cyber Attacks” (Jan. 19, 2017); and “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016).

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  • From Vol. 10 No.16 (Apr. 20, 2017)

    SEC Urges Advisers Relying Upon Unibanco No-Action Letters to Submit Certain Documentation 

    As investment advisers eagerly await clarity about the direction the SEC will take in the Trump era and whether it will deviate from past enforcement practices, SEC guidance and information updates on major policy issues face intense scrutiny. One of the most significant publications to come out of the agency since the new administration took office provides specific guidance to multi-national financial institutions relying on the “Unibanco letters,” which concern the extra-territorial application of the Investment Advisers Act of 1940. This update contains valuable information from compliance and procedural standpoints, as the SEC appears to be reminding advisers that rely upon the Unibanco letters about the complex requirements set forth therein. To help readers understand the significance of the information update and its effect on their businesses, this article analyzes the update and provides commentary from legal practitioners with experience representing multi-national advisory firms. For more on the Unibanco letters, see “SEC Delays Registration Deadline for Hedge Fund Advisers, and Clarifies the Scope and Limits of Registration Exemptions for Private Fund Advisers, Foreign Private Advisers and Family Offices” (Jun. 23, 2011).

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  • From Vol. 10 No.15 (Apr. 13, 2017)

    Private Fund Managers Should Continue Aggressive Compliance Efforts Despite New Administration

    As President Trump’s administration disseminates its economic and fiscal agendas and policies, many see the arrival of an era of lighter regulation after years of record-breaking enforcement activity by the SEC. See “What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers” (Oct. 20, 2016). This is reinforced by the pro-business policies endorsed by President Trump, which were largely codified by the February executive order outlining a set of “core principles” for the economy. See “How the Trump Administration’s Core Principles for Financial Regulation May Benefit the U.S. Funds Industry (Part One of Two)” (Feb. 16, 2017). Despite this sentiment, however, advisers and funds are ill-advised to let their guards down. Amid the general optimism, many questions persist. How will the SEC and other regulatory agencies function in the Trump era? Will budget cuts make a significant difference in an era of technologically enhanced enforcement? Is the SEC’s review of registered investment advisers likely to drop below the current estimated 10 percent? Will the SEC attempt to allocate some of its enforcement functions among other regulators? Are advisers and funds sufficiently preparing for examinations under the new SEC regime? To cast light on these and other urgent questions, The Hedge Fund Law Report has conducted an in-depth interview with Benjamin Kozinn, who recently joined the law firm of Lowenstein Sandler as a partner, and this article sets forth his insights. For commentary from Kozinn’s colleague Matthew A. Magidson, see “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers” (Jul. 25, 2013).

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  • From Vol. 10 No.12 (Mar. 23, 2017)

    Avoiding Common Pitfalls Under the Custody Rule: Inadvertent Custody, Delivery Failures and GAAP Compliance (Part One of Two)

    Since its initial adoption in 1962, Rule 206(4)-2 of the Investment Advisers Act of 1940, commonly referred to as the “custody rule,” has undergone a number of revisions and has increasingly been the subject of SEC comments. The SEC’s Office of Compliance Inspections and Examinations has issued several risk alerts – in 2013 and, most recently, in February 2017 – identifying custody deficiencies as an area of concern. See “Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues” (Feb. 23, 2017); and “SEC Risk Alert Reveals Significant Deficiencies in Custody Practices of Hedge Fund Managers and Other Investment Advisers” (Mar. 7, 2013). This latest risk alert prompted The Hedge Fund Law Report to investigate whether the staff commonly identifies deficiencies in custody rule compliance by investment advisers. Our research suggests that, while alternative asset managers of “plain vanilla” private funds tend to comply with the rule with minimal difficulty, weaknesses can and do occur when advisers are presented with nuanced circumstances. In this two-part series, we identify six common traps that can lead to a private fund adviser’s non-compliance with elements of the custody rule. This first article identifies options for private fund managers to comply with the rule; discusses the frequency with which custody is reviewed during SEC examinations; and identifies common weaknesses in the areas of inadvertent custody, preparing audited financial statements (AFS) and meeting the deadline for delivering AFS. The second article will discuss circumstances under which private fund advisers may fail to realize that they have custody, the auditor independence requirement and liquidation audits.

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  • From Vol. 10 No.11 (Mar. 16, 2017)

    Nine Risks That Inform FINRA’s Examination and Surveillance Program

    FINRA has a broad purview when it comes to examining and investigating firms, and enforcing regulations and rules, within the financial industry. There are nine areas of risk that continually arise in the discussions between FINRA and representatives of its member firms. These fall into two general categories: financial and operational risks; and sales practices and business conduct risks. These points came across in a panel discussion presented by FINRA, moderated by Chip Jones, FINRA’s Senior Vice President for Member Relations and Education, and featuring Bill Wollman, FINRA’s Executive Vice President for the Office of Risk Oversight and Operational Regulation, and Mike Rufino, FINRA’s Executive Vice President for the Office of Sales Practice. The panel discussion provided valuable insight for any fund manager with an affiliated broker-dealer, as well as all fund managers that trade with broker-dealers, about the principle risks those firms face. This article explores the nine risks outlined by the panelists. For more on FINRA, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 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).  

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  • From Vol. 10 No.4 (Jan. 26, 2017)

    OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity 

    The SEC’s Office of Compliance Inspections and Examinations (OCIE) has detailed its plans and goals for 2017. Several of the priorities identified by OCIE – including cybersecurity and anti-money laundering (AML) initiatives – have been priorities in previous years. See “OCIE Outlines Examination Priorities for 2016” (Jan. 14, 2016). At the same time, the 2017 initiatives also illustrate a significant shift with new priorities – notably, enhanced oversight of FINRA in order to protect investors. The release also acknowledges OCIE’s expanded use of data analytics to identify industry practices and registrants with high-risk profiles. OCIE’s priorities provide insight for hedge, private equity and other private fund advisers into the regulator’s priorities and areas of focus in the coming year. This article analyzes OCIE’s release, presenting the key points most relevant to private fund advisers along with interpretations and insights from lawyers and former SEC officials at the forefront of interactions between the financial sector and the regulators. For more on SEC priorities, see “Outgoing SEC Chair Outlines New Model for Enforcement Priorities in 2017 and Beyond” (Jan. 12, 2017); and “What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers” (Oct. 20, 2016).

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  • From Vol. 10 No.3 (Jan. 19, 2017)

    ACA 2016 Compliance Survey Covers SEC Exams; Compliance Staffing and Budgeting; Annual and Ongoing Compliance Reviews; and AML/Sanctions Compliance (Part One of Two)

    ACA Compliance Group (ACA) recently completed its 2016 Alternative Fund Manager Compliance Survey, covering a number of top-of-mind issues facing the managers of hedge funds and more illiquid private funds. The survey’s findings were described in a recent webinar by ACA’s Danielle Joseph, a senior principal consultant, and Brian Lattanzio, a senior compliance analyst and private equity associate. This article, the first in a two-part series, examines the survey’s findings with respect to recent SEC examination experiences; compliance staffing and budgeting; compliance reviews, testing and training; and anti-money laundering and sanctions compliance. The second article will summarize the survey’s findings and speakers’ insights concerning custody; fees; safeguarding assets; and personal trading. For our two-part coverage of ACA’s 2015 compliance survey, see: “SEC Exams, MNPI and Restricted Lists” (Oct. 1, 2015); and “Expert Networks, Fund Expenses and Electronic Communications” (Oct. 8, 2015). For coverage of prior ACA surveys, see “SEC Exams, CCOs, Compliance Reviews, Custody, Fees and Personal Trading” (Dec. 11, 2014); “Current Hedge Fund Practices on Marketing, Trading, Counterparties and Valuation” (Jun. 13, 2014); and “Benchmarking of Private Fund Manager Compliance Practices (Part One of Two)” (Oct. 3, 2013).

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  • From Vol. 10 No.3 (Jan. 19, 2017)

    BakerHostetler Panel Analyzes SEC Use of Administrative Proceedings and Whistleblower Incentives, and Provides Guidance for Fund Managers Facing an Examination (Part Two of Two)

    As part of the transition to the incoming administration of President-Elect Donald J. Trump, many in the hedge fund industry anticipate the potential for a lighter-touch regulatory approach at the SEC. This was the focus of a recent panel discussion hosted by BakerHostetler and featuring Marc Powers and Mark Kornfeld, partners in BakerHostetler’s securities litigation practice; Walter Van Dorn, partner and national leader of the firm’s international securities and capital markets practices; and Michelle Chopper, director of the advisory and consulting practices at Arthur Bell. The key takeaways from the panel are presented in this two-part series. This second article discusses the SEC’s practice of trying contested cases in front of administrative law judges hired by the SEC, evaluates the impact of the Dodd-Frank Act’s whistleblower program on SEC enforcement efforts and provides guidance for managers on navigating a regulatory exam or investigation. The first article addressed the SEC’s renewed interest in compliance with the pay to play rule, the relentless crack down on insider trading and ways technology is giving the SEC an edge in detecting violations. For additional insight from Powers, see “Investment Strategies, Considerations and Uncertainties of Distressed Debt Investments by Hedge Funds” (Apr. 9, 2015); “Chapter 15 of the Bankruptcy Code Presents Litigation Risks and Liability for Creditors, Counterparties, Service Providers and Others Doing Business With Bankrupt Offshore Hedge Funds” (Oct. 3, 2013); and “Five Takeaways for Other Hedge Fund Managers From the SEC’s Record $602 Million Insider Trading Settlement With CR Intrinsic” (Mar. 21, 2013).

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  • From Vol. 9 No.43 (Nov. 3, 2016)

    Attorney-Consultant Privilege? Specific Circumstances Where Fund Managers May – and May Not – Be Able to Use Kovel Arrangements (Part Three of Three)

    So-called “Kovel arrangements” provide unique opportunities for fund managers and their legal counsel to extend the attorney-client privilege to consultants. The context surrounding a Kovel arrangement plays just as significant a role in determining whether the privilege will be upheld as satisfying the legal requirements of the Kovel doctrine. There are certain circumstances – such as an internal investigation – under which Kovel arrangements are frequently employed by hedge funds and other companies. See “D.C. Circuit Confirms Applicability of Attorney-Client Privilege to Internal Investigations” (Aug. 7, 2014); and “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations” (Feb. 28, 2013). However, there are additional specific situations when this approach can be particularly effective at protecting a hedge fund manager’s operations and processes from being exposed to the public. This final article in a three-part series describes those contexts in which hedge fund managers can benefit from having their attorneys engage consultants via Kovel arrangements, as well as situations where that possibility is tenuous or nonexistent. The first article outlined the Kovel doctrine’s legal requirements and key items to consider before deciding to waive or invoke the privilege. The second article contained practical guidance for maintaining a Kovel arrangement on a daily basis, as well as the provisions to include in an engagement letter with a consultant to ensure the privilege is upheld. For background information on how hedge funds can utilize compliance consultants, see “The Role of Outsourced Compliance Consultants in the Hedge Fund Compliance Ecosystem” (Jun. 27, 2014). 

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  • From Vol. 9 No.43 (Nov. 3, 2016)

    OCIE Director Marc Wyatt Details Use of Technology and Coordination With Other Agencies to Execute OCIE’s Four-Pillar Mission

    Like many governmental agencies, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has an expansive mandate and limited resources, requiring it to allocate those resources in an informed and careful manner. Despite this fact, compliance officers at fund managers and broker-dealers should not underestimate the risk of OCIE scrutinizing their actions. This is especially true as OCIE enhances its technological sophistication, as well as its ability to detect risks within the market and among individual market players, as it pursues the “Four Pillars” of its mission. These themes were conveyed in a keynote speech by Marc Wyatt, OCIE’s Director, on October 17, 2016, at the National Society of Compliance Professionals 2016 National Conference in Washington, D.C. This article analyzes key takeaways from the speech. For coverage of Wyatt’s first speech as acting director of OCIE, see “Acting OCIE Director Discusses the Office’s Focus on Private Equity Managers and Emphasizes the Importance of Disclosure by Advisers” (May 28, 2015). For analysis of a speech by Wyatt’s predecessor, see “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities” (Oct. 10, 2014).

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  • From Vol. 9 No.41 (Oct. 20, 2016)

    Attorney-Consultant Privilege? Key Considerations for Fund Managers When Utilizing, Invoking and Waiving the Kovel Privilege for Consultants (Part One of Three) 

    Private fund managers frequently rely on assistance from legal counsel to bolster their operations and compliance practices, comfortable that the attorney-client privilege will shield these efforts from the SEC and others. As managers increasingly engage consultants to audit their compliance programs, a logical concern is whether similar protections are available to protect those efforts. For example, a manager engaging a consultant to conduct a risk assessment of its cybersecurity preparedness would not want the results to become public. See “Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations” (Oct. 6, 2016). This three-part series describes the use of so-called “Kovel arrangements” by private fund managers to extend the attorney-client privilege to interactions with consultants. This first article describes the requirements of the Kovel privilege as established by case law, as well as critical considerations for managers when deciding whether to invoke or waive the privilege when interacting with the SEC, other regulators or litigants. The second article will detail the requisite features of a fully-compliant Kovel arrangement, including necessary features of engagement letters and the daily implementation of the arrangement. The third article will examine circumstances under which it is and is not appropriate for fund managers to employ Kovel arrangements. For more on the attorney-client privilege, see “How Hedge Fund Managers May Address the Practical Implications of the NY Court of Appeals’ Attempt to Clarify the Common Interest Doctrine” (Sep. 29, 2016); and “D.C. Circuit Confirms Applicability of Attorney-Client Privilege to Internal Investigations” (Aug. 7, 2014). 

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  • From Vol. 9 No.39 (Oct. 6, 2016)

    How Studying SEC Examinations Can Enhance Investor Due Diligence

    Investors who are performing or planning to undertake due diligence on hedge funds can glean practical guidance from SEC examinations of fund managers. This was the primary theme of a recent webinar presented by the Investment Management Due Diligence Association (IMDDA) featuring Kristina Staples, managing director of ACA Compliance Group. This article summarizes Staples’ primary insights from the webinar. For more on due diligence, see “RCA Asset Manager Panel Offers Insights on Hedge Fund Due Diligence” (Apr. 2, 2015); “Operational Due Diligence From the Hedge Fund Investor Perspective: Deal Breakers, Liquidity, Valuation, Consultants and On-Site Visits” (Apr. 25, 2014); and “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers” (Apr. 18, 2014). For additional commentary from Staples, see “Five Steps That CCOs Can Take to Avoid Supervisory Liability, and Other Hedge Fund Manager CCO Best Practices” (Mar. 27, 2015). For coverage of a previous IMDDA webinar, see “How Managers May Address Increasing Demands of Limited Partners for Standardized Reporting of Fund Fees and Expenses” (Sep. 1, 2016).

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  • From Vol. 9 No.36 (Sep. 15, 2016)

    How Fund Managers Can Prevent or Remedy Improper Fee and Expense Allocations (Part Three of Three)

    In recent years, the SEC has targeted perceived fee and expense improprieties by private fund managers, with each enforcement action causing managers to fortify their internal practices in an attempt to avoid similar regulatory scrutiny. This increased SEC focus has also caused managers to proactively remedy improper fee or expense allocations revealed by their newly enhanced policies and procedures. This final article in our three-part series provides practical guidance about preventative measures fund managers can take to ensure fees and expenses are properly allocated, as well as post-violation efforts they can perform to remedy any improper allocations. Taken together, these can help managers ensure their procedures meet industry standards and may mitigate the severity of any future SEC sanctions. The first article in this series detailed trends in the types of expense allocations most aggressively scrutinized by the SEC. The second article in the series examined the role of inadequate disclosure and failed policies and procedures in causing expense allocation violations and provided steps managers can take to buttress each of those areas. For more on expense allocations, see “Fees, Conflicts, Investment Allocations and Other Hot Topics Hedge Fund Managers Should Expect During an SEC Examination (Part Two of Two)” (Jun. 30, 2016); and our two-part series entitled “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?”: Part One (May 2, 2013); and Part Two (May 9, 2013).

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  • From Vol. 9 No.35 (Sep. 8, 2016)

    Flawed Disclosures to Avoid – and Policies and Procedures to Adopt – for Managers to Reduce Risk of SEC Scrutiny of Fee and Expense Practices (Part Two of Three)

    Since early 2015, when it announced that private fund fee and expense allocation practices would be an enforcement priority, the SEC has pursued actions against managers for an array of improper fee and expense allocations. These enforcement actions frequently alleged inadequate disclosure or deficient policies and procedures. This article, the second in a three-part series, examines inadequacies in disclosures that often lead to SEC enforcement actions and provides guidance for how managers should disclose fee and expense allocations going forward. For more on disclosure to investors, see “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016); and “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?” (Sep. 16, 2011). This article also summarizes the types of allocation scenarios and other recommended features managers should include in their written expense allocation policies and procedures. For additional coverage of manager compliance programs, see “Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program” (Aug. 28, 2014). The first article in this series detailed trends in the types of expense allocations most aggressively scrutinized by the SEC. The third article will describe practices managers should adopt to prevent violations, as well as remedial actions to take upon discovering the improper allocation of a fee or expense. For additional coverage of expense allocations, see “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2016); and “Barbash, Breslow and Rozenblit Discuss Hedge Fund Allocations, Restructurings and Advisory Boards” (Apr. 7, 2016).

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  • From Vol. 9 No.35 (Sep. 8, 2016)

    How Studying SEC Enforcement Trends Can Help Hedge Fund Managers Prepare for SEC Examinations and Investigations

    In a recent interview with The Hedge Fund Law Report, Patricia A. Poglinco and Robert G. Van Grover, partners at Seward & Kissel, discussed the types of activities the SEC is targeting when bringing enforcement actions against hedge and other fund managers. They also explored the evolving nature of SEC investigations and what hedge fund managers can do to prepare for these examinations. These are among the issues that Poglinco and Van Grover will explore in greater depth as they each moderate panels at the upcoming “Private Funds Forum” co-hosted by Seward & Kissel and Bloomberg BNA to be held on September 15, 2016. For additional insight from Poglinco, see “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?” (Jan. 22, 2015). For commentary from Van Grover, see “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?” (Sep. 16, 2011); “Implications for Hedge Fund Managers of Recent Insider Trading Enforcement Initiatives (Part One of Three)” (Feb. 25, 2011); and our three-part series entitled “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?”: Part One (Sep. 12, 2013); Part Two (Sep. 19, 2013); and Part Three (Sep. 26, 2013).

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  • From Vol. 9 No.34 (Sep. 1, 2016)

    Former SEC Senior Counsel Offers Insight on SEC Enforcement Focus and Priorities

    Jamie Lynn Walter recently joined Kirkland & Ellis in Washington, D.C., to help build the office’s investment funds group. Walter last served as a Senior Counsel in the Private Funds Branch of the Division of Investment Management at the SEC, where she provided legal advice and guidance on a wide range of matters involving the regulation of investment advisers and investment funds, including private funds, mutual funds and exchange-traded funds. She made significant contributions to several agency rules and was integral in developing the SEC’s December 2015 proposed rule entitled “Use of Derivatives by Registered Investment Companies and Business Development Companies.” In connection with her joining Kirkland & Ellis, The Hedge Fund Law Report recently interviewed Walter about several topics important to hedge fund managers. This article sets forth Walter’s thoughts on the current regulatory landscape, including current areas of SEC focus; the interaction between the Commission and fund advisers; patterns in SEC enforcement; and regulatory priorities. For additional insight from Kirkland & Ellis attorneys, see “Portability and Protection of Hedge Fund Investment Track Records” (Nov. 10, 2011); and our two-part series on remote SEC examinations: “What Hedge Fund Managers Can Expect” (May 12, 2016); and “How Hedge Fund Managers Can Prepare” (May 19, 2016).

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  • From Vol. 9 No.34 (Sep. 1, 2016)

    Practical Guidance From Former SEC Examiners on Preparing for and Surviving SEC Examinations

    With the SEC continuing to focus on investment adviser compliance, a recent presentation hosted by compliance solutions provider MyComplianceOffice (MCO) and compliance consultant NorthPoint Compliance offered timely and practical guidance on preparing for SEC examinations, the examination process and examination trends. The program was moderated by Stephen Taylor, chief commercial officer at MCO, and featured Victoria Hogan, NorthPoint’s president, and Colleen Montemarano, a NorthPoint consultant, each of whom has more than six years’ experience as an SEC compliance examiner. This article highlights the key insights from the presentation. For another discussion of the exam process, see our two-part series: “What Hedge Fund Managers Need to Know About Getting Through an SEC Examination” (Jun. 16, 2016); and “Fees, Conflicts, Investment Allocations and Other Hot Topics” (Jun. 30, 2016).

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  • From Vol. 9 No.27 (Jul. 7, 2016)

    Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure

    The SEC is broadening its enforcement activities; it filed a record 807 enforcement actions for securities law violations and issued orders for $4.19 billion in penalties and disgorgements in fiscal year 2015, as acknowledged recently by SEC Chair Mary Jo White. A material subset of that activity was in the hedge fund and asset management space. See “SEC Chair’s Testimony Highlights SEC’s Bolstered Presence in Asset Management Space” (Jun. 16, 2016). Accordingly, it is vital for hedge fund managers to understand the practical consequences of the SEC’s enforcement approach, including its effect on market demand and the consequences of SEC action; the regulator’s investigative approach; and areas of scrutiny, including cybersecurity, market integrity and disclosure. These were a few of the topics discussed at the Ninth Annual Advanced Topics in Hedge Fund Practices: Manager and Investor Perspectives conference recently hosted by Morgan, Lewis & Bockius. This article highlights the key insights from several panels featuring partners Jedd Wider, Timothy Levin, Merri Jo Gillette, Amy Greer, Steven Hansen and Jennifer Klass. For additional coverage of the conference, see “How Can Private Fund Managers Grant Preferential Rights? Delaware Chancery Court Decision Stresses Need for Fund Document Integration” (Jun. 30, 2016). For additional insight from Morgan Lewis partners, see “Recent Developments Affect Classifications of Control Groups and Fiduciaries Under ERISA” (Apr. 14, 2016); and “Key Person Provisions in Hedge Fund Documents: Structure, Consequences and Demand From Institutional Investors” (Sep. 17, 2009).

