Blockchain technology – a distributed database used to immutably timestamp and record transactions – is most commonly thought of in a single context, yet its applications are varied and limited only by the objectives of the adopting users. While popular society is fixated on its use for digital currencies (e.g., Bitcoin) or as a medium for illicit transactions, many more practical blockchain applications could greatly enhance the efficacy of the financial sector while also dramatically reducing its overhead expenses, such as by streamlining fund operations while simultaneously improving compliance protocols. This three-part series provides an overview of necessary information and considerations for the eventual integration of blockchain technology into the financial sector. This second article describes various potential uses of blockchain technology, such as reconciling trades and onboarding investors, to improve private fund operational efficiencies and compliance efforts. The first article detailed how blockchain works and provided examples of how major elements of the financial industry (e.g., derivatives trading and repurchase agreements) are already incorporating the technology. The third article will explore how and when the private funds industry will adopt the technology, while presenting issues related to that implementation. For more on how fund managers can utilize technology, see “The SEC’s Broken Windows Approach: Compliance Resources, CCO Liability and Technology Concerns for Hedge Fund Managers (Part Two of Two)” (Oct. 1, 2015); “Can Emerging Hedge Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2015); and “Can Private Fund Marketing Be Automated?” (Aug. 7, 2014). Read full article …

Private equity funds in mid-2017 stand at a propitious juncture, with abundant opportunities in numerous industries and sectors, particularly as foreign interest in U.S. real estate surges and uncertainty over the future of the Affordable Care Act fosters interest in privately managed health facilities and programs. Co-investment opportunities are particularly popular as managers seek out larger and more numerous deals, as well as ways to minimize risk. The increased popularity of co-investments has, however, brought a concomitant tightening of scrutiny by the SEC. Fund managers contemplating co-investments must take special care to include certain disclosures in offering documents and ensure proper allocation of investment opportunities and expenses. It is essential to approach co-investments – as well as carry arrangements, distressed debt opportunities, closed-end funds and many other opportunities – with a solid grounding in the myriad legal issues involved. To help illuminate these issues, the Hedge Fund Law Report interviewed Robert Goldstein and Ian Schwartz, partners in the private equity practice of McDermott Will & Emery. For coverage of Schwartz’s recent move to the firm, see “McDermott Will & Emery Hires Ian Schwartz As Head of Investment Funds Practice” (Apr. 6, 2017). Read full article …

In mid-2016, the German legislature agreed on a fundamental reform of the German Investment Tax Act. The completely revised act – which will affect any fund that invests in German assets or that has German investors – will come into force on January 1, 2018, giving investment fund managers the balance of 2017 to prepare for such changes. In a guest article, Nadine Schader, an attorney at Flick Gocke Schaumburg, provides an overview of the new German tax regime as it relates to investment funds and their investors; clarifies the critical distinction between investment funds and special investment funds, along with how the new regime applies to each category; and provides guidance on the steps that investment managers should take to determine if their funds will be classified as investment funds or special investment funds as it relates to German source income. For more on tax reforms abroad, see “Recent Tax Developments May Make U.K. Limited Companies More Favorable Than U.K. LLPs for U.S. Fund Managers” (Apr. 20, 2017); and “Key Hedge Fund Tax Developments in the U.K., the European Union, Ireland, Germany, Spain, Australia, India and Puerto Rico” (Jun. 27, 2013). Read full article …

The SEC recently filed a civil enforcement action against a U.S. government employee, a consultant and two hedge fund analysts. It alleges that, on three separate occasions, the government employee provided the consultant with nonpublic information about proposed changes to Medicare reimbursement rates. The consultant conveyed that information to his hedge fund clients who, in turn, traded on the information in advance of the public announcements of the rate changes. In the SEC press release announcing the action, Stephanie Avakian, Acting Director of the SEC Division of Enforcement, stated, “There’s no place on Wall Street or in our government for such blatant misuse of highly confidential information.” This article summarizes the SEC’s complaint, highlighting the allegations most relevant to hedge fund managers that use political intelligence firms. For another SEC action involving improper use of nonpublic regulatory information, see “SEC Continues to Focus on Insider Trading and Fund Valuation” (Jun. 30, 2016). For an SEC action against a political intelligence firm, see “Self-Evaluation Policies Are Insufficient for Political Intelligence Firms to Avoid MNPI Violations” (Dec. 17, 2015). Read full article …

