Jul. 13, 2017

What Fund Managers Can Learn From “Tipper X”: Best Practices for Preventing and Detecting Insider Trading (Part One of Two)

As regulators continue focusing on insider trading, hedge fund managers must strive to improve their compliance policies and procedures to prevent employee misconduct. See “SEC Complaint Suggests the Agency Will Continue Aggressive Enforcement Actions for Insider-Trading Violations” (May 11, 2017). To provide another perspective on insider trading, the Hedge Fund Law Report recently spoke with Tom Hardin, founder of Tipper X Advisors LLC. Known as “Tipper X,” Hardin was one of the most prolific informants in securities fraud history, assisting the U.S. government in numerous criminal insider trading cases as part of a DOJ cooperation agreement. As a convicted insider trader and informant, he has a unique perspective on insider trading, including how fund employees rationalize trading on material nonpublic information and how the private fund industry’s culture of compliance has evolved. This first article in our two-part series presents Hardin’s insights on how private fund compliance staff can prevent and detect insider trading activity, including best practices for training employees, ensuring prudent email use, preventing employees from rationalizing their insider trading, restructuring employee compensation to avoid incentivizing risky behavior and identifying insider trading activity. The second article will analyze ways regulators combat insider trading activity, the impact of recent insider trading cases on the regulatory environment and the potential effect of the current administration’s anti-regulatory stance on insider trading. See “General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action” (Nov. 3, 2016); and our two-part coverage of the Seward & Kissel Private Funds Forum: “Mitigate Improper Dissemination of Sensitive Information” (Sep. 22, 2016); and “Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading” (Sep. 29, 2016).

Unexpected Traps for Filing Other-Than-Annual Amendments Using the Revised Form ADV and How to Avoid Them

New SEC rules to amend Part 1A of Form ADV will become effective on October 1, 2017. See “The ‘Why’ Behind the Recent Form ADV Amendments: What Information the SEC Will Require and How the Agency Intends to Use It” (May 4, 2017). Much has been written about how a fund manager should complete the amended Form ADV anew as part of its annual updating amendment, which most advisers will file in March 2018. See “A Roadmap of Potential Landmines for Fund Managers to Avoid When Completing the Revised Form ADV” (May 25, 2017). If an adviser is required to amend its Form ADV after October 1, 2017, but prior to its March 2018 annual update (Other-Than-Annual Amendment), however, it may have to disclose additional information, creating a new and larger project out of what otherwise might have been a simple change to its Form ADV. In a guest article, Steven M. Felsenthal, general counsel and chief compliance officer of Millburn Ridgefield Corporation, discusses two potential traps that may cause an adviser to file an Other-Than-Annual Amendment using the amended form, explores the ramifications of doing so and suggests an approach to avoid providing some of this information earlier than anticipated. This article incorporates insights gleaned from personal conversations the author had with industry participants on how to effectively navigate the nuances of the amended Form ADV for an Other-Than-Annual Amendment. For additional insight from Felsenthal, see “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend” (Sep. 18, 2014); and “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’: Why Should Commodity Pool and Hedge Fund Managers Care?” (Jun. 23, 2011).

Tips and Warnings for Navigating the Big Data Minefield

Data-gathering and analytics have become valuable tools for private fund managers when making their investment decisions. As technology outpaces the law in this area, however, managers must use caution when acquiring and using data. See “Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping” (Jun. 15, 2017). A recent presentation featuring Proskauer partners Robert G. Leonard, Jeffrey D. Neuburger, Joshua M. Newville and Jonathan E. Richman discussed the evolving methods of collecting data, the risks involved and the ways managers can use big data without running afoul of applicable law. This article summarizes the panelists’ insights. For more from Leonard, see “How Fund Managers Can Prevent or Remedy Improper Fee and Expense Allocations (Part Three of Three)” (Sep. 15, 2016); and “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview With Proskauer Partner Robert Leonard” (Mar. 5, 2015).

