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    Jun. 15, 2017

Implications for Fund Managers of the Supreme Court’s Ruling in Kokesh v. SEC

The U.S. Supreme Court’s unanimous ruling in Kokesh v. SEC on June 5, 2017, has established that the SEC’s efforts to win disgorgement of money and assets in enforcement cases are subject to a five-year statute of limitations. Crucial to the Court’s reasoning is the argument that disgorgement is punitive in nature rather than simply a remedy to help maintain the smooth and stable functioning of the financial markets. The ruling in Kokesh is of monumental significance for firms in the financial services sector that have struggled to track down witnesses and documents in order to mount a defense in cases winding their way through courts for years. Although the Supreme Court’s decision may bring relief to many, it would be a mistake to assume that the ruling will result in a more permissive and lenient regulatory environment. On the contrary, the SEC may end up pushing much harder to settle enforcement actions on an expedited schedule, within the statute of limitations. More respondents may end up in administrative proceedings, having to make their cases on the SEC’s “home turf.” Even more seriously, it is uncertain at this point what the stance of insurance carriers will be with respect to disgorgement payments that have been covered by their policies until now. This article analyzes the Supreme Court’s decision, along with insights from industry practitioners with expertise in SEC enforcement matters. For analysis of another recent Supreme Court ruling, see “Supreme Court’s Ruling in Salman v. U.S. Affirms the Importance of a Tipper’s ‘Personal Benefit’ for Insider Trading, but Also Creates Uncertainty” (Feb. 9, 2017).

Blockchain and the Private Funds Industry: Potential Impediments to Its Eventual Adoption (Part Three of Three)

Although excitement about the potential use of blockchain technology – an immutable, time-stamped and decentralized digital ledger of transactions – in the private funds industry has been growing, numerous impediments to its large-scale adoption remain. Issues ranging from a lack of regulatory support of blockchain to basic concerns about the resources required to implement the technology could slow its growth in the private funds industry. Consequently, it will likely be several years before the industry fully uses this technology, with the adoption driven by large organizations and service providers rather than fund managers. To assist our readers with comprehending the nature, uses and future of blockchain, this three-part series provides an overview of the technology through the lens of the private funds industry. This third article details issues that could stymie the spread of blockchain, while also setting forth a realistic timeline and manner for its likely adoption by the private funds industry. The first article provided a primer on the technology and detailed several financial industry uses that are already being explored. The second article explored potential private fund back-office functions (e.g., regulatory reporting and maintaining shareholder ledgers) that could be optimized using blockchain technology. For more on how fund managers can utilize technology, see “Can Private Fund Marketing Be Automated?” (Aug. 7, 2014); and our two-part series on “Key Considerations for Hedge Fund Managers in Evaluating the Use of Cloud Computing”: Part One (Oct. 18, 2012); and Part Two (Oct. 25, 2012).

Treaties Offer Fund Managers Means to Reclaim Overpayments but Require Updating to Keep Pace With the Market

Due to the inability of some foreign governments to determine beneficial owner identities, many funds undertaking cross-border investments lose more money in tax payments than strictly required by law. Governments have attempted to ameliorate this problem by adopting bilateral tax reclamation treaties with other governments, but this has proved a partial solution at best. Treaty-making is stymied in the U.S. Congress and some foreign legislative bodies, and instances of fraud – including a massive scandal costing the nation of Denmark billions – have soured some to the very idea of tax reclamation. In many instances, the variety and complexity of investment vehicles add further layers of difficulty and opacity to the process. Nevertheless, tax reclamation can be indispensable for funds and investors to regain money that rightfully belongs to them. To help readers understand the myriad issues involved in cross-border tax payment and reclamation, the Hedge Fund Law Report has interviewed Len Lipton, managing director of tax reclamation service provider GlobeTax, and this article presents his insights. For earlier commentary from Lipton on this topic, see “How Can Hedge Funds Recoup Overwithholding of Tax on Non-U.S. Source Interest and Dividends?” (Sep. 12, 2013). For more on tax issues affecting private funds, see “How Managers Can Structure Direct Lending Funds to Minimize U.S. Tax Consequences to Foreign and U.S. Tax-Exempt Investors: ‘Season and Sell’ and Blocker Structures (Part One of Two)” (May 18, 2017).

Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping

On April 13, 2017, craigslist obtained a judgment against RadPad, a third party that collected data through automated means from its site. The $60.5 million judgment was based on various claims relating to RadPad’s use of sophisticated techniques to evade detection and harvest content from craigslist’s site, as well as distribution of unsolicited commercial emails to craigslist users to market RadPad’s own apartment rental listing service. While it is doubtful that craigslist will ever collect this sizeable judgment, the case highlights some of the issues faced by persons, such as hedge fund managers, who collect – or engage others to collect – data through automated means for commercial purposes. In a guest article, Proskauer partners Robert G. Leonard, Jeffrey D. Neuburger and Joshua M. Newville provide an overview of big data and web scraping, outline potential sources of liability to hedge fund managers that collect big data and describe best practices for navigating several areas of potential liability. For additional insight from Newville and other Proskauer partners, see “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017). For further commentary from Leonard, see our two-part series on The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: “Managed Account Disclosure, Umbrella Registration and Outsourced CCOs” (Nov. 3, 2016); and “Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management” (Nov. 17, 2016).

Steps Hedge Fund Managers Should Take to Defend Against the Rising Threat of Ransomware in the Wake of WannaCry

An aggressive ransomware attack – referred to as WannaCry, WCry or Wanna Decryptor – recently spread across more than 150 countries and quickly affected hundreds of thousands of victims. WannaCry was a wake-up call for many about the rising threat of ransomware, which extorts payments from people and organizations after infecting and encrypting their systems. In light of the recent attack, the SEC has issued guidance to its registrants on its expectations in this area. With WannaCry as its backdrop, this article describes common elements of ransomware attacks; provides background on the increased prevalence of these attacks; and outlines protective measures recommended by the SEC, as well as other suggestions from industry experts, that all hedge fund managers should review against their own policies and procedures. See “K&L Gates-IAA Panel Provides Comprehensive Overview of Cybersecurity Laws and Threats Applicable to Investment Managers (Part One of Two)” (Apr. 23, 2015).

How Due Diligence Professionals Approach the Private Fund Review Process

The Investment Management Due Diligence Association (IMDDA) recently issued a survey report providing valuable insight into the views of due diligence professionals as to the importance of operational and investment due diligence functions and responsibilities. This article summarizes the portions of the report that focus on the specific types of information that due diligence professionals review when examining a manager. For coverage of other IMDDA events, see “How Fund Managers Can Prepare for Investor Due Diligence Queries About Cybersecurity Programs” (Feb. 2, 2017); “How Studying SEC Examinations Can Enhance Investor Due Diligence” (Oct. 6, 2016); and “How Managers May Address Increasing Demands of Limited Partners for Standardized Reporting of Fund Fees and Expenses” (Sep. 1, 2016).

Adam Summers Joins Fried Frank in New York

Fried Frank has added Adam Summers as a partner in the firm’s finance practice in New York. Summers advises corporations, private equity funds, debt funds and investment banks on high-yield bond financings, syndicated credit facilities and acquisition financings. For coverage of another recent hire at the firm, see “Fried Frank Expands Its Asset Management Group in New York” (Jan. 12, 2017). For additional insights from Fried Frank partners, see “Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe” (Mar. 9, 2017); and “Marketing Strategies for U.S. Hedge Fund Managers Under AIFMD (Part One of Two)” (Jul. 21, 2016).

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