Nov. 9, 2017

The Challenges and Benefits of Multi-Factor Authentication in the Financial Sector (Part Two of Two)

As hackers become more sophisticated, it is incumbent upon fund managers to find ways to prevent cyber breaches and protect their investors’ accounts and information. A crucial way to protect against breaches that involve stolen credentials or account compromise is the use of more than one factor to establish identity online – multi-factor authentication (MFA). This second article in our two-part series explores innovations in MFA, including those from the Fast Identity Online Alliance; the expectations of global regulators; resources and guidance for best practices; and how fund managers can economically implement an MFA system. The first article discussed the MFA landscape for the financial sector; strategies for ensuring both security and user friendliness; challenges that certain factors present; and the means to overcome those challenges. For more on cybersecurity issues facing investment managers, see our two-part series “Cyber Crisis Communication Plans: What Works and What Fund Managers Should Avoid”: Part One (Aug. 24, 2017); and Part Two (Sep. 7, 2017).

Investment Advisers and Funds Face Dramatically Expanded Global Oversight Despite Expectations of Relaxed Regulation Under Trump Administration

Financial regulators in the U.S. and Europe have taken unmistakable steps in recent months to increase their oversight of the activities of investment advisers and funds. While the stated goals of many programs are to monitor risk more effectively across jurisdictions and to avert disasters reminiscent of 2008, many managers feel that the SEC and the European Commission have yet to develop simple and effective methodologies. These developments – along with little legislative movement on proposed reforms like the Financial CHOICE Act or the repeal of the Volcker Rule – have occurred in the U.S. despite the Trump administration’s pro-business rhetoric. In addition, cybersecurity concerns remain a critical driver of regulatory priorities, particularly in the aftermath of the breach of the SEC’s EDGAR system. These issues were the focus of the first panel of the recent third annual Private Funds Forum hosted by Bloomberg BNA and Seward & Kissel. The speakers were Jiří Król, deputy chief executive officer and global head of government affairs for AIMA; Rosali Pretorius, partner at Simmons & Simmons; Matt Siano, managing director and general counsel for Two Sigma Investments; and Robert Van Grover, partner at Seward & Kissel. This article highlights the key points conveyed by the panelists. For coverage of last year’s forum, see “How Managers Can Mitigate Improper Dissemination of Sensitive Information (Part One of Two)” (Sep. 22, 2016); and “How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading (Part Two of Two)” (Sep. 29, 2016). See also our interview with Van Grover and fellow Seward & Kissel partner Patricia Poglinco on trends in the regulatory space: “Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds” (Sep. 14, 2017).

Ganek Dismissal Demonstrates Broad Latitude Granted to Government During Investigations of Fund Managers

Execution of a search warrant at a hedge fund manager’s business premises can be catastrophic. That was the case for Level Global Investors (LG), which folded less than three months after the FBI executed a search warrant at its offices seeking evidence of insider trading. After LG co-founder David Ganek learned that the warrant application incorrectly alleged that he knowingly received inside information from an LG analyst, he sued several government officials for damages, asserting violations of, among other things, his Fourth and Fifth Amendment rights. The U.S. Court of Appeals for the Second Circuit (Court) recently dismissed his causes of action, holding that the defendants are entitled to qualified immunity from suit and that misstatements in the search warrant did not violate Ganek’s constitutional rights. The Court’s finding should serve as an important warning that, even if the government commits missteps in its pursuit of insider trading and other violations, targeted fund managers may not have recourse to reverse or mitigate the damage done by those actions. This article analyzes the Court’s order, along with the facts and circumstances leading up to it. For a summary of Ganek’s complaint, see “Former Level Global Head David Ganek Sues U.S. Attorney Bharara and Other Senior DOJ and FBI Personnel, Claiming Fabrication of Evidence Against Him” (Mar. 12, 2015).