Ways Fund Managers Can Adjust to Rapidly Changing Regulatory Frameworks in the Middle East and Europe

Fund managers looking at capital-raising opportunities in the Middle East must develop a nuanced understanding of the many ways regulations in the region differ from those with which the managers may be familiar. While Saudi Arabia, Kuwait, Qatar and Bahrain are brimming with investable assets, managers must understand the importance of Sharia-compliant structures for many family offices in the region. The European alternative investment space may be more familiar to some managers, but regulatory developments there are also affecting funds and the way they do business. Nevertheless, some vehicles, such as Undertakings for Collective Investments in Transferable Securities structures, enjoy enduring popularity. In Europe as in the Middle East, it is essential for fund managers to come to the table armed with knowledge. All these points came across in a panel discussion at the tenth annual Advanced Topics in Hedge Fund Practices Conference: Manager and Investor Perspectives recently hosted by Morgan Lewis and featuring partners Ayman Khaleq and William Yonge. This article presents the key takeaways from the panel discussion. For coverage of another session of the conference, see “Investor Pressure Drives New Performance Compensation Models and Increased Disclosure Obligations for Managers” (Jun. 29, 2017). For coverage of former SEC Chair Christopher Cox’s keynote talk at the conference, see “Hedge Funds’ Image Crisis: Fighting Public Perceptions Against the Backdrop of Potential Financial Sector Reforms” (Jun. 22, 2017).

How Private Fund Managers Can Navigate the Hazards of State Income-Sourcing Rules

Private funds with operations or investors in multiple states face a complex and shifting taxation regime. For example, a manager that derives all of its management fee income from its New York operations may still have to file returns in other states and allocate portions of that income to those states. A recent presentation by Baker Tilly Virchow Krause offered an overview of the rules for sourcing state income; the related filing and apportionment rules; and other state tax issues relevant to private fund managers. The program featured Gregory Kastner, senior tax manager at Baker Tilly; and Michele Gibbs Itri, partner at Tannenbaum Helpern Syracuse & Hirschtritt. The issues addressed in their presentation are particularly timely in light of New York’s recent settlement with Harbinger Capital over its alleged improper shifting of performance fee income from New York to a lower-tax jurisdiction. See “New York State Record Tax Whistleblower Settlement With Harbinger Capital Partners Illustrates Pitfalls of Domestic Tax-Shifting Schemes” (Apr. 27, 2017). For a comprehensive look at hedge fund taxation, see our four-part series: “Allocations of Gains and Losses, Contributions to and Distributions of Property From a Fund, Expense Pass-Throughs and K-1 Preparation” (Jan. 16, 2014); “Provisions Impacting Foreign Investors in Foreign Hedge Funds” (Jan. 23, 2014); “Taxation of Foreign Investments and Distressed Debt Investments” (Jan. 30, 2014); and “Taxation of Swaps, Wash Sales, Constructive Sales, Short Sales and Straddles” (Feb. 6, 2014).

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).

Mergermarket Group Rebrands as Acuris

The Hedge Fund Law Report’s parent company, Mergermarket Group – the leading provider of business intelligence and research for fixed income, transactions, compliance and equities – has relaunched under the brand name Acuris

Willkie Expands Its New York Asset Management Group

Lior J. Ohayon has joined Willkie Farr & Gallagher’s asset management practice as a partner based in New York. Ohayon advises investment management firms and banks on fund formation, fund management and myriad financial rules and regulations in the U.S. and abroad. For insights from other Willkie attorneys, see “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016); “Current and Former Directors of SEC Division of Investment Management Discuss Hot Topics Under the Investment Company Act” (Mar. 10, 2016); and “Is the Use of an Independent Valuation Firm Superior to a Manager’s Internal Valuation Process?” (Apr. 23, 2015).

David Dueno Joins K&L Gates in Chicago

Private equity attorney David D. Dueno has joined K&L Gates as a partner in Chicago. Formerly practicing in-house, Dueno advises private equity funds, venture capital funds and portfolio companies on a wide range of cross-border transactions, including financings, joint ventures, acquisitions and dispositions. Dueno has worked on numerous transactions in the European, Asian and Middle Eastern fund markets, while specializing in deals involving parties and assets in Africa. For coverage of other recent hires at K&L Gates, see “Giovanni Meschia Joins K&L Gates in Milan” (Jun. 8, 2017); and “K&L Gates Enhances Investment Management Practice With Addition of Broker-Dealer Regulatory Attorney” (May 25, 2017).