May 11, 2017

Four Steps NYC-Based Fund Managers Should Take in Light of Newly Enacted Law Prohibiting Compensation History Queries When Interviewing Prospective Employees

On May 4, 2017, New York City Mayor Bill de Blasio signed into law legislation prohibiting firms based in New York City from inquiring about or relying upon the compensation history of applicants in connection with the hiring process. Following on the heels of last year’s amendments to the New York Equal Pay Act, the new law is intended to help close the gender-based pay disparity gap by largely removing reliance on current compensation levels at the time of hire. Critics argue that the law introduces considerable inefficiencies into the recruiting process, will have an inflationary impact on wages and will create traps for the unwary. The pay history law is just the latest in a raft of recent state and local legislation regulating the employment practices of New York City-based firms. In a guest article, Richard Rabin and Desireé Busching, partner and counsel, respectively, at Akin Gump, describe the new pay history law, including what practices will be permitted once the new law comes into effect, and provide four steps that advisers to private funds and other financial institutions should take now to prepare for the new law’s effective date. For additional insight from Rabin on employment related matters, see “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017); “Steps Hedge Fund Managers Can Take in Light of NY Attorney General’s View That Certain Non-Compete Clauses Are Unconscionable” (Sep. 22, 2016); and “What the NLRB Complaint Against Bridgewater Means for Hedge Fund Manager Employment Agreements” (Sep. 8, 2016).

SEC Complaint Suggests the Agency Will Continue Aggressive Enforcement Actions for Insider-Trading Violations

As the financial sector waits eagerly to see who will fill vacancies in the leadership of the SEC, the agency continues to take an aggressive stance against insider trading. The tough posture of the regulators is evident in a recent SEC complaint filed against a vice president and risk management officer at a leading investment bank who allegedly committed insider trading in complicity with his wife. The complaint details a number of flagrant violations of internal policy at the insider’s bank and of insider-trading law. To help fund managers understand the case and its significance, this article analyzes the complaint and furnishes insight from legal experts specializing in white-collar enforcement cases. For discussion of another recent insider trading case, see “Court to Rule on Novel Issue of Insider Trading Law in Case Against Leon Cooperman and Omega Advisors” (Mar. 30, 2017); and “Alleging Dozens of Violations, SEC Charges Leon Cooperman and Omega Advisors With Insider Trading and Failing to Make Regulatory Filings” (Sep. 29, 2016).

Three Approaches to Valuing Fund Assets and How Auditors Review Those Valuations

Hedge fund managers face valuation issues in many areas, including investments, redemptions, financial-statement reporting, succession planning and incentive grants. A recent Pepper Hamilton briefing addressed valuation methodologies from an appraiser’s perspective and issues auditors scrutinize when reviewing asset valuations by a fund manager. Pepper Hamilton partner Gregory J. Nowak moderated the discussion, which featured James L. Kerr, managing director at Rockport Investment Partners; and Andrew R. Halperin, partner at EisnerAmper. This article summarizes their insights. For recent guidance from Nowak and Pepper Hamilton attorneys on how hedge funds can protect their intellectual property, see our two-part series: “Trademarks and Copyrights” (Feb. 23, 2017); and “Trade Secrets and Patents” (Mar. 9, 2017). For additional insight from EisnerAmper, see our three-part series on how hedge funds can mitigate FIN 48 exposure: “Europe” (Mar. 17, 2016); “China” (Mar. 24, 2016); and “Australia and Mexico” (Mar. 31, 2016).