Perspectives on Operational Due Diligence From an Investor, Consultant and Manager

Once an investor determines that a fund manager’s strategy and performance are a good fit, it must also confirm that the manager’s personnel, infrastructure, systems and controls are adequate and suited to support the investment function and ensure smooth operations. A recent panel at the ninth annual RSM Investment Industry Summit offered the perspectives of an institutional investor, consultant and fund manager on the operational due diligence (ODD) process, including yellow and red flags encountered during ODD and reasons why managers may fail ODD. Alan D. Alzfan, partner at RSM US, moderated the discussion, which featured Neil Datta, director at Optima Fund Management; Simon Fludgate, head of ODD at Aksia; and Louis LaRocca, general counsel and chief compliance officer of Gotham Asset Management. This article highlights their most salient points. For additional insight from Alzfan, see “Eight Refinements of the Traditional ‘2 and 20’ Hedge Fund Fee Structure That Can Powerfully Impact Manager Compensation and Investor Returns” (May 20, 2011). For further commentary from Aksia and Fludgate, see “Aksia’s 2015 Hedge Fund Manager Survey Reveals Industry Views on Liquidity, Financing, the AIFMD, Liquid Alternatives, Fees, Co-Investments and Risk Reporting” (Jan. 22, 2015); and “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface With Investment Consultants to Access Institutional Capital (Part One of Two)” (Jul. 11, 2013).

New CFTC Chair Outlines Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform

In recent testimony before the House Committee on Agriculture, CFTC Chairman J. Christopher Giancarlo summarized the CFTC’s enforcement priorities and discussed ways to facilitate market-enhancing financial technology, cybersecurity and swaps reform. Giancarlo also outlined Project KISS, or “Keep it Simple Stupid” – an initiative meant to simplify and reduce the cost of CFTC regulations and practices – and the CFTC’s continued commitment to developing a position limits rule and the correct threshold for the de minimis exception. Giancarlo’s testimony provides valuable insight to fund managers into the regulator’s priorities and anticipated actions. This article reviews those portions of Giancarlo’s testimony most relevant to fund managers. For additional analysis of CFTC priorities and goals, see “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

ACA Offers Roadmap to Maintaining Books and Records: Document Retention and SEC Expectations (Part Two of Two)

Investment advisers are faced with the ongoing challenge of ensuring compliance with the numerous rules and regulations governing their books and records. A recent ACA Compliance Group (ACA) program offered a comprehensive overview of the documents and records that investment advisers are required to maintain, focusing on ways advisers can ensure that those records be complete, accessible and in the proper form in the event of an SEC examination. The program featured Beth Manzi, chief operating officer of private fund administrator PEF Services LLC, and Theodore E. Eichenlaub, partner at ACA. This second article in our two-part series considers the electronic storage of records, document destruction, testing of compliance programs and SEC examinations. The first article discussed the regulatory background surrounding the maintenance of adviser-specific records, including corporate and accounting documents; marketing documents; and emails. For additional insights from ACA, see our two-part series “A Roadmap for Advisers to Comply With Marketing and Advertising Regulations”: Part One (Aug. 3, 2017); and Part Two (Aug. 10, 2017).

Upcoming HFLR Panel Discussion to Explore Best Practices for Fund Managers to Mitigate Insider Trading Risk

Please join the Hedge Fund Law Report and MoloLamken on Wednesday, November 15, 2017, at 5:30 p.m. EST, for a panel discussion regarding the latest developments in insider trading law, such as the rulings in U.S. v. Newman, Salman v. U.S. and U.S. v. Martoma, and the potential implications for funds, including adjustments that fund managers should consider making to their policies and procedures. This presentation will explore ways for advisers to manage risks associated with expert networks, political intelligence firms and third-party consultants. The program, entitled “Mitigating Insider Trading Risk,” will be moderated by William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, and will feature Brian Guzman, general counsel of Indus Capital Partners; Katherine Goldstein, partner at Milbank; Brendan Kalb, managing director and general counsel at AQR Capital Management; and Justin Shur, partner at MoloLamken. The panel discussion will take place at the Four Seasons Hotel on 57th Street in New York and will be followed by a networking reception. Space at the program is limited; please contact to reserve a spot by November 10, 2017.

Tax Partner Joins O’Melveny & Myers in New York

O’Melveny & Myers has strengthened its tax and restructuring practices with the hiring of Alexander Anderson as a partner in New York. Anderson advises clients on the tax dimensions of investment fund structuring, securities offerings, financings, mergers, acquisitions and restructurings. See “How the E.U. Tax-Haven Blacklist May Affect Private Funds Formed in Blacklisted Jurisdictions” (Nov. 2, 2017); and “How Tax Reforms Proposed by the Trump Administration and House Republicans May Affect Private Fund Managers” (Feb. 9, 2017). For commentary from other O’Melveny partners, see “The Rationale, Mechanics and Common Terms for Secondary Market Sales of Private Equity Fund Interests” (Apr. 11, 2013).