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  • From Vol. 9 No.26 (Jun. 30, 2016)

    Fees, Conflicts, Investment Allocations and Other Hot Topics Hedge Fund Managers Should Expect During an SEC Examination (Part Two of Two)

    As the SEC increases investigations and enforcement of hedge fund managers and other registered investment advisers to private funds, it is honing its focus on certain topics. Subject to requests for increasing amounts of information and scrutiny in particular areas, managers must know what to expect from and how to respond to SEC examinations. To help prepare hedge fund managers for an SEC examination, Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa, hosted a panel discussion featuring Ropes & Gray partners Eva Carman, Sarah Davidoff and Joel Wattenbarger. The first article in this two-part series summarized the panel’s insights on effectively navigating the SEC examination process. This second article addresses key areas of SEC focus, including requests for email; conflicts of interest; allocation of fees, expenses and investment opportunities; valuation; cybersecurity; broker-dealer registration; and attorney-client privilege. For additional insight from Carman, see “Ropes & Gray Hosts Teleconference on SEC Enforcement Actions Against Investment Managers, Potential Regulatory Changes in Response to Madoff and Private Plaintiff Claims Against Investment Managers” (Feb. 12, 2009). For further commentary from Wattenbarger, see “Proposed Volcker Rule and the Effect on Private Fund Sponsors and Investors” (Oct. 27, 2011); and “How Will the SEC’s Pay to Play Rule Impact Mergers and Acquisitions of Hedge Fund Management Companies?” (Aug. 6, 2010).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    What Hedge Fund Managers Need to Know About Getting Through an SEC Examination (Part One of Two)

    The SEC continues to assert its regulatory authority by probing hedge fund managers and other registered investment advisers to private funds. See “Effects of Expanding SEC Investment Adviser Examinations” (Mar. 24, 2016). Managers must prepare to withstand this increased scrutiny and respond accordingly. To assist hedge fund managers in this preparation, Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa, hosted a panel discussion featuring Ropes & Gray partners Eva Carman, Sarah Davidoff and Joel Wattenbarger. This article, the first in a two-part series, summarizes the panel’s insights on effectively navigating the SEC examination process. The second article will highlight key areas of SEC focus, including requests for email; conflicts of interest; allocation of fees, expenses and investment opportunities; valuation; cybersecurity; broker-dealer registration; and attorney-client privilege. For additional insight from Carman and Wattenbarger, see “Insights Gleaned From Successfully Navigating Presence Examinations With Hedge Fund Manager Clients” (Mar. 7, 2013). For insight from Davidoff, see “The Impact on Private Fund Managers of Final Regulations Under the Volcker Rule” (Mar. 13, 2014). 

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  • From Vol. 9 No.20 (May 19, 2016)

    How Hedge Fund Managers Can Prepare for SEC Remote Examinations (Part Two of Two)

    As the SEC, including its Office of Compliance Inspections and Enforcement, expands the number of examinations it conducts of hedge fund managers and registered investment advisers, it is increasingly turning to remote examinations, both to reach more never-before examined advisers and to sweep for particular issues. However, remote exams carry with them certain risks that hedge fund managers must anticipate and mitigate, and managers must properly prepare for these exams. This second article in a two-part series explores the risks of a remote exam and the best practices for a hedge fund manager in preparing for and weathering one. The first article outlined reasons why the SEC examines hedge fund managers remotely and delineated the differences between remote and in-person exams. For more on preparing for SEC examinations, see “Usable Lessons and Proven Survival Techniques From the Hedge Fund Examination Trenches” (Oct. 10, 2014); and “SEC Staff Provides Roadmap to Middle-Market Private Fund Adviser Examinations” (May 16, 2014).

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  • From Vol. 9 No.19 (May 12, 2016)

    What Hedge Fund Managers Can Expect From SEC Remote Examinations (Part One of Two)

    In an effort to reach more hedge fund managers and other registered investment advisers, the SEC is conducting more inspections and examinations, reassigning staff to handle increased workload and deploying additional resources, such as its National Exam Analytics Tool and the new Office of Risk and Strategy. See “Effects of Expanding SEC Investment Adviser Examinations” (Mar. 24, 2016). Another tool in the SEC’s arsenal is its ability to review hedge fund managers and investment advisers remotely in lieu of conducting an onsite examination. This process broadens the SEC’s overall reach, while also focusing on particular issues. However, hedge fund managers must remain wary of the unique risks inherent to remote exams. This article, the first in a two-part series, outlines the reasons the SEC conducts remote examinations and delineates the differences between remote and in-person exams. The second article will discuss the risks of a remote exam and best practices for a hedge fund manager in preparing for and enduring a remote exam. For more on preparing for SEC examinations, see “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016); and “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination” (Jan. 28, 2016).

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  • From Vol. 9 No.19 (May 12, 2016)

    U.S., U.K. and Offshore Regulators Discuss Best Ways for Hedge Fund Managers to Approach Regulation (Part One of Two)

    Hedge fund managers are subject to scrutiny by regulators in numerous jurisdictions – where the manager is based, where the fund is based and where the fund is marketed. In an increasingly global economy, cross-border regulators are cooperating more frequently, sharing information and coordinating efforts to govern the growing hedge fund industry. This month, the Hedge Fund Association presented a Global Regulatory Briefing that featured Emma Bailey, Director of the Investment Supervision and Policy Division of the Guernsey Financial Services Commission; Jennifer A. Duggins, Co-Head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Garth Ebanks, Deputy Head of the Investments and Securities Division of the Cayman Islands Monetary Authority; Ifor Hughes, Assistant Director of Policy in the Policy, Legal and Enforcement department of the Bermuda Monetary Authority; and Robert Taylor, Head of the Investment Management Department at the U.K. Financial Conduct Authority. This first article in a two-part series summarizes the speakers’ commentary on fund regulation in their respective jurisdictions, cooperation among regulators and whether hedge fund regulation is sufficient to address fraud. The second article will highlight the panelists’ insights with respect to cybersecurity, anti-money laundering, the Alternative Investment Fund Managers Directive, advertising and liquidity. For more on cooperation among regulators, see “SEC Chair Emphasizes Enforcement Focus on Strong Remedies and Individual Liability” (Nov. 12, 2015); and “E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers” (Oct. 8, 2015).

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  • From Vol. 9 No.18 (May 5, 2016)

    SEC Division Heads Enumerate Enforcement Priorities, Including Conflicts of Interest, Valuation, Performance Advertising and CCO Liability (Part Two of Two)

    If historical trends continue, at least one out of ten examinations of investment advisers and investment companies conducted by the SEC Office of Compliance Inspections and Enforcement (OCIE) will be referred to the Division of Enforcement (Enforcement). To avoid becoming subject to sanctions or used to send a message to the industry, hedge fund managers must keep a close watch on areas that Enforcement considers priorities. In addition, as the SEC Division of Investment Management (IM) churns out new rules, guidance and restrictions, hedge fund managers face a corresponding expansion of their compliance obligations. The current initiatives and priorities of Enforcement and IM were some of the topics discussed during a recent day-long seminar hosted by the SEC as part of its Compliance Outreach Program. SEC Chair Mary Jo White delivered opening remarks, and participants included Enforcement Director Andrew Ceresney, IM Director David Grim and OCIE Director Marc Wyatt. The first two segments of the seminar featured Diane C. Blizzard, Associate Director of IM; Jane Jarcho, Deputy Director of OCIE’s National Exam Program; and Anthony S. Kelly, Co-Chief of the Asset Management Unit (AMU) of Enforcement. Our two-part series highlights the key insights from those presentations. This second part examines the priorities and operations of each of Enforcement and IM. The first part discussed SEC initiatives, including the Compliance Outreach Program itself, and also explored OCIE’s characteristics, current campaigns and examination priorities. For more on Enforcement, see “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016); and our series on “The SEC’s Broken Windows Approach”: “Conflicts of Interest and Expense Allocation Concerns” (Sep. 24, 2015); and “Compliance Resources, CCO Liability and Technology Concerns” (Oct. 1, 2015).

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    SEC Division Heads Enumerate OCIE Priorities, Including Cybersecurity, Fees, Bad Actors and Never-Before Examined Hedge Fund Managers (Part One of Two)

    As the number of new investment advisers and investment companies continues to increase, the duties of the Office of Compliance Inspections and Enforcement (OCIE) – the “eyes and ears” of the SEC – grows more complex. While deploying additional resources to examine hedge fund managers and other investment advisers, OCIE must prioritize and focus on select areas. OCIE’s current initiatives and priorities were discussed during a recent day-long seminar hosted by the SEC as part of its Compliance Outreach Program. Participating in the seminar were senior personnel from the Division of Enforcement (Enforcement), Division of Investment Management (IM) and OCIE. Opening with remarks by SEC Chair Mary Jo White, the program was hosted by Andrew Ceresney, Director of Enforcement; David Grim, Director of IM; and Marc Wyatt, Director of OCIE. This two-part series highlights the key insights from those presentations. This first part discusses SEC initiatives, including the Compliance Outreach Program itself, and also explores OCIE’s characteristics, current campaigns and examination priorities. The second part will examine the priorities and operations of each of Enforcement and IM. For more on OCIE, see “OCIE Outlines Examination Priorities for 2016” (Jan. 14, 2016); “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Action (Part Three of Four)” (Jan. 15, 2015); and “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities” (Oct. 10, 2014).

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  • From Vol. 9 No.14 (Apr. 7, 2016)

    Barbash, Breslow and Rozenblit Discuss Hedge Fund Allocations, Restructurings and Advisory Boards

    Liquidity and performance presentation are only two of the myriad issues facing hedge fund managers. See “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016). Hedge fund and private equity managers must also be wary of numerous issues that can trigger conflicts of interest or anti-fraud violations, including expense allocations, restructuring and the use of advisory boards. See “Full Disclosure of Portfolio Company Fee and Payment Arrangements May Reduce Risk of Conflicts and Enforcement Action” (Nov. 12, 2015). During a recent Practising Law Institute program, panelists discussed these and other topics. Barry P. Barbash, a former Director of the SEC Division of Investment Management and now a partner at Willkie Farr & Gallagher, moderated the program, which featured Stephanie R. Breslow, a partner at Schulte Roth & Zabel; and Igor Rozenblit, co-leader of the Private Funds Unit of the SEC Office of Compliance Inspections and Examinations. This article summarizes the panelists’ discussion of these issues. For additional commentary from Breslow, see “Schulte Partner Stephanie Breslow Discusses Tools for Managing Hedge Fund Crises Caused by Liquidity Problems, Poor Performance or Regulatory Issues” (Jan. 9, 2014). For further insight from Rozenblit, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Action (Part Three of Four)” (Jan. 15, 2015).

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  • From Vol. 9 No.12 (Mar. 24, 2016)

    Effects of Expanding SEC Investment Adviser Examinations

    In its quest to increase scrutiny of hedge fund managers and investment advisers, the SEC is looking to review a larger percentage of investment advisers, examining a broader universe of topics and gathering ever-larger quantities of data. At a recent program at the Practising Law Institute’s 2016 Investment Management Institute, panelists offered substantive information about the SEC’s examination processes and practices, including data analysis and the possibility that it will rely on third-party examiners. Panelists also addressed SEC concerns with fund liquidity and chief compliance officer liability. Moderated by Paul F. Roye, a former Director of the SEC Division of Investment Management and currently a director of Capital Research and Management Company, the panel featured Joseph P. DiMaria, Assistant Regional Director in the SEC New York Regional Office’s investment adviser / investment company examination program; Maria Gattuso, a principal at Deloitte & Touche; and Philip L. Kirstein, independent compliance officer and senior officer at AllianceBernstein. This article summarizes the key insights promulgated by the panel. For more on SEC investigations, see “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015); and our two-part series on “The SEC’s Broken Windows Approach”: “Conflicts of Interest and Expense Allocation Concerns” (Sep. 24, 2015); and “Compliance Resources, CCO Liability and Technology Concerns” (Oct. 1, 2015).

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  • From Vol. 9 No.8 (Feb. 25, 2016)

    Hedge Fund Managers Face Imminent NFA Cybersecurity Deadline

    The NFA’s recent Interpretive Notice on cybersecurity is poised to become effective in a matter of days. NFA members, including hedge fund managers registered with the NFA as commodity pool operators or commodity trading advisers, are now required to adopt an Information Systems Security Program. See “NFA Notice Provides Cybersecurity Guidance to Hedge Fund Managers Registered As CPOs and CTAs” (Nov. 19, 2015). To help NFA members prepare for the impending deadline, the NFA recently held a “Cybersecurity Workshop” featuring a number of senior NFA personnel and industry experts. Among other topics discussed during the presentation, panelists offered an overview of the requirements set out in the Notice and insight into what NFA examiners will look for after the notice takes effect. This article summarizes the panelists’ discussion of these issues. For more on CFTC and NFA requirements applicable to hedge fund managers, see our three-part CPO Compliance Series: “Conducting Business With Non-NFA Members (NFA Bylaw 1101)” (Sep. 6, 2012); “Marketing and Promotional Materials” (Oct. 4, 2012); and “Registration Obligations of Principals and Associated Persons” (Feb. 7, 2013).

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  • From Vol. 9 No.7 (Feb. 18, 2016)

    Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams

    A panel of current and former regulators at PLI’s Hedge and Private Fund Enforcement & Regulatory Developments 2015 event discussed the use of “big data” by the SEC; explored the risk of CCO liability; and offered advice on preparing for SEC examinations. The program, entitled “SEC Inspections and Examinations of Private Equity and Hedge Funds,” was moderated by Barry R. Goldsmith, a partner at Gibson Dunn, and featured Lindi Beaudreault, an attorney at Murphy & McGonigle; Marc E. Elovitz, a partner at Schulte Roth & Zabel; Igor Rozenblit, a co-leader of the Private Funds Unit of the SEC Office of Compliance Inspections and Examinations (OCIE); and John H. Walsh, a partner at Sutherland Asbill & Brennan and former OCIE acting director. This article summarizes the principal takeaways from the presentation. For more on SEC inspections, see “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination” (Jan. 28, 2016).

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  • From Vol. 9 No.6 (Feb. 11, 2016)

    SEC’s Rozenblit Offers Perspectives From the Private Funds Unit

    Igor Rozenblit, co-leader of the Private Funds Unit (PFU) of the SEC Office of Compliance Inspections and Examinations, shared his expertise in a panel at PLI’s Hedge and Private Fund Enforcement & Regulatory Developments 2015 event. Among other topics covered during the session entitled “SEC Inspections and Examinations of Private Equity and Hedge Funds,” Rozenblit discussed the operations and priorities of the PFU. This article summarizes the key takeaways from Rozenblit’s remarks. For additional commentary from Rozenblit, see “Operations and Priorities of the Private Funds Unit” (Sep. 24, 2015); and “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four)” (Jan. 15, 2015).

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  • From Vol. 9 No.4 (Jan. 28, 2016)

    Hedge Fund Managers Advised to Prepare for Imminent SEC Examination

    As it pursues its “broken windows” approach to enforcement, the SEC has filed a record number of actions against hedge fund managers and investment advisers. Faced with this increased regulatory scrutiny, managers – both emerging and established – need to be cognizant of and prepared for aggressive inspection by regulators, as well as possible enforcement action. Among other topics, speakers at the annual Sadis & Goldberg Alternative Investment Seminar addressed the issue of increased regulatory scrutiny and how hedge fund managers can prepare for SEC examinations and investigations. This article summarizes the salient points made during the discussion. For more from Sadis & Goldberg, see “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools” (Dec. 4, 2014); and “Tax Efficient Hedge Fund Structuring in Anticipation of the New 3.8% Surtax on Net Investment Income and Proposals to Limit Individuals’ Tax Deductions” (Oct. 18, 2012).

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  • From Vol. 9 No.2 (Jan. 14, 2016)

    OCIE Outlines Examination Priorities for 2016

    Earlier this week, the SEC released the Office of Compliance Inspections and Examinations’ (OCIE) 2016 priorities. Addressing issues affecting numerous financial institutions, including hedge fund managers and other investment advisers; investment companies; broker-dealers; transfer agents; and clearing agencies, OCIE’s announcement revealed new areas of focus, including liquidity controls, public pension advisers, product promotion, exchange-traded funds and variable annuities. The priorities also confirm the SEC’s emphasis on cybersecurity and fees. “These new areas of focus are extremely important to investors and financial institutions across the spectrum,” said SEC Chair Mary Jo White in a press release announcing the priorities. “Through information sharing and conducting comprehensive examinations, OCIE continues to promote compliance with the federal securities laws to better protect investors and our markets.” Echoing White’s emphasis on compliance, OCIE Director Marc Wyatt expressed “hope that registrants will use this information to inform the evaluation of their own compliance programs in these key areas.” This article summarizes OCIE’s list of priorities for 2016. For more on OCIE priorities, see “SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit” (Sep. 24, 2015); and “ACA Compliance Professionals and SEC Veteran John H. Walsh Share Insights on SEC Priorities for 2015” (Apr. 23, 2015).

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  • From Vol. 8 No.45 (Nov. 19, 2015)

    ALM General Counsel Summit Reveals How Hedge Fund Managers Can Prepare for SEC Examinations

    As the SEC continues its unprecedented enforcement streak – with 807 enforcement orders for a record $4.2 billion in monetary remedies in the last fiscal year – hedge fund managers need to prepare for the inevitable SEC examination.  See “SEC Chair Emphasizes Enforcement Focus on Strong Remedies and Individual Liability,” The Hedge Fund Law Report, Vol. 8, No. 44 (Nov. 12, 2015).  Proper preparation for an examination is critical for hedge fund managers to minimize the risk of further enforcement action.  Speakers at Corporate Counsel’s Ninth Annual Hedge Fund General Counsel and Compliance Officer Summit addressed the best strategy for these preparations, including having a robust compliance program with proper policies and procedures in place, as well as conducting periodic mock examinations.  This article summarizes those panel discussions, highlighting recommended tools and techniques hedge fund managers may employ to properly prepare for SEC, as well as internal, investigations.  For more on preparing for SEC exams, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four),” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

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  • From Vol. 8 No.41 (Oct. 22, 2015)

    SEC Chief of Staff Offers Nine Key Considerations for Investment Adviser and Broker-Dealer Compliance Officers

    Despite myriad changes in financial markets, to investment adviser and broker-dealer regulations and at the SEC itself, the “critical importance of the role” played by compliance professionals has remained steadfast.  So said SEC Chief of Staff Andrew J. Donohue at the National Regulatory Services 30th Annual Fall Investment Adviser and Broker-Dealer Compliance Conference.  Donohue offered his observations about the wide array of challenges compliance professionals face, how the SEC can help overcome those challenges and additional considerations.  This article summarizes Donohue’s speech.  For additional insight from SEC officials on CCO liability, see “SEC Commissioner Speaks Out Against Trend Toward Strict Liability for Compliance Personnel,” The Hedge Fund Law Report, Vol. 8, No. 25 (Jun. 25, 2015); and “SEC Commissioner Issues Statement Supporting Hedge Fund Manager Chief Compliance Officers,” The Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015).

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  • From Vol. 8 No.39 (Oct. 8, 2015)

    ACA 2015 Compliance Survey Covers Expert Networks, Fund Expenses and Electronic Communications (Part Two of Two)

    ACA Compliance Group recently released the results of its 2015 Alternative Fund Manager Compliance Survey, which considered a variety of compliance issues faced by hedge fund managers and other private fund managers.  The survey results and comparisons to those of the firm’s prior surveys were presented at a recent webinar by Colleen Marencik, a senior principal consultant at ACA Compliance Group, and Tessa Carbone, a consultant at that firm.  This article, the second in a two-part series, summarizes the key findings from the survey and the insights offered by Carbone and Marencik with respect to expert networks and consultants, fund expenses and electronic communications.  The first article addressed the survey demographics, SEC exam experiences, material nonpublic information and restricted lists.  For coverage of prior ACA surveys, see “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013); and “ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority,” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

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  • From Vol. 8 No.37 (Sep. 24, 2015)

    SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit

    Igor Rozenblit, co-leader of the Private Funds Unit (PFU) of the SEC Office of Compliance Inspections and Examinations, recently delivered the keynote address at Practising Law Institute’s Hedge Fund Management 2015 program, in which he discussed the PFU and offered valuable insight into its operations and priorities.  In a subsequent segment of that program, he and Scott Weisman, a PwC managing director and former assistant director of the SEC Division of Enforcement, delved further into the operations and concerns of the PFU.  Nora M. Jordan, a partner at Davis Polk, moderated the programs.  This article summarizes the key takeaways from Rozenblit’s remarks.  For additional commentary from Rozenblit, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four),” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

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  • From Vol. 8 No.36 (Sep. 17, 2015)

    ACA 2015 Compliance Survey Covers SEC Exams, MNPI and Restricted Lists (Part One of Two)

    ACA Compliance Group recently released the results of its 2015 Alternative Fund Manager Compliance Survey, which considered a variety of compliance issues faced by private fund managers, including hedge fund managers.  At a recent webinar, Colleen Marencik, a senior principal consultant at ACA Compliance Group, and Tessa Carbone, a consultant at that firm, discussed the survey results and offered comparisons of this year’s results with those of the firm’s prior surveys.  This article, the first in a two-part series, summarizes the key findings from the survey and the insights offered by Carbone and Marencik with respect to the survey demographics; SEC exam experiences; material nonpublic information; and restricted lists.  The second article will address expert networks and consultants, fund expenses and electronic communications.  For coverage of prior ACA surveys, see “ACA 2014 Compliance Survey Covers SEC Exams, CCOs, Compliance Reviews, Custody, Fees and Personal Trading,” The Hedge Fund Law Report, Vol. 7, No. 46 (Dec. 11, 2014); “ACA Compliance Survey Covers Current Hedge Fund Practices on Marketing, Trading, Counterparties and Valuation,” The Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); and “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013).

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  • From Vol. 8 No.24 (Jun. 18, 2015)

    NFA Conference Addresses Examination Focus Areas, Investigation Processes and Reporting Requirements for Swap Dealers and Major Swap Participants (Part Two of Two)

    As members of the NFA, registered swap dealers (SDs) and major swap participants (MSPs) are subject to examination and investigation by the NFA – an involved process that can lead to disciplinary action.  In addition to compliance with NFA and CFTC regulations, the NFA examines SDs and MSPs for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  While most hedge fund managers likely do not themselves qualify as SDs or MSPs, counterparties with which they do business may be so registered, and non-compliance issues with, or disciplinary action against, those counterparties may affect the managers’ hedge funds.  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring and SD and MSP reporting requirements.  This article, the second in a two-part series, discusses upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  The first article highlighted the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  For more on SDs and MSPs, see “Katten Partner Raymond Mouhadeb Discusses the Purpose, Applicability and Implications of the August 2012 ISDA Dodd-Frank Protocol for Hedge Fund Managers, Focusing on Whether Hedge Funds Should Adhere to the Protocol,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).

