Jan. 18, 2018

A Fund Manager’s Roadmap to Big Data: MNPI, Web Scraping and Data Quality (Part Two of Three)

As fund managers increasingly turn to sophisticated data streams to boost investment returns and produce greater operational efficiencies, it is critical that they understand the legal and practical risks posed by the use of big data. Issues surrounding material nonpublic information (MNPI) pose the greatest threat to firms. Managers must understand not only the misappropriation framework under the Securities Exchange Act of 1934, but also how the New York State Attorney General and regulators in the E.U. pursue insider trading claims. Additionally, whether engaging internally in web scraping or purchasing scraped data from third parties, managers must be conscious of contractual, intellectual property and tort claims that a site owner may allege against a fund manager. Finally, many of the largest challenges posed by the use of big data are practical or ethical in nature. This second article in our three-part series on big data analyzes issues and best practices surrounding the acquisition of MNPI; web scraping; and the quality and testability of data. The first article explored the big-data landscape and how fund managers can acquire and use big data in their businesses. 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 recommended methods for mitigating those risks. For more on big data, see “Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping” (Jun. 15, 2017).

Private Fund Advisers and Service Providers Must Evolve Their Businesses to Keep Pace With Innovations in Technology, or Risk Becoming Obsolete

Hardly a day goes by without some mention of technology’s impact on the financial services industry. The extraordinary rise, and recent dip, in the price of bitcoin dominates the financial news; conference providers tout headlines that blockchain will forever change the asset management industry; and regulators and securities lawyers are being asked to opine on whether digital tokens are securities, thus subject to securities regulations. What does all of this mean for a hedge or private equity fund manager? In a recent interview with the Hedge Fund Law Report, Anthony Cowell, partner and head of alternative investments at KPMG in the Cayman Islands, discussed how innovations in technology are reshaping the private funds industry. Cowell will chair the Cayman Alternative Investment Summit, taking place February 8‑9, 2018, where industry leaders will discuss the impact of emerging technologies on the global alternative investment industry. For more information about the symposium, click here. To register for the conference, click here, using the HFLR’s promotional code available in this article for a 15 percent discount. For additional insights from KPMG partners, see “What Role Should the GC or CCO Play in the Audit of a Fund’s Financial Statements?” (Feb. 23, 2017).

HFLR Panel Identifies Best Practices for Avoiding Insider Trading Liability in the Aftermath of Martoma

The U.S. Court of Appeals for the Second Circuit’s ruling in U.S. v. Martoma in August 2017 raises the prospect that defendants in insider trading cases can no longer rely on defenses established in U.S. v. Newman. See “In U.S. v. Martoma, Second Circuit Eliminates ‘Meaningfully Close Personal Relationship’ Element Articulated in Newman for Insider Trading Prosecutions” (Sep. 14, 2017). The elimination of the requirement that the government must prove a meaningfully close personal relationship between tipper and tippee in order to bring an insider trading conviction is especially significant for hedge funds that employ outside networks for information to inform trading strategies and decisions. In the complex post-Martoma compliance landscape, fund general counsels and chief compliance officers must implement measures that adapt to the monumental changes in insider trading law, minimize compliance risk and shield themselves from the kinds of ruinous enforcement actions that have plagued some of the largest investment advisers in recent months. All of these points came across in a panel discussion sponsored by the Hedge Fund Law Report and MoloLamken. Moderated by William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, the panel featured Katherine Goldstein, partner at Milbank Tweed Hadley & McCloy; Brian Guzman, general counsel of Indus Capital Partners; Brendan Kalb, managing director and general counsel of AQR Capital Management; and Justin Shur, partner at MoloLamken. This article summarizes the key takeaways from the discussion. For more on insider trading, see “Hedge Fund Manager Deerfield Fined $4.7 Million for Failing to Adopt Insider Trading Compliance Policies Tailored to the Firm’s Specific Risks” (Sep. 21, 2017); and “How Can Hedge Fund Managers Distinguish Between Market Color and Inside Information?” (Nov. 19, 2009).

Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement: Examination Process, Interview Preparation and Remediation Considerations (Part Two of Two)

In a recent program, Davis Polk partners Leor Landa, Amelia T.R. Starr and James H.R. Windels, along with associate Marc J. Tobak, provided their views on how advisers can prepare for SEC examinations in light of the current regulatory environment. This second article in our two-part series provides guidance on the steps that advisers can take to minimize the potential that the SEC’s Office of Compliance Inspections and Examinations refers the adviser to the Division of Enforcement. The first article discussed five areas identified by the panelists that frequently pose significant risk to investment advisers during the examination process. For more on mitigating enforcement risk, see “Seven Recommendations to Assist Private Fund Managers in Navigating Heightened SEC Examination and Enforcement Activity” (Jul. 11, 2013); “How Can Hedge Fund Managers Understand Recent SEC Developments to Mitigate Enforcement Risk?” (Feb. 21, 2013); and “What Do Hedge Fund Managers Need to Know to Prepare for, Handle and Survive SEC Examinations? (Part Three of Three)” (Feb. 18, 2011). For further commentary from Davis Polk, see “Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities” (Jun. 14, 2012).

ACA 2017 Fund Manager Compliance Survey Addresses SEC Exams and Practices Used to Mitigate Counterparty Risk (Part One of Two)

Compliance-focused surveys provide an opportunity for private fund advisers to benchmark their policies, procedures and practices against their industry peers. The findings of the 2017 Alternative Fund Manager Compliance Survey conducted by ACA Compliance Group (ACA) were discussed in a recent webinar by Colleen Marencik and Brian Lattanzio, director and consultant, respectively, at ACA. This article, the first in a two-part series, examines the survey’s findings with respect to recent SEC examinations, along with hedge fund trading and counterparty issues, including best execution; soft dollars; principal transactions and cross trades; dark pools; and trade errors. The second article will discuss the survey’s findings regarding investment allocation practices by private equity and real estate managers, including co-investments; cross transactions; best execution and fees; conflicts of interest; and valuation. See also our two-part coverage of ACA’s April 2017 fund manager compliance survey: “Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Common Measures to Protect MNPI” (Jun. 1, 2017); and “Variety in Expense Allocation Practices and Business Continuity Measures” (Jun. 8, 2017).

David Graff Joins Robins Kaplan in New York

Robins Kaplan has hired David Graff, a litigator who focuses on cross-border legal proceedings, as a partner in the firm’s New York office. Graff represents investors seeking to recover compensation for their interests in private funds in foreign jurisdictions. His practice unites expertise in disparate areas including litigation, foreign investment and restructuring law. For insight from other Robins Kaplan attorneys, see “How Hedge Fund Managers Can Address Common Issues and Risks When Enforcing Judgments Against Debtors” (Oct. 20, 2016).