Jan. 4, 2018

Electronic Signatures: Implementation Considerations for Fund Managers (Part Two of Two)

Given their efficiency, electronic signatures (e‑signatures) are becoming more prevalent in financial transactions, particularly in light of the volume of documents and contracts involved. Nevertheless, understanding when and how they work in the contracting process and navigating the variety of available technologies remain perplexing to many fund managers and others in the financial services industry. This second installation of our two-part series on e‑signatures offers practical advice from lawyers and technical consultants on how a fund manager can implement a compliant e‑signatures program, as well as vet and engage vendors that provide these services. In the first article, K&L Gates attorneys discussed the legal landscape for e‑signatures; the differences between an e‑signature and a digital one; and the legal risks associated with the adoption of e‑signatures. See also our three-part series on electronic communications: “SEC Takes Steps to Drill Down on Electronic Communications” (Nov. 30, 2017); “Information Request List Provides Insight Into SEC Expectations on the Use of Electronic Communications by Advisers and Employees” (Dec. 7, 2017); and “Six Key Issues to Address in Electronic Communication Policies and Guidance on Preparing for Future Scrutiny of Electronic Messaging” (Dec. 14, 2017).

How Blockchain Will Continue to Revolutionize the Private Funds Sector in 2018

Like many innovations that preceded it, blockchain trading – the use of a digitalized ledger to trade bitcoin and other cryptocurrencies in a decentralized manner – has generated skepticism and anxiety among various market participants. Although bitcoin has been trading for many years, its use is illegal in some countries and has drawn criticism from regulators even where it is legal. Despite this, bitcoin traded at record highs in 2017 and looks poised to climb even higher in 2018. These developments do not come without any downside, however. Blockchain technology stands to streamline certain administrative and auditing functions, thereby threatening to knock some traditional businesses out of the market. The highly particular way in which bitcoin trades – with a single individual possessing the ability to move and transfer enormous sums instantaneously – also poses special security risks. Further, the perception that bitcoin is reaching, or has reached, a precarious “bubble” may not be wholly unfounded. To help readers understand these issues and formulate an approach to the new technologies in the months to come, the Hedge Fund Law Report has interviewed Karl Cole-Frieman, a founding partner of boutique law firm Cole-Frieman & Mallon and an expert on the evolving blockchain and bitcoin markets. This article presents Cole-Frieman’s insights. See our three-part series on blockchain and the private funds industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017). For prior commentary from Cole-Frieman, see “Who Should Newly Registered Hedge Fund Managers Designate As the Chief Compliance Officer, and How Much Are Chief Compliance Officers Paid?” (Feb. 25, 2011).

HFLR Program Parses OCIE’s Recent Advertising Risk Alert: Identifying Advertisements and Common Deficiencies in Performance Advertising (Part One of Two)

On September 14, 2017, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert that highlighted six common deficiencies under Rule 206(4)-1 of the Investment Advisers Act of 1940 – the so-called “Advertising Rule” – identified by OCIE during examinations of SEC-registered investment advisers. A recent webinar presented by the Hedge Fund Law Report discussed in detail each of the deficiencies, along with other compliance issues that frequently arise with respect to an adviser’s advertising practices. Kara Bingham, Associate Editor of the Hedge Fund Law Report, moderated the discussion, which featured Todd Kaplan, founder and principal of Cloudbreak Compliance Group; Christine M. Lombardo, partner at Morgan Lewis; and Richard F. Kerr, partner at K&L Gates. This article, the first in a two-part series, discusses the broad view the SEC takes when deciding which communications fall within the definition of an advertisement, as well as four examples of deficiencies frequently found in performance advertising. The second article will explore the disclosures required when presenting gross performance in one-on-one presentations to prospective investors, circumstances under which claims of compliance with voluntary performance disclosure standards may be deemed misleading, ways to avoid deficiencies when discussing past specific recommendations in advertisements and the results of the touting initiative conducted by OCIE. See our three-part series on advertising compliance: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

HFA Briefing Covers U.S. and Global Regulatory Climate Relating to Liquidity, Enforcement, Examinations and Cybersecurity

