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    Apr. 5, 2018

How Fund Managers Should Structure Their Cybersecurity Programs: CISO Hiring, Governance Structures and the Role of the CCO (Part Two of Three)

A fund manager’s chief compliance officer (CCO) or chief technology officer may appear to be the natural choice to develop and oversee the firm’s cybersecurity program. Nevertheless, given that those officers likely lack requisite expertise and are burdened by other responsibilities, fund managers should hire a dedicated chief information security officer (CISO) to serve in this function. Although no one governance structure is appropriate for all organizations, CISOs must be sufficiently independent and empowered to challenge organizational initiatives. This does not mean, however, that CCOs should be voiceless; rather, they must partner with CISOs, leveraging their unique skills in policy management, monitoring and investigating. This article, the second in our three-part series, analyzes the reasons why fund managers should hire a dedicated CISO, reviews information security governance structures and explores the role of the CCO as a strategic partner. The first article discussed the risks and costs associated with cyber 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 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 “RCA Panel Outlines Keys for Hedge Fund Managers to Implement a Comprehensive Cybersecurity Program” (Jun. 18, 2015).

Three Asset-Based Financing Options for Private Funds: Total Return Swaps, Structured Repos and SPV Financing (Part One of Two)

Traditional forms of financing – such as cash prime brokerage, securities lending and plain-vanilla repurchase agreements – continue to account for a large portion of the financing available to private funds and asset managers. These financing arrangements, however, tend to be available only for more liquid assets and are generally either callable on demand or committed for six months or less. As funds seek to use greater leverage; finance esoteric, illiquid assets; and obtain financing on a more committed and longer-term basis, bespoke financing arrangements have become increasingly popular, most of which can be categorized into three buckets: (1) total return swap (TRS) financing; (2) structured repo financing; and (3) special purpose vehicle/entity (SPV) financing. In this guest article, the first in a two-part series, Fabien Carruzzo and Daniel King, partner and associate, respectively, at Kramer Levin, review the main features of TRS financing, and highlight the comparative advantages and disadvantages to private funds of using this structure, taking into consideration the flexibility, the complexity of the legal documentation and the level of asset protection afforded by the structure. The second article will provide a comparative overview of structured repo financing and SPV financing transactions. For further discussion of financing available to private funds, see “Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers” (Mar. 16, 2017); and “How Fund Managers Can Mitigate Prime Broker Risk: Preliminary Considerations When Selecting Firms and Brokerage Arrangements (Part One of Three)” (Dec. 1, 2016). For additional commentary from Carruzzo, see “OTC Derivatives Clearing: How Does It Work and What Will Change?” (Jul. 14, 2011).

How to Prepare for the Technological Revolution’s Transformation of the Hedge Fund Industry

Many believe that an inevitable disruption to the alternative investment industry by technology is imminent. Investment advisers that embrace and prepare for this by adopting and implementing system upgrades, digitization and cognitive technologies will likely be rewarded for their nimbleness, while those that choose not to risk becoming obsolete. See our two-part series on “How Alternative Investment Managers Can Avoid Becoming Digital Dinosaurs”: How Digitization May Transform the Industry (Mar. 1, 2018); and How Private Fund Managers Are Entering the Digital Age (Mar. 8, 2018). Not only organizations will be affected by this technological revolution, however. Individuals seeking to thrive within fund managers, for example, will need to develop new skills to successfully operate in a technology-driven organization. The Hedge Fund Law Report recently interviewed William J. Kelly, CEO of Chartered Alternative Investment Analyst Association and a moderator at the 2018 Cayman Alternative Investment Summit. This article presents Kelly’s insights on how individuals can prepare themselves to succeed in this dynamic industry. For additional commentary on the evolution of the hedge fund industry, see “Schulte Roth & Zabel Founding Partner Paul Roth Discusses the History and Future of the Hedge Fund Industry” (Feb. 8, 2018).

D.C. Circuit Court Vacates Dodd-Frank’s Credit Risk Retention Rule As It Applies to CLO Managers

A recent ruling by the U.S. Court of Appeals for the D.C. Circuit granted a major victory for the Loan Syndications and Trading Association (LSTA) and managers of collateralized loan obligations (CLOs) that the LSTA represents. Specifically, the Court threw out the risk retention requirement imposed on open-market CLOs in 2014 in accordance with a flawed application of Section 941 of the Dodd-Frank Act. The Court’s opinion clarifies precisely what the Dodd-Frank Act mandates and draws a number of fine semantic distinctions, mainly around what it does or does not mean to “transfer” an asset and to be a “securitizer.” Although the decision is significant, it may be far from the final word on CLO risk retention, however, as the regulatory agencies could appeal the ruling to the U.S. Supreme Court. To help readers understand these issues, this article summarizes the case and presents analysis from legal professionals with expertise in securitizations and the applicable rules and regulations. For more on risk retention, see “CLO 2.0: How Can Hedge Fund Managers Navigate the Practical and Legal Challenges of Establishing and Managing Collateralized Loan Obligations? (Part Two of Two)” (Jun. 27, 2013).