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  • From Vol. 8 No.22 (Jun. 4, 2015)

    NFA Conference Addresses Examination Processes, Training and Compliance Best Practices for Swap Dealers and Major Swap Participants (Part One of Two)

    Under Dodd-Frank, registered swap dealers (SDs) and major swap participants (MSPs) are required to become members of a registered futures association, such as the NFA or the CFTC.  In addition, Section 4s of the Commodity Exchange Act requires registered SDs and MSPs to meet specific requirements with regard to, among other things, capital and margin; reporting and recordkeeping; daily trading records; business conduct standards; documentation standards; trading duties; and designation of a chief compliance officer.  Registered member firms will be examined by the NFA for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring, and SD and MSP reporting requirements.  This article, the first in a two-part series, highlights the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  The second article will review upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  For more on SDs and MSPs, see “CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants,” The Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

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  • From Vol. 8 No.21 (May 28, 2015)

    Acting OCIE Director Discusses the Office’s Focus on Private Equity Managers and Emphasizes the Importance of Disclosure by Advisers

    The SEC’s Office of Compliance Inspections and Examinations (OCIE) protects investors by administering the SEC’s nationwide examination and inspection program.  In his first speech as acting director of OCIE, Marc Wyatt reviewed OCIE’s activities since the enactment of Dodd-Frank, particularly during the last year, and described anticipated OCIE activity in the private equity space.  For coverage of a speech by Wyatt’s predecessor, see “OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing,” The Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014).

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  • From Vol. 8 No.18 (May 7, 2015)

    FRA Liquid Alts 2015 Conference Highlights ’40 Act Fund Structures and Regulatory Concerns with Alternative Mutual Funds (Part Two of Three)

    As the liquid alternatives (or alternative mutual fund) space has expanded significantly in recent years, offerings of alternative mutual funds by hedge fund managers have similarly increased.  Accordingly, as more hedge fund managers look to launch alternative mutual funds, it is important for them to understand the common structures under the Investment Company Act of 1940 (’40 Act).  Additionally, as regulators are interested in ensuring alternative mutual funds meet regulatory requirements and managers of those funds operate within the confines of applicable regulations, it is imperative that managers launching alternative mutual funds understand those regulatory concerns.  See “Alternative Mutual Fund Managers Have Two Custody Rules to Worry About,” The Hedge Fund Law Report, Vol. 8, No. 8 (Feb. 26, 2015).  These topics were among those discussed at the recent Liquid Alts 2015 conference hosted by Financial Research Associates, LLC.  This article, the second in a three-part series, focuses on the panel discussions of ’40 Act fund structures and regulatory concerns with liquid alternative funds.  The first article discussed the keys to successfully launching and operating an alternative mutual fund.  The third article will review issues investors should consider while conducting due diligence on an alternative mutual fund.  For more on alternative mutual funds, see “Regulatory and Practitioner Perspectives on Alternative Mutual Fund Compliance Risk,” The Hedge Fund Law Report, Vol. 8, No. 8 (Feb. 26, 2015).

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  • From Vol. 8 No.16 (Apr. 23, 2015)

    ACA Compliance Professionals and SEC Veteran John H. Walsh Share Insights on SEC Priorities for 2015

    The SEC continues to hone its focus on investment advisers and funds, scrutinizing matters including firms’ compliance programs, conflicts of interest, cybersecurity and potential insider trading.  To that end, the SEC is conducting certain initiatives and employing various tools, such as data analytics and dialogue outreach.  A recent program presented by ACA Compliance Group offered the perspectives of three compliance practitioners about where the SEC will focus its attention in 2015.  It covered new and continuing SEC initiatives and the SEC’s use of quantitative analytics, highlighting areas of concern with regard to alternative mutual funds, fixed income managers, cybersecurity, conflicts of interest and insider trading.  The program featured Dan Campbell, Managing Director, and Joseph DiGiglio, a Principal Consultant, at ACA Compliance Group; and John H. Walsh, a 23-year veteran of the SEC and partner at Sutherland Asbill & Brennan.  See also “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four),” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).  This article summarizes the key points raised during the program.

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  • From Vol. 8 No.12 (Mar. 27, 2015)

    SEC Chair White Identifies the SEC’s Top Concerns Arising Out of 2014 Examinations of Private Fund Managers and Alternative Mutual Funds

    In testimony on March 24, 2015 before the House Committee on Financial Services, SEC Chair Mary Jo White discussed, among other topics, the SEC’s risk monitoring initiatives with respect to asset managers; potential SEC rulemaking on enhanced data reporting for funds and advisers; common deficiencies found in 2014 presence examinations of private fund managers; focus areas in 2014 examinations of alternative mutual funds; and top SEC concerns relating to cybersecurity at fund managers.  This article highlights the main points from White’s testimony on each of these topics.  See also “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four),” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

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  • From Vol. 8 No.8 (Feb. 26, 2015)

    Regulatory and Practitioner Perspectives on Alternative Mutual Fund Compliance Risk

    Alternative mutual funds offer hedge fund managers a way to increase their assets by reaching a retail investor audience.  In the U.S., such funds are governed by the Investment Company Act of 1940 and, as such, must meet a broad array of regulatory and compliance requirements – requirements that are new to many hedge fund managers.  See “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014).  At a recent program, two private sector practitioners and an SEC official considered the compliance challenges faced by hedge fund managers that launch, advise or sub-advise alternative mutual funds.  This article summarizes the main points from the program.

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  • From Vol. 8 No.7 (Feb. 19, 2015)

    RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part One of Two)

    Hedge funds are subject to regulatory scrutiny, and enforcement actions against managers have been increasing in frequency and sophistication.  Hedge fund managers therefore need to ensure compliance with the ever-growing panoply of regulations to which they are subject; and registered managers need to prepare for routine and other examinations by regulators.  In order to assist managers with these aims, the Regulatory Compliance Association held its Compliance, Risk and Enforcement 2014 Symposium in New York City.  This article, the first in a two-part series, summarizes the panelists’ discussion on the NFA’s and SEC’s risk-focused tools and technologies; the SEC’s 2015 examination and enforcement priorities; and preparing for SEC examinations.  The second article in the series will cover risks associated with regulatory reporting and emerging AIFMD issues.  See also “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?,” The Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015).  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.

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  • From Vol. 8 No.4 (Jan. 29, 2015)

    Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss CFTC Compliance, Conflicting Regulatory Regimes and Best Marketing Practices (Part Two of Four)

    The most difficult compliance issues currently facing the hedge fund industry were front and center at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  This article, the second in a four-part series covering the Summit, contains insight on CFTC compliance, conflicting regulatory regimes in compliance programs, and the regulatory and operational considerations of marketing from Amanda Olear, associate director of the Division of Swap Dealer Intermediary Oversight at the CFTC; Patricia Cushing, director of compliance at the National Futures Association; Myles Edwards, general counsel and CCO at Constellation Wealth Advisors; Mark Schein, CCO and managing director at York Capital Management; Jeanette Turner, managing director and general counsel at Advise Technologies; Jennifer Duggins, senior vice president and CCO at Chilton Investment Company; Edward Dartley, of counsel at Pepper Hamilton; Marc Baum, general counsel and chief administrative officer at Serengeti Asset Management; and Simon Raykher, general counsel at Kepos Capital LP.  The first article in the series covered regulatory priorities, handling regulatory examinations and cybersecurity preparedness.  The third and fourth installments in the series will cover: proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

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  • From Vol. 8 No.3 (Jan. 22, 2015)

    How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?

    A fund’s financial auditors are charged with taking reasonable steps to assure that the fund’s financial statements are free from material misstatements.  A regulatory investigation or allegation of misconduct against a fund or its manager can delay completion of an audit, lead to a qualified audit opinion or even derail the audit and lead to resignation of the auditor.  In that regard, a recent PracticeEdge session offered by the Regulatory Compliance Association (RCA) considered the steps a fund manager should take when faced with a regulatory investigation or allegation of misconduct, how to develop an effective response plan, and the impact that the matter will have on the annual audit process and the firm’s financial statements.  See also “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012).  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.

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  • From Vol. 8 No.3 (Jan. 22, 2015)

    Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Handling Regulatory Examinations and Mitigating Cybersecurity Risks (Part One of Four)

    Participants at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM, zeroed in on the key compliance issues currently facing the hedge fund industry.  This article, the first in a four-part series covering the Summit, contains insight on regulatory priorities, handling regulatory examinations and cybersecurity preparedness from Andrew Bowden, a director at the SEC’s Office of Compliance Inspections and Examinations; Dianne Mattioli, CCO at Hedgemark; Larry Block, managing director, counsel and CCO at Island Capital Group LLC; Cynthia Marian, vice president, CCO and deputy general counsel at Tinicum Inc.; and David Lashway, a partner at Baker & McKenzie LLP.  Future installments in the series will cover: CFTC compliance; proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; conflicting regulatory regimes; marketing considerations; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

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  • From Vol. 8 No.2 (Jan. 15, 2015)

    SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four)

    This is the third article in a four-part series covering the Practising Law Institute’s (PLI) Hedge and Private Fund Enforcement & Regulatory Developments 2014 event, chaired by Barry Goldsmith, a partner at Gibson Dunn & Crutcher and co-head of its Securities Enforcement Practice.  The first article in this series discussed key points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, on enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The second article addressed CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  This third article in the series focuses on: (1) SEC priorities for inspections and examinations of private fund advisers; (2) new technology and quantitative examination tools; (3) best practices for preparing for inspections and examinations; (4) how to interact with regulators to maximize positive outcomes and minimize the chance of an enforcement referral; and (5) how to preserve attorney-client privilege while complying with requests for information.  The participants in the relevant PLI panel included Hannah Berkowitz, a shareholder at Murphy & McGonigle, P.C.; Marc Elovitz, a partner and chair of Schulte Roth & Zabel’s Investment Management Regulatory & Compliance Group; Igor Rozenblit, co-head of the Private Funds Unit at the SEC’s Office of Compliance Inspections and Examinations; and John H. Walsh, a 23-year veteran of the SEC and partner at Sutherland Asbill & Brennan LLP.  See “Three Steps in Responding to an SEC Examination Deficiency Letter and Other Practical Guidance for Hedge Fund Managers from SEC Veteran and Sutherland Partner John Walsh,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).

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  • From Vol. 8 No.1 (Jan. 8, 2015)

    K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three)

    This article is the third in a three-part series discussing practical insights from a recent presentation on insider trading and compliance priorities by K&L Gates partners Michael W. McGrath, Carolyn A. Jayne and Nicholas S. Hodge.  This article summarizes six noteworthy compliance insights and four recent enforcement themes relevant to hedge fund managers.  The first article in this series provided background on critical aspects of insider trading doctrine (including entity liability and special considerations for CFA charter holders) and described four enforcement patterns bearing directly on hedge fund trading strategies and operations.  The second article detailed eight prophylactic measures that hedge fund managers can implement to avoid insider trading violations and also included a detailed discussion of what McGrath called “the next great undiscovered country for enforcement actions.”  On insider trading, see also “Second Circuit Overturns Newman and Chiasson Convictions, Raising Government’s Burden of Proof in Tippee Liability Insider Trading Cases,” The Hedge Fund Law Report, Vol. 7, No. 47 (Dec. 18, 2014).

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  • From Vol. 7 No.46 (Dec. 11, 2014)

    ACA 2014 Compliance Survey Covers SEC Exams, CCOs, Compliance Reviews, Custody, Fees and Personal Trading

    ACA Compliance Group (ACA) recently completed its 2014 Alternative Fund Manager Compliance Survey, which examined managers’ experience with recent SEC examination initiatives, the role of a manager’s chief compliance officer, compliance reviews and testing, custody and safeguarding of assets, fees and personal trading.  On November 14, 2014, Jack Rader and Danielle Joseph, both Senior Principal Consultants at ACA, discussed the survey results.  For coverage of prior ACA surveys, see “ACA Compliance Survey Covers Current Hedge Fund Practices on Marketing, Trading, Counterparties and Valuation,” The Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013); “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013); and “ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority,” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    Examinations, the AIFMD, International and Tax Issues: An Interview with Brian Guzman, Partner and General Counsel at Indus Capital Partners, LLC (Part Two of Two)

    The HFLR recently interviewed Brian Guzman, Partner and General Counsel at Indus Capital Partners, LLC, on various top-of-mind issues for hedge fund manager general counsels.  Our interview generally covered valuation, cybersecurity, examinations, the AIFMD, and international and tax issues.  This article, the second in a series, conveys Guzman’s insights on the latter four topics.  In particular, this article discusses the SEC’s top three focus areas in examinations of hedge fund managers; the key differences between SEC and NFA examinations; the chief conflicts in side-by-side management of hedge funds and alternative mutual funds; how the AIFMD has affected marketing by U.S. hedge fund managers to European institutions; challenges in filing Annex IV; achieving consistency across disclosures; notable differences and similarities between international insider trading regimes; transfer pricing issues for hedge fund managers; and post-409A tax deferral strategies.  The first article in this series relayed Guzman’s thoughts on valuation and cybersecurity.  This interview was conducted in connection with (1) the Regulatory Compliance Association’s Compliance, Risk and Enforcement Symposium, which took place on November 4 in New York City – Guzman participated in that Symposium and we will cover it in subsequent issues of the HFLR – and (2) the RCA’s upcoming Regulation, Operations and Compliance (ROC) Symposium, to be held in Bermuda in April 2015.  For more on ROC Bermuda 2015, click here; to register for it, click here.  For additional insight from Guzman, see “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); “RCA Symposium Clarifies Current Market Practice on Side Letters, Conflicts of Interest, Insider Trading Investigations, Whistleblowers, FATCA and Use of Managed Accounts Versus Funds of One (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

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  • From Vol. 7 No.39 (Oct. 17, 2014)

    Practical Guidance for Hedge Fund Managers on Preparing For and Handling NFA Audits

    A hedge fund manager may be subject to CFTC jurisdiction and registration as a commodity pool operator (CPO) or commodity trading adviser (CTA) if it uses derivatives or trades in commodities.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012); and Part Two of Two, Vol. 5, No. 19 (May 10, 2012).  A CPO or CTA is required to become a member of the National Futures Association (NFA) and, as such, is subject to NFA rules and regulations and to periodic audits.  In that regard, a recent program reviewed the nuts and bolts of an NFA audit, NFA compliance programs and common audit issues; offered strategies for preparing for and surviving an audit; and summarized recent CFTC guidance that affects CPOs and CTAs.  The program featured Robert V. Cornish, Jr., a partner at Phillips Lytle LLP; Dorothy D. Mehta, a special counsel at Cadwalader, Wickersham & Taft LLP; Deborah A. Monson, a partner at Ropes & Gray, LLP; and Heather Wyckoff, counsel at Haynes & Boone LLP.  See also “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).

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  • From Vol. 7 No.38 (Oct. 10, 2014)

    Usable Lessons and Proven Survival Techniques from the Hedge Fund Examination Trenches

    A recent PracticeEdge session presented by the Regulatory Compliance Association explored the panelists’ experiences with SEC and NFA examinations and provided an overview of key substantive issues that are likely to be addressed in those exams.  The program was moderated by Christopher M. Wells, a partner at Proskauer Rose LLP.  The other speakers were Cynthia Marian, a Vice President, Chief Compliance Officer and Deputy General Counsel of Tinicum, Inc.; Dianne Mattioli, CCO of Hedgemark Securities; Mark Polemeni, CCO – Asset Management at Citadel, LLC; and Catherine Smith, General Counsel of Guidepoint Global, LLC.  See also “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three),” The Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

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  • From Vol. 7 No.38 (Oct. 10, 2014)

    OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities

    Andrew J. Bowden, the Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), recently spoke at the CFA Institute’s 2014 GIPS Standards Annual Conference.  He noted that the SEC has recently completed GIPS training for its examination staff and that OCIE has been pursuing several important initiatives.  He discussed those initiatives, recent enforcement actions involving performance-reporting issues and the continuing improvement of the SEC’s technological capabilities.  For additional insight from Bowden, see part two of our series on the RCA’s Compliance, Risk & Enforcement 2013 Symposium, held in December 2013, at which Bowden delivered the keynote address.  See also “OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing,” The Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014).

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  • From Vol. 7 No.32 (Aug. 28, 2014)

    SEC Continues Pre-Action Probe of Stilwell Inter-Fund Loans

    The U.S. District Court for the Southern District of New York recently ordered hedge fund principal Joseph D. Stilwell to show cause why he should not give additional testimony to the SEC in connection with the SEC’s investigation of the circumstances surrounding a number of inter-fund loans between funds advised by Stilwell Value, LLC.  Stilwell first testified about certain inter-fund loans in 2013.  However, the SEC claimed that it received evidence of additional inter-fund loans earlier this year and is seeking to compel Stilwell to give additional testimony.  For more on transactions among hedge funds, see “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors,” The Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).  For more on transactions between hedge fund managers and funds, see “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  For more on loans from hedge funds to managers, see “Important Implications and Recommendations for Hedge Fund Managers in the Aftermath of the SEC’s Settlement with Philip A. Falcone and Harbinger Entities,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).

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  • From Vol. 7 No.32 (Aug. 28, 2014)

    Alternative Investment General Counsel Summit Addresses Examinations, Insider Trading, Political Intelligence and Expert Networks (Part Two of Two)

    This is the second article in a two-part series covering ALM’s inaugural Alternative Investment General Counsel Summit in New York – an event at which law firm partners, in-house counsel and regulators discussed best practices on legal issues faced by hedge fund managers.  The first article addressed conflicts of interest raised by dual registration and valuation; the constituent elements of a culture of compliance; the interaction between compensation structures and regulatory developments; AIFMD compliance and timing; presence exam survival strategies; and the role of risk alerts in refining a compliance program.  This article discusses effective responses to regulatory audits and examinations; insider trading; political intelligence; and expert networks.  See also “ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing, OTC Derivatives Reforms, Insider Trading Best Practices, the JOBS Act, AIFMD and Activist Investing (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).

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  • From Vol. 7 No.31 (Aug. 21, 2014)

    OCIE Letter Foreshadows Examination Activity Focused on Municipal Advisors

    On August 19, 2014, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published a letter announcing its intention to examine certain municipal advisors (MAs) that must register with the SEC between July 1 and October 31, 2014 and that are not registered with FINRA.  In its letter addressed to MA senior executives and principals, OCIE explained that it will be examining a “significant percentage” of the newly registered MAs through a National Exam Program (NEP).  MAs must register with the SEC under Section 975 of Dodd-Frank, which amended Section 15B of the Securities Exchange Act of 1934, and they owe fiduciary duties to the municipal pension funds that they advise.  Hedge fund managers should understand the SEC’s agenda concerning the upcoming MA examinations because certain pension fund advisers – critical gatekeepers between hedge fund managers and the considerable volume of retirement assets available for investment – may be deemed to be MAs and therefore scrutinized as part of NEP’s initiative.  See “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 27 (Jul. 11, 2013).  In turn, hedge fund managers should understand the total range of concerns bearing on the entities to which they market, or on the intermediaries serving those entities; to the extent pension consultants are under increased examination pressure, managers’ marketing efforts, other things being equal, are more likely to be successful if they take those pressures into account.

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    Alternative Investment General Counsel Summit Covers Dual Registration, Valuation, Compensation Structures, the AIFMD, Presence Exams and Risk Alerts (Part One of Two)

    ALM’s Corporate Counsel recently hosted its inaugural Alternative Investment General Counsel Summit in New York.  Speakers at the event, including law firm partners, in-house counsel and regulators, addressed conflicts of interest raised by dual registration and valuation; the constituent elements of a culture of compliance; the interaction between compensation structures and regulatory developments; AIFMD compliance and timing; presence exam survival strategies; the role of risk alerts in refining a compliance program; effective responses to regulatory audits and examinations; insider trading; political intelligence; and expert networks.  This is the first article in a two-part series summarizing the points made at the Summit that can impact the design or implementation of hedge fund manager compliance programs.  See also “ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Distressed Debt Investing (Part Two of Three),” The Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013).

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  • From Vol. 7 No.28 (Jul. 24, 2014)

    Five Key Compliance Challenges for Alternative Mutual Funds: Valuation, Liquidity, Leverage, Disclosure and Director Oversight

    On June 30, 2014, Norm Champ, Director of the SEC’s Division of Investment Management, delivered a speech providing an overview of the forces behind the growing alternative mutual fund industry and some concrete steps that hedge fund managers can take to avoid compliance pitfalls when entering that industry.  See “Key Investment and Operational Restrictions Imposed on Alternative Mutual Funds by the Investment Company Act of 1940 (Part Two of Two),” The Hedge Fund Law Report, Vol. 7, No. 25 (Jun. 27, 2014).  Specifically, Champ discussed: how alternative mutual fund managers should approach the regulatory issues associated with valuation, liquidity, leverage and disclosure; the role of directors in overseeing compliance programs of alternative mutual funds; ongoing and new initiatives by OCIE targeting alternative mutual funds’ compliance programs; and the utility of IM Guidance Updates in revising compliance programs.  See also “Citi Survey Highlights Opportunities for Hedge Fund Managers as Institutional Investors Seek to Optimize their Portfolios (Part Two of Two),” The Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014) (in particular, section entitled “The Rise of Alternative Mutual Funds”).

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  • From Vol. 7 No.26 (Jul. 11, 2014)

    Hedge Fund Industry Experts Discuss Presence Examinations Priorities, SEC Investigations and How an Admission in an SEC Settlement May Affect Insurance Coverage

    Since enactment of the Dodd-Frank Act, the SEC has been shining a bright light on newly registered investment advisers, particularly through its presence exam initiative.  See “A Roadmap and Recommendations for Hedge Fund Managers Facing Presence Examinations,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Private fund managers need to be prepared to respond appropriately and effectively when the SEC comes calling, whether through a routine examination or a formal investigation.  In that regard, a recent program highlighted the areas on which the SEC has focused in its presence exam initiative, the mechanics of an SEC investigation and how admissions of liability may affect the availability of insurance coverage.  The speakers included Mary O’Connor, Global Head of the Financial Institutions Group at Willis Group Holdings; Richard Magrann-Wells, Senior Vice President at Willis; Christopher Lombardy, partner at Kinetic Partners US LLP; Robert J. Herm, Vice President at Axis Insurance; Gary Stein, partner at Schulte Roth & Zabel LLP; and Theodore A. Keyes, special counsel at Schulte.  This article provides a long-form recitation of the material points made during the program.

