Aug. 30, 2018

How to Avoid the Eight Best Execution Compliance Issues in OCIE’s Latest Risk Alert

Section 206 of the Investment Advisers Act of 1940 establishes a federal fiduciary standard under which an investment adviser has a duty to seek to obtain “best execution” of client transactions, taking into consideration the circumstances of the particular transaction. In other words, an adviser must execute securities transactions for clients in such a manner that the client’s total costs or proceeds in each transaction are the most favorable under the circumstances. Ensuring best execution, however, is challenging given the highly subjective nature of the assessment. The SEC Office of Compliance Inspections and Examinations (OCIE) recently issued a National Exam Program Risk Alert that discusses the eight most frequent best execution-related compliance issues identified in deficiency letters from more than 1,500 adviser examinations. In addition to summarizing OCIE’s findings, this article provides guidance on how advisers can avoid similar errors from an industry practitioner with expertise in this area. For more on other recent OCIE Risk Alerts, see “Six Most Frequent Fee and Expense Compliance Issues” (May 3, 2018); and “Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017).

The Ins and Outs of GIPS Compliance: What Hedge Fund Managers Need to Know About the Voluntary Standards and Pending Revisions

Although not legally required, more than 80 percent of the top 100 asset managers claimed compliance with the Global Investment Performance Standards (GIPS) for their assets under management as of June 30, 2017, and there is a growing interest in GIPS from Asia-Pacific and Africa, according to panelists at a recent webinar hosted by Ascendant Compliance Management. The webinar speakers included Adam DiPaolo, associate general counsel and senior consultant at Ascendant; Michael W. McGrath, partner at K&L Gates; and Antonella Puca, director at the CFA Institute. This article summarizes Puca’s discussion of GIPS and pending changes to the standards that may affect how fund managers who claim GIPS compliance must present their performance results. For coverage of the portions of this webinar that addressed adviser advertising generally, see “How Investment Advisers Can Mitigate Common Advertising Risks” (Jul. 19, 2018).

SEC Continues to Target Pay to Play Violations

The SEC continues its aggressive pursuit of pay to play violations. It recently issued settlement orders against three investment advisers for violations of Rule 206(4)‑5 under the Investment Advisers Act of 1940 – the so-called “pay to play rule” (Rule). The Rule makes it unlawful for an adviser to provide investment advice for compensation to a government entity – including a pension fund – for two years after a covered associate of the adviser makes a contribution to an official of the government entity. This article details the relevant provisions of the Rule, the terms of the settlements and the SEC waiver granted to the parent of one of the affected advisers – a public issuer that could have been rendered ineligible for “well-known seasoned issuer” status under Rule 405 of the Securities Act of 1933. See “Pay to Play, Revenue Sharing and Wrap Fees Remain on the SEC’s Radar” (Apr. 20, 2017).

Current Investor Sentiment Swinging in Favor of Hedge Funds, Credit Suisse Survey Notes

Credit Suisse Prime Services – Capital Services (CS) recently released its 2018 Mid‑Year Survey of Hedge Fund Investor Sentiment (Mid‑Year Survey), an extension of its annual hedge fund industry sentiment survey. The Mid‑Year Survey explores current investor interest in hedge funds as an asset class, strategy preferences and current industry trends relating to fees and expenses. Among the Mid‑Year Survey’s findings, CS found a 16% increase in net demand for hedge funds, as compared to 2017; increased investor interest in non-traditional alternative investment products; a push by investors for managers to absorb a greater proportion of fund expenses; and a sizeable dispersion on the amount of fees being paid by respondents. This article analyzes CS’ findings, with added insight provided to the Hedge Fund Law Report by Joseph Gasparro, CS’ leader of strategic advisory and content. For coverage of previous CS investor studies, see 2018 Hedge Fund Survey; 2017 Mid-Year Hedge Fund Investor Sentiment Survey; 2017 Hedge Fund Survey; 2016 Mid-Year Hedge Fund Investor Sentiment Survey; 2016 Hedge Fund Survey; 2015 Mid-Year Hedge Fund Investor Sentiment Survey; and 2015 Hedge Fund Survey.

BakerHostetler Expands Litigation Group With Addition of Partner Howard E. Cotton

The litigation group at BakerHostetler has a new addition to its New York office: partner Howard E. Cotton. Cotton regularly serves as lead counsel in trials and appeals in state