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    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).

How the SEC May Circumvent the Five-Year Statute of Limitations on Disgorgement Under Kokesh v. SEC

On June 5, 2017, the U.S. Supreme Court ruled in Kokesh v. SEC that the disgorgement remedy available to the SEC is restricted by a five-year statute of limitations. See “Implications for Fund Managers of the Supreme Court’s Ruling in Kokesh v. SEC” (Jun. 15, 2017). The decision was widely seen as a victory for entities that are subject to the enforcement arm of the SEC. The total monetary liability for advisers alleged to have engaged in securities violations may be dramatically reduced due to Kokesh. Advisers also have greater certainty that they will not be punished for violations that occurred outside the five-year limitations period. It is unlikely, however, that the Commission’s Division of Enforcement will take the Kokesh decision lying down, and it may adopt strategies to mitigate the impact of the Court’s decision on its ability to seek penalties and disgorgement from advisers. In a guest article, MoloLamken partner Justin V. Shur and associate Eric R. Nitz discuss some of the legal tools available to the SEC to circumvent Kokesh now that disgorgement is not the open-ended and unlimited remedy it had previously been. For additional commentary from Shur and Nitz, see our coverage of Och-Ziff’s SEC and DOJ settlements: “Settlements With Och-Ziff and Two Executives Underscore FCPA Compliance Risks to Private Fund Managers” (Oct. 27, 2016); and “Five Compliance Lessons Private Fund Managers Can Glean” (Nov. 3, 2016).

Reading the Regulatory Tea Leaves: Recent White House and Congressional Action and Insights From SIFMA and FINRA Conferences

There has been a great deal of uncertainty concerning the direction of financial industry regulation. To address this unease, a recent MyComplianceOffice (MCO) presentation – hosted by Joseph Boyhan of MCO and featuring Shearman & Sterling partner Russell D. Sacks and counsel Jennifer D. Morton – offered insight into the status of pending legislation, tax reforms, the fiduciary rule and regulatory priorities. This article examines the points from the presentation that are most relevant to private fund managers. For coverage of another MCO overview of SEC and FINRA enforcement updates, see “What the Record Number of 2016 SEC and FINRA Enforcement Actions Indicates About the Regulators’ Possible Enforcement Focus for 2017” (Dec. 15, 2016). For additional insights from Sacks, see “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).

Recent Changes to Delaware Corporate Law May Affect Transactions by Hedge Fund Managers

Delaware corporate law has experienced a number of recent changes and trends, including the standard of judicial review in certain merger and acquisition transactions; legislation and court decisions affecting corporate bylaws; and other recent court decisions affecting items such as preferred stock investments, transactions with controlling shareholders and director compensation arrangements. A recent program sponsored by K&L Gates that featured partner Lisa R. Stark examined these topics in depth. The content of this program should be of particular interest to any fund manager or investment adviser that is formed as a Delaware corporation, as well as advisers that pursue activist investment strategies or that invest in the equity of a company’s capital structure. This article highlights the key points from Stark’s presentation. For additional insights from K&L Gates attorneys, see “New Rule Offers Managers a Way to Raise Capital in China” (Apr. 13, 2017); and “What Role Should the GC or CCO Play in the Audit of a Fund’s Financial Statements?” (Feb. 23, 2017).

Surveys Show Cyber Risk Remains High for Investment Advisers and Other Financial Services Firms Despite Preventative Measures

The potential price tag of a cyber breach is immense and continuing to rise in the U.S. See “Investment Adviser Penalized for Weak Cyber Policies; OCIE Issues Investor Alert” (Oct. 1, 2015). This article summarizes three recent surveys conducted by the Ponemon Institute; TD Bank; and ACA Aponix, in conjunction with the National Society of Compliance Professionals, each of which provides insight into the current state of vulnerabilities of investment advisers and other financial firms. See also “How Hedge Fund Managers Can Meet the Cybersecurity Challenge: A Plan for Building a Cyber-Compliance Program (Part Two of Two)” (Dec. 10, 2015); and “RCA Panel Outlines Keys for Hedge Fund Managers to Implement a Comprehensive Cybersecurity Program” (Jun. 18, 2015).

Compliance Corner Q3-2017: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

What issues should hedge fund manager chief compliance officers (CCOs) be focusing on in the third quarter? In addition to completing the various regulatory filings and requirements due at the end of the quarter, CCOs should focus on building out their compliance programs to include forensic testing and other assessments to address internal risks and SEC staff expectations. See “Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues” (Feb. 23, 2017). To ensure that fund managers stay on top of the regulatory filings they need to perform each quarter, the Hedge Fund Law Report is introducing this quarterly feature. This first installment, authored by Danielle Joseph and Anne Wallace, director and analyst, respectively, at ACA Compliance Group, highlights some notable regulatory filings fund managers need to perform in the third quarter of 2017, including the deadlines and requirements associated with quarterly transaction reports, Form PF, Form ADV and Form 13F. For additional coverage of reporting requirements applicable to fund managers under certain circumstances, see “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016); and our two-part series on regulatory reporting by non-E.U. hedge fund managers under E.U. private placement regimes: “Guidance for Registering” (Dec. 3, 2015); and “Roadmap for Reporting” (Dec. 10, 2015).

David Blass Joins Simpson Thacher in Washington, D.C.

Simpson Thacher has expanded its Washington, D.C., office’s investment funds practice with the addition of David W. Blass as a partner. See “SEC’s David Blass Expands on the Analysis in Recent No-Action Letter Bearing on the Activities of Hedge Fund Marketers” (Mar. 13, 2014). Blass was previously general counsel of the Investment Company Institute and, prior to that role, Chief Counsel and Associate Director of the SEC’s Division of Trading and Markets. He brings to his new role deep expertise in policies, rules and regulations affecting hedge funds, private equity funds, registered funds and broker-dealers. For additional insights from Simpson Thacher attorneys, see our two-part series “Structuring Private Funds to Avoid ERISA While Accommodating Benefit Plan Investors”: Part One (Feb. 5, 2015); and Part Two (Feb. 12, 2015).

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