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  • From Vol. 7 No.25 (Jun. 27, 2014)

    RCA ECO 2014 Symposium Offers Insight from Top SEC Officials on Cybersecurity, Reg M, Examinations, Insider Trading Investigations, the Newman Appeal, Expert Networks and Political Intelligence (Part Two of Two)

    This is the second article in a two-part series covering the Regulatory Compliance Association’s Enforcement, Compliance and Operations 2014 Symposium, held on May 1, 2014 in New York City.  This article summarizes the key insights offered at the Symposium by top SEC officials and industry participants with respect to cybersecurity, Rule 105 of Regulation M, hedge fund manager examinations, evolving investigative techniques used in criminal investigations of insider trading, insider trading doctrine and the appeal in United States v. Newman, expert networks and political intelligence.  The first article in this series dealt with regulatory transparency, custody, conflicts raised by serving simultaneously as a broker and investment adviser, what the SEC’s Division of Trading and Markets does, interaction between the SEC’s Office of Compliance Inspections and Examinations and its Enforcement Division, broker registration of in-house marketing departments, alternative mutual funds and the JOBS Act.  See “RCA Enforcement, Compliance and Operations 2014 Symposium Offers Insight from Top SEC Officials on Custody, Conflicts, Broker Registration, Alternative Mutual Funds and the JOBS Act (Part One of Two),” The Hedge Fund Law Report, Vol. 7, No. 22 (Jun. 6, 2014).

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  • From Vol. 7 No.25 (Jun. 27, 2014)

    Cybersecurity for Hedge Fund Managers: Compliance Best Practices, SEC Examinations and Cyber-Liability Insurance

    On March 26, 2014, the SEC hosted a cybersecurity roundtable featuring representatives from regulators and the private sector.  See “Seven Cybersecurity Risks That SEC Examiners Will Look for in Examinations of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 17 (May 2, 2014).  Three weeks later, OCIE issued a Risk Alert on cybersecurity preparedness in the securities industry, and announced a plan to examine more than 50 registered investment advisers and broker-dealers on cybersecurity matters.  Just last week, CNBC and others reported that in late 2013, cyber criminals installed a malicious computer program on the servers of a large hedge fund manager, interrupting its high-speed trading strategy and routing trade information to offsite servers.  Clearly, cyber threats are a practical problem for hedge fund managers and – in light of regulators’ recognition of the practical problem – a regulatory issue.  A recent program offered concrete advice for hedge fund managers on addressing both the practical risk from cyber threats and the derivative regulatory risk.  In particular, the program focused on three themes: how to craft and implement effective cybersecurity policies and procedures; what the SEC wants to see at hedge fund managers in terms of cybersecurity; and the availability of insurance against cyber risks and losses.  This article summarizes the points from the discussion that hedge fund managers can use to update their approaches to cybersecurity.  In addition, this article relays the four main findings from a recent report by McKinsey & Company on effective cybersecurity strategies.  See also “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014) (section entitled “Cybersecurity”).

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  • From Vol. 7 No.22 (Jun. 6, 2014)

    RCA Enforcement, Compliance and Operations 2014 Symposium Offers Insight from Top SEC Officials on Custody, Conflicts, Broker Registration, Alternative Mutual Funds and the JOBS Act (Part One of Two)

    On May 1, 2014, the Regulatory Compliance Association held its Enforcement, Compliance and Operations (ECO) 2014 Symposium in New York City.  Top SEC officials and other panelists at the ECO 2014 Symposium offered detailed, current and candid insight on regulatory transparency, custody, conflicts raised by serving simultaneously as a broker and investment adviser, what the SEC’s Division of Trading and Markets does, interaction between the SEC’s Office of Compliance Inspections and Examinations and its Enforcement Division, broker registration of in-house marketing departments, alternative mutual funds, the JOBS Act, cybersecurity, Regulation M, examinations, expert networks and political intelligence.  This is the first article in a two-part series summarizing the key takeaways from the ECO 2014 Symposium.  See also “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three),” The Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

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  • From Vol. 7 No.19 (May 16, 2014)

    SEC Staff Provides Roadmap to Middle-Market Private Fund Adviser Examinations

    The Association for Corporate Growth, in cooperation with law firm Venable LLP and accounting and consulting firm McGladrey LLP, recently sponsored a panel discussion on examinations of middle-market investment advisers featuring six experienced SEC staff members and other professionals.  The program provided valuable insights into how the SEC selects advisers for examinations and how it conducts those exams.  See also “Seven Recommendations to Assist Private Fund Managers in Navigating Heightened SEC Examination and Enforcement Activity,” The Hedge Fund Law Report, Vol. 6, No. 27 (Jul. 11, 2013).

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  • From Vol. 7 No.19 (May 16, 2014)

    OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing

    On May 6, 2014, Andrew J. Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), delivered a speech at Private Equity International’s Private Fund Compliance Forum 2014 in New York City.  The speech provided a candid and detailed recitation of compliance shortcomings identified by OCIE in 150 presence examinations of private equity managers conducted since October 2012.  Specifically, Bowden discussed: statistics on OCIE and the Presence Exam Initiative; limited partnership agreements; post-investment due diligence and monitoring; “zombie” advisers; consolidation and compression of returns; four commonly identified deficiencies relating to expenses; four troubling practices relating to fees; OCIE’s approach to valuation; two compliance issues raised by fund marketing; and the three chief elements of a successful culture of compliance.  Many, perhaps most, of Bowden’s points made with respect to private equity advisers would apply with equal force – or at least by close analogy – to hedge fund managers.  This article summarizes the points from the speech that may cause private fund managers to adjust their compliance policies and procedures.  For a discussion of a speech delivered by then-SEC Asset Management Unit Chief Bruce Karpati at PEI’s 2013 Private Fund Compliance Forum, see “Bruce Karpati Addresses Private Equity Enforcement Trends, Initiatives and Priorities,” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  (Karpati has since joined KKR as global chief compliance officer.)

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  • From Vol. 7 No.17 (May 2, 2014)

    Seven Cybersecurity Risks That SEC Examiners Will Look For in Examinations of Hedge Fund Managers

    Cybersecurity has been a growing priority for the SEC.  See “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Two of Three),” The Hedge Fund Law Report, Vol. 7, No. 8 (Feb. 28, 2014).  On March 26, 2014, the SEC hosted a cybersecurity roundtable that featured representatives of regulatory agencies, leading professional firms, financial institutions and other businesses.  SEC Chair Mary Jo White and Commissioner Luis A. Aguilar gave opening remarks that stressed the SEC’s concerns about cybersecurity threats.  Following that event, the SEC’s Office of Compliance Inspections and Examinations issued a National Exam Program Risk Alert (Alert) that outlined a new initiative to “assess cybersecurity preparedness in the securities industry and . . . obtain information about the industry’s recent experiences with certain types of cyber threats,” including a plan to examine more than 50 registered investment advisers and broker-dealers on cybersecurity matters.  The Alert also included examples of questions relating to cybersecurity that examiners may pose to investment advisers and broker-dealers.  For hedge fund managers, whether or not registered, the Alert and speeches at the roundtable offer valuable guidance for identifying and addressing cybersecurity threats, and preparing for SEC examinations that focus in part on cybersecurity.  See also “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014).

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  • From Vol. 7 No.13 (Apr. 4, 2014)

    Seward & Kissel Partner Steven Nadel Identifies 29 Top-of-Mind Issues for Investors Conducting Due Diligence on Hedge Fund Managers

    On March 25 and 26, 2014 at the Princeton Club in New York, Financial Research Associates held the most recent edition of its annual Hedge Fund Due Diligence Master Class.  During an opening “fireside chat,” Seward & Kissel LLP partner Steven Nadel identified 29 areas of concern for investors engaged in due diligence of hedge fund managers.  Many of these concerns overlap with concerns of regulators examining hedge fund managers.  This article lists the issues identified by Nadel and relays his market color on each.

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  • From Vol. 7 No.11 (Mar. 21, 2014)

    New York City Bar’s “Hedge Funds in the Current Environment” Event Focuses on Hedge Fund Structuring, Private Fund Examinations, Compliance Risks and Seeding Arrangements

    On March 5, 2014, the New York City Bar held the most recent edition of its annual “Hedge Funds in the Current Environment” event.  Panelists at the event – including general counsels and chief compliance officers (CCOs) from leading hedge fund managers and partners from top law firms – addressed hedge fund structuring considerations (including the purposes and mechanics of mini-master funds); the myth of the unregulated hedge fund; analogies between regulatory examinations and investor due diligence; seven key areas of regulatory interest in hedge fund examinations; five headline issues confronting CCOs; four pros and seven cons of hedge fund seeding arrangements; and a structuring alternative to seeding ventures.  This article highlights the salient points from the event.  For our coverage of the 2012 edition of this event, see “Davis Polk ‘Hedge Funds in the Current Environment’ Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).

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  • From Vol. 7 No.9 (Mar. 7, 2014)

    Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three)

    On January 30, the SEC hosted the 2014 edition of its annual Compliance Outreach Program National Seminar for senior professionals at hedge fund managers and other investment advisers.  Panelists at the seminar included senior SEC officials and CCOs from hedge and private equity fund managers.  The seminar provided candid insight from regulators and conveyed best practices developed in the private sector.  This is the third article in a three-part series summarizing the more noteworthy points made at the seminar.  This article covers: compliance considerations specific to the private equity industry; best practices in fair value pricing; due diligence on pricing services; CCO liability; and outsourcing of compliance functions.  The first article in this series discussed SEC Chairman Mary Jo White’s opening remarks and detailed the compliance, examination and enforcement priorities outlined by the heads of relevant SEC divisions.  And the second article detailed SEC priorities by theme and by SEC division and relayed insights on nine topics of specific interest to private fund advisers: presence examinations, risk assessments, conflicts, co-investments, allocation of expenses, marketing, custody, allocation of investment opportunities and broker-dealer registration.

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  • From Vol. 7 No.8 (Feb. 28, 2014)

    Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Two of Three)

    On January 30, the SEC hosted the 2014 version of its annual Compliance Outreach Program National Seminar for senior professionals at hedge fund managers and other investment advisers.  Panelists at the seminar included senior SEC officials and CCOs from hedge and private equity fund managers.  The seminar provided candid insight from regulators and conveyed best practices developed in the private sector.  This is the second article in a three-part series summarizing the more noteworthy points made at the seminar.  This article covers discussions of SEC priorities by theme and by SEC division and relays insights on nine topics of specific interest to private fund advisers: presence examinations, risk assessments, conflicts, co-investments, allocation of expenses, marketing, custody, allocation of investment opportunities and broker-dealer registration.  The first article discussed SEC Chairman Mary Jo White’s opening remarks and detailed the compliance, examination and enforcement priorities outlined by the heads of relevant SEC divisions.  See “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).  The third article will focus on private equity compliance issues, valuation and CCO liability.

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  • From Vol. 7 No.7 (Feb. 21, 2014)

    Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three)

    On January 30, the SEC hosted the 2014 version of its annual Compliance Outreach Program National Seminar for senior professionals at hedge fund managers and other investment advisers.  Panelists at the seminar included senior SEC officials and CCOs from hedge and private equity fund managers.  The seminar provided first-person insight into the concerns of regulators with direct jurisdiction over hedge fund managers, and also highlighted private sector best practices.  This is the first article in a three-part series summarizing the more noteworthy points made at the seminar.  This article covers SEC Chairman Mary Jo White’s opening remarks, then details the compliance, examination and enforcement priorities outlined by the heads of the relevant SEC divisions.  See also “SEC Provides Recommendations for Establishing an Effective Risk Management Program for Hedge Fund Managers at Its Compliance Outreach Program National Seminar,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012); “Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

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  • From Vol. 7 No.6 (Feb. 13, 2014)

    Three Steps in Responding to an SEC Examination Deficiency Letter and Other Practical Guidance for Hedge Fund Managers from SEC Veteran and Sutherland Partner John Walsh

    The vast majority of hedge fund managers with any nexus to the U.S. interact with the SEC – directly via examinations, enforcement actions or filings, or indirectly by operating under the specter of anti-fraud enforcement.  Counsel (in-house or outside) and compliance officers can, accordingly, best effectuate their prophylactic purpose by understanding the expectations, operations and motivations of SEC officials and staff.  Few understand these dynamics – and how they relate to hedge fund managers – better than Sutherland Asbill & Brennan LLP partner and former SEC official John H. Walsh.  During his 23-year tenure at the SEC, Walsh, among other things, played a key role in creating the Office of Compliance Inspections and Examinations (OCIE), designed and implemented the SEC’s securities compliance examination practices and served as OCIE’s acting director in 2009.  The Hedge Fund Law Report recently interviewed Walsh in connection with the publication of Investment Adviser’s Legal and Compliance Guide, Second Edition, a treatise that Walsh co-authored with Terrance J. O’Malley.  Our interview aimed to connect Walsh’s experience with the concerns of hedge fund managers, and covered topics including: retraining of OCIE staff in 2009; building blocks of a credible “tone at the top”; managing voluminous SEC information requests during examinations; the role of technology in a well-designed examination strategy; factors SEC officials consider in making referrals to Enforcement; the advisability of voluntary presentations to SEC examiners; core elements of effective information barriers; responding to SEC deficiency letters; access to previously-issued SEC deficiency letters; information sharing between the SEC and other regulators; admissions of wrongdoing; and attorney-client privilege.

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  • From Vol. 7 No.6 (Feb. 13, 2014)

    OCIE Risk Alert Identifies the Chief Concerns of Pension Fund Gatekeepers When Performing Hedge Fund Due Diligence

    The SEC’s Office of Compliance Inspections and Examinations (OCIE), in coordination with the Division of Investment Management and the Asset Management Unit of the Enforcement Division, recently issued a Risk Alert summarizing the due diligence procedures that certain investment advisers employ when considering hedge funds and other alternative investments for their clients.  This article summarizes the key findings of the Risk Alert.  See also “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).

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  • From Vol. 7 No.5 (Feb. 6, 2014)

    K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part Two of Two)

    This is the second of two articles covering the 2013 version of the annual K&L Gates investment management seminar.  This article covers two sessions, one discussing the SEC’s approach to examinations and enforcement actions involving fund managers, and another tackling implications of the JOBS Act for fund managers.  The first article relayed key points from a session on regulatory developments impacting registered commodity pool operators and commodity trading advisors, as well as U.S. and European regulations governing swaps and other over-the-counter derivatives.  See “K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part One of Two),” The Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014).

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities

    On February 4, 2014 – this coming Tuesday – the New York office of Ropes & Gray will host GAIM Regulation 2014.  The event will feature an all-star speaking faculty including general counsels and chief compliance officers from leading hedge fund managers, top partners from Ropes and other law firms and officials from the SEC, CFTC, FINRA and other U.S. and global regulators.  The intent of the event is to share best practices in a private setting, and to hear directly from relevant regulators.  For a fuller description of the event, click here.  To register, click here.  The Hedge Fund Law Report recently interviewed three Ropes partners on some of the more noteworthy topics expected to be discussed at GAIM Regulation 2014.  Generally, we discussed SEC and regulatory issues with Laurel FitzPatrick, co-leader of Ropes’ hedge funds practice and co-managing partner of its New York office; CFTC and derivatives issues with Deborah A. Monson, a partner in Ropes’ Chicago office; and enforcement issues with Zachary S. Brez, co-chair of Ropes’ securities and futures enforcement practice.  Specifically, our long form interview with these partners included detailed discussions of the future of hedge fund advertising following the JOBS Act; the impact of the Volcker rule on hedge fund hiring and trading; fund manager responses to the SEC’s focus on broker registration of in-house marketing personnel; best practices for preparing for and navigating SEC examinations; structuring multi-year incentive fees; the impact of swap execution facilities on hedge fund manager obligations and cleared derivatives execution agreements; recent National Futures Association developments relevant to hedge fund managers; design and enforcement of robust information barriers; measures that managers can take to preserve the firm before and after initiation of an enforcement action; government enforcement priorities for hedge fund managers; and specific financial products likely to face government scrutiny in the next two years.

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    Current and Former Regulators and Prosecutors Particularize the Enforcement Challenges Facing Hedge Fund Managers in 2014

    Current and former regulators and prosecutors from the SEC, CFTC and New York State Attorney General’s (NYSAG) Office recently offered insight on the enforcement landscape confronting hedge fund managers during a session entitled “Current Hedge Fund and Private Equity Fund Enforcement Priorities – The Enforcers’ Perspective,” which was part of PLI’s “Hedge Fund and Private Equity Enforcement & Regulatory Developments 2013” program.  Barry R. Goldsmith, a partner at Gibson, Dunn & Crutcher LLP, moderated the session.  The speakers were Stephen L. Cohen, an Associate Director at the SEC’s Division of Enforcement; Chad Johnson, Chief of the Investor Protection Bureau of the NYSAG’s Office; Colleen P. Mahoney, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, and former SEC acting general counsel and Deputy Director of its Division of Enforcement; and Manal Sultan, Deputy Director and a chief trial attorney for the Division of Enforcement of the CFTC.  As is customary, Cohen, Johnson and Sultan all noted that the views they expressed were not official statements of agency policy.  This article summarizes the salient points raised during the panel discussion.  For details of a 2013 speech by Bruce Karpati, the former Chief of the Asset Management Unit of the SEC’s Division of Enforcement, outlining the SEC’s enforcement priorities for 2013, see “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).

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  • From Vol. 7 No.1 (Jan. 9, 2014)

    RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three)

    This is the third installment in our three-part series covering the RCA’s Compliance, Risk & Enforcement 2013 Symposium.  It summarizes key points from two sessions, one offering perspectives from regulators and industry participants on regulatory risks and compliance best practices relating to expert networks, valuation, custody and allocation of expenses; and another providing a detailed look into fund administrator shadowing.  The first installment covered highlights from two sessions, one addressing effective risk assessments for hedge fund managers and the other offering current and former government officials’ perspectives on expert networks, political intelligence, insider trading and valuation-related conflicts of interest.  The second installment summarized the most salient points from two sessions, including the keynote address by OCIE Director Andrew Bowden, and a session addressing fund distribution, the JOBS Act, broker registration, National Futures Association oversight of hedge fund marketing practices and the EU’s Alternative Investment Fund Managers Directive.

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  • From Vol. 6 No.48 (Dec. 19, 2013)

    RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Two of Three)

    Hedge fund industry experts, including regulators from the SEC and National Futures Association (NFA), recently gathered at the RCA’s Compliance, Risk & Enforcement 2013 Symposium (Symposium) to offer varied perspectives and advice on topics relevant to hedge fund managers.  This second installment in a three-part article series covering the Symposium summarizes notable points from two sessions, including: (1) the keynote address by Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), who outlined OCIE examination priorities for hedge fund managers; and (2) another session addressing regulatory challenges confronting managers engaged in fund distribution, including the JOBS Act, broker registration, NFA oversight of hedge fund marketing practices and the EU’s Alternative Investment Fund Managers Directive.  The first article in this series covering the Symposium summarized two sessions, one on conducting effective risk assessments for hedge fund managers (including discussions of forensic testing and testing for insider trading, order allocations and best execution), and the other incorporating current and former government officials’ perspectives on expert networks, political intelligence, insider trading investigations and prosecutions and valuation-related conflicts of interest.  See “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).  The third article will summarize key points from two sessions, one identifying regulatory risks and outlining compliance best practices with respect to use of expert networks, valuation of assets, custody and the allocation of expenses, and another providing a detailed look into fund administrator shadowing.

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  • From Vol. 6 No.45 (Nov. 21, 2013)

    ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing, OTC Derivatives Reforms, Insider Trading Best Practices, JOBS Act, AIFMD and Activist Investing (Part One of Three)

    On September 30 and October 1, 2013, ALM Events hosted its 7th Annual Hedge Fund General Counsel Summit during which law firm and in-house practitioners shared insights on legal, operational and other challenges faced by hedge fund managers.  This first installment in a three-part series covering the summit highlights the salient points from panel discussions addressing strategies for handling government investigations and issues faced by chief compliance officers, including dual-hatting and supervisory liability.  See “Benefits, Challenges and Recommendations for Persons Simultaneously Serving as General Counsel and Chief Compliance Officer of a Hedge Fund Manager,” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  The second article in the series will address opportunities and challenges associated with distressed debt investing (including participation in Chapter 11 proceedings, claims trading and risks of distressed debt investing); the impact of over-the-counter derivatives reforms on fund managers (including new mandatory clearing, execution and reporting requirements as well as CFTC cross border rules); and best practices for addressing insider trading risks.  The third article will provide regulatory updates on the JOBS Act, the Alternative Investment Fund Managers Directive and new Canadian and U.S. initiatives that will impact activist investing strategies.

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  • From Vol. 6 No.40 (Oct. 17, 2013)

    Criminal and Civil Actions against Purported Investment Adviser Underscore the Imperative of Candor during SEC Examinations

    On September 13, 2013, the SEC charged Frederick D. Scott, owner of a New York-based investment advisory firm, with defrauding investors and falsely claiming he managed $3.7 billion in assets.  On the same day, in a parallel criminal action brought in the Eastern District of New York, Scott pled guilty to making materially false statements to the SEC during the course of an investigation and conspiring to commit wire fraud.  Scott, who will be sentenced later this year, faces up to five years’ imprisonment on the false statements charge alone.  The joint actions against Scott highlight the government’s commitment to civilly and criminally charging individuals who defraud investors and lie during the course of an SEC examination or investigation.  See “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012).  In preparing for investigations, investment advisers must ensure that all personnel who communicate with the SEC are well versed in the potential repercussions of withholding material information or lying to examiners.  This article summarizes the civil and criminal charges against Scott and his subsequent plea deal, based on allegations contained in the SEC complaint, the criminal information and a Debevoise & Plimpton LLP Client Update describing the case and Scott’s plea deal.

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  • From Vol. 6 No.38 (Oct. 3, 2013)

    ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two)

    ACA Compliance Group (ACA) recently released the second part of its three-part report describing the results of its surveys of hedge fund and private equity fund manager compliance practices, focusing on the completion and preparation of regulatory filings, various insider trading issues and expense practices.  ACA also presented a webcast explaining and expanding on the survey findings.  The report and webcast provided important market color and guidance enabling hedge fund and private equity fund managers to benchmark their compliance practices against those of their peers.  This article, the first of two installments covering the report and webcast, summarizes survey results relating to (1) the present status and focus areas of hedge fund and private equity fund manager presence examinations, and (2) fund managers’ preparation and completion of regulatory filings (e.g., Form ADV, Form PF and non-U.S. regulatory filings), including a discussion of how many managers are making various regulatory filings; what resources are being used to prepare such filings; how Form PF expenses are being allocated among a manager and its funds; and whether Form PF is being shared with fund investors.  The second installment will address insider trading issues (including discussions of information barriers, online data rooms, non-disclosure agreements, restricted and watch lists, political intelligence, expert networks and public company contacts); and expense practices (including the use of expense caps and the allocation of expenses among a manager and its funds).  For coverage of the first part of the ACA compliance report, conducted during the first quarter of this year, see “ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority,” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

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  • From Vol. 6 No.31 (Aug. 7, 2013)

    DLA Piper Hedge Fund Valuation Webinar Covers Fair Value Methodologies, Valuation Services, Valuing Illiquid Positions and Handling Valuation Inquiries During SEC Examinations

    Hedge fund valuation practices are commonly misunderstood, and they are clearly subject to heightened scrutiny by the SEC.  See “SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points,” The Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013).  With this in mind, a recent panel discussion hosted by international law firm DLA Piper provided a comprehensive and detailed overview of the valuation deficiencies that have been the subject of recent SEC enforcement actions; outlined valuation best practices for hedge fund managers (including “fair value” valuation methodologies, the use of third-party valuation services and valuation methodologies for illiquid positions); and detailed steps that managers should take to navigate valuation inquiries during SEC examinations.  The expert panel included valuation experts, a former SEC examiner and a former government prosecutor.  This article focuses on the detailed guidance offered by the experienced panel.