Former SEC Examiners Provide Perspective on 2018 OCIE Examination Priorities

The SEC Office of Compliance Inspections and Examinations (OCIE) recently issued its 2018 National Exam Program Examination Priorities. A recent program presented by MyComplianceOffice (MCO) focused on the examination priorities concerning retail investors, cybersecurity and anti-money laundering. The program, moderated by MCO marketing executive Joe Boyhan, featured Victoria Hogan, president of NorthPoint, and Colleen Montemarano, a consultant at that firm, each of whom has more than six years of experience as an SEC examiner. This article summarizes their insights. For further coverage of OCIE exam priorities, see 2018 Examination Priorities; 2017 Examination Priorities; and 2016 Examination Priorities. For additional commentary from Hogan and Montemarano, see “Practical Guidance From Former SEC Examiners on Preparing for and Surviving SEC Examinations” (Sep. 1, 2016).

Credit Suisse Survey Finds Greater Satisfaction With Hedge Fund Investments, Strong Demand for Equity Strategies and Growing Flexibility on Fee Structures

Credit Suisse Prime Services – Capital Services (CS) recently released its tenth annual survey of the hedge fund industry covering overall demand for hedge fund investments; asset flows by strategy and region; use of preferential fee terms; interest in non-traditional hedge fund products; and industry prospects and risks. Among the key findings in this year’s survey are that institutional investors were significantly more satisfied with the performance of hedge fund portfolios in 2017 than in 2016 and that hedge funds are offering their investors a more diverse range of fee structures than ever before, Robert Leonard, global head of capital services at CS, told the Hedge Fund Law Report. Improved performance and more constructive fee arrangements have, in turn, led to more positive investor sentiment toward hedge funds. This article summarizes the key findings of the study, with additional insights from Leonard. For coverage of previous CS investor studies, see 2017 Mid-Year Hedge Fund Investor Sentiment Survey; 2017 Hedge Fund Survey; 2016 Mid-Year Hedge Fund Investor Sentiment Survey; 2016 Hedge Fund Survey; 2015 Mid-Year Hedge Fund Investor Sentiment Survey; and 2015 Hedge Fund Survey.

Upcoming HFLR Webinar to Explore Regulatory Considerations of Private Funds Investing in Cryptocurrencies

Please join the Hedge Fund Law Report on Wednesday, April 11, 2018, at 11:00 a.m. EDT, for a complimentary webinar discussing some of the emerging regulatory trends concerning cryptocurrencies, including the role of gatekeeper being played by the SEC and the challenges in applying regulations that were designed for more traditional asset classes to cryptocurrencies. The webinar, entitled “Cryptocurrency and Private Funds: What Investors and Managers Need to Know About Emerging Regulatory Trends,” will be moderated by William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, and will feature Karl Cole-Frieman, founding partner of Cole-Frieman & Mallon, and Lee Schneider, partner at McDermott Will & Emery. To register for the webinar, click here.

Dechert Hires Former SEC Branch Chief in Washington, D.C.

Jim Curtis, a former Branch Chief in the Office of Chief Counsel in the SEC’s Division of Investment Management, has joined Dechert as a counsel in the firm’s corporate and securities practice in Washington, D.C. Curtis will focus his practice on closed-end funds; business development companies; REITs; and other vehicles and products. For coverage of other recent hires at Dechert, see “Jane Scobie Joins Dechert in London” (Nov. 30, 2017); “Monica Gogna Joins Dechert in London” (Oct. 5, 2017); and “Dechert Expands Corporate Practice in Singapore” (Sep. 28, 2017). For commentary from other Dechert attorneys, see “Dechert Partners Discuss How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect” (Apr. 6, 2017).

Erik Walsh Returns to Arnold & Porter

Arnold & Porter has strengthened its financial services practice with the hiring of Erik Walsh, a former associate at the firm, as a counsel based in New York. Walsh practiced law at Arnold & Porter for more than seven years before taking an in-house position at the Federal Reserve Bank of New York in June 2012, where his role included overseeing investigations of suspected illegal market manipulation, money-laundering, violations of Office of Foreign Assets Control rules and other types of malfeasance. For insights from other Arnold & Porter attorneys, see our three-part series on fee and expense allocation practices: “Practices Fund Managers Should Avoid” (Aug. 25, 2016); “Flawed Disclosures to Avoid” (Sep. 8, 2016); and “Preventing and Remedying Improper Allocations” (Sep. 15, 2016).

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