Mar. 22, 2018

How Fund Managers Should Structure Their Cybersecurity Programs: Background and Best Practices (Part One of Three)

Nation-states, organizations, groups and individuals continue to employ increasingly sophisticated methods to target information systems and computer networks. Governments and regulators – including the SEC and the U.K. Financial Conduct Authority – are also intensifying their scrutiny of organizations’ cybersecurity programs. See our two-part series “Navigating FCA and SEC Cybersecurity Expectations”: Part One (Jan. 7, 2016); and Part Two (Jan. 14, 2016). As a result, it is becoming more expensive to combat and contain cyber-related attacks. Given that cybersecurity is an enterprise-wide risk, fund managers must, at a minimum, ensure that they comply with industry best practices, including adopting one or more cybersecurity frameworks and creating a culture of cybersecurity compliance. This article, the first in a three-part series, discusses the risks and costs associated with cybersecurity attacks; the global focus on cybersecurity; relevant findings observed by the Office of Compliance Inspections and Examinations during the examination of SEC registrants; and cybersecurity best practices. The second article will analyze the need for fund managers to hire a dedicated chief information security officer, review information security governance structures and explore the role of the chief compliance officer as a strategic partner. The third article will evaluate methods for facilitating communication between cybersecurity stakeholders; outsourcing and co-sourcing of cybersecurity functions; and best practices for employing and overseeing third-party cybersecurity vendors. See our two-part series on how fund managers can meet the cybersecurity challenge: “A Snapshot of the Regulatory Landscape” (Dec. 3, 2015); and “A Plan for Building a Cyber-Compliance Program” (Dec. 10, 2015).

What Are the Implications for Investment Managers of the Revised Prudential Framework for E.U. Investment Firms?

The European Commission (EC) recently proposed an overhaul of the prudential framework for E.U. investment firms. Investment managers based in the E.U. should monitor the proposal through the legislative process given its eventual implications for not only the level of regulatory capital that those managers would be required to hold, but also for the restrictions on the ways in which those managers would be able to pay their employees and the remuneration disclosures they would be required to make. In a guest article, Leonard Ng and Caitlin McErlane, partner and associate, respectively, at Sidley Austin, explore the implications of the EC’s proposed overhaul of the prudential framework for E.U. investment firms, particularly with respect to E.U. investment managers. For a discussion of other recent issues affecting the E.U., see “How ESMA’s Opinions on the Relocation of U.K. Financial Market Participants to the E.U. May Affect Fund Managers Post-Brexit” (Nov. 16, 2017). For additional insight from Ng, see “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015).

Point72 Complaint Ignites Discussion on Relevant Facts in “Hostile Environment” Lawsuits

In this era of heightened sensitivity to claims of sexual harassment, executives and managers in the asset management industry are likely to view with concern the complaint recently filed against billionaire Steven A. Cohen’s firm, Point72 Asset Management. The plaintiff, Point72 associate director Lauren Bonner, has alleged that Point72’s working environment was distinctly unwelcoming for female employees; that Bonner and other women at the firm suffered months-long hostile, demeaning and intimidating treatment; and that Point72 discriminated against Bonner by favoring male colleagues with regard to pay and promotions. While the allegations in the complaint are serious, the nature of the complaint has raised the eyebrows of some analysts, who have claimed that it includes dozens of inflammatory charges whose relevance to the treatment allegedly suffered by Bonner is often far from clear. To cast light on these issues and offer practical steps that asset managers can take to avoid similar legal trouble, this article analyzes the complaint and presents commentary from legal professionals with expertise in anti-discrimination law. For coverage of another lawsuit relating to harassment at a fund manager, see “Portfolio Manager Accuses Former Employer and Supervisor of Retaliation for Reporting Sexual Harassment” (Feb. 15, 2018).

SFA White Paper Links Robust Fund Governance to Fund Longevity

Sound Fund Advisors (SFA), a firm that offers independent fund directorship services, recently released a white paper considering the relationship between good fund governance and fund survival, and offering best practices for the creation and operation of fund boards. This article summarizes the key findings from the study and includes insights from Ramona Bowry, SFA director and one of the study’s authors. For additional commentary from professional directors, see “Former General Counsel and Current Independent Director Discusses the Importance of Robust Fund Governance” (Dec. 8, 2016); and “Former Law Firm Partner and Current Independent Director Provides Perspective on Hedge Fund Governance Issues, Regulatory Matters and Allocator Concerns” (Oct. 27, 2016).

Panel Offers Perspectives on Internal Compensation Arrangements for Investment Professionals: Hedge Fund Compensation and Non-Competes (Part Two of Two)

Hedge fund compensation is typically less complicated than private equity fund compensation: partners receive a share in a fund’s distributable profits while portfolio managers negotiate over levels of guaranteed compensation, expenses that are covered under the definition of “net profits” and their “buying power.” Private fund managers also routinely utilize non-compete agreements to bind employees, and although certain states disfavor non-compete agreements, they are generally enforceable. A recent program hosted by Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA), and featuring McDermott Will & Emery partners Ian M. Schwartz, Evan A. Belosa and Alejandro Ruiz, discussed these issues, among others. This article, the second in a two-part series, explores hedge fund compensation, including profit shares, and restrictive employment covenants. The first article discussed carried interest, taxation thereof and deferred compensation arrangements. For coverage of recent compensation surveys, see “RCA Compensation Trends Panel Discusses Strong Market for Private Fund Compliance and Legal Personnel” (Jan. 25, 2018); and “2017 Compliance Salary Survey: How Do Fund Managers Compare?” (Jan. 4, 2018). For additional commentary from Schwartz, see “Private Equity in 2017: How to Seize Upon Rising Opportunity While Minimizing Compliance and Market Risk” (Jun. 8, 2017). For coverage of a prior program hosted by MLA, see our two-part series featuring commentary from former 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).

A Checklist for Evaluating Employee Disciplinary Policies and Procedures of Private Fund Managers

Properly disciplining employees when they violate an adviser’s policy or otherwise engage in misconduct is a necessary and useful part of remediation. Private fund advisers should have good disciplinary policies in place before misconduct or policy breaches occur to ensure that any discipline or penalty that is imposed is neither ad hoc nor arbitrary. When an employee does engage in misconduct or breach an adviser’s compliance policy, the investment adviser should proceed with care to ensure a just and defensible outcome. This checklist provides private fund advisers with questions to ask both about their policies and about specific procedures to ensure that their disciplinary processes are running as smoothly as possible. For additional insight on employee discipline, see our three-part series: “Best Practices for Fund Managers to Develop an Employee Discipline Framework That Fosters Predictability in the Face of Inconsistent Laws” (Feb. 8, 2018); “Best Practices for Fund Managers When Investigating and Documenting Employee Discipline” (Feb. 15, 2018); and “Best Practices for Fund Managers to Ensure a Fair Process When Disciplining Employees” (Feb. 22, 2018).

Mayer Brown Expands Fund Formation Practice in New York

Iliana Kirova, an attorney specializing in fund formation, has joined Mayer Brown in New York as a partner, where she will advise funds, fund sponsors and institutional investors on the structuring and launch of many different kinds of investment vehicles, including private equity funds, real estate funds and funds of funds. For commentary from other Mayer Brown attorneys, see “How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll” (Feb. 23, 2017); and our three-part series on how funds can use subscription credit facilities: “Provide Funds With Needed Liquidity but Require Advance Planning by Managers” (Jun. 2, 2016); “Offer Hedge Funds and Managers Greater Flexibility” (Jun. 9, 2016); and “Operational Challenges for Private Fund Managers” (Jun. 16, 2016).