Feb. 2, 2017

Lessons on Separation Agreements That Fund Managers Can Glean From Recent SEC Action

The SEC has issued an order against an investment adviser for language in its separation agreements forcing departing employees to forfeit financial incentives for reporting misconduct under the SEC’s whistleblower program. See “How Can Hedge Fund Managers Mitigate the Reputational Harm of Whistleblower Complaints?” (Oct. 8, 2010). This order is particularly significant for employers in the asset management space because it highlights liabilities that may arise if employers include certain terms and language in separation agreements – including seemingly standard and uncontroversial provisions designed to protect the employer’s interests. This article examines the facts and allegations contained in the order, along with commentary from employment law experts from firms that regularly represent asset management clients. For analysis of the SEC’s current stance on whistleblower protection, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017); “Outgoing SEC Chair Outlines New Model for Enforcement Priorities in 2017 and Beyond” (Jan. 12, 2017); and “What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers” (Oct. 20, 2016).

How Have Industry Developments Affected the Value of Legal and Compliance Staff? An Interview With David Claypoole on In-House Compensation at Fund Managers (Part One of Two)

In a regulatory landscape where fund managers are subject to greater scrutiny, the market for in-house legal and compliance personnel – including general counsels (GCs), chief compliance officers (CCOs) and junior staff – has flourished. Questions have arisen, however, as to whether the compensation of legal and compliance personnel will be affected by the increasingly volatile performance of private funds. In a recent interview with the Hedge Fund Law Report, David Claypoole, founder and president of Parks Legal Placement, shared detailed insight into the overall market for and compensation of legal and compliance personnel based on more than a decade of compensation data. In this article, the first in a two-part series, Claypoole discusses how recent hedge fund performance may affect GC and CCO compensation; trends he has identified in legal and compliance compensation; the drivers of compensation for top legal and compliance personnel; and the backgrounds of candidates vying for these positions. In the second installment in this series, Claypoole will share his thoughts on anticipated changes to the legal and compliance landscape under the new Trump administration, including a possible repeal of the Dodd-Frank Act; the movement of in-house staff from hedge funds to other industries or practices; and characteristics of successful in-house personnel. In April, Claypoole will be presenting on trends in legal and compliance compensation at GAIM Ops Cayman 2017. For more information on the conference, click here. To register for the conference, taking advantage of the HFLR’s promotional discount of 10% off the conference price (plus an additional $700 savings before February 17, 2017), click the link available in this article. For more from Claypoole, see his prior two-part interview on the market for in-house compensation at hedge fund managers: “What Is the Value of Legal and Compliance Staff?” (Mar. 12, 2015); and “Trends in Legal and Compliance Hiring and Staffing” (Mar. 19, 2015).

How Fund Managers Can Prepare for Investor Due Diligence Queries About Cybersecurity Programs 

Cybersecurity remains a top-of-mind issue for regulators, investors and advisers. As part of operational due diligence, investors often evaluate whether an adviser has robust cybersecurity defenses. Similarly, advisers must ensure that their administrators, brokers and other third parties have appropriate defenses. A recent program presented by the Investment Management Due Diligence Association (IMDDA) explored the fundamentals of cyber due diligence, the role of insurance in cybersecurity preparedness, recommendations for evaluating cyber insurance coverage and the evolving cyber risk landscape. The program was moderated by Richard M. Morris, a partner at Herrick Feinstein, and featured Herrick partner Alan R. Lyons; Herrick associate Erica L. Markowitz; and Michael Stiglianese, a managing director of BDO USA. This article details the panelistsinsights, which provide valuable guidance to investors when conducting cyber due diligence on fund managers and to fund managers about the necessary elements of a cybersecurity program. For additional insights from Morris, see How Developments With Californias Pension Plan Disclosure Law, the SECs Rules and FINRAs CAB License May Impact Hedge Fund Managers and Third-Party Marketers” (Oct. 13, 2016); and How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part Two of Two)” (Dec. 12, 2013). For coverage of other IMDDA events, see 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).

Failure by Investment Advisers to Ensure Accurate Client Billing May Lead to SEC Enforcement Action and Penalties

The fee and expense practices of private fund managers and other investment advisers are a perennial target of SEC scrutiny. SeeSelf-Reporting and Remedying Improper Fee Allocations May Not Be Sufficient for Fund Managers to Avoid SEC Action” (Sep. 15, 2016); and Undisclosed Increase in Investment Advisers Fees Could Result in Significant Penalties” (Jun. 23, 2016). In two recent enforcement actions, the SEC alleged that Citigroup Global Markets, Inc. (CGMI) and Morgan Stanley Smith Barney, LLC (MSSB) overbilled advisory clients and failed to preserve customer records. MSSB was also charged with violating the custody rule under the Investment Advisers Act of 1940. While the operations of asset management behemoths MSSB and CGMI are infinitely more complicated than those of many hedge fund advisers, the settlements are a timely reminder that fund advisers must have adequate policies and procedures to ensure that the fees assessed against investors and clients adhere to the disclosures made in fund offering documents, investment management agreements and any side letters. Advisers are also encouraged to consider whether their own policies and procedures are designed to identify the sorts of deficiencies outlined by the SEC in MSSBs and CGMIs policies and procedures. This article summarizes the nature of the violations and the terms of both settlements. For more on fee and expense allocation practices, see our three-part series: Practices Fund Managers Should Avoid” (Aug. 25, 2016); “Flawed Disclosures to Avoid” (Sep. 8, 2016); and Preventing and Remedying Improper Allocations” (Sep. 15, 2016).  

ACA 2016 Compliance Survey Addresses Custody; Fee Policies and Arrangements; Safeguarding of Assets; and Personal Trading (Part Two of Two)

In its 2016 Alternative Fund Manager Compliance Survey, ACA Compliance Group (ACA) covered various issues pertinent to hedge fund and illiquid private fund managers. ACAs Brian Lattanzio, a senior compliance analyst and private equity associate, and Danielle Joseph, a senior principal consultant, discussed the survey results in a recent webinar. This article, the second in a two-part series, explores the survey findings concerning the custody of fund assets and certificated securities; procedures around and types of fees charged by illiquid fund managers; steps to safeguard assets; and personal trading. The first article summarized the surveys results pertaining to SEC examinations; compliance staffing and budgeting; compliance reviews, testing and training; and anti-money laundering and sanctions compliance. For additional insights from ACA experts, see Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015); and The SECs Broken Windows Approach: Compliance Resources, CCO Liability and Technology Concerns for Hedge Fund Managers (Part Two of Two)” (Oct. 1, 2015).

Paul Rosen Joins Katten in London

Katten Muchin Rosenman has expanded its London office with its hire of Paul Rosen as a partner. Rosen primarily advises clients on regulatory issues affecting funds, with his practice also encompassing mergers and acquisitions, private equity transactions and capital markets deals. For insight from Katten partners, see How Claim Traders Can Pursue Reclamation and Administrative Expense Claims in Retail and Other Insolvencies” (Jan. 26, 2017); “What the LSTAs Revised Delayed Compensation Requirements Mean for Loans Trading on Par/Near Par Documents” (Oct. 27, 2016); and Private Equity Firms From Across the Industry Spectrum Advise on Trends and Terms in the Current Co-Investment Market” (Aug. 11, 2016).