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  • From Vol. 6 No.30 (Aug. 1, 2013)

    A Roadmap and Recommendations for Hedge Fund Managers Facing Presence Examinations

    In the fall of 2012, the SEC unleashed its latest tactic aimed at identifying potential issues and deficiencies for newly registered investment advisers – the “presence examination.”  See “OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  These “focused, risk-based” examinations came on the heels of the recent influx of SEC registrants (resulting from Dodd-Frank legislation) and are driven in large part by the limited resources available to the SEC staff.  Namely, of the more than 4,000 private fund advisers registered with the SEC (as of April 2013), more than 1,500 registered since July 21, 2010, representing an increase of more than 50 percent in registered private fund advisers.  Through the Presence Examination initiative, the SEC is looking to reach as many of these new registrants as possible, substituting mini risk-based examinations in lieu of traditional “full-blown” examinations, which have historically proved ineffective at reaching the masses.  As of April 2013, approximately 20 percent of all advisers that have been registered for more than three years had never been examined.  In an April 16, 2013 speech at the 2013 NASAA Public Policy conference, SEC Commissioner Elisse B. Walter noted that the Presence Exam initiative creates a way to “meaningfully engage, assess risk, and establish a presence and credibility” with new registrants, serving as a reminder that “we’re out here, keeping an eye on things.”  Many newly registered private fund managers will face presence examinations in the next two years.  In a guest article, Jillian Timmermans, a Partner and Vice President at Cordium, provides a roadmap and practical recommendations that will help such managers navigate the presence examination process more effectively.

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  • From Vol. 6 No.28 (Jul. 18, 2013)

    WilmerHale and Deloitte Identify Best Legal and Accounting Practices for Hedge Fund Valuation, Fees and Expenses

    On June 19, 2013, WilmerHale and Deloitte jointly hosted a webinar entitled “Valuation Issues, SEC Examinations & Enforcement Actions.”  The panel of attorneys and auditors discussed the SEC’s heightened focus on private fund manager practices related to valuation, calculation of fees and allocation of expenses.  Panelists also outlined compliance best practices for hedge fund managers relating to valuation, fees, expenses and other areas on which regulators are focused.  For more on those focus areas, see “OCIE Director Bowden Identifies Five Key Lessons for Hedge Fund Managers from Recent Presence Examinations,” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  This article summarizes salient points from the webinar.

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  • From Vol. 6 No.27 (Jul. 11, 2013)

    Seven Recommendations to Assist Private Fund Managers in Navigating Heightened SEC Examination and Enforcement Activity

    Hedge fund managers must contend with a gathering storm of SEC examinations and heightened attention from the SEC’s Division of Enforcement.  This guest article describes the context and goals of the increased examination and enforcement activity, and provides seven practical recommendations to assist private fund managers in preparing for and navigating heightened examination and enforcement scrutiny.  The authors of this article are Marc Fagel, previously Director the SEC’s San Francisco Regional Office and now a partner at Gibson, Dunn & Crutcher LLP, and Kenneth Burke, a litigation associate at Gibson Dunn.

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  • From Vol. 6 No.25 (Jun. 20, 2013)

    PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations

    The Practising Law Institute recently sponsored a program entitled “Hedge Fund Compliance and Regulation 2013,” which included a segment entitled “Investor Relations: Ethical Considerations and Compliance Challenges.”  During that session, the expert panel of regulators and industry professionals offered detailed insights on topics related to hedge fund investor relations, including compliance violations unearthed during recent presence examinations of hedge fund managers; strategies for building and maintaining an effective compliance program; views on navigating specific compliance challenges including valuation, conflicts, fees, disclosures and preferential treatment; and potential changes that could arise as a result of the Jumpstart Our Business Startups Act.  This article summarizes key insights from the session.  For our coverage of another session from the program, see “PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance,” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

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  • From Vol. 6 No.24 (Jun. 13, 2013)

    PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance

    The Practising Law Institute recently sponsored a program entitled “Hedge Fund Compliance and Regulation 2013,” which included a segment entitled “Building an effective compliance program and strategies for dealing with regulators.”  During that segment, the expert panel – consisting of regulators and industry professionals – offered unique and detailed insight on how regulators and managers approach the SEC and NFA examination process.  Among other things, the panel offered a behind-the-scenes look at how the SEC and NFA approach regulatory examinations; practical guidance on how managers should approach the examination process; candid thoughts on hot-button issues, including the allocation of Form PF expenses, whether managers should document their annual compliance reviews and how regulators use such reports; challenges that hedge fund managers face in complying with NFA Bylaw 1101; and making disciplinary disclosures.

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  • From Vol. 6 No.21 (May 23, 2013)

    RCA Symposium Panels Discuss New CFTC and NFA Regulations Governing Obligations of Hedge Fund Managers Required to Register as CPOs or CTAs

    On April 18, 2013, the Regulatory Compliance Association held its Regulation, Operations & Compliance 2013 Symposium (RCA Symposium) in New York City.  Panels during the RCA Symposium covered various topics, including new regulations of the U.S. Commodity Futures Trading Commission and the National Futures Association (NFA) that apply or will apply to numerous hedge fund managers.  The two panels that tackled these issues addressed, among other things, registration obligations of commodity pool operators (CPO) and their principals and associated persons; reporting and other obligations applicable to new CPO and CTA registrants; Bylaw 1101; required ethics training programs; regulations governing marketing and promotional materials; and NFA audits.  This article addresses salient points from both sessions.  See also “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).

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  • From Vol. 6 No.21 (May 23, 2013)

    How Can Hedge Fund Managers Prepare for an SEC Investigation and Maximize the Odds of Obtaining Insurance Coverage? (Part Two of Two)

    On May 2, 2013, a panel of experts from K&L Gates, Jamison & Co. L.L.C. and ACA Compliance Group hosted a webinar entitled, “Issues Arising from SEC Investigations of Private Fund Managers: How to Prepare for an Investigation and How to Maximize the Odds of Obtaining Insurance Coverage.”  This article, the second in a two-part series covering the webinar, addresses insurance coverage for hedge fund managers, including: an overview of directors and officers and errors and omissions policies; the state of the market for insurance coverage for hedge funds and managers; the risk of relying on fund indemnification without obtaining insurance; judicial decisions providing guidance on the scope of coverage, including with respect to SEC investigations; steps that funds and managers can take to maximize insurance coverage for SEC investigations; the SEC’s enforcement push; steps managers can take to formulate a plan for handling an SEC investigation; common mistakes managers make during investigations; and measures that managers can take to minimize enforcement risk.  See also “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 6 No.21 (May 23, 2013)

    OCIE Director Bowden Identifies Five Key Lessons for Hedge Fund Managers from Recent Presence Examinations

    On April 18, 2013, just before being named the new Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), Andrew J. Bowden spoke at the Regulatory Compliance Association’s “Regulation, Operations & Compliance 2013” Symposium.  Bowden provided context for and color on OCIE’s recently-issued policy statement entitled “Examination Priorities for 2013,” and highlighted important findings from recently-conducted presence examinations.  This article summarizes the key points from Bowden’s speech.  For more on concerns identified by SEC staff during recent presence examinations, see “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).

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  • From Vol. 6 No.20 (May 16, 2013)

    How Can Hedge Fund Managers Prepare for an SEC Investigation and Maximize the Odds of Obtaining Insurance Coverage? (Part One of Two)

    On May 2, 2013, a panel of experts from K&L Gates, Jamison & Co. L.L.C. and ACA Compliance Group hosted a webinar entitled, “Issues Arising from SEC Investigations of Private Fund Managers: How to Prepare for an Investigation and How to Maximize the Odds of Obtaining Insurance Coverage.”  This article, the first in a two-part series covering the webinar, addresses the SEC’s enforcement push against hedge fund managers; steps managers can take to formulate a plan for handling an SEC investigation; common mistakes managers make during investigations; and measures that managers can take to minimize enforcement risk.  For our coverage of current SEC enforcement priorities, see “SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points,” The Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013).

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  • From Vol. 6 No.19 (May 9, 2013)

    ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority

    On April 16, 2013, ACA Compliance Group hosted a webinar in which it discussed findings from its recent survey of hedge and private equity fund managers regarding annual compliance reviews, forensic testing, risk management, custody, safeguarding of client assets, fee calculations and resources dedicated to compliance.  This article summarizes the survey findings and the practical takeaways from those findings as communicated by ACA in the course of the webinar.

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  • From Vol. 6 No.16 (Apr. 18, 2013)

    SEC Commissioner Walter Explains How an Overworked and Under-Resourced SEC Staff Can Nonetheless Examine Private Fund Advisers Effectively

    On April 16, 2013, SEC Commissioner Elisse Walter addressed the 2013 NASAA Public Policy Conference in Washington, D.C.  The general theme of Walter’s address was that with respect to examinations of investment advisers, federal and state securities regulators have more obligations than they have resources.  Specifically, the Dodd-Frank Act reallocated responsibility for examinations of small and mid-sized investment advisers from the SEC to state securities regulators.  See “NASAA Report Identifies Most Commonly Cited Investment Adviser Deficiencies Found in Coordinated State Adviser Examinations and Recommends Compliance Best Practices for Mid-Sized Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 12 (Mar. 22, 2012).  While part of the intent of this reallocation of responsibility was to “free up” the SEC’s examination resources, Dodd-Frank may have increased the SEC’s total workload by bringing private fund advisers under its regulatory, examination and enforcement auspices.  See “Challenges Faced By, Risks Encountered By and Lessons Learned From First Filers of Form PF,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  In short, state securities regulators have more advisers to examine and federal securities regulators have larger and more complex advisers to examine.  Yet neither has materially more budget.  So how are the various regulators supposed to conduct adequate examinations and protect investors?  Walter’s speech was intended, in part, to address that question by sharing the SEC’s learning with her state counterparts.  To do so, Walter discussed the challenges presented by small firms; three specific ways in which SEC examination staff members have remained effective in light of limited resources; and relevant examination statistics.  Walter’s speech was, in effect, a follow-up to her statement on the SEC’s 2011 Study on Enhancing Investment Adviser Examinations.  For a discussion of that study, and of Walter’s contemporaneous statement, see “Key Insights for Registered Hedge Fund Managers from the SEC’s Recently Released Study on Investment Adviser Examinations,” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).

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  • From Vol. 6 No.10 (Mar. 7, 2013)

    Ropes & Gray Partners Share Insights Gleaned from Successfully Navigating Presence Examinations with Hedge Fund Manager Clients

    On October 9, 2012, the Office of Compliance Inspections and Examinations (OCIE) of the SEC announced that it was going to conduct “focused, risk-based examinations of investment advisers to private funds that recently registered with the [SEC]” (Presence Exams).  See “OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  On February 12, 2013, three partners at Ropes & Gray LLP presented a webinar entitled “SEC Presence Exams – Issues for Hedge Fund Managers,” to share their experience on how OCIE has conducted Presence Exams; their perspectives on hot-button areas of SEC investigations; and their tips for navigating a Presence Exam successfully.  This article summarizes the key points from the webinar.  See also “SEC’s National Examination Program Publishes Official List of Priorities for 2013 Examinations of Hedge Fund Managers and Other Regulated Entities,” The Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013).

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  • From Vol. 6 No.9 (Feb. 28, 2013)

    RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part Two of Two)

    On December 18, 2012, the Regulatory Compliance Association held its Compliance, Risk & Enforcement Symposium at the Pierre Hotel in New York City.  Participants at the event included leading hedge fund industry professionals, and panels focused on topics including insider trading, compliance programs and reviews, SEC examination priorities, hedge fund governance, Form PF and marketing and advertising issues.  This article – the second installment in a two-part series covering the Symposium – discusses SEC examination priorities (and practical guidance for addressing areas of concern); recent trends in hedge fund governance; lessons learned from initial Form PF filings and strategies for completing Form PF; and marketing and advertising issues, including a discussion of the JOBS Act and related topics.  The first installment covered, among other things: insider trading (including a discussion of manager cooperation, the elements of insider trading, the continuing viability of the mosaic theory, insider trading investigative techniques and the use of expert networks and paid consultants); and compliance programs and reviews (including a discussion of the approach to and framework for hedge fund compliance programs and reviews, and specific policies and procedures designed to address trading risks).  See “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).

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  • From Vol. 6 No.9 (Feb. 28, 2013)

    SEC’s National Examination Program Publishes Official List of Priorities for 2013 Examinations of Hedge Fund Managers and Other Regulated Entities

    On February 21, 2013, the SEC’s National Examination Program (NEP) published its list of priorities for examinations of investment advisers (including hedge fund managers) and other regulated entities for 2013.  The NEP list not only addresses presence examinations of newly registered investment advisers, but also discusses focus areas for examinations of previously-registered advisers.  Also, unlike prior speeches addressing adviser examination priorities for 2013, this announcement reflects an official SEC statement on the matter.  This article offers a deep dive into the SEC’s thinking on each of the specified examination priorities.

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  • From Vol. 6 No.8 (Feb. 21, 2013)

    How Can Hedge Fund Managers Understand Recent SEC Developments to Mitigate Enforcement Risk?

    Whether it be insider trading, soft dollar issues, misappropriation or misrepresentations, the slew of SEC enforcement actions filed against investment advisers in the last year – along with the recently released results from the SEC’s Division of Enforcement (Enforcement) – speaks volumes.  The SEC is taking action.  The statistics alone show a concerning trend: In 2011, the SEC filed 146 enforcement actions relating to investment advisers or investment companies, a single year record and a 30 percent increase over fiscal year 2010.  These record numbers caused the industry to question whether this was merely an anomaly – possibly a byproduct of the financial crisis – or whether the industry as a whole became a target.  With the release of the SEC’s fiscal year 2012 numbers – 147 enforcement actions against investment advisers and investment companies, one more than the previous year’s record number – the SEC confirmed the industry’s fears.  Investment advisers remain in the SEC’s cross-hairs.  Understanding how this happened can help a firm reduce the risk of becoming the subject of an SEC examination or enforcement investigation.  This requires looking behind the statistics.  Although the driving force behind this trend is likely a multitude of factors, the primary culprits are an aggressive Asset Management Unit within Enforcement, the SEC’s new whistleblower program and an enhanced and invigorated Office of Compliance Inspections and Examinations.  In a guest article, Andrew J. Dunbar, a partner at Sidley Austin LLP and a former SEC enforcement attorney, discusses each of these developments in an effort to help hedge fund managers minimize the risk of becoming the subject of an SEC enforcement action.

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  • From Vol. 6 No.4 (Jan. 24, 2013)

    K&L Gates Investment Management Seminar Provides Guidance for Hedge Fund Managers on Social Media, Pay to Play Rules, ERISA Rule Changes, AIFMD, SEC Examination and Enforcement Priorities, Form PF, the JOBS Act, CPO Regulation and FATCA

    On December 5, 2012, international law firm K&L Gates held its 2012 Investment Management Conference in New York.  Speakers at the conference provided guidance on various regulatory developments impacting hedge funds, including: the use of social media; pay to play rules; rule changes under the Employee Retirement Income Security Act of 1974 (ERISA) impacting managers of plan assets; the E.U. Alternative Investment Fund Managers Directive (AIFMD); SEC examination and enforcement priorities; Form PF; the JOBS Act; regulation of commodity pool operators (CPOs); and the Foreign Account Tax Compliance Act (FATCA).  This article highlights the key points discussed at the conference on each of the foregoing topics.

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  • From Vol. 6 No.4 (Jan. 24, 2013)

    OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers at the RCA’s Compliance, Risk & Enforcement 2012 Symposium

    For legal and compliance professionals in the hedge fund industry, understanding the priorities of the SEC is critical in assessing risk, allocating resources and updating policies and procedures.  In particular, legal and compliance professionals need to be aware of examination priorities and enforcement trends because fumbling in the course of an examination or enforcement action could have real and adverse business consequences.  The SEC communicates its priorities indirectly and directly.  It communicates indirectly via enforcement actions and the resulting documents.  See, e.g., “Recent Enforcement Action Highlights SEC’s Concern with Preferential Redemption Rights Granted to Favored Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).  And it communicates directly – albeit through the noncommittal prism of form disclaimers – via speeches by commissioners and high-level staffers.  Two important instances of such direct communications occurred on December 18, 2012, at the Regulatory Compliance Association’s Compliance, Risk & Enforcement 2012 Symposium in New York City.  At that event, Carlo V. di Florio, Director of OCIE, and Bruce Karpati, Chief of the Asset Management Unit (AMU) of the SEC’s Enforcement Division, jointly delivered the keynote address.  On the examinations side, di Florio described: how the SEC gathers information and assesses risk; the new presence examination program; and OCIE’s current examination priorities for hedge fund managers.  On the enforcement side, Karpati discussed: the Enforcement Division’s new approach to initiating matters; the AMU’s approach to risk assessment; ten seminal enforcement actions recently taken against hedge fund managers; current enforcement priorities; and compliance best practices for hedge fund managers.  This article summarizes the insights from both speeches that have direct bearing on preparation by hedge fund managers for examinations and enforcement actions.

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  • From Vol. 5 No.48 (Dec. 20, 2012)

    Former SEC Asset Management Unit Co-Chief Robert Kaplan and Former NYS Insurance Superintendent Eric Dinallo, Both Current Debevoise Partners, Discuss the Purpose, Process and Consequences of Presence Examinations of Hedge Fund Managers

    On October 9, 2012, the SEC’s Office of Compliance Inspections and Examinations (OCIE) sent a letter to senior management of newly registered private fund advisers noting that such managers imminently may be subjected to so-called “presence examinations.”  See “OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  The letter provided some information on how presence examinations would work and what examiners would be looking for, but the letter also left many important questions unanswered.  To fill in the gaps left by the letter and round out the industry’s understanding of what presence examinations will mean for registered hedge fund managers, The Hedge Fund Law Report recently conducted an interview with Robert Kaplan and Eric Dinallo.  Kaplan is the former Co-Chief of the SEC’s Asset Management Unit within the Division of Enforcement and Dinallo is the former New York State Superintendent of Insurance; both are currently partners at Debevoise & Plimpton LLP.  Our interview covered, among other things: what presence examinations are; how OCIE evaluates the risk of hedge fund managers when allocating examination resources; the impact of a whistleblower on a manager’s risk profile; whether and how managers should approach mock examinations; whether self-reporting of violations found during mock examinations is advisable; how managers should approach senior management interviews with OCIE staff; how managers can ensure consistency across various fund documents and examination interview responses; key conflicts of interest OCIE will focus on during presence examinations; other key focal areas for presence examinations; whether managers must disclose the initiation of routine OCIE examinations to investors; whether managers must disclose unremediated material deficiencies to prospective fund investors; how OCIE approaches referrals of matters to the Division of Enforcement; and steps a manager can take to speed up an OCIE examination.

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  • From Vol. 5 No.47 (Dec. 13, 2012)

    NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests

    The National Futures Association (NFA) held a workshop (workshop) in New York on October 23, 2012 to help commodity pool operators (CPOs) and commodity trading advisors (CTAs) – including hedge fund managers that trade commodity interests – determine whether they must register with the U.S. Commodity Futures Trading Commission and the NFA, and to understand their regulatory obligations if they are required to do so.  Topics discussed during the workshop included popular CPO and CTA registration exemptions; reporting requirements for registrants, including those related to disclosure documents and financial reports; requirements related to promotional materials and sales practices for registrants; and the NFA audit process.  This article provides feature length coverage of the key topics discussed during the workshop.

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  • From Vol. 5 No.39 (Oct. 11, 2012)

    OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for “Presence Examinations”

    On October 9, 2012, the Securities and Exchange Commission’s (SEC’s) Office of Compliance Inspections and Examinations (OCIE) sent a letter (Letter) to senior management of newly registered investment advisers (i.e., advisers that registered with the SEC after July 21, 2011), describing the SEC’s National Examination Program, alerting them to upcoming OCIE examinations of newly registered advisers to private funds to be conducted in the next two years (presence examinations) and highlighting the focal areas of such presence examinations.  This article summarizes some key takeaways from the Letter.

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  • From Vol. 5 No.36 (Sep. 20, 2012)

    How Should Hedge Fund Managers Handle and Document Investor Complaints?

    Not all hedge fund investors are satisfied customers, but not all dissatisfied hedge fund customers sue or seek to arbitrate.  A halfway house between legal action and no action is the investor complaint – an expression of dissatisfaction with some aspect of the investment relationship, which need not relate to performance.  Good performing hedge fund managers can (and do) receive investor complaints, and the most formidable types of complaints frequently relate to matters other than performance, for example, the legality or propriety of conduct of manager personnel.  Adaptive hedge fund managers have developed an infrastructure and style for responding to complaints, and view them as an opportunity to engage investors and other constituencies.  Lesser managers bristle at any whiff of criticism, though that is a bad strategy for all involved; from the investor perspective, part of the job of a hedge fund manager is engaging with reasonable investor inquiries, including justified complaints.  Moreover, given the relatively small size of the hedge fund investor universe (at least compared to the retail investing population), the SEC’s whistleblower bounty program and competition for scarce assets, appropriately calibrated responses to investor complaints can have implications for marketing, reputation and regulatory relations.  In short, navigating the investor complaint process is a relatively novel challenge in the hedge fund industry, but an increasingly important one.  To help hedge fund managers think through the various components of this challenge, this article discusses: what constitutes an investor complaint; who within the management company should receive such complaints; how investor complaints should be investigated and addressed; when to notify the general counsel of an investor complaint; how to determine the appropriate course of action, including whether, when and how to respond to complaints; and how to document a complaint.