A recent 2017 global regulatory briefing sponsored by Bloomberg and the Hedge Fund Association (HFA) offered insight into the global regulatory climate, including liquidity management, cross-border enforcement, NFA exams abroad and cybersecurity. Greg Babyak, Bloomberg’s head of government and regulatory affairs, delivered opening remarks focused on the Trump administration and the current U.S. regulatory climate. Lisa Roitman, Bloomberg business development and marketing strategist, moderated the subsequent panel discussion, which featured Louis P. Berardocco, Senior Manager of Examinations Compliance at the NFA; Ryan Hill, Supervisory Special Agent at the Department of Homeland Security; Edward Y. Kim, partner at Krieger Kim & Lewin; Jude Scott, Chief Executive Officer of Cayman Finance; and Robert Taylor, Head of Global Asset Management Regulatory Strategy at the U.K. Financial Conduct Authority. This article summarizes the key takeaways from the program. For coverage of another HFA global regulatory briefing, see “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Views on Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016).

Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement: Five Key Priorities for OCIE (Part One of Two)

Although there has been much talk of deregulation under the Trump administration, investment advisers remain subject to close SEC scrutiny. A recent program presented by Davis Polk discussed the current SEC examination and enforcement climate affecting advisers, including an overview of five key examination priorities, and offered guidance on preparing for and handling routine examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (OCIE), all with a view toward minimizing the risk of a referral to the SEC’s Division of Enforcement (Enforcement Division). The program featured Davis Polk partners Leor Landa, Amelia T.R. Starr and James H.R. Windels, along with associate Marc J. Tobak. This two-part series summarizes the panel’s insights. This first article discusses five areas identified by the panelists on which OCIE frequently focuses during the examination of investment advisers. The second article will provide guidance on the steps that advisers can take to minimize the likelihood that OCIE will refer certain issues to the Enforcement Division. For more on the current regulatory environment, see our two-part series providing commentary from former senior SEC attorneys: “Chair Clayton’s Priorities and the Current Enforcement Climate” (Dec. 7, 2017); and “Current Regulatory Climate, Adviser Examinations and the Enforcement Referral Process” (Dec. 21, 2017). For coverage of prior Davis Polk programs, see our two-part series on activist hedge funds: “Filing Obligations and Other Operational Considerations” (May 5, 2016); and “Settlement, Prospects, Shareholder Engagement and Proxy Access Considerations” (May 12, 2016).

2017 Compliance Salary Survey: How Do Fund Managers Compare?

Chief compliance officers (CCOs) in the financial services industry rank fourth in terms of total compensation, according to a new compensation survey by the Society of Corporation Compliance and Ethics. In addition, the survey – which addresses pay rates as they relate to job responsibilities, title, type of organization, education level, geographic location and a variety of other factors – found, among other things, that the legal and regulatory field lacks ethnic diversity (the majority of survey respondents identified themselves as white) and that the vast majority of those in the field, from the CCO on down, are working without benefit of an employment contract. This article analyzes the details of the survey and its principal findings. See “Hedge Fund Manager Compensation Survey Looks at 2014 Compensation Levels, Job Satisfaction and Hiring Trends” (Jan. 22, 2015); and “Greenwich Associates and Johnson Associates Annual Compensation Report Shows Strength at Traditional Asset Managers Relative to Hedge Funds” (Nov. 6, 2014).

Ropes & Gray Expands Investment Funds Practice in Boston

Ropes & Gray has hired Keren Rimon as counsel in the firm’s private investment funds practice in Boston. Rimon was previously senior vice president for private funds at Harvard Management Company, where she provided legal advice concerning the organization’s hedge fund and private equity investment portfolios. Rimon also advised on regulatory compliance and tax matters affecting the portfolios. For insights from other Ropes & Gray attorneys, see “Steps Hedge Fund Managers Should Take Now to Ensure Their Swap Trading Continues Uninterrupted When New Regulation Takes Effect March 1, 2017” (Feb. 9, 2017); and “A Fund Manager’s Guide to Calculating and Reporting Short Sales Under European Regulations” (Jan. 5, 2017).