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    Nov. 30, 2017

Are Hedge Fund Managers Receiving the Message? SEC Takes Steps to Drill Down on Electronic Communications (Part One of Three)

Earlier in 2017, the SEC’s Office of Compliance Inspections and Examinations examined a handful of investment advisers, focusing on the forms of electronic communications used by those advisers and their employees. Many speculate that these exams were part of a new sweep exam focused on electronic messaging. Meanwhile, an official-seeming information request list (Request List) became public, although the SEC has not formally confirmed the existence of an electronic communications sweep exam nor the authenticity of the Request List. This three-part series is designed to assist compliance professionals with managing the ever-evolving electronic communication technologies that many adviser employees are already using, or desire to use, in their daily business practices. Given the widespread belief that these electronic communication-focused exams are part of a sweep exam, this first article provides background on sweep exams, with particular focus on this electronic messaging exam and the potential drivers of SEC focus in this area. The second article will break down the various components of the Request List and analyze the implications and consequences of certain requests. The third article will examine best practices for advisers when designing their electronic communications policies, taking into account the items requested in the Request List, as well as how advisers that are not the subject of the electronic communications exam can nonetheless proactively prepare for future scrutiny in this area. For more on electronic communications, see “ACA 2015 Compliance Survey Covers Expert Networks, Fund Expenses and Electronic Communications (Part Two of Two)” (Oct. 8, 2015); and “Survey Highlights Compliance Professionals’ Attitudes and Practices Concerning Electronic Communications Compliance” (Feb. 9, 2012).

Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?

The SEC has taken recent enforcement action against Deerfield Capital Management (Deerfield), Artis Capital Management (Artis) and R.T. Jones Capital Equities Management (R.T. Jones) for failing to maintain policies and procedures tailored to the risks of their respective operations. Although the areas of deficiency in question vary widely, the respondents all found themselves in trouble for allegedly failing to maintain and enforce “reasonably designed” policies and procedures. Despite expectations that the SEC, under new leadership, would reduce the “broken windows” approach to enforcement, some believe these three cases foreshadow the deployment of the dramatically expanded resources available to the SEC’s Office of Compliance Inspections and Examinations for investment adviser examinations in a broad effort to ensure that firms maintain appropriately tailored policies and procedures, as well as oversee employees in sensitive areas of their operations. As SEC Chair Jay Clayton recently told the Hedge Fund Law Report, “looking at firms’ policies and procedures will continue to be a priority for the Commission.” To help readers understand this trend, adopt best practices and insulate themselves against similar enforcement actions, the HFLR has interviewed legal professionals with expertise in regulatory enforcement matters. This article presents the insights from those interviews, along with Clayton’s further thoughts on the matter. For analysis of the Deerfield, Artis and R.T. Jones cases, respectively, see “Hedge Fund Manager Deerfield Fined $4.7 Million for Failing to Adopt Insider Trading Compliance Policies Tailored to the Firm’s Specific Risks” (Sep. 21, 2017); “General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action” (Nov. 3, 2016); and “Investment Adviser Penalized for Weak Cyber Policies; OCIE Issues Investor Alert” (Oct. 1, 2015).

Evaluating Pay Equality: Steps Investment Managers Should Consider to Avoid Running Afoul of Equal Pay Laws

While harassment allegations against an ever-growing number of male power figures dominate the news, another equal employment opportunity issue simmers steadily below the surface: the pursuit of pay equity for women and minorities. In the past few years, several states have passed pay equity laws affording employees greater protections than those historically provided by federal law, and equal pay has become a focal point in politics and board rooms. Investment managers can expect increasing scrutiny of these issues in the months and years ahead. As firms turn their attention toward the year-end compensation cycle, they should consider taking the initiative to identify and correct any unwarranted pay disparities. In a guest article, Akin Gump partners Richard J. Rabin and Esther G. Lander, along with counsel Anastasia M. Kerdock, outline key federal and state equal pay laws, as well as steps investment managers should take in planning and conducting an internal pay analysis. For additional insight from Rabin, see “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017); “Steps Hedge Fund Managers Can Take in Light of NY Attorney General’s View That Certain Non-Compete Clauses Are Unconscionable” (Sep. 22, 2016); and “What the NLRB Complaint Against Bridgewater Means for Hedge Fund Manager Employment Agreements” (Sep. 8, 2016).

