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    Jun. 21, 2018

A Succession-Planning Roadmap for Fund Managers (Part Three of Three)

Most organizations fail to plan for the departures of key employees until it is already too late. Fund managers must understand that creating an effective succession plan takes considerable time and requires an intimate understanding of the organization’s particularities. Informal succession plans are likely to lead to incoherent strategies, as well as biased employment decisions that may negatively affect firms’ abilities to adapt to the changing market and expose them to legal action. To avoid these dangers, a fund manager should adopt a mission statement; develop competency models; cultivate management buy-in; evaluate employee past performance and future potential; train, develop and retain high-potential employees; communicate the succession plan; and evaluate and test the plan. This article, the third in a three-part series, evaluates the risks of poor succession planning and provides a roadmap for developing a robust succession plan. 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 chief compliance officer (CCO) succession planning and the risks of using an outsourced CCO. The second article examined CCO hiring and onboarding; explored whether managers should departmentalize their compliance departments from their legal departments; and analyzed the risks of high CCO turnover. See our two-part succession-planning series: “A Blueprint for Hedge Fund Founders Seeking to Pass Along the Firm to the Next Generation of Leaders” (Nov. 21, 2013); and “Selling a Hedge Fund Founder’s Interest to an Outside Investor” (Jan. 16, 2014).

The Power of “No”: SEC Commissioner Peirce on Enforcement As Last Resort

An article in a legal publication argued that SEC Commissioner Hester M. Peirce has a tendency to vote “no” on cases the SEC’s Division of Enforcement has recommended the SEC bring or settle in-house. Peirce responded to that article and explained “the why behind [her] no” in a recent speech. Peirce’s remarks provide insight into her view of the overarching philosophy of the SEC’s enforcement program; several factors that guide her consideration of enforcement recommendations; and certain practices that give her pause when reviewing enforcement actions. This article analyzes Peirce’s speech and provides key takeaways from it according to lawyers with SEC enforcement experience. For more on the SEC’s enforcement agenda, see our two-part series offering insight from former senior SEC attorneys: “Chair Clayton’s Priorities and the Current Enforcement Climate” (Dec. 7, 2017); and “The Current Regulatory Climate, Adviser Examinations and the Enforcement Referral Process” (Dec. 21, 2017).

The Importance of Exercising Due Diligence When Hiring Auditors and Other Vendors

The SEC recently announced that it had issued an order against an accounting firm and two partners for willfully aiding and abetting violations of Rule 206(4)-2 (the so-called “custody rule”) of the Investment Advisers Act of 1940 relating to the audits of funds’ financial statements. The order bars the certified public accounting firm and two certified public accountants (CPAs) from appearing or practicing before the SEC as accountants for certain periods, and it requires payment of disgorgement, interest and civil penalties. The settlement of this enforcement action is relevant to registered investment advisers because it illustrates how critical errors by the accountants auditing a fund’s financial statements can result in custody rule violations by the adviser. This article examines the mistakes made by the accountants in the case; discusses the importance of exercising due diligence when engaging accounting firms and other vendors; and presents analysis from an attorney who is also a CPA. See “What Role Should the GC or CCO Play in the Audit of a Fund’s Financial Statements?” (Feb. 23, 2017).

Ways Fund Managers Can Comply With New York’s New Anti-Sexual Harassment Policy and Training Requirements (Part Two of Two)

New York City and New York State each recently passed laws that impose new anti-sexual harassment policy and training requirements on private employers. In complying with these laws, New York-based private fund advisers should review and modify their anti-sexual harassment policies to conform with the standards set forth in the new city and state laws; train all of their employees on sexual harassment prevention at least once a year; and take care when entering into separation and settlement agreements with current or former employees with regard to nondisclosure and mandatory arbitration provisions. To assist our readers in understanding the city and state laws and their potential impact, this two-part series analyzes the laws and their requirements and provides commentary from lawyers focused on employment-related matters. This second article in the series offers suggestions on what fund managers should do to comply with the laws’ requirements. The first article explored the key elements of the new laws. For additional commentary on employment issues, see “Evaluating Pay Equality: Steps Investment Managers Should Consider to Avoid Running Afoul of Equal Pay Laws” (Nov. 30, 2017); “Four Steps NYC-Based Fund Managers Should Take in Light of Newly Enacted Law Prohibiting Compensation History Queries When Interviewing Prospective Employees” (May 11, 2017); and “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017).