Recent Settlement Highlights Importance of Compliance With NFA Rules, Even for Managers Relying on CFTC Regulation 4.13(a)(3) Exemption

A London-based private fund manager with more than $4 billion in assets under management recently settled NFA charges that it improperly advanced funds from its investment pools to its affiliates and engaged in other misconduct and compliance failures. The action is notable both because substantive NFA-enforcement proceedings are relatively uncommon and because certain of the pools involved in the prohibited affiliate transactions were exempt from registration under CFTC Regulation 4.13(a)(3). The action serves as a reminder that NFA members operating exempt pools are nevertheless subject to NFA rules and that compliance will be audited by the NFA during examinations. This article discusses the NFA allegations set forth in the complaint and the terms of the settlement. For more on NFA membership, see “CFTC Requires Most Registered Commodity Pool Operators, Commodity Trading Advisors and Introducing Brokers to Join the NFA” (Sep. 17, 2015); “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)” (Jan. 30, 2014); and “CPO Compliance Series: Registration Obligations of Principals and Associated Persons (Part Three of Three)” (Feb. 7, 2013).

How Emerging Manager CTAs May Deploy UCITS and ETF Fund Structures to Access Foreign Capital

Commodity trading advisors (CTAs) reeling from heavy outflows in 2016 may be looking for ways to begin making inroads into foreign markets in 2017. A wide array of options for doing so are available to CTAs, particularly via Undertakings for Collective Investments in Transferable Securities (UCITS) structures and exchange-traded funds (ETFs). For all their advantages, however, these vehicles’ complexity and cost may render them infeasible for a given CTA. Moreover, it is a mistake to assume that foreign jurisdictions share the pro-business stance of the new U.S. administration. Consequently, CTAs need to be exceedingly careful when choosing these vehicles, and an informed approach to these options can help CTAs flourish in foreign markets. All these points came across in a panel discussion during the recent CTAExpo/Emerging Manager Forum. Moderated by Stephen Klein, a portfolio manager at Abingdon Capital Management LLC, the panel featured Alex Lenhart, senior vice president of Singapore Exchange Ltd.; Bob Swarup, principal of Camdor Global Advisors Ltd.; Lynette Lim, co-chief executive officer of Phillip Capital Inc.; and Scott Brusso, senior director for foreign exchange and metals sales for Intercontinental Exchange, Inc. This article presents the key takeaways from the panel discussion. For more on the UCITS market and prospects for fund managers looking for opportunities abroad, see our two-part series, “Dechert Partners Outline Post-Brexit Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg” (Nov. 10, 2016); and “Dechert Partners Discuss Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures” (Nov. 17, 2016).

SEC Officials Flesh Out Cybersecurity Enforcement and Examination Priorities (Part One of Two)

While the SEC has provided some guidance and pursued a limited number of enforcement actions, the state of its cybersecurity enforcement program is still unclear to many fund managers. At the recent IAPP Global Privacy Summit, Stephanie Avakian, Acting Director of the SEC Division of Enforcement, and Shamoil Shipchandler, SEC Regional Director for the Fort Worth Regional Office, spoke candidly about the agency’s plans and approach. This first part of our two-part series covering their discussion includes their views on which enforcement actions serve as the best guidance, how they identify new cases, recent enforcement trends and their coordination efforts with law enforcement and state regulators. Part two will include their insights on the SEC’s cybersecurity examination process and guidance on corporate disclosures. For more on how fund managers can mitigate cyber risk, see “Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations” (Oct. 6, 2016); and “FCA Director Lays Out Expectations for Cybersecurity of Financial Services Firms: Identification of Cyber Risks, Detection, Firm Preparedness and Information Sharing” (Sep. 29, 2016). 

J.R. Morgan Joins Andrews Kurth in Texas

Investment management lawyer J.R. Morgan has joined Andrews Kurth as counsel in Austin, Texas. He primarily advises private fund sponsors on the launch of management companies, domestic funds and international funds, including hedge funds, private equity funds, venture capital funds, real estate funds, private debt funds, funds of one and co-investment vehicles. For more on co-investments, see “Seminar Highlights the Ample Fundraising and Co-Investment Opportunities in the Private Equity Industry, Along With Attendant Deal Flow and Fee Structure Issues” (Dec. 8, 2016); and “Private Equity Firms From Across the Industry Spectrum Advise on Trends and Terms in the Current Co-Investment Market” (Aug. 11, 2016).