Trio of SEC No-Action Letters Addresses Concerns Raised by Decoupling of Research and Commission Payments Under MiFID II

The recast Markets in Financial Instruments Directive (MiFID II), which takes effect on January 3, 2018, requires the decoupling of payments for broker research from execution services. Money managers, broker-dealers and other market participants have been concerned, however, that complying with these MiFID II provisions could lead to them being out of compliance with U.S. securities laws and regulations. Specifically, (1) broker-dealers are concerned that if they receive payments earmarked specifically for research, they may be deemed to be acting as investment advisers; (2) money managers are concerned that use of a research payment account in accordance with MiFID II would not satisfy the safe harbor for bundled commissions under Section 28(e) of the Securities Exchange Act of 1934; and (3) investment advisers are concerned that they will no longer be able to aggregate orders for registered investment companies with those of other clients. The SEC recently issued three no-action letters that allay the above concerns. This article analyzes the relief provided in each of those letters, along with the applicable rationale. For more on these issues, see “MiFID II May Have Significant Ramifications on Research Payments Involving U.S. Managers With Cross-Border Operations” (Jul. 27, 2017).

The Effect of 2017 Tax Developments on Advisers to Private Funds: New Partnership Audit Rules, Tax Reform, Blockers, Discounted Gifting, Fee Waivers and State Nexus Issues

A recent panel at the ninth annual RSM Investment Industry Summit offered insights into a number of pending tax issues of interest to private fund managers, including the revised partnership audit regime; tax reform; potential benefits of foreign blockers; discounted gifting; IRS regulation and enforcement around private equity fee waivers; and evolving concepts of state tax nexus rules. The program was moderated by RSM tax partner Gennaro (Jerry) Musi and featured tax partner Moshe Metzger and senior tax managers Ashima Arora and Richard Joslin. This article summarizes the portions of the presentation most relevant to private fund managers. For additional commentary from RSM personnel, see “Investor Gatekeepers Advise Emerging Managers on How to Stand Out When Pitching and Marketing Their Funds” (Dec. 15, 2016); “How Investment Managers Can Advertise Sub-Adviser Performance Without Violating SEC Rules” (Dec. 1, 2016); and “HFA Symposium Offers Perspectives From Cybersecurity Industry Professionals on Preparedness, Vendor Management, Cyber Insurance and Cloud Services” (Jul. 7, 2016).

HFLR and Seward & Kissel Webinar Explores Trends Identified in Side Letter Study (Part Two of Two)

As the competition for investor allocations among private fund advisers remains competitive, the bargaining power in side letter negotiations has shifted in favor of the investor. In order to obtain a side letter in the first place, however, allocators must be prepared to make sizeable investments. These findings, which were identified in the Seward & Kissel (S&K) 2016/2017 Hedge Fund Side Letter Study, were discussed in a recent webinar hosted by the Hedge Fund Law Report and S&K. The webinar was moderated by William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, and featured commentary on the side letter environment from Steve Nadel, lead author of the S&K side letter study. This article, the second in a two-part series, explores side letter trends identified in, and key takeaways from, the study, and analyzes whether President Trump’s stated pro-business stance will affect the terms offered by managers in side letters. The first article discussed the demographics of investment managers and investors that commonly enter into side letters, and key side letter terms. For additional insights from Nadel on side letters, see “HFLR and Seward & Kissel Webinar Explores Common Issues in Negotiating and Monitoring Side Letters” (Nov. 10, 2016).

Jane Scobie Joins Dechert in London

Dechert has expanded its private equity and tax practices with the hiring of partner Jane Scobie, who advises clients on the tax aspects of numerous types of transactions, including fund formations, investments, restructurings and takeovers. For coverage of other recent hires at Dechert, see “Joachim Kayser Joins Dechert in Frankfurt” (Jun. 29, 2017); “Rob Bradshaw Joins Dechert in London” (Apr. 27, 2017); “Jeff Mackey Joins Dechert in Dublin” (Mar. 9, 2017); and “Michael Wong Joins Dechert in Hong Kong” (Feb. 16, 2017). For commentary from other Dechert partners, see “How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect” (Apr. 6, 2017).

K&L Gates Expands Investment Management Practice in London

K&L Gates has continued to build its presence in the global investment funds markets with the hiring of Michelle Moran as a partner in its London office. Moran advises clients globally on the formation and management of hedge funds, UCITS structures, real estate funds and investment trusts. Her clients include investment managers, brokers, custodians and service providers. For coverage of other recent hires at the firm, see “David Dueno Joins K&L Gates in Chicago” (Jul. 13, 2017); and “K&L Gates Enhances Investment Management Practice With Addition of Broker-Dealer Regulatory Attorney” (May 25, 2017).

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