The D.B. Zwirn Saga Continues: SEC Settles With Fund Manager’s CFO Over Fraud Claims

Daniel B. Zwirn’s high-flying hedge fund management firm, D.B. Zwirn & Co., L.P. (DBZ), went into a death spiral in 2007 after Zwirn disclosed to investors certain improper inter-fund transfers that could have subjected one of the offshore funds to a significant U.S. tax liability and exposed the firm’s poor internal control systems. Zwirn blamed Perry A. Gruss, DBZ’s chief financial officer. The SEC apparently agreed, filing a civil complaint against Gruss in 2011, claiming that he had aided and abetted DBZ’s violations of the anti-fraud provisions of the Investment Advisers Act of 1940. In March 2017, the U.S. District Court for the Southern District of New York (Court) granted summary judgment to the SEC on its most serious charges. More recently, in May 2018, the Court entered a final judgment against Gruss, and the SEC subsequently issued a settlement order. This case highlights the need for fund managers to implement carefully crafted internal controls over critical matters like cash movement procedures and the risks of entrusting a single individual with authority over those functions. This article focuses on the details of the Court’s March 2017 opinion deciding the summary judgment motion and explores the terms of the final judgment and the settlement order. For more on internal controls, see “GLG Partners Settlement Illustrates SEC Views Regarding Valuation Controls at Hedge Fund Managers” (Jan. 16, 2014); and “SEC’s Recent Settlement With a Hedge Fund Manager Highlights the Importance of Documented Internal Controls When Managing Conflicts of Interest Associated With Asset Valuation and Cross Trades” (Jan. 9, 2014).

What Robo-Advisers Can Expect From SEC Examinations

There are no compliance shortcuts available to robo-advisers; investment advisers that offer automated advice must fully comply with all the duties imposed by the Investment Advisers Act of 1940 and its rules, as well as the obligations pertaining to technology platforms. A recent ACA Compliance Group (ACA) program offered a view from the trenches as to what the SEC looks for when it examines robo-advisers. The program featured Burton J. Esrig, managing director at ACA Technology; Luis Garcia, principal consultant with ACA; and Susan I. Gault-Brown, partner at Morrison & Foerster. This article summarizes their insights. For coverage of ACA’s 2018 compliance survey, see our two-part series: “Compliance Programs and SEC Examination Priorities” (May 31, 2018); and “Electronic Communications, Personal Trading and Corruption Risk” (Jun. 14, 2018).

Upcoming HFLR Webinar to Explore Employment-Related Issues Faced by Private Fund Managers

Please join Hedge Fund Law Report on Wednesday, June 27, 2018, from 12:00 to 1:00 p.m. EDT for a complimentary webinar, entitled “How Fund Managers Should Respond to Recent Trends & Developments in Employment Law.” In addition to discussing current trends and developments in employment law, the program will tackle various pressing employment topics, such as sexual harassment in the workplace, including the #MeToo movement and associated legislation; pay equity and related lawsuits in the private funds industry; developments in arbitration and what they mean for fund managers; the Trump NLRB and its implications for the private funds industry; bans on requesting salary history information; and family-, sick- and safe-leave requirements. In this webinar, Robin L. Barton, Senior Reporter at the Hedge Fund Law Report, will host a one-on-one discussion with Richard J. Rabin, partner at Akin Gump and head of the New York office’s labor and employment group. There will also be time reserved to answer questions from attendees. CLE credit is available in NY, NJ, CA and TX. To register for the webinar, click here.

Michael Weinsier Joins Pryor Cashman As Co-Head of Private Equity Practice

Pryor Cashman has hired Michael Weinsier in its New York office as a partner and co-head of the firm’s private equity (PE) practice. Weinsier will represent a wide range of PE funds, family offices and other financial sponsors, as well as their portfolio companies. For commentary from another Pryor Cashman attorney, see our three-part series on closing a hedge fund to outside investors: “Factors to Consider” (Jan. 21, 2016); “Operational Considerations” (Jan. 28, 2016); and “Mechanical Considerations” (Feb. 4, 2016).

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