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  • From Vol. 5 No.24 (Jun. 14, 2012)

    Davis Polk “Hedge Funds in the Current Environment” Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities

    On May 11, 2012, the New York City Bar Association held its annual “Hedge Funds in the Current Environment” program co-hosted by law firm Davis Polk & Wardwell LLP.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: SEC examination priorities, such as insider trading, trade reviews and asset verification; establishing registered alternative funds; trends in hedge fund manager mergers and acquisitions; and hedge fund advertising after passage of the Jumpstart Our Businesses Startups (JOBS) Act.  Notably, Norm Champ, Deputy Director of the Office of Compliance Inspections and Examinations with the SEC, provided an up-to-date view of the SEC’s examination priorities in relation to hedge funds and their managers.  This article summarizes the key points discussed at the conference relating to each of the foregoing topics.

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  • From Vol. 5 No.19 (May 10, 2012)

    Benefits, Challenges and Recommendations for Persons Simultaneously Serving as General Counsel and Chief Compliance Officer of a Hedge Fund Manager

    As a result of law, regulation, investor pressure or the gravitational pull of best practices – or a combination of these forces – more and more hedge fund managers feel the need to have a general counsel (GC) and a chief compliance officer (CCO).  For managers with both titles on the organization chart, the question inevitably arises: Should different people serve in the different roles, or should one person serve in both roles?  There are advantages and disadvantages to both approaches.  A so-called “dual-hatted” employee serving as both GC and CCO is typically less expensive from a compensation perspective, but the volume of work at a larger or more complex manager may be more than one person can handle.  But the analysis extends well beyond compensation and quantity of work.  The decision to dual-hat implicates attorney-client privilege issues, examination preparedness, the reliability of internal controls, the effectiveness of marketing and investor relations and other issues.  At a fundamental level, the decision will inform the scope and depth of the manager’s “culture of compliance” – and it is not necessarily the case that a hedge fund manager with a dual-hatted GC/CCO has an inferior culture of compliance.  The analysis is more refined, and often turns on the structure and strategy of the manager, and effectiveness and ethics at the individual level.  The goal of this article is to help hedge fund managers think through the issues raised by dual-hatting.  For managers considering dual-hatting, this article provides a roadmap to the relevant questions.  For managers that have already made a decision with respect to dual-hatting – whether for or against – this article highlights relevant issues and strategies for addressing them.  In particular, this article discusses: the roles and responsibilities of the GC and CCO; the benefits and costs of having one employee wear both hats; recommendations for hedge fund managers that wish to employ such arrangements; and alternative solutions for hedge fund managers that choose not to use such arrangements.  This article also includes specific compensation ranges for hedge fund manager GCs, CCOs and dual-hatted employees.

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  • From Vol. 5 No.19 (May 10, 2012)

    SEC’s OCIE Director, Carlo di Florio, Discusses Examination Strategies and Expectations for Impending Examinations of Private Equity Advisers

    Now that the registration deadline for many private fund advisers to register with the SEC has come and gone, the SEC’s Office of Compliance Inspections and Examinations (OCIE) is ramping up its efforts to prepare for the impending examinations of many newly registered private fund advisers.  In that vein, on May 2, 2012, OCIE Director Carlo V. di Florio addressed the Private Equity International Private Fund Compliance Forum on various topics, including: demographic information regarding the population of advisers that are now registered with the SEC; the SEC’s anticipated multi-phase examination strategy and risk-based examination approach; and the SEC’s expectations for impending examinations of newly registered advisers.  Although di Florio’s remarks were specifically targeted towards private equity fund advisers, they are nonetheless very relevant for all SEC-registered private fund advisers, including hedge fund managers.  This article summarizes the key takeaways from di Florio’s address.

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  • From Vol. 5 No.18 (May 3, 2012)

    How Does the SEC Approach Custody Issues in the Course of Examinations of Hedge Fund Managers?

    The regulatory scrutiny of custody issues has intensified in recent years due to high-profile scandals involving investment advisers, and the SEC is spending more time on the review of custody issues during examinations of registered investment advisers, including hedge fund managers.  On January 31, 2012, the SEC hosted its annual “Compliance Outreach Program National Seminar” (Seminar).  The Seminar included five sessions.  The fifth session – entitled “Safety and Soundness of Client Assets/Custody” (Session) – discussed the impact of Rule 206(4)-2 under the Advisers Act (Custody Rule) on registered investment advisers, such as hedge fund managers.  The Session began with a discussion of the Custody Rule’s requirements, including a discussion of the 2009 amendments to the Custody Rule.  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010).  The Session also discussed the SEC’s approach to reviewing custody issues during examinations of investment advisers.  Specifically, the Session explained what an investment adviser should expect with respect to the review of custody issues during an SEC examination and how to prepare for custody reviews in the course of examinations.  This article discusses the foregoing topics and the other key takeaways from the Session.

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  • From Vol. 5 No.13 (Mar. 29, 2012)

    Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers

    The most significant impact of SEC registration on a private fund adviser is that the adviser becomes subject to inspection by the SEC’s Office of Compliance Inspections and Examinations (OCIE).  The greatest risk arising from an examination is that the inspection staff decides to refer a finding from an inspection to the Division of Enforcement (Enforcement) for an investigation.  Despite the severe collateral consequences that can befall a fund manager simply from the initiation of an investigation, divining whether the staff is contemplating an Enforcement referral is a surprisingly elusive proposition.  With numerous newly registered hedge fund managers about to undergo their first inspection, the risk of investigations has never been higher.  In a guest article, Mark K. Schonfeld and Kenneth J. Burke, Partner and Associate, respectively, at Gibson Dunn & Crutcher LLP, discuss the increasing risks of compliance examinations becoming enforcement investigations and practical strategies for hedge fund managers for anticipating and mitigating those risks.

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  • From Vol. 5 No.12 (Mar. 22, 2012)

    NASAA Report Identifies Most Commonly Cited Investment Adviser Deficiencies Found in Coordinated State Adviser Examinations and Recommends Compliance Best Practices for Mid-Sized Hedge Fund Managers

    The Dodd-Frank Wall Street Reform and Consumer Protection Act shifted a great deal of responsibility for regulating many mid-sized investment advisers with between $25 million and $100 million in assets under management (AUM) to state regulatory authorities.  See “Registration, Reporting, Disclosure and Operational Consequences for Hedge Fund Managers of the SEC’s New ‘Regulatory Assets Under Management’ Calculation,” The Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).  Hedge fund managers within that AUM range must therefore become familiar with the state laws, rules and regulations that govern their activities because they will likely be subject to periodic examinations from state regulatory authorities.  While the SEC staff attempts to convey its adviser examination priorities to the advisory industry through various speeches and pronouncements, state regulatory authorities are generally silent with respect to their adviser examination priorities.  As such, state-regulated investment advisers have little guidance to inform their preparations for regulatory examinations.  Given this backdrop, at the end of 2011, the North American Securities Administrators Association (NASAA), the lobbying arm of the various state securities authorities, issued a report (Report) detailing the most common deficiencies found during state regulatory examinations of investment advisers conducted between January 1, 2011 and June 30, 2011.  The Report also contained a series of recommended best practices to assist mid-sized hedge fund managers and other investment advisers in mitigating risks of regulatory violations.  While state examinations priorities can vary from state to state, the Report nonetheless provides valuable insight into what state regulators, as a whole, are focusing on in their examinations of investment advisers.  This article details the 13 categories of cited deficiencies and the 15 best practice recommendations contained in the Report.

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  • From Vol. 5 No.9 (Mar. 1, 2012)

    National Futures Association COO Dan Driscoll Discusses Registration, Reporting and Related Challenges Facing Hedge Fund Managers with Strategies Involving Commodities or Derivatives

    Hedge fund managers with strategies that involve commodities or derivatives are facing complicated new registration and reporting requirements.  On the registration side, on February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules that rescinded the CFTC Rule 4.13(a)(4) exemption from commodity pool operator (CPO) registration that has been heavily relied upon by many hedge fund managers and their affiliates.  See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  As a result, many hedge fund managers will either have to qualify for another exemption from CPO registration (most likely the Rule 4.13(a)(3) exemption for de minimis commodity interest trading activity), or register as a CPO.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  On the reporting side, with the adoption of new CFTC Rule 4.27(d), CPOs that manage private funds and that are dually registered with the SEC as investment advisers and with the CFTC as CPOs will need to complete Form PF, which requires detailed information about the private funds managed by the adviser/CPO.  See “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  With these registration, reporting and related challenges in mind, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will identify and address critical issues and pitfalls with respect to Form PF.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)  One of the anticipated speaking faculty members for the Form PF session at the RCA Symposium is Dan Driscoll, the Chief Operating Officer of the National Futures Association (NFA).  We recently interviewed Driscoll, who spoke with The Hedge Fund Law Report about Form PF and other issues related to CFTC and NFA regulation of hedge fund managers.  Specifically, our interview covered topics including: interpretational and operational issues related to qualification for the Rule 4.13(a)(3) de minimis exemption from CPO registration; the applicability of the relief granted under Rule 4.7 to hedge fund managers; the NFA examination and enforcement paradigm, including questions about how registrants are targeted for examination, what are the focus areas for NFA audits and how audits can lead to NFA enforcement activity; prospective NFA regulation of swap dealers and major swap participants; and Form PF, including issues related to the use of Form PF data for NFA enforcement activity, interpretation and confidentiality.

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  • From Vol. 4 No.46 (Dec. 21, 2011)

    RCA Asset Management Thought Leadership Symposium Highlights Regulators’ Examination and Enforcement Priorities, the New SEC Examination Paradigm and Liability Concerns for CCOs and General Counsels

    On November 10, 2011, the Regulatory Compliance Association held its Annual Fall Asset Management Thought Leadership Symposium (RCA Symposium) in New York City.  Panelists repeatedly emphasized the trend towards increased regulatory scrutiny of hedge fund managers.  The SEC’s Division of Enforcement (Enforcement Division) anecdotally confirmed this sentiment the day before the RCA Symposium when it announced that it had filed a record 735 enforcement actions against a variety of market professionals during fiscal year 2011.  Through these actions, the SEC has demonstrated its willingness to hold not only firms liable for their compliance failures, but also those individuals that provided inadequate oversight of their firms’ compliance programs.  See “Three Recent SEC Orders Demonstrate a Renewed Emphasis on Investment Adviser Compliance Policies and Procedures by the Enforcement Division,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  Speakers at the RCA Symposium addressed numerous topics, including: examination and enforcement priorities for the SEC and the NFA; the different types of SEC and NFA examinations; recent examination experiences and advice on preparing for examinations; the reality of CCO and GC liability for compliance failures; and the need for operational changes in light of new regulations impacting hedge fund managers.  This article summarizes key points discussed during the RCA Symposium on each of the foregoing topics.

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  • From Vol. 4 No.40 (Nov. 10, 2011)

    Business Issues with Legal Consequences: A Wide-Ranging Interview with Dechert Partner George Mazin about the Most Important Challenges Facing Hedge Fund Managers

    The Hedge Fund Law Report recently had the privilege of interviewing George J. Mazin, a Partner at Dechert LLP, and a deservedly well-regarded member of the hedge fund bar.  As evidenced by the text of our interview, which is included in this issue of The Hedge Fund Law Report, George has an aptitude for identifying the legal consequences of business issues, and explaining them clearly.  He also has the kind of market color that only comes with years – decades – in the trenches, and experience across business cycles.  Our interview was wide-ranging, reflecting the diversity of George’s experience, which in turn reflects the range of legal issues relevant to hedge fund managers.  In particular, our interview covered: valuation considerations in connection with affiliate transactions; valuations based on fraudulent sales and rigged dealer bids; manager overrides of third-party valuations; whether side pockets remain viable in new hedge fund launches; how even non-ERISA hedge funds can analogize the ERISA model of independent pricing; effective valuation testing programs; the interaction between GAAP and the custody rule; GAAP exceptions to audit opinions; use of counterparty confirmations by the SEC; delayed audits; custody of derivatives and limited partnership interests; insider trading policies with respect to market chatter and channel checking; how to grant side letters in light of selective disclosure considerations; how algorithmic or high-speed trading firms can prepare for regulatory examinations; legal considerations in connection with loans from a hedge fund to a manager; best practices in connection with principal trades; and whether side-by-side investing by manager personnel can pass muster under fiduciary duty and related principles.  This interview was conducted in connection with the Regulatory Compliance Association’s Fall 2011 Asset Management Thought Leadership Symposium, which is taking place today at the Pierre Hotel in New York.

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  • From Vol. 4 No.38 (Oct. 27, 2011)

    SEC Exams of Hedge Fund Advisers: Focus Areas and Common Deficiencies in Compliance Policies and Procedures

    It is a well-known fact that the SEC has significantly fewer examiners than it has registrants to examine.  Nowhere is the SEC more outnumbered than in the investment adviser arena, with approximately 435 examiners compared to more than 11,000 registered investment advisers.  In the first quarter of 2012, advisers with less than $100 million in assets under management will generally transition from SEC registration to state registration.  However, the mandatory registration of private fund advisers with more than $150 million in assets will continue to pose significant resource challenges to SEC examiners.  What’s more, the newly registered private fund advisers will likely be higher risk and more complex firms, which will require more examination resources than those firms moving off the SEC’s rosters.  To help manage this resource imbalance, SEC examinations are becoming much more focused and targeted on high-risk firms and the highest risk activities and practices within those firms; and as a result of various factors discussed in this article, SEC examiners are much better prepared than in the past to scrutinize hedge fund business practices and they have an eager group of well-equipped enforcement staff ready to bring cases – often a series of cases – on the issues where examiners are focusing.  In a guest article, Kimberly Garber – a Founding Principal of boutique compliance firm CORE-CCO, LLC, and former Associate Regional Director in charge of the Examination Program in the Fort Worth Regional Office of the SEC – discusses five risk areas where SEC examiners commonly focus in hedge fund examinations and where compliance policies and procedures are often lacking.  In each area, how comprehensive a firm’s procedures need to be will depend on the risks presented by the firm’s business practices, affiliates and client relationships, and how actively the firm and its personnel engage in each type of activity.  If a firm does not purport to engage in or chooses to prohibit certain activities, its policies and procedures should specify such prohibited practices but also contemplate controls to ensure that employees do not inadvertently or purposefully engage in prohibited activities.

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  • From Vol. 4 No.33 (Sep. 22, 2011)

    Fifth Annual Hedge Fund General Counsel Summit Covers Insider Trading, Expert Networks, Whistleblowers, Exit Interviews, Due Diligence, Examinations, Pay to Play and More

    On September 13, 2011, ALM Events hosted its fifth annual Hedge Fund General Counsel Summit at the Harvard Club in New York City.  Participants at the event discussed how the changing regulatory landscape is impacting the day-to-day policies, procedures and practices of hedge fund managers.  Of particular note, discussions focused on insider trading in the post-Galleon world; best compliance practices for engaging and using expert network firms; how to motivate employees to report wrongdoing internally rather than filing whistleblower complaints; the interaction between non-disparagement clauses in hedge fund manager exit agreements and the whistleblower rule; best practices for exit interviews; best practices for responding to initial and ongoing due diligence inquiries; consistency across DDQs and other documents; standardization of DDQs versus customized answers; whether to disclose the existence or outcome of regulatory actions; how to deal with government investigations and examinations; and strategies for complying with the pay to play rule.  This article summarizes the most noteworthy points made at the event.

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  • From Vol. 4 No.32 (Sep. 16, 2011)

    Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?

    Generally, two categories of hedge fund managers will be required to register with the SEC as investment advisers by March 30, 2012: (1) managers with assets under management (AUM) in the U.S. of at least $150 million that manage solely private funds; and (2) managers with AUM in the U.S. between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle, such as a managed account.  See “Will Hedge Fund Managers That Do Not Have To Register with the SEC until March 30, 2012 Nonetheless Have To Register in New York, Connecticut, California or Other States by July 21, 2011?,” The Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).  Registration will trigger a range of new obligations.  For example, registered hedge fund managers that do not already have a chief compliance officer (CCO) will have to hire one.  See “To Whom Should the Chief Compliance Officer of a Hedge Fund Manager Report?,” The Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011).  Also, registered hedge fund managers will have to complete, file and deliver, as appropriate, Form ADV.  See “Application of Brochure Delivery and Public Filing Requirements of New Form ADV to Offshore and Domestic Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011).  But perhaps the most onerous new obligation for newly registered hedge fund managers will be the duty to prepare for, manage and survive SEC examinations.  Most hedge fund managers facing a registration requirement for the first time have hired high-caliber people and completed complex forms.  Therefore, hiring a CCO and completing Form ADV will exercise existing skill sets.  But few such managers have experienced anything like an SEC examination.  On the contrary, many such managers have spent years behind a veil of permissible secrecy, disclosing little, rarely disseminating information beyond top employees and large investors and interacting with the government only indirectly.  Examinations will change all that.  The government will show up at your office, often with little or no notice; they will ask to review substantially everything; and a culture of transparency will have to replace a culture of secrecy, where the latter sorts of cultures still exist.  (The SEC does not appreciate secrecy and has any number of ways of demonstrating its lack of appreciation.)  Hedge fund managers facing the new examination reality will have to think about two sets of issues.  The first set of issues relates to examination preparedness, and The Hedge Fund Law Report has written in depth on this topic.  See, e.g., “Legal and Practical Considerations in Connection with Mock Examinations of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 26 (Aug. 4, 2011).  The second set of issues relates to examination management and survival, and that is the broad topic of this article.  Specifically, this article addresses a question that hedge fund managers inevitably face in connection with examinations: What should we tell investors and when and how?  To help hedge fund managers identify the relevant subquestions, think through the relevant issues and hopefully plan a disclosure strategy in advance of the commencement of an examination, this article discusses: the three types of SEC examinations and similar events that may trigger a disclosure examination; the five primary sources of a hedge fund manager’s potential disclosure obligation; whether and in what circumstances hedge fund managers must disclose the existence or outcome of the three types of SEC examinations; rules and expectations regarding responses to due diligence inquiries; selective and asymmetric disclosure issues; how hedge fund managers may reconcile the privileged information rights often granted to large investors in side letters with the fiduciary duty to make uniform disclosure to all investors; whether hedge fund managers must disclose deficiency letters in response to inquiries from current or potential investors, and whether such disclosure must be made even absent investor inquiries; whether managers that elect to disclose deficiency letters should disclose the letters themselves or only their contents; best practices with respect to the mechanics of disclosure (including how and when to use telephone and e-mail communications in this context); and whether deficiency letters may be obtained via a Freedom of Information Act request.

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  • From Vol. 4 No.18 (Jun. 1, 2011)

    Is a Hedge Fund Manager Required to Disclose the Existence or Substance of SEC Examination Deficiency Letters to Investors or Potential Investors?

    Following an examination of a registered hedge fund manager by the SEC staff, the staff typically issues a deficiency letter to the manager listing compliance shortcomings identified by the staff during the examination.  See “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Three of Three),” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011).  Quickly, comprehensively and conclusively remedying compliance shortcomings identified in a deficiency letter should be a first order of business for any hedge fund manager – that is the easy part, a point that few would dispute.  However, considerably more ambiguity surrounds the question of whether and to what extent hedge fund managers must disclose to investors and potential investors various aspects of SEC examinations – including their existence, scope, focus and outcome.  More particularly, hedge fund managers that receive deficiency letters routinely ask: must we disclose the fact of receipt of this deficiency letter or its contents to investors or potential investors?  And does the answer depend on whether potential investors have requested information about or contained in a deficiency letter in due diligence or in a request for proposal (RFP)?  The answers to these questions generally have been governed by a “materiality” standard – the same standard that, at a certain level of generality, governs all disclosure questions.  The consensus guidance has been: disclose whatever is material.  But this is more of a reframing of the question than an answer.  The practical question in this context is how to assess materiality in the interest of disclosing adequately, avoiding anti-fraud or breach of fiduciary duty claims and ensuring best investor relations practices.  A recently issued SEC order (Order) settling administrative proceedings against a registered investment adviser provides limited guidance on the foregoing questions.  This article describes the facts recited in the Order, the SEC’s legal analysis and how that analysis can inform decision-making of hedge fund managers considering whether and to what extent to disclose the existence or substance of deficiency letters to investors or potential investors.  This analysis has particular relevance for hedge fund managers seeking to grow institutional assets under management by responding to RFPs.

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  • From Vol. 4 No.14 (Apr. 29, 2011)

    Legal Considerations for Hedge Fund Managers that Use Social Media

    In late 2010, the SEC sent a “sweep” letter (the “Sweep Letter”) to a number of registered investment advisers requesting information on their involvement with social media and related recordkeeping practices.  The Sweep Letter appears to signal heightened regulatory awareness that social media websites such as Facebook and LinkedIn are increasingly being used by investment advisers to connect with clients.  Use of these sites by hedge fund and other private fund advisers may present regulatory issues, however, under the advertising rules of the Investment Advisers Act of 1940 (the “Advisers Act”) and the exemptions for private placements under the Securities Act of 1933.  With the repeal of the private adviser exemption from Advisers Act registration still on track for July, social media compliance by advisers to hedge funds and private funds can present important compliance issues.  In a guest article, Diana E. McCarthy and Andrew E. Seaberg, Partner and Associate, respectively, at Drinker Biddle & Reath LLP, detail: the specific items requested in the Sweep Letter; existing regulatory guidance on social media use (including guidance with respect to testimonials and supervision); advertising issues raised by social media; how hedge fund managers can develop a robust social media policy; personal use of social media and related compliance policies; and business use of social media and related compliance policies.

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  • From Vol. 4 No.14 (Apr. 29, 2011)

    SEC’s Hedge Fund Focus to Include Review of Funds That Outperform the Market

    Recently, during Congressional testimony, Robert Khuzami, the Director of the SEC’s Division of Enforcement (Enforcement Division), faced tough questions regarding the SEC’s response to the Madoff scandal.  In response, Khuzami revealed an investigative initiative concerning hedge funds.  The Enforcement Division is now focusing on hedge funds that outperform “market indexes by 3% and [are] doing it on a steady basis.”  Khuzami referred to such performance as “aberrational,” and stated that Enforcement is “canvassing all hedge funds” for such “aberrational performance.”  This initiative raises a number of questions.  Should skilled portfolio managers (and their investors) bear the burden and costs of an SEC investigation just because they have returned more than the market?  How and why did the Enforcement Division determine to set the threshold at three percent?  Does the three percent threshold reflect “aberrational” performance, as Khuzami suggests?  What is considered outperformance on a “steady basis”?  Will the Enforcement Division focus on performance on a quarterly basis, or over one year, three years, or longer periods?  In a guest article, Fredric Firestone, Eugene Goldman and Michael Ungar – all Partners in the White Collar & Securities Defense Practice Group at McDermott Will & Emery LLP, based in Washington, D.C., and all Enforcement Division alumni – address these and related questions, and explain the implications of the new enforcement initiative for hedge fund managers.

