Jan. 11, 2018

A Fund Manager’s Roadmap to Big Data: Its Acquisition and Proper Use (Part One of Three)

The exponential growth of IT systems has given researchers, governments, corporations and fund managers the ability to identify correlations and patterns from a combination of previously unlinked data sets with incredible speed. “Big data” often refers to the use of predictive analytics, which extract value from these data sets. Raw data can be collected from a variety of sources, including user interactions on the internet, satellite images, consumer transactions and industry trends. Although only a small minority of fund managers comprehensively capture value from this data, spending on big data continues to increase with fundamental-driven investors seeking to enter the environment. Building an internal infrastructure to acquire and process raw data is a time-consuming and expensive undertaking. As a result, most fund managers look to third-party data vendors in an effort to not only generate alpha, but to respond to new regulatory requirements; reduce costs; and assist with other operational and managerial functions. This article, the first in a three-part series, explores the big-data landscape and how fund managers can acquire and use big data. The second article will analyze issues and best practices surrounding the acquisition of material nonpublic information; web scraping; and the quality and testability of data. The third article will discuss risks associated with data privacy, the acquisition of data from third parties and the use of drones, as well as ways fund managers can mitigate those risks. For more on big data, see “Tips and Warnings for Navigating the Big Data Minefield” (Jul. 13, 2017).

BakerHostetler Briefing Provides Regulatory Update: Insight on the SEC Under Chair Clayton, Examinations by OCIE and Implementation of MiFID II (Part One of Two)

There has been considerable uncertainty regarding the direction that the SEC might take under Chair Jay Clayton. A recent BakerHostetler program discussed current SEC initiatives; the SEC’s approach to examinations of investment advisers; the Commission’s enforcement priorities; the impact of the recast Markets in Financial Instruments Directive (MiFID II) on U.S. managers and broker-dealers; and taxation of loan origination and cryptocurrencies. The program was moderated by Marc D. Powers, partner at BakerHostetler and national leader of the firm’s securities litigation, regulatory enforcement and hedge fund industry practices, and featured Walter Van Dorn, partner and head of BakerHostetler’s international capital markets practice; Jonathan A. Forman, counsel at BakerHostetler; Simcha B. David, partner at EisnerAmper; and Andrew N. Siegel, then-partner, chief compliance officer and chief regulatory counsel at Perella Weinberg Partners. The first article in this two-part series reviews recent regulatory initiatives undertaken by the SEC that affect investment advisers, along with the implementation of MiFID II and whether the change in leadership at the SEC will influence the examination environment. The second article will discuss hot topics in SEC enforcement, as well as the tax aspects of loan origination and cryptocurrencies. For more from Powers and Van Dorn, see “BakerHostetler Panel Analyzes Shifts in Enforcement Policies and Tactics As Industry Anticipates New Administration and SEC Chair (Part One of Two)” (Jan. 5, 2017); and “BakerHostetler Panel Analyzes SEC Use of Administrative Proceedings and Whistleblower Incentives, and Provides Guidance for Fund Managers Facing an Examination (Part Two of Two)” (Jan. 19, 2017).

E.U. Publishes Blacklist and Grey List of Non-Cooperative Tax Jurisdictions: Funds Formed in Grey-Listed Bermuda, Cayman Islands, Guernsey, Jersey and Others May Be Affected by Potential Tax Law Revisions

The European Commission recently published its much-anticipated list of non-cooperative tax jurisdictions. See “How the E.U. Tax Haven Blacklist May Affect Private Funds Formed in Blacklisted Jurisdictions” (Nov. 2, 2017). The list is effectively split in two: 17 non-E.U. jurisdictions are included on a so-called “blacklist”; and a further 47 are included on a so-called “grey list.” Of the two, the grey list is of significantly greater interest and importance to the private funds industry, as it contains a number of jurisdictions in which advisers to private funds frequently elect to form offshore investment vehicles, including the Cayman Islands, Bermuda, Jersey and Guernsey. In a guest article, Will Smith and Caleb McConnell, partner and associate, respectively, at Sidley Austin, review the composition of jurisdictions on the blacklist and the grey list; the impact to private funds that are organized in those locales; and steps that must be taken by grey-listed jurisdictions to avoid future blacklist status. For additional coverage of the U.K.’s approach to combatting tax evasion, see “U.K. Proposes Legislation to Impose Criminal Liability on Companies and Partnerships Whose Employees and Other Agents Facilitate Tax Evasion (Part One of Two)” (Feb. 23, 2017); and “How U.S. Private Fund Managers May Avoid Running Afoul of Proposed U.K. Legislation Criminalizing the Facilitation of Tax Evasion (Part Two of Two)” (Mar. 2, 2017). For further commentary from Smith on tax issues, see “Recent Tax Developments May Make U.K. Limited Companies More Favorable Than U.K. LLPs for U.S. Fund Managers” (Apr. 20, 2017).

