Jul. 26, 2018

Why Fund Managers Should Ensure Personal Trading Policies Address Cryptocurrencies and ICOs (Part One of Two)

Fund managers that invest in cryptocurrencies or cryptocurrency-related strategies must ensure that their personal trading policies take these instruments into account in order to address the conflict of interest that arises when employees invest in the same assets held by the managers’ funds. Hedge fund managers that have not invested in cryptocurrencies, however, cannot simply ignore the existence of this emerging asset class, because their employees may want to either trade in virtual currencies or participate in initial coin offerings (ICOs). As a result, all fund managers – even those whose investment strategies do not include cryptocurrencies or ICOs – should ensure that their personal trading policies address these assets. This two-part series discusses the inclusion of cryptocurrencies and ICOs in fund manager personal trading policies. This first article analyzes why fund managers must amend their personal trading policies to address cryptocurrencies and ICOs. The second article will explore the factors fund managers must consider when determining how to do so and examine the challenges in allowing employees to trade in this asset class. For more on personal trading policies generally, see our three-part series “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures”: Part One (Jan. 19, 2012); Part Two (Jan. 26, 2012); and Part Three (Feb. 9, 2012).

What Are the Key Takeaways for Fund Managers From the SEC’s Draft Strategic Plan for 2018‑2022?

The SEC recently published its draft strategic plan (Strategic Plan) for fiscal years 2018‑2022. The plan highlights the SEC’s commitment to serving the long-term interests of retail investors; becoming more innovative, responsive and resilient to market developments and trends; and leveraging staff expertise, data and analytics to bolster performance. This article analyzes the Strategic Plan’s stated goals and the initiatives designed to pursue those goals; provides key takeaways for fund managers from the plan; and offers insight from lawyers with extensive SEC experience. For more on current SEC priorities, see “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018).

HFLR Program Looks at Recent Developments and Trends in Employment Law Relevant to Fund Managers

A recent program presented by the Hedge Fund Law Report examined legislative responses to sexual harassment and the #MeToo movement; male dominance of the hedge fund industry; pay equity and pay history laws; arbitration; changes in the National Labor Relations Board under the Trump administration; and family and sick leave laws. The program featured Robin L. Barton, Senior Reporter at the Hedge Fund Law Report, and Richard J. Rabin, partner at Akin Gump Strauss Hauer & Feld. This article summarizes the key takeaways from the program. For more from Rabin on employment issues, see How Investment Managers Can Prevent and Manage Claims of Harassment in the Age of #MeToo” (Dec. 14, 2017).

Ropes & Gray Survey and Forum Consider Credit Fund Structures, Leverage, Conflicts of Interest and Challenging Environment (Part Two of Two)

Credit fund managers must be keenly aware of the conflicts of interest that often go hand-in-hand with their strategies. This was one of the principal findings of a recent report issued by Ropes & Gray, which surveyed 100 credit fund managers in cooperation with Debtwire. In a recent webinar, Ropes & Gray partners James R. Brown, Eva Ciko Carman, Alyson Brooke Gal and Jessica Taylor O’Mary explained the survey results and key takeaways from the Ropes & Gray Credit Funds Forum. Our two-part series summarizes the report’s findings and the webinar speakers’ insights. This second article examines a variety of conflicts of interest that frequently arise for credit managers, the forms of leverage these managers are using, the types of issues that investors subject to the Employee Retirement Income Security Act of 1974 raise for credit managers and specific issues that arise for these managers when being examined by the SEC. The first article discussed the types of credit strategies offered by the survey participants, challenges currently facing credit funds and the types of fund structures adopted by credit fund managers – including “season and sell” structures, treaty funds, business development companies and blockers – when engaging in a direct lending strategy. See our three-part series on conflicts arising out of simultaneous management of hedge funds and private equity funds: “Investment Conflicts” (May 7, 2015); “Operational Conflicts” (May 14, 2015); and “How to Mitigate Conflicts” (May 21, 2015).

Investment Advisers Must Have Adequate Policies, Procedures and Controls to Prevent Theft of Client Funds

Fund managers must ensure that they take appropriate steps to prevent and detect fraud by rogue employees. Morgan Stanley Smith Barney LLC (MSSB) recently settled SEC claims that it had inadequate policies, procedures and controls governing transfers of client funds initiated by verbal or in-person client requests. The settlement order indicates that a rogue MSSB financial adviser took advantage of MSSB’s practices and embezzled approximately $5 million from certain advisory clients by filing false attestations regarding purported verbal transfer requests. MSSB allegedly had no procedure for confirming those requests and failed to adequately supervise the adviser. In addition to making its clients whole, MSSB agreed to accept a significant fine and other sanctions. This article details the fraud; the alleged shortcomings in MSSB’s policies and procedures; and the terms of the settlement. For discussion of an SEC action against MSSB for failure to safeguard client information, see “SEC Enforcement Action Illustrates Focus on Investment Adviser Obligation to Secure Client Information” (Jun. 23, 2016). For more on the SEC’s focus on inadequate policies and procedures, see “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017).

Thompson Hine Adds Christopher D. Carlson to Investment Management Team

Christopher D. Carlson is a new addition to Thompson Hine’s D.C. office, joining as counsel in the investment management and the corporate transactions and securities groups. Previously at Goldman Sachs Asset Management, his practice focuses on a wide range of registered funds, including mutual funds, exchange-traded funds, multi-manager funds, master-feeder funds, interval funds and closed-end funds, as well as listed and unlisted business development companies. For additional commentary from Thompson Hine attorneys, see “Seminar Offers Insights on Organizing Alternative Mutual Funds, AIFMD, FATCA and the JOBS Act” (Dec. 5, 2013); and our two-part series “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?”: Part One (May 2, 2013); and Part Two (May 9, 2013).