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  • From Vol. 4 No.6 (Feb. 18, 2011)

    What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Three of Three)

    By July 21, 2011, many hedge fund managers that previously were not required to register with the SEC as investment advisers will be required to register.  Specifically, two categories of hedge fund managers will be required to register with the SEC as investment advisers: (1) hedge fund managers with assets under management in the U.S. of at least $150 million that manage solely private funds; and (2) hedge fund managers with assets under management in the U.S. between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle (for example, a managed account).  Registration will subject previously unregistered hedge fund managers to a range of new regulatory obligations and burdens.  One of the most notable new burdens is that registered hedge fund managers will be subject to SEC examinations.  (Generally, unregistered hedge fund managers are not subject to examinations, though they may be subject to subpoenas or information requests from the SEC where the agency suspects fraud or violation of the federal securities laws.)  To assist newly registered (or soon to be registered) hedge fund managers and other registered investment advisers in preparing for, handling and surviving SEC examinations, the Regulatory Compliance Association’s 2011 Spring Asset Management Thought Leadership Symposium will feature an extended 1.5 hour session entitled “Regulatory Examinations – Briefing on Latest Inquiries from SEC and NFA Staff.”  That RCA Symposium will take place on April 7, 2011 at the Marriott Marquis in Times Square in New York.  (For a fuller description of the Symposium, click here.  To register for the Symposium, click here.)  The Hedge Fund Law Report recently conducted detailed interviews with three of the thought leaders scheduled to participate in the Regulatory Examinations session at the RCA’s April Symposium: Steven A. Yadegari, Senior Vice President & General Counsel at Cramer Rosenthal McGlynn, LLC; Stephen A. McShea, General Counsel & Chief Compliance Officer at Larch Lane Advisors LLC; and Matthew Eisenberg, Partner at Finn Dixon & Herling LLP.  Those interviews provide a preview of the topics to be discussed at the RCA Symposium, and offer detailed insights, practical strategies and actionable recommendations for newly registered hedge fund managers facing the prospect of regulatory examinations – in many cases, for the first time.  We are publishing these interviews as a three-part series.  The full text of our interview with Steven Yadegari was included in our issue of February 3, 2011.  See “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011).  And full text of our interview with Stephen McShea was included in our issue of February 10, 2011.  See “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Two of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  The full text of our interview with Matthew Eisenberg is included in this issue of The Hedge Fund Law Report, below.  The Eisenberg interview covered a wide range of relevant topics, including but not limited to: four principal areas in which the SEC has been focusing its enforcement activity of late; the relationship among SEC sweeps, examinations and enforcement actions; primary lessons for hedge fund managers from the SEC’s recent sweeps and enforcement actions; the impact of new leadership in key examination roles at the SEC (for example, Carlo di Florio as Director of OCIE) on examinations of hedge fund managers; the SEC’s goals in conducting examinations; suggested goals of hedge fund managers when undergoing examinations; lessons for both the SEC and hedge fund managers of the report by the SEC Inspector General on Westridge Capital Management and related matters; the likelihood that a self-regulatory organization (SRO) for investment advisers will be given authority to examine registered hedge fund managers; whether SRO examination authority over hedge fund managers would be better or worse than the current state of affairs; principal areas of focus of the CFTC and National Futures Association (NFA) in their enforcement efforts; authority of the CFTC and NFA to examine hedge fund managers; and specific steps that managers can take to create and demonstrate a commitment to compliance and to strike the right “tone at the top.”

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  • From Vol. 4 No.5 (Feb. 10, 2011)

    What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Two of Three)

    By July 21, 2011, many hedge fund managers that previously were not required to register with the SEC as investment advisers will be required to register.  Specifically, two categories of hedge fund managers will be required to register with the SEC as investment advisers: (1) hedge fund managers with assets under management in the U.S. of at least $150 million that manage solely private funds; and (2) hedge fund managers with assets under management in the U.S. between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle (for example, a managed account).  Registration will subject previously unregistered hedge fund managers to a range of new regulatory obligations and burdens.  One of the most notable new burdens is that registered hedge fund managers will be subject to SEC examinations.  (Generally, unregistered hedge fund managers are not subject to examinations, though they may be subject to subpoenas or information requests from the SEC where the agency suspects fraud or violation of the federal securities laws.)  To assist newly registered (or soon to be registered) hedge fund managers and other registered investment advisers in preparing for, handling and surviving SEC examinations, the Regulatory Compliance Association’s 2011 Spring Asset Management Thought Leadership Symposium will feature an extended 1.5 hour session entitled “Regulatory Examinations – Briefing on Latest Inquiries from SEC and NFA Staff.”  That RCA Symposium will take place on April 7, 2011 at the Marriott Marquis in Times Square in New York.  (For a fuller description of the Symposium, click here.  To register for the Symposium, click here.)  The Hedge Fund Law Report recently conducted detailed interviews with three of the thought leaders scheduled to participate in the Regulatory Examinations session at the RCA’s April Symposium: Steven A. Yadegari, Senior Vice President & General Counsel at Cramer Rosenthal McGlynn, LLC; Stephen A. McShea, General Counsel & Chief Compliance Officer at Larch Lane Advisors LLC; and Matthew Eisenberg, Partner at Finn Dixon & Herling LLP.  Those interviews provide a preview of the topics to be discussed at the RCA Symposium, and offer detailed insights, practical strategies and actionable recommendations for newly registered hedge fund managers facing the prospect of regulatory examinations – in many cases, for the first time.  We are publishing these interviews as a three-part series.  The full text of our interview with Steven Yadegari was included in last week’s issue of The Hedge Fund Law Report.  See “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011); our interview with Stephen McShea is included in this issue; and our interview with Matthew Eisenberg will be published in next week’s issue.  Our interview with Stephen McShea, included in full below, covered a wide range of relevant topics, including but not limited to: how the length, depth and coverage period of examinations of hedge fund managers have evolved; the average length of time between notification and initiation of an exam; grounds (if any) upon which the SEC may grant a delayed exam start date; trends with respect to the number of additional requests that hedge fund managers can expect during an exam; the role of presentations in the exam process (as distinct from interviews with key people); the advisability of creating a regulatory exam preparation team; the utility of mock examinations; the importance of getting all management company personnel on the same page with respect to the business of the management company and its products; the difference between compliance policies and procedures in theory and in practice; regulatory attention on the allocation of responsibility (internally and externally) for specific functions; creating a written matrix of responsibilities; steps hedge fund managers can take to strike the right “tone at the top”; how to use prior deficiency letters; what to say and not to say at exit interviews; and the relevance for examinations of resource constraints at the SEC.

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  • From Vol. 4 No.5 (Feb. 10, 2011)

    Key Insights for Registered Hedge Fund Managers from the SEC's Recently Released Study on Investment Adviser Examinations

    Facing a growing divide between the number of SEC-registered investment advisers (RIAs) and its ability to examine them, on January 19, 2011, the SEC released its “Study on Enhancing Investment Adviser Examinations,” for congressional review.  The Study, mandated by Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), disclosed that RIA examinations had significantly declined in the last six years due to the increase in RIAs as well as RIA assets under management, and a concomitant decrease in Office of Compliance Inspections and Examination (OCIE) staff.  The Study’s authors predicted that this imbalance would continue to get worse as OCIE staffing cannot keep pace with future industry growth.  That, it said, was certain even though Congress, in the Dodd-Frank Act, had substantially lessened the SEC's workload in the immediate future by raising the asset threshold for SEC registration from $25 million to, in general, $100 million.  Based on its conclusion that the SEC still faces “significant capacity challenges,” the Study's authors recommended that Congress strengthen the SEC investment adviser examination program by either: (1) authorizing the SEC's imposition of "user fees" on RIAs to fund the program; (2) authorizing one or more SROs, subject to SEC supervision, to examine all RIAs; or (3) authorizing FINRA to examine dually registered broker-dealer/RIAs for compliance with the Investment Advisers Act of 1940, as amended.  This article summarizes the background of the Study and these recommendations.  Significantly, this article also details the process of an OCIE-led examination and thus provides a helpful guide for any hedge fund manager preparing for an SEC examination.  See also “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Two of Three),” above, in this issue of The Hedge Fund Law Report; “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011).

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  • From Vol. 4 No.4 (Feb. 3, 2011)

    What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part One of Three)

    By July 21, 2011, many hedge fund managers that previously were not required to register with the SEC as investment advisers will be required to register.  Specifically, two categories of hedge fund managers will be required to register with the SEC as investment advisers: (1) hedge fund managers with assets under management in the U.S. of at least $150 million that manage solely private funds; and (2) hedge fund managers with assets under management in the U.S. between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle (for example, a managed account).  Registration will subject previously unregistered hedge fund managers to a range of new regulatory obligations and burdens.  One of the most notable new burdens is that registered hedge fund managers will be subject to SEC examinations.  (Generally, unregistered hedge fund managers are not subject to examinations, though they may be subject to subpoenas or information requests from the SEC where the agency suspects fraud or violation of the federal securities laws.)  To assist newly registered (or soon to be registered) hedge fund managers and other registered investment advisers in preparing for, handling and surviving SEC examinations, the Regulatory Compliance Association’s 2011 Spring Asset Management Thought Leadership Symposium will include a session entitled “Regulatory Examinations – Briefing on Latest Inquiries from SEC and NFA Staff.”  That RCA Symposium will take place on April 7, 2011 at the Marriott Marquis in Times Square in New York.  (For a fuller description of the Symposium, click here.  To register for the Symposium, click here.)  The Hedge Fund Law Report recently conducted detailed interviews with three of the thought leaders scheduled to participate in the Regulatory Examinations session at the RCA’s April Symposium: Steven A. Yadegari, Senior Vice President & General Counsel at Cramer Rosenthal McGlynn, LLC; Stephen A. McShea, General Counsel & Chief Compliance Officer at Larch Lane Advisors LLC; and Matthew Eisenberg, Partner at Finn Dixon & Herling LLP.  Those interviews provide a preview of the topics to be discussed at the RCA Symposium, and offer detailed insights, practical strategies and actionable recommendations for newly registered hedge fund managers facing the prospect of regulatory examinations – in many cases, for the first time.  We are publishing these interviews as a three-part series.  The full text of our interview with Steven Yadegari is included in this issue of The Hedge Fund Law Report; our interview with Stephen McShea will be published in next week’s issue; and our interview with Matthew Eisenberg will be published in the following week’s issue.  Our interview with Steven Yadegari, included in full below, covered a wide range of relevant topics, including but not limited to: the statutory authority upon which the SEC relies in conducting examinations; the SEC’s authority to examine unregistered hedge fund managers; the three primary types of inspections and examinations; when to disclose examinations to hedge fund investors, and what to avoid in the course of disclosure; how the presence of multiple SEC divisions with authority over hedge fund managers impacts the examination process; the goals and objectives that hedge fund managers should aspire to when under examination; the average length of time between notification and initiation of an exam; grounds (if any) upon which the SEC may grant a delayed exam start date; the advisability of creating a regulatory exam preparation group; the SEC’s move to so-called “risk-based” exams, and the import of that move for hedge fund managers; how exams have evolved in terms of length or duration; the interaction between interviews of key personnel and presentations to SEC staff; whether presentations should be written or only oral; the utility of mock examinations; books and records rules as applied to mock examinations; and steps hedge fund managers can take to strike the right “tone at the top.”

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  • From Vol. 3 No.47 (Dec. 3, 2010)

    Repeal of Dodd-Frank Confidentiality Protection for SEC: What Investment Advisers Lost and What Remains

    On October 5, 2010, President Obama signed Senate Bill 3717 (“Bill”) into law, amending the Investment Advisers Act of 1940 (the “IAA”) by repealing a broad exemption of the Securities and Exchange Commission (“SEC”) from the Freedom of Information Act (“FOIA”) and other disclosure obligations enacted only three months before by Section 929I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Section 929I, which added Section 210(d) to the IAA, exempted the SEC from being compelled through FOIA and non-FOIA litigation to disclose information obtained by the SEC in connection with reporting obligations of financial institutions, including in connection with the SEC’s surveillance, risk assessment, regulatory or oversight activities.  The SEC had requested the exemption to facilitate its enforcement activities.  According to the SEC, financial institutions resist providing the agency with non-public information on the grounds that the SEC might not be able to keep it confidential, particularly from competitors or other third parties seeking the information through discovery in connection with commercial litigation or otherwise.  After the SEC used Section 210(d) to avoid disclosing details of its failure to detect the Bernie Madoff Ponzi scheme, Congress determined that Section 210(d) was overbroad, and repealed the provision.  In a guest article, Hillel M. Bennett and Gary L. Granik, both Partners at Stroock & Stroock & Lavan LLP, and Alessandro J. Sacerdoti, an Associate at Stroock, discuss in detail: the reporting and filing requirements applicable to investment advisers, as established by Dodd-Frank; the new confidentiality protections for filed information included in Dodd-Frank; confidential treatment of information obtained by the SEC during examinations and investigations; Exemption 8 of FOIA; the Aguirre case; requests by investment advisers for confidential treatment of non-public information disclosed to the SEC during an examination or investigation; confidentiality of proprietary information under Dodd-Frank; and potential legislative action with respect to confidentiality of information filed with or obtained by the SEC.

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  • From Vol. 3 No.46 (Nov. 24, 2010)

    Participants at Hedge Fund Compliance Summit Detail Best Practices with Respect to Insider Trading, SEC Examinations, Risk Mitigation, Marketing Materials, Valuation and Avoiding Investor Lawsuits: Part One of Two

    On November 15 and 16, 2010, Financial Research Associates, LLC and the Hedge Fund Business Operations Association presented a Hedge Fund Compliance Summit at the Princeton Club in New York City.  The substance of the Summit was relevant – even prescient – and the timing was fortuitous.  Insider trading was a prominent topic of discussion at the Summit, and on November 20, 2010, about two weeks after the Summit, insider trading received a stunning boost on the list of concerns of hedge fund managers.  That day, The Wall Street Journal and other sources disclosed the existence of a wide-ranging civil and criminal insider trading probe being jointly conducted by the SEC and the U.S. Attorney’s Office in Manhattan.  Then, on Monday, November 22, 2010, the Federal Bureau of Investigation raided the offices of three hedge fund managers.  According to press reports, at least one purpose of those raids was to gather documents in connection with the insider trading investigation reported by the Journal.  Following the raids, a number of well-known hedge fund and mutual fund managers received subpoenas from the U.S. Attorney’s Office in Manhattan.  According to press reports, those subpoenas are very broad and include requests for documents and information relating to use of expert networks and soft dollar practices.  See “For Hedge Fund Managers, Expert Networks Offer Access to Corporate Insiders While Mitigating (Though Not Eliminating) the Likelihood of Insider Trading Violations,” The Hedge Fund Law Report, Vol. 2, No. 48 (Dec. 3, 2009).  Insider trading is a topic that The Hedge Fund Law Report has covered in depth, and that we intend to cover in even more depth in the coming months.  Notably, Harry S. Davis (who participated at the Summit), Richard Morvillo and Justin Mendelsohn, all of Schulte Roth & Zabel LLP, published an article on insider trading in the HFLR earlier this year that we think should be required reading for hedge fund manager personnel.  See “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment,” The Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010).  Also, Michael D. Trager, Richard L. Jacobson and Christopher Rhee, of Arnold & Porter LLP, published an article in the HFLR that can – and should – be read as a companion piece to the Schulte article.  See “The SEC’s New Focus on Insider Trading by Hedge Funds,” The Hedge Fund Law Report, Vol. 3, No. 22 (Jun. 3, 2010).  Our coverage of the Summit complements these and other HFLR articles on insider trading by highlighting the more important and nonintuitive insights offered by Summit participants on insider trading.  In particular, we discuss points raised by panelists on consultants and expert networks, sharing of information among personnel at different hedge fund managers, rumors and insider trading considerations in connection with bank debt trading.  Beyond insider trading, this article summarizes key insights from Summit participants regarding SEC examinations and identification and mitigation of key risks.  A follow-up article will discuss points made by Summit participants on compliance considerations in connection with preparing and using marketing and advertising materials, valuation and avoiding investor lawsuits.

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  • From Vol. 3 No.41 (Oct. 22, 2010)

    Participants at Fourth Annual Hedge Fund General Counsel Summit Outline Key Risks Facing Hedge Fund Managers and How to Address Them

    On October 4, 2010, ALM Events hosted its fourth annual Hedge Fund General Counsel Summit in New York City.  The event brought together a number of industry thought leaders who identified key areas of risk facing hedge fund managers, and offered ideas on how to address those risks.  Specifically, participants at the Summit discussed: Dodd-Frank; insider trading; implementing and maintaining ethical walls; investors’ due diligence expectations; risk management trends; preparing for an SEC examination; and developing pay to play policies and procedures.  This article summarizes some of the key ideas discussed at the Summit.

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  • From Vol. 3 No.28 (Jul. 15, 2010)

    Key Legal Considerations in Connection with Loans from Hedge Funds to Hedge Fund Managers

    Can there be circumstances in which it makes business and legal sense for a hedge fund manager to cause one of its managed hedge funds to lend money or other assets to the manager?  The visceral response from most hedge fund legal and compliance professionals generally – and from those surveyed by The Hedge Fund Law Report on this question specifically – is: rarely, if at all.  However, this is a question that merits attention from hedge fund managers for at least three reasons.  First, even if loans from funds to managers are imprudent or prohibited in most circumstances, there may be some circumstances in which such loans may be permissible; and in a still-tight credit environment for most hedge funds and managers, it is important to be aware of the risks and benefits of all credit options.  Second, it is more important to understand why such loans may be ill-advised than merely to understand that such loans may be ill-advised, in particular because the explanation touches on many other aspects of the hedge fund-manager relationship (including fiduciary duty, principal trading and others).  Third, a wide range of transactions, some of them nonintuitive, may constitute loans from a hedge fund to a manager.  For example, if an affiliate of the manager lends securities to the fund and that loan is secured by cash, does the “loan” of securities from the affiliate to the fund constitute a “loan” of cash from the fund to the manager?  As discussed more fully below, the SEC’s standard document request letter for investment adviser examinations asks for documentation of loans from funds to advisers, and registered hedge fund managers will be subject to such examinations.  Therefore, it is important for hedge fund managers to appreciate the full range transactions that may constitute loans for examination purposes.  The goal of this article is to provide a fuller answer to that initial question – can there be circumstances in which it makes business and legal sense for a hedge fund manager to cause one of its managed hedge funds to lend money or other assets to the manager?  To do so, this article begins by enumerating examples of circumstances in which a hedge fund may make or be construed to have made a loan to its manager.  As indicated, some of those circumstances may be indirect, roundabout or non-obvious, and our point is not to provide an exhaustive list, but rather to suggest that many fact patterns that do not look like loans may be deemed (by the SEC or investors) to be loans.  The article then goes on to address the chief legal concerns in connection with loans from funds to advisers, including concerns relating to fiduciary duty, SEC examinations, ERISA, principal trading, advisory boards, commodity pool operators, disclosure and manager defaults.  The article includes concrete suggestions for structuring loans from hedge funds to managers in a way that may, in appropriate circumstances, pass muster with regulators and investors.

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  • From Vol. 3 No.20 (May 21, 2010)

    Richards Kibbe & Orbe LLP and ACA Compliance Group Webcast Highlights Developments in SEC Examinations of Registered Investment Advisers, and How to Prepare for a Surprise Visit from the SEC

    Hedge fund advisers represent a significant priority for the Securities and Exchange Commission (SEC) in its rulemaking, enforcement and examination efforts.  For hedge fund managers registered with the SEC as investment advisers, the SEC’s examination program has become increasingly important; and significantly more hedge fund managers are likely to be required to register with the SEC in light of the Senate's passage of the Financial Stability Bill.  Pursuant to Section 204 of the Investment Advisers Act of 1940 (the Advisers Act), the books and records of any registered investment adviser (RIA) may undergo compliance examinations by SEC staff.  These examinations aim to protect investors by determining whether RIAs are complying with the law, adhering to the disclosures that they have provided to their clients and maintaining appropriate compliance programs to ensure compliance with the law.  If the SEC examines an RIA, the RIA must provide examiners with access to all requested advisory records that it maintains.  The RIA must also provide the SEC with access to the written policies and procedures required by law to prevent violations of federal securities laws.  The policies and procedures, once implemented, should prevent violations from occurring, detect violations that have occurred and promptly correct any past violations.  The RIA should also prepare for the examination staff to review communications with investors for consistency and accuracy.  The failure of this examination program to detect several high-profile investment adviser frauds, including the Ponzi scheme perpetrated by Bernard Madoff, has led to criticism of the SEC and increased the significance of the examination itself.  On April 22, 2010, Richards Kibbe & Orbe LLP partner Eva Marie Carney co-presented a webcast entitled “SEC Examinations of Investment Advisers” with Joel Sauer of the ACA Compliance Group.  The webcast focused on some of the most important developments in RIA examinations.  It addressed topics such as how to prepare for the visit, asset verification tests, e-mail requests, common exam deficiencies, and the SEC’s enhanced subpoena powers.  It also addressed various “polling questions” or hypotheticals as tutorials for the audience.  This article summarizes the salient details of the presentation, including a step-by-step analysis of how an RIA can best prepare for and effectively manage an SEC examination, and the most common areas of focus during the examination.

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  • From Vol. 3 No.17 (Apr. 30, 2010)

    Hedge Fund Operations and Technology Conference Focuses on SEC Reviews, Outsourcing of Operations, Operational Due Diligence, Multiple Prime Broker Relationships and More

    On April 21, 2010, Financial Technologies Forum LLC hosted its Third Annual Hedge Fund Operations & Technology conference in New York City.  The backdrop for the conference was a hedge fund industry coming out of two years of turmoil and refocused on hedge fund organizational structures, risk profiles, counterparties, trade processes, compliance policies, valuation approaches, information technology infrastructure and manager backgrounds.  The underlying question that the conference sought to address was how hedge fund operations and technology are evolving in light of the lessons learned during the crisis.  This article focuses on the more noteworthy points discussed during the conference, including potential new regulation and registration requirements; compliance policies and strategies (including use of a compliance calendar); anticipated increases in the frequency and depth of SEC reviews of hedge funds (including specific areas on which the SEC is expected to focus); demands from investors for increased transparency; outsourcing of operational functions (including appropriate service levels and due diligence to be performed on service providers); the specific components of operational due diligence, especially as it relates to service providers; and the rationale for and management of multiple prime brokerage relationships.

