Jun. 28, 2018

Unique Security Risks Posed by Cryptocurrency Investing: Steps Fund Managers Must Take to Protect Individuals With Access to Client Assets

As an asset class, cryptocurrencies pose unique security risks that are different from those posed by equities or derivatives. As the managers of cryptocurrency funds begin to manage a greater amount of cryptocurrency assets, they could themselves become targets. Thus, those managers need to take adequate security measures, both at work and when away from the office, to address those risks. This article discusses the unique security risks posed by cryptocurrencies, the most vulnerable individuals and ways fund managers can manage those risks. For more on investing in cryptocurrencies, see “Opportunities and Challenges Posed by Three Asset Classes on the Frontier of Alternative Investing: Blockchain, Cannabis and Litigation Finance” (Dec. 14, 2017).

Now That the DOL’s Fiduciary Rule Has Been Vacated by the Fifth Circuit, What Are the Implications for Fund Managers?

On June 21, 2018, the U.S. Court of Appeals for the Fifth Circuit issued its “mandate,” making effective its earlier decision to vacate the Department of Labor’s fiduciary rule (Fiduciary Rule) in its entirety. The mandate removes the Fiduciary Rule from the books and restores the old five-part test for determining when one is an investment advice fiduciary under the Employee Retirement Income Security Act of 1974, as amended (ERISA). Hedge fund and other private fund managers that market their products and services to ERISA and individual retirement account (IRA) investors will likely be impacted by these developments. In a guest article, K&L Gates partner Robert L. Sichel provides background on the Fiduciary Rule and discusses the effect that the Fifth Circuit’s mandate vacating the rule will likely have on how fund managers interact with, and market to, ERISA and IRA investors. For additional insight from Sichel on the Fiduciary Rule, see “Steps Hedge Fund Managers May Take Today to Avoid Being Deemed a Fiduciary Under the DOL’s New Fiduciary Rule” (Jun. 29, 2017).

HFLR Program Provides Overview of Five Financing Options Available to Private Funds (Part One of Two)

Depending on the nature of their operations, strategies and investments, private fund managers have access to a number of different sources of financing. A recent webinar presented by the Hedge Fund Law Report provided an overview of the following types of financing arrangements used by private funds: total return swap (TRS) financing, structured repurchase agreements (repos), prime broker (PB) financing, special purpose vehicle (SPV) financing and subscription credit facilities. The program was moderated by Kara Bingham, Associate Editor of the Hedge Fund Law Report, and featured Fabien Carruzzo, partner at Kramer Levin; Matthew K. Kerfoot, partner at Dechert; and Jeff Johnston, managing director at Wells Fargo Securities, LLC. This article, the first in a two-part series, explores basic principles of financing arrangements and provides an overview of PB financing and TRS financing. The second article will provide an in-depth discussion of structured repos, SPV financing and subscription credit facilities. See “Types, Terms and Negotiation Points of Short- and Long-Term Financing Available to Hedge Fund Managers” (Mar. 16, 2017).

Advisers Must Disclose Conflicts of Interest and Heed the Terms of Client Agreements, or Risk Stiff SEC Sanctions

An adviser’s receipt of fees tied to the amount of client assets the adviser invests with a third-party asset manager creates a textbook conflict of interest. A manager recently fell into that trap when it was unable to persuade certain third-party asset managers to pay those fees directly to the manager’s affected clients and, instead, agreed to receive them directly. The manager compounded the problem by failing to disclose that arrangement to its affected clients or to recognize that its advisory agreements with those clients generally prohibited it from receiving compensation from outside managers. This article analyzes the recent SEC settlement order that resulted from those missteps. For another recent SEC action concerning the receipt of undisclosed compensation by an adviser, see “SEC Continues Scrutiny of Undisclosed Fees at Fund Managers” (Jun. 7, 2018).

K&L Gates Program Discusses the Ins and Outs of Global Fundraising for Fund Managers: The Asia-Pacific Region (Part Two of Two)

There are more opportunities and methods to access investment opportunities in the People’s Republic of China than ever before; however, choosing the correct platform to access the Chinese market is key. This and other points were explored in a recent program hosted by K&L Gates, which was moderated by K&L Gates partner C. Todd Gibson and featured partners Natalie R. Boyd, Michelle Moran, Dr. Hilger von Livonius, Choo Lye Tan and Matthew J. Watts. This article, the second in a two-part series, discusses the new Asia Region Funds Passport, the Australian Collective Investment Vehicle, the available means to invest directly in securities in China and ways Asian securities authorities are regulating cryptocurrencies. The first article reviewed pending proposals to streamline cross-border fund marketing in the E.U.; the impact on fundraising of Brexit and the recast Markets in Financial Instruments Directive; and the challenges of marketing in the Middle East. For additional discussions of fundraising in China, see “New Rule Offers Managers a Way to Raise Capital in China” (Apr. 13, 2017); and “How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll” (Feb. 23, 2017).

SEC Chair Offers Observations on Culture at Fund Managers and the SEC

Various global regulators have emphasized the importance of promoting “good culture” at fund managers and other financial institutions. See “FCA Chief Executive Touts Senior Managers Regime and Remuneration Restrictions As Important Incentives to Promote Good Culture at Fund Managers” (Apr. 12, 2018). SEC Chair Jay Clayton has now joined his voice to the chorus. In a recent speech, Clayton offered his thoughts on the importance of developing, improving and reinforcing positive culture in financial institutions, as well as at the SEC. His remarks provide fund managers with valuable insight into the SEC and its expectations for creating and maintaining proper culture. This article summarizes the most salient points from Clayton’s address. For coverage of other speeches by Clayton, see “Approach to Dodd-Frank Rulemaking and Expectations for Fund ‘Gatekeepers’” (Feb. 15, 2018); and “Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017).

Faegre Baker Daniels Expands Chicago Office With Addition of Former In-House Counsel

Emma L. Rodriguez‑Ayala has joined Faegre Baker Daniels’ Chicago office as a partner in its corporate group. Rodriguez‑Ayala is an investment management attorney who spent more than seven years in-house at a registered investment adviser, commodity pool operator and commodity trading advisor. For additional insight from Faegre Baker Daniels, see “What Are Hybrid Gates, and Should You Consider Them When Launching Your Next Hedge Fund?” (Feb. 18, 2011).