Jun. 14, 2018

What Fund Managers Should Consider When Hiring and Onboarding CCOs; Determining CCO Governance Structures; and Evaluating Risks of CCO Turnover (Part Two of Three)

Hiring a dedicated chief compliance officer (CCO) requires both an expansive and focused search; although a fund manager would ideally hire someone who possesses competencies that match closely with its activities, it may not have that luxury depending on the pool of qualified candidates. Once a manager has hired a CCO, it should properly onboard him or her and develop a governance structure specific to its values and culture. Although the U.S. government tends to prefer separation between an organization’s compliance and legal departments, a priori departmentalization may lead to several unintended consequences. A manager must not stop once the CCO has been hired and onboarded, however; managers must understand and be prepared for the attendant risks of CCO turnover, such as the breakdown of day-to-day responsibilities. This article, the second in a three-part series, examines CCO hiring and onboarding; explores whether managers should separate their compliance departments from their legal departments; and analyzes the risks of high CCO turnover. The first article discussed the SEC’s proposed rule on business continuity and transition plans; the potential impact of the rule’s withdrawal; the importance of CCO succession planning; and the risks of using an outsourced CCO. The third article will evaluate the risks of poor succession planning and provide a roadmap for developing a robust succession plan. See “Survey Reveals Compliance Weaknesses of Hedge Fund Managers Relative to Other Financial Services Firms, Including CCO Qualifications and Frequency of Annual Compliance Reviews” (Sep. 15, 2016).

How the GDPR Will Affect Private Funds’ Use of Alternative Data

The E.U.’s General Data Protection Regulation (GDPR), which took effect May 25, 2018, primarily affects investment managers and private funds that are based in the E.U. The GDPR’s restrictions on the processing of “personal data” of individuals in the E.U., however, may affect managers and funds that are located outside the E.U. if they process the data of individuals located in the E.U. in connection with the offering of services to those individuals. Because more funds are using alternative data in their operations – notably in driving their trading strategies and making investment decisions – the GDPR may impact how these funds obtain and use alternative data if that data contains what is arguably considered the personal data of individuals in the E.U. To help readers understand the potential impact of the GDPR on funds’ use of alternative data, the Hedge Fund Law Report interviewed Peter D. Greene, partner and vice-chair of the investment management group at Lowenstein Sandler. This article presents his insights. For more from Greene, see our three-part series on the opportunities and risks presented by big data: “Acquisition and Proper Use” (Jan. 11, 2018); “MNPI, Web Scraping and Data Quality” (Jan. 18, 2018); and “Privacy Concerns, Third Parties and Drones” (Jan. 25, 2018).

Key Elements of New York’s New Anti-Sexual Harassment Policy and Training Requirements (Part One of Two)

The #MeToo and Time’s Up movements have launched workplace sexual harassment issues to the forefront of employment law. All employers, including private fund advisers, must therefore take appropriate steps to address sexual harassment, regardless of whether they are specifically required by law. New York City and New York State officials are not waiting for private employers to act voluntarily, and in recent months both the city and state have passed laws that impose new anti-sexual harassment policy and training requirements on private employers based in New York. To help our readers understand the city and state laws and their potential impact, this two-part series analyzes the laws and their requirements and provides insight from lawyers focused on employment-related matters. This first article in the series summarizes the key elements of the new laws. The second article will offer suggestions on what fund managers should do to comply with the laws’ requirements. For more on harassment, see “What Fund Managers Need to Know About the Legislative Response to #MeToo” (May 5, 2018); and “How Investment Managers Can Prevent and Manage Claims of Harassment in the Age of #MeToo” (Dec. 14, 2017). On Wednesday, June 27, 2018, from 12:00 to 1:00 p.m. EDT, the Hedge Fund Law Report will host a webinar featuring a one-on-one conversation between Senior Reporter Robin L. Barton and Richard J. Rabin, partner at Akin Gump and head of the New York office’s labor and employment group. The program will provide a comprehensive overview of employment-related issues affecting private fund managers – including sexual harassment, pay equity and others – and discuss how private fund managers should address those issues. To register for the complimentary webinar, click here.

How Fund Managers Can Navigate Establishing Parallel and Debt Funds in Luxembourg in the Shadow of Brexit and Proposed E.U. Delegation Rules

The Association of the Luxembourg Fund Industry (ALFI) recently organized a seminar that examined different fund structures within Luxembourg, as well as political and regulatory developments within Europe. The seminar featured panel discussions with representatives from asset managers, in addition to financial services, legal and accounting firms. This article highlights the portions of the seminar addressing the establishment of parallel E.U. funds and Luxembourg debt funds; Brexit; and the E.U.’s proposed delegation rules. For additional coverage of the ALFI program, including a summary of the keynote address of H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, along with the portions of the seminar that covered marketing funds in the E.U. and setting up an E.U. alternative investment fund manager, see “Luxembourg Remains a Significant Point of Entry for Non-E.U. Managers to Raise Capital in the E.U.” (May 17, 2018). For more on E.U. regulatory developments, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016).

Charges of Fraudulent Valuation, Insider Trading and Failure to Supervise Employees Cost Manager and CFO More Than $10 Million in SEC Settlement

The SEC recently issued settlement orders against an investment adviser and its chief financial officer (CFO) in connection with alleged insider trading and fraudulent valuation practices by several of the adviser’s former portfolio managers. The SEC charged that, by virtue of the portfolio managers’ misconduct, the adviser violated the antifraud and compliance provisions of the federal securities laws and the CFO allegedly failed to supervise the portfolio managers. This article analyzes the terms of the settlements. For another recent enforcement action involving improper valuation, see “Hedge Fund Platinum Partners and Principals Face Civil and Criminal Proceedings From SEC and DOJ Over Alleged Fraudulent Valuation Practices and Liquidity Misrepresentations” (Jan. 12, 2017). For more on actions involving inadequate insider trading policies and procedures, see “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017). For another SEC action involving a failure to supervise, see “Despite His ‘Bad Acts,’ Issuers Beneficially Owned by Steven A. Cohen Are Not Precluded From Private Offerings Based on the Bad Actor Rule” (Jan. 21, 2016).

ACA 2018 Compliance Survey Examines Electronic Communications, Personal Trading and Corruption Risk (Part Two of Two)

ACA Compliance Group (ACA) director Danielle Joseph and principal consultant Ken Harman discussed the results of ACA’s 2018 Alternative Fund Manager Compliance Survey in a recent presentation. This article, the second in a two-part series, details the portions of the survey that covered electronic communications, personal trading and corruption risk, and offers insights from the speakers. The first article examined compliance programs and SEC examination priorities. For coverage of ACA’s 2016 compliance survey, see “SEC Exams; Compliance Staffing and Budgeting; Annual and Ongoing Compliance Reviews; and AML/Sanctions Compliance” (Jan. 19, 2017); and “Custody; Fee Policies and Arrangements; Safeguarding of Assets; and Personal Trading” (Feb. 2, 2017).

Mark Proctor Joins Willkie Farr’s Asset Management Group

Willkie Farr & Gallagher has hired Mark Proctor as a partner in the firm’s asset management group. Working in the New York office, Proctor advises private fund managers on structuring, establishing and operating private investment funds, including blind pools, co-investment funds and pledge funds. For additional commentary from Proctor, see “Alternative Investment General Counsel Summit Covers Dual Registration, Valuation, Compensation Structures, the AIFMD, Presence Exams and Risk Alerts (Part One of Two)” (Aug. 7, 2014). For coverage of another recent hire by Willkie Farr, see “Former FINRA Associate General Counsel Moves to Willkie Farr” (Feb. 15, 2018).