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  • From Vol. 3 No.12 (Mar. 25, 2010)

    Katten Muchin Rosenman Hosts Program on “Infected Hedge Funds” Highlighting Rights and Remedies of Investors in Hedge Funds Whose Managers are Accused of Insider Trading or of Operating Ponzi Schemes

    The discovery, duration and depth of Ponzi schemes and insider trading rings uncovered during the last two years have altered, to a degree, the assumptions of institutional investors.  While investors do not presume that every hedge fund manager is engaged in illicit activity, they have expanded their due diligence checklists to include questions intended to identify and avoid bad actors.  Investors also realized that due diligence can never be perfect, and accordingly, have refocused on the legal rights and remedies available to parties invested with managers that are or are alleged to be operating Ponzi schemes or engaged in insider trading.  See “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment,” The Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010).  In recognition of these abiding concerns among institutional investors, and the concomitant interest among hedge fund managers in demonstrating their commitment to compliance, law firm Katten Muchin Rosenman LLP hosted a seminar on March 16, 2010 titled “Infected Hedge Funds: Rights and Remedies.”  The Katten Partners that served as panelists discussed various relevant topics, including the categories of claims and defenses available to investors in hedge funds whose managers are accused of Ponzi scheme operation or insider trading; differences in remedies available to direct and indirect investors; the SEC’s new enforcement initiatives and cooperation measures (including cooperation agreements, deferred prosecution agreements and non-prosecution agreements); and prophylactic measures hedge fund managers can take to prevent accusations of insider trading or running a Ponzi scheme.  This article describes in detail the most relevant topics discussed and points made at the Katten seminar.

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  • From Vol. 3 No.6 (Feb. 11, 2010)

    Application to Hedge Fund Managers of the Internal Control Report Requirement of the Amended Custody Rule

    Under the amended custody rule, registered hedge fund managers that are excepted from the surprise examination requirement still may be subject to the internal control report requirement.  That is, under the amended custody rule, a registered hedge fund manager with actual or deemed custody of client assets generally would be required to undergo an annual surprise examination.  However, the rule contains an exception to the surprise examination requirement for advisers to pooled investment vehicles that deliver annual audited financial statements (prepared by an independent, PCAOB-registered accountant) to investors in the pool within 120 days of the end of the pool’s fiscal year (180 days for funds of funds).  See “How Can Hedge Fund Managers Structure Managed Accounts to Remain Outside the Purview of the Amended Custody Rule’s Surprise Examination Requirement?,” The Hedge Fund Law Report, Vol. 3, No. 5 (Feb. 4, 2010).  Similarly, under the amended custody rule, a registered hedge fund manager that self-custodies client assets or uses a related person to custody client assets is required to obtain or receive from that related person, at least annually, a written report from a PCAOB-registered accountant describing (as discussed more fully in this article) the manager’s or the related person’s custody controls, tests of those controls performed by the accountant and the results of such tests.  The amended custody rule does not contain an exception to the internal control report requirement for advisers to pooled investment vehicles.  Accordingly, a hedge fund manager may avoid the surprise examination requirement while remaining subject to the internal control report requirement.  For example, a hedge fund manager controlled indirectly by a bank holding company that custodies client assets at a broker-dealer also indirectly controlled by that bank holding company would be subject to the internal control report requirement, but could avoid the surprise examination requirement.  While the so-called Volcker Rule would prohibit the foregoing scenario, even independent hedge fund managers that custody assets at affiliated broker-dealers would have to comply with the internal control report requirement.  See "Senate Banking Committee Hears Testimony from Hedge Fund Industry Experts and Academics on 'Volcker Rule,'" below, in this issue of The Hedge Fund Law Report.  Because commissioning an initial internal control report and subsequent reports is likely to be expensive, especially for smaller hedge fund managers, the internal control report requirement generated controversy when the custody rule amendments were originally proposed.  Nonetheless, the requirement made it into the final rule, and the SEC’s apparent disregard of industry comments on this point appears to contain an element of action-forcing: the SEC’s stated goal in amending the custody rule was to “encourage custodians independent of the adviser to maintain client assets as a best practice whenever feasible.”  A hedge fund manager that maintains custody at an independent custodian would not be subject to the internal control report requirement.  Therefore, the cost of preparing internal control reports may be understood as a penalty for self-custody or related-party custody.  In an effort to assess the real impact of the internal control report requirement on hedge fund managers, this article discusses: the specific elements required to be included in internal control reports; who may prepare such reports; the interaction of surprise examinations and internal control reports; potential use by the SEC of such reports in the course of inspections and examinations; whether or not such reports will be public; how such reports will factor into the institutional investor due diligence process; and fee levels and structures for preparation of internal control reports.

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  • From Vol. 3 No.5 (Feb. 4, 2010)

    How Can Hedge Fund Managers Structure Managed Accounts to Remain Outside the Purview of the Amended Custody Rule’s Surprise Examination Requirement?

    Under the amended custody rule, a registered hedge fund manager that has custody of client assets is required to undergo an annual surprise examination unless it is eligible for one or more of three exceptions from the surprise examination requirement.  Generally, an adviser is deemed to have custody under the amended rule in any of four circumstances: if (1) it maintains physical custody of client funds or securities; (2) it has the authority to obtain client funds or securities, for example, by deducting advisory fees from a client’s account or otherwise withdrawing funds from a client’s account; (3) it acts in a capacity that gives it legal ownership of or access to client funds or securities (for example, where it acts as general partner of a limited partnership); or (4) client funds or securities are held directly or indirectly by a “related person” of the adviser.  However, even if an adviser is deemed to have custody for any of the foregoing reasons, it would not be subject to the annual surprise examination requirement if it were eligible for any of the following three exceptions: (1) if it is deemed to have custody solely based on its fee deduction authority; (2) to the extent it advises pooled investment vehicles that deliver annual audited financial statements (prepared by an independent, PCAOB-registered accountant) to investors in the pool within 120 days of the end of the pool’s fiscal year (180 days for funds of funds); or (3) if it is deemed to have custody solely based on custody by a “related person” and that related person is “operationally independent” of the adviser.  For a thoroughgoing discussion of the mechanics of the amended custody rule, see “How Does the Amended Custody Rule Change the Balance of Power Between Hedge Fund Managers and Accountants?,” The Hedge Fund Law Report, Vol. 3, No. 4 (Jan. 27, 2010).  Accordingly, most registered hedge fund managers would not be subject to the surprise examination requirement, with respect to hedge funds under management, because they would be eligible for the “pooled investment vehicle” exception.  However, to the extent a hedge fund manager also manages managed accounts, the manager would not be eligible for the pooled investment vehicle exception with respect to those managed accounts.  There are at least two reasons for this: (1) the typical managed account only has one investor, and thus is not “pooled” within the meaning of the amended custody rule; and (2) generally, hedge fund managers do not distribute audited financial statements to managed account investors (though such investors often conduct their own audits of the account).  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010).  Therefore, a hedge fund manager may only avoid the annual surprise examination requirement with respect to any managed accounts under management if: (1) it is not deemed to have custody of the funds or securities in the managed accounts; or (2) it is eligible for an exception from the surprise examination requirement other than the pooled investment vehicle exception.  The problem is, many managed accounts are structured and operated in ways that would cause their managers to be deemed to have custody and would render their managers ineligible for any exception.  For example, if a hedge fund manager has authority to deduct fees from the managed account and custodies the managed account assets at an affiliate of the manager that is not operationally independent of the manager, the manager would not be eligible for any exception.  See “SEC Adopts Investment Adviser Custody Rule Amendments,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  Given the intrusiveness, expense and potential reputational harm arising out of surprise examinations, this article examines how managed accounts may be structured so that the manager will not be deemed to have custody of the assets in the account.  (The urgency of such avoidance is compounded by the growing chorus of calls from institutional investors for exposure to hedge fund strategies via managed accounts.)  In particular, the remainder of this article details: precisely what a managed account is (including the use of segregated portfolio companies in the Cayman Islands); the benefits of managed accounts; the drawbacks of managed accounts; how managed accounts can be structured and documented to avoid imputing custody of the assets in the account to the manager, or to ensure that the manager remains eligible for the fee deduction exception to the surprise examination requirement; the special case of private securities and illiquid assets; and special purpose vehicle considerations.

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  • From Vol. 3 No.4 (Jan. 27, 2010)

    How Does the Amended Custody Rule Change the Balance of Power Between Hedge Fund Managers and Accountants?

    The bad news about the amended custody rule is the surprise examination requirement.  The good news, at least for many hedge fund managers, is the annual audit exception.  (That is, the amended custody rule contains an exception from the surprise examination requirement for advisers to pooled investment vehicles that are annually audited by a PCAOB-registered accountant and that distribute audited financial statements prepared in accordance with GAAP to fund investors within 120 days (180 days for funds of funds) of the fund’s fiscal year end.)  See “SEC Adopts Investment Adviser Custody Rule Amendments,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  The qualified news is that while many hedge fund managers may avail themselves of the annual audit exception, an appreciable number may not.  For example, managers whose funds are audited by non-PCAOB-registered accountants, or that do not (or cannot) distribute audited financial statements to fund investors within 120 days of the fund’s fiscal year end, would not be eligible for the annual audit exception.  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010).  For such “ineligible” hedge fund managers, the surprise examination requirement may complicate operations for at least two reasons.  First, it creates a de facto annual audit requirement.  The substance of a surprise examination – explained in the SEC’s adopting release and a related interpretive release providing specific guidance for accountants – closely resembles the substance of an annual audit.  (The substance of a surprise examination is discussed in more detail in this article.)  Moreover, as the SEC pointed out in the adopting release accompanying the custody rule amendments, a hedge fund manager’s inability to predict which transactions an auditor will test in the course of an annual audit is analogous to the “surprise” element of the examination requirement.  Second – and perhaps more controversially – the surprise examination requirement may complicate operations for hedge fund managers that are not eligible for the annual audit exception because of various SEC reporting requirements imposed on accountants that conduct surprise examinations.  Those reporting requirements are described in more detail in this article, but in pertinent part would require an accountant to file with the SEC, within four business days of resignation, dismissal or other termination from an engagement to provide surprise examinations, Form ADV-E, along with an explanation of any problems that contributed to such resignation, dismissal or other termination.  Importantly, Form ADV-E, along with the accompanying explanation, would be publicly available.  According to the adopting release, the policy rationale for such public availability is to enable current and potential clients of an adviser to assess for themselves the importance of the explanation provided by the accountant for its resignation, dismissal or other termination.  The concern haunting the subset of hedge fund managers that are (or are concerned about becoming) subject to the annual surprise examination requirement is that the Form ADV-E filing requirement may – in cases where reasonable minds can differ on close accounting and valuation calls – further enhance the leverage of accountants over managers.  In other words, the concern is that revised Form ADV-E may increase the volume and specificity of an accountant’s “noisy withdrawal,” and in recognition of that, may increase risk aversion on the part of hedge fund managers in dealings with accountants.  The rejoinder to this argument is that accountants already have considerable leverage over hedge fund managers, as evidenced most starkly by the consequences flowing from withholding of an unqualified audit opinion letter.  See, e.g., “Former CFO of Highbridge/Zwirn Special Opportunity Fund Sues Ex-Partner Daniel B. Zwirn for Defamation and Breach of Contract,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  In an effort to assess the extent to which the custody rule amendments may alter the balance of power between accountants and hedge fund managers, this article examines: how custody is defined in the amended custody rules (because custody is a condition precedent for application of the surprise examination requirement); the substance of the surprise examination requirement; the three exceptions from the surprise examination requirement; relevant SEC reporting requirements (on Form ADV-E); expert insight on whether and how the SEC reporting requirements may increase the leverage of accountants vis-à-vis hedge fund managers; existing accountant leverage (including a discussion of audit representation letters); who bears the cost of a surprise examination; and PCAOB resource limits.

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  • From Vol. 3 No.1 (Jan. 6, 2010)

    SEC Adopts Investment Adviser Custody Rule Amendments

    At an open meeting held on December 16, 2009, the Securities and Exchange Commission (SEC) adopted amendments to the custody requirements under the Investment Advisers Act of 1940 (Advisers Act).  These amendments aim to strengthen controls over client assets held by registered investment advisers (RIAs) or their affiliates.  On December 30, 2009, the SEC published the adopting release for these amendments.  These amendments significantly modify the amendments previously proposed in May 2009 in response to about 1,300 comment letters.  For a more detailed analysis of the prior proposal, see “SEC Proposes Stricter Custody Rules for Investment Advisers,” The Hedge Fund Law Report, Vol. 2, No. 21 (May 27, 2009).  For an analysis of the impact of the proposed custody rule on hedge fund managers, see “The SEC’s Proposed Custody Rule Changes: An Analysis of the Impact on Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 2, No. 21 (May 27, 2009).  Rule 206(4)-2 under the Advisers Act, commonly referred to as the “custody rule,” protects assets managed by RIAs.  The rule requires RIAs to maintain client funds and securities with a “qualified custodian” in accounts that contain only client funds, and to segregate and identify client securities and hold them in a reasonably safe place.  Few RIAs maintain physical custody of client assets, however; the SEC deems many RIAs to have custody because an RIA affiliate – e.g., an affiliated prime broker – maintains the client assets or the RIA retains access to the accounts via fee arrangements, general partner relationships or powers of attorney, among others.  The amendments to Rule 206(4)-2 impose significant additional requirements on RIAs with “custody” of client assets, including an annual surprise examination by an independent public accountant, registered with the Public Company Accounting Oversight Board to verify client assets, as well as a report by the accountant of internal controls relating to the custody of those assets.  With the amendment, the SEC also published an interpretive release providing guidance to auditors regarding the surprise examination and internal controls report requirements.  This article summarizes the amendments and their implications for the investment adviser community generally, and hedge fund managers specifically.

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  • From Vol. 2 No.38 (Sep. 24, 2009)

    SEC Recommends More Hedge Fund Oversight in Audit on Its Failure to Uncover Madoff Fraud; House Oversight and Government Reform Committee Chairman Questions SEC Competence

    On September 4, 2009, the Securities and Exchange Commission (SEC) published the report of its Office of the Inspector General (OIG) chronicling the failure of its enforcement and examinations staff to uncover Bernard Madoff’s fraud despite numerous red flags dating as far back as 1992.  In an accompanying statement, SEC Chairwoman Mary Schapiro pledged her agency’s continuing and careful review of the report to “learn every lesson we can to help build upon the many reforms we have already put into place.”  Meanwhile, in a letter dated September 3, 2009 to Chairwoman Schapiro, House Oversight and Government Reform Committee Chairman Edolphus Towns (D-N.Y.), asked whether the level of experience of the SEC’s employees has improved since Congress authorized the SEC to increase compensation in 2002.  He also pledged to hold a hearing on the subject.  Then, on September 10, 2009, SEC Inspector General H. David Kotz testified before the Senate Banking Committee regarding the audit of the agency’s failed oversight of Bernard Madoff.  He told the committee to expect more reports, more revelations of missteps, and more recommendations aimed at improving nearly every aspect of operations within the Office of Compliance Inspections and Examinations (OCIE), and of procedures within the Division of Enforcement (DoE).  This article summarizes the major findings of the OIG report, the concerns expressed in Chairman Towns’ letter, and the pertinent details of Inspector General Kotz’ testimony before the Senate Banking Committee.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    For Hedge Funds and Their Managers, the SEC’s New Enforcement Initiatives May Increase the Likelihood, Speed and Vigor of Inspections and Examinations

    On August 5, 2009, Robert Khuzami, Director of the Division of Enforcement (Enforcement Division) of the Securities and Exchange Commission (SEC) delivered remarks before the New York City Bar entitled “My First 100 Days as Director of Enforcement.”  In those remarks, Khuzami announced changes and new initiatives for the Enforcement Division.  After a “rigorous self-assessment” of the Enforcement Division’s recent performance, Khuzami said, the new initiatives will refocus the Enforcement Division on speed and efficiency, less supervision and increased incentives for cooperation on the part of subjects of enforcement actions.  For hedge funds and their managers, the restructuring of the Enforcement Division can have various relevant consequences, including increased potential for investigations or examinations; increased speed with which examinations may proceed after they are announced (and hence less notice of examinations); and, in general, an Enforcement Division that is both more zealous and better educated with respect to many of the investment activities and operations of hedge funds.  We describe the new Enforcement Division units and discuss the Enforcement Division’s new priorities, focusing on hedge fund consultants and placement agents; streamlining of management of the Enforcement Division; the proposed Office of Market Intelligence; the likely effects of increased specialization; the anticipated increased scrutiny; and the likely impact on hedge funds and hedge fund managers of units other than the new Asset Management Unit.

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  • From Vol. 2 No.31 (Aug. 5, 2009)

    Changing Hedge Fund Landscape Key Focus of Foundation for Accounting Education’s 2009 Hedge Funds and Alternative Investments Conference

    On July 29, 2009, the Foundation for Accounting Education presented the 2009 Hedge Funds and Alternative Investments Conference in New York City.  During the one-day event, industry participants discussed the changing landscape for hedge funds, including new demands from investors and the most recent regulatory developments.  A key theme echoed by the participants was that hedge funds need to be better prepared to deal with the changes that are coming, from registration to new valuation policies to increased examinations, not only by the Securities and Exchange Commission (SEC) but by the Internal Revenue Service (IRS) as well.  We detail the key take-aways from the conference, including a discussion of the erosion of trust among hedge fund managers and investors; pressure on hedge fund fees; likely changes in hedge fund regulation; expanded SEC examinations of hedge fund managers and improvements to the training of the SEC’s hedge fund examination staff; and the new IRS Managed Funds Group.

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  • From Vol. 2 No.25 (Jun. 24, 2009)

    The SEC’s Proposed Custody Rule Changes: An Analysis of the Impact on Hedge Fund Managers

    The SEC recently voted to propose changes to the Advisers Act custody rule.  The SEC initiated this action with the intention of providing additional safeguards when an adviser has custody of client assets.  The proposed changes follow a series of recent enforcement actions involving alleged misappropriation or other misuse of client assets.  The proposed changes would primarily impose two new requirements on registered advisers with custody of client assets.  First, those advisers would need to undergo an annual surprise examination by an independent public accountant to verify client assets.  Second, those advisers who are qualified custodians and self custody client assets or use a related person who is a qualified custodian (rather than an “independent” qualified custodian) would need to obtain a written report from an independent public accountant.  The report would include an opinion as to the qualified custodian’s controls regarding the custody of client assets.  While the proposed changes would impact all registered advisers with custody of client assets, the changes would also have unique application to hedge fund managers.  In a guest article, Terrance J. O’Malley and Jessica Forbes, both Partners at Fried, Frank, Harris, Shriver & Jacobson LLP, examine the proposed changes to the custody rule from the perspective of a hedge fund manager.  Their article begins with a brief review of the rule’s history, then examines the current requirements under the rule and finally describes the proposed changes, including those most relevant to hedge fund managers.

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  • From Vol. 2 No.21 (May 27, 2009)

    What Does the Market Think of the SEC’s Proposed Amendments to the Custody Rule?

    Following a spate of alleged Ponzi schemes and two dozen recent enforcement actions involving the misuse of client funds, the SEC has proposed amendments to custody rules to increase scrutiny and accountability of money managers.  The most significant of the proposed changes would require all registered investment advisers who have any kind of custody of client assets to undergo a surprise examination by an independent public accountant once per year to verify the existence and proper treatment of the funds.  The rigor and reporting requirements would differ depending on whether investment advisers place client funds with affiliated or unaffiliated custodians.  As a companion piece to our article describing the proposed amendments to the custody rules (above, in this issue of The Hedge Fund Law Report), we offer reactions from industry participants to the proposed amendments, and discuss the potential impact of the amendments on unregistered hedge fund managers.

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  • From Vol. 2 No.21 (May 27, 2009)

    Key Lessons from the Second Annual Hedge Fund Tax, Accounting & Administration Master Class: IFRS, Fair Value and SEC Examinations

    From May 18th through May 20th, 2009, Financial Research Associates LLC and The Hedge Fund Business Operations Association presented the Second Annual Hedge Fund Tax, Accounting & Administration Master Class in New York City.  During the three-day conference, leading industry participants discussed the latest developments in hedge fund taxation, regulation, accounting and administration.  A key theme among the participants was that valuation will receive greater regulatory focus going forward, and hedge fund managers will need to keep up to date on relevant changes in accounting standards in order to prevent (or survive) investigations from the SEC and other regulators.  We summarize some of the key take-aways from the conference, and we include a lengthy discussion of how to approach and survive an SEC examination based on comments at the conference from Thomas Biolsi, Associate Regional Director of the SEC, and Thomas Verderber, Staff Accountant at the SEC.

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  • From Vol. 2 No.12 (Mar. 25, 2009)

    SEC to Seek Third-Party Confirmation of Investor Assets Held by Regulated Firms

    In March 9, 2009 letter to Managed Funds Association (MFA), the hedge fund trade association, and the Investment Adviser Association (IAA), Gene A. Gohlke, Associate Director of the SEC’s Office of Compliance Inspections and Examinations, said that in “recent months,” his staff has decided that to verify assets, it will have to request independent confirmation of investor assets from various third parties.  In his letter, Gohlke told the MFA that to confirm the existence of assets managed by the adviser being examined, the staff may contact the following individuals and entities: bank and broker-dealer custodians; account administrators; investors in hedge funds managed by the adviser; advised clients; derivative counterparties; hedge fund administrators and/or managers that are invested in by advised clients; National Securities Clearing Corp., Depository Trust & Clearing Corp.; and auditors for the advisory firm and/or investor accounts.  We outline the salient points from the letter, and provide insight from industry participants into the potential implications of the letter for hedge fund managers.

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  • From Vol. 1 No.16 (Jul. 22, 2008)

    SEC Begins Using Revised Examination Document and Information Request Letter

    The SEC has started using a revised template document and information request letter in connection with its examinations of registered investment advisers and other registered entities. The revised letter replaces the controversial 27-page letter released last year by the SEC’s New York Regional Office. The revised letter is shorter and contains more general requests for documents and information, which may mean fewer requests from the SEC up front, but more supplementary requests in the course of an examination. The revised letter also contains certain categories of requests focused specifically on advisers to private funds.

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  • From Vol. 1 No.8 (Apr. 22, 2008)

    SEC to Issue Standardized Examination Letter

    • New, more concise requirements expected in upcoming months to replace last year’s highly criticized SEC NY Regional formal examination letter requirements.
    • Revised requirements to be narrowed to include disclosure of client assets under management, risk management and internal controls.
    • Compliance officers urged to integrate new SEC requirements into policies, procedures and practices.
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