SEC Cyber Unit Files Charges Against Allegedly Fraudulent ICO

As the prices of bitcoin and other cryptocurrencies march relentlessly upward, regulators have been taking notice. The SEC recently filed a civil enforcement complaint against Quebec resident Dominic Lacroix, his company PlexCorps and his partner, Sabrina Paradis-Royer, in connection with an initial coin offering (ICO) of “PlexCoins,” which are based on the Ethereum platform. This article details the events giving rise to the action and the SEC’s specific allegations, with insights from Matthew Rossi, Mayer Brown partner and former Assistant Chief Litigation Counsel in the SEC’s Division of Enforcement. With charges that allege misconduct in connection with the ICO and blockchain technology, as well as misconduct regarding the use of social media, hacking and other cybersecurity issues, this case shows managers the priorities and areas of focus of the SEC’s new Cyber Unit. For more on cryptocurrency, see “How Blockchain Will Continue to Revolutionize the Private Funds Sector in 2018” (Jan. 4, 2018); and “Opportunities and Challenges Posed by Three Asset Classes on the Frontier of Alternative Investing: Blockchain, Cannabis and Litigation Finance” (Dec. 14, 2017). For additional commentary from Rossi, see “Private Equity FCPA Enforcement: High Risk or Hype?” (Feb. 19, 2015).

HFLR Program Parses OCIE’s Recent Advertising Risk Alert: Misleading Claims of GIPS Compliance, Past Specific Investment Recommendations and Results of SEC’s Touting Initiative (Part Two of Two)

SEC commentary provides valuable insight to compliance personnel on the hot-button issues being prioritized by the Commission, as well as the sort of conduct that does, and does not, lead to a referral to the SEC’s Division of Enforcement. By staying informed of the SEC’s approach to certain issues, advisers can learn from the mistakes of similarly situated advisers. A recent webinar presented by the Hedge Fund Law Report discussed six deficiencies identified in a National Exam Program Risk Alert that violate Rule 206(4)-1 of the Investment Advisers Act of 1940 – the so-called “Advertising Rule” – as well as 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 second in a two-part series, explores the disclosures required when presenting gross performance in a one-on-one presentation to prospective investors, the 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 the SEC’s Office of Compliance Inspections and Examinations. The first article discussed the broad view that 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. See “Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017).

Annual Walkers Fundamentals Seminar Highlights Trends in Investor Sentiment, Governance, Side Letters, Fund Structures, Investment Vehicles and Restructurings

While the hedge fund industry has generally rebounded from a dismal 2016 with improved performance and net inflows, not all hedge funds have benefitted equally. Investors continue to apply pressure on and shape how hedge fund managers structure their funds and negotiate with investors. A panel at the recent 10th annual Walkers Fundamentals Hedge Fund Seminar hosted by Walkers Global in New York City addressed, among other things, investor sentiment; developments and trends in the use of independent directors, side letters, fund structures and investment vehicles; and fund restructurings. Walkers partner Ashley Gunning introduced the panel, which featured partners Tim Buckley and Rolf Lindsay. This article summarizes the key points presented by the panelists. For coverage of the Walkers Fundamentals Hedge Fund Seminar from prior years, see: 2016 Seminar; 2015 Seminar; 2014 Seminar; 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

Former Head of SEC’s New York Regional Office Joins Finn Dixon & Herling

Andrew Calamari, who most recently served as Director of the New York Regional Office of the SEC, will join the law firm Finn Dixon & Herling as a partner effective January 15, 2018. Calamari joined the SEC in 2000 and became head of the New York office in 2012. At Finn Dixon, he will advise clients as a member of the following practice areas: government and internal investigations; investment advisers and broker-dealers; and litigation. For additional insights from Finn Dixon attorneys, see “All-Star Panel at RCA PracticeEdge Session Analyzes Five Key Regulatory Challenges Facing Hedge Fund Managers” (Oct. 2, 2014); and “What Do Hedge Fund Managers Need to Know to Prepare for, Handle and Survive SEC Examinations? (Part Three of Three)” (Feb. 18, 2011).