Apr. 19, 2018

How Fund Managers Can Identify and Prepare for Ransomware Threats (Part One of Two)

With easy-to-use ransomware toolkits hitting the cyber crime market and sophisticated hackers using novel attack strategies, fund managers need to firmly grasp the risks of ransomware and the measures they can take to proactively mitigate those risks. They must also create an effective, comprehensive response to potential attacks. In this two-part series, legal and technical experts share their insights on how fund managers can prepare for ransomware threats by employing effective cyber hygiene and planning. This first article covers the current methods of attack and their risks, as well as prevention techniques and how fund managers can prepare for an inevitable attack. The second article will address effective response measures, including if experts should be used to conduct a forensic analysis, whether to pay a ransom and how cryptocurrency is changing the landscape. See “Steps Hedge Fund Managers Should Take to Defend Against the Rising Threat of Ransomware in the Wake of WannaCry” (Jun. 15, 2017).

Compliance Corner Q2-2018: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

The SEC continues to increase its touchpoints with registered investment advisers. In its most recently published Agency Financial Report, the Commission reported that it examined 15 percent of SEC-registered investment advisers during its 2017 fiscal year, up from 11 percent in 2016 and 8 percent five years ago. Given the SEC’s heightened examination coverage, private fund investment advisers should continue to ensure that they are making timely and accurate filings and meeting required compliance deadlines and obligations in order to reduce potential regulatory scrutiny from SEC staff during examinations. This fourth installment of the Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anthony Frattone, director and consultant, respectively, at ACA Compliance Group, highlights regulatory filings and code of ethics reports that must be completed during the second quarter of 2018. In addition, this article discusses compliance deadlines relating to Rule 22e‑4 under the Investment Company Act of 1940 (the Liquidity Risk Management Program Rule) and the E.U. General Data Protection Regulation (GDPR). For more on GDPR, see “A Fund Manager’s Roadmap to Big Data: Privacy Concerns, Third Parties and Drones (Part Three of Three)” (Jan. 25, 2018).

Program Highlights Malta’s Fund-Friendly Environment

A recent program sponsored by FinanceMalta – a public-private venture promoting Malta as a financial center – provided an overview of private fund formation in Malta; the advantages of domiciling funds and managers there; the nation’s regulatory and tax regimes; and its emerging approach to blockchain and cryptocurrency. Thalius Hecksher, global director at TridentTrust, moderated the discussion, which featured Chris Casapinta, executive director of Alter Domus; Adam de Domenico, founder and CEO of Cordium Malta; James Farrugia, partner at GANADO Advocates; Ivan Grech, a representative of FinanceMalta; and Christopher Portelli, associate partner at EY Malta. This article highlights the key points raised by the panelists. For additional commentary from FinanceMalta, see “What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta” (Jan. 26, 2017).

Business and Legal Issues in Raising Capital for Cryptocurrency Funds

A recent installment of the Cryptocurrency Fund Workshop Series presented by the Capital Fund Law Group offered a capital-raising primer for funds that seek to invest in cryptocurrencies and cryptocurrency-related strategies. The program, which covered both legal and business issues in setting up a cryptocurrency-focused fund, featured John S. Lore and Beth‑ann Roth, managing partner and partner, respectively, at Capital Fund Law Group, along with Alex Mascioli, CEO of North Street Global. This article summarizes their insights. For a look at the technology underlying cryptocurrency, see our three-part series on blockchain and the financial services 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).

Ameriprise Settlement Reflects Continued SEC Focus on Conflicts of Interest and Retail Investors

An adviser faces a potential conflict of interest every time it recommends a product that generates fees or other revenues to it or an affiliate. The conflict that arises when recommending a mutual fund share class to a client ties in directly with the SEC’s renewed focus on protecting retail investors. See “Retail Investors Top List of OCIE 2018 Exam Priorities” (Mar. 8, 2018). A recent SEC settlement order with Ameriprise Financial Services, Inc. (Ameriprise) is a prime example. Ameriprise allegedly neglected to advise certain clients that they were eligible for waiver of the sales load on certain mutual fund share classes that it offered, resulting in those clients paying unnecessarily high sales loads and other fees. The order comes on the heels of the SEC’s recent announcement of its Share Class Selection Disclosure Initiative (Share Class Initiative). This article examines the facts underlying the order and the outcome of the settlement. For analysis of the Share Class Initiative, see “What Does the SEC’s Latest Self-Reporting Initiative Portend for the Future of Enforcement?” (Mar. 1, 2018).

Study Charts Rise of Non-Equity Funds and Related Founder Share Classes

New hedge funds employing equity strategies decreased significantly in 2017 while non-equity funds surged. In addition, the number of non-equity funds that offered founder share classes more than doubled from the amount seen in 2016. These trends – along with others relating to fund fees, liquidity, structures and seeding – were tracked by Seward & Kissel (S&K) in its annual study of hedge funds launched by new U.S.-based manager clients in 2017. This article presents the key takeaways from the study together with insights from Steve Nadel, partner in S&K’s investment management practice and lead author of the study. For coverage of previous editions of S&K’s annual study, see: 2016 Study (Mar. 23, 2017); 2015 Study (Mar. 31, 2016); 2014 Study (Mar. 5, 2015); 2012 Study (Apr. 11, 2013); and 2011 Study (Feb. 23, 2012).

Sean Scott Joins MJ Hudson in London

Sean Scott has joined MJ Hudson as a partner in London. Scott advises onshore and offshore clients on fund formation, operational matters and regulatory compliance. For commentary from other MJ Hudson partners, see our two-part series on environmental, social and governance investing: “The Past, Present and Future of ESG Investing in the Hedge Fund Industry” (Nov. 10, 2016); and “How Hedge Fund Managers Can Design an ESG Investing Policy” (Nov. 17, 2016); as well as “How Hedge Fund Managers Can Raise Capital and Expand Despite Increasing Regulation and Investor Demands” (Feb. 4, 2016).