On March 1, 2017, the New York State Department of Financial Services (DFS) cybersecurity regulations (Regulations) came into effect. Some industry professionals believe that compliance with the Regulations will become the “gold standard” for hedge fund managers, and it is also conceivable that the SEC or other states may follow New York’s lead and adopt similar measures. For recent perspectives from SEC officials on cybersecurity, see our two-part series: “Enforcement and Examination Priorities” (May 11, 2017); and “Guidance on When to Disclose Cyber Events” (May 18, 2017). For perspectives from another regulator, see “FCA Director Lays Out Expectations for Cybersecurity of Financial Services Firms: Identification of Cyber Risks, Detection, Firm Preparedness and Information Sharing” (Sep. 29, 2016). A panel of cybersecurity industry professionals at the third annual Alternative Asset Management Symposium sponsored by Crystal & Company (Crystal) offered a summary of the Regulations and discussed how they may affect alternative asset managers and their service providers. Sandy Crystal, executive vice president at Crystal, hosted the event. Jeremy I. Bohrer, partner at Brown Rudnick, moderated the discussion, which featured Ron Borys, senior managing director at Crystal; John F. Mullen, partner at Mullen Coughlin; Cuyler Robinson, vice president at Charles River Associates; and Russell Sherman, partner at Prosek Partners. This article highlights the key takeaways from the discussion. For coverage of Crystal’s 2016 symposium, see “Cyber Insurance Providers May Play a Key Role in Assisting Hedge Fund Managers Mitigate Cyber Incidents” (May 26, 2016). For additional insights from Crystal and Borys, 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). Read full article …

ACA Compliance Group (ACA) recently completed its 2017 Alternative Fund Manager Compliance Survey containing responses from 262 illiquid and hedge fund managers on a broad swath of topics. The survey findings were discussed in a webinar by Danielle Joseph and Tessa Carbone, director and principal consultant, respectively, at ACA. This second article in a two-part series details the similarities and differences in expense allocation practices, business continuity efforts and succession planning at managers of hedge and illiquid funds. The first article addressed trends in the nature and coverage of SEC examination efforts, along with how fund managers use restricted lists and expert networks (among other means) to protect material nonpublic information. 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). Read full article …

Investment management attorney Giovanni Meschia has joined the Milan office of K&L Gates as a partner. Meschia, who previously practiced law at Jones Day, advises clients on a wide array of domestic and cross-border transactions, including the structuring, launch and operation of private equity, venture capital, real estate and debt funds. His clients include sponsors, as well as institutional investors making alternative investments locally and internationally. For coverage of another recent hire at the firm, see “K&L Gates Enhances Investment Management Practice With Addition of Broker-Dealer Regulatory Attorney” (May 25, 2017). For additional commentary from K&L Gates attorneys, see “New Rule Offers Managers a Way to Raise Capital in China” (Apr. 13, 2017); and “D.C. Circuit Delivers Significant Victory for the SEC in Upholding the Use of Administrative Law Judges in Enforcement Proceedings” (Sep. 8, 2016). Read full article …

Paul Hespel recently joined Alston & Bird as a finance partner in the firm’s New York office. Hespel represents corporate borrowers, financial sponsors, portfolio companies and alternative capital sources in finance and restructuring matters. For insights from other Alston & Bird attorneys, see “Financial CHOICE Act of 2017 Proposes Sweeping Reforms, but May Allow Regulators to Maintain Status Quo in Some Areas” (Jun. 1, 2017); and “Lessons on Separation Agreements That Fund Managers Can Glean From Recent SEC Action” (Feb. 2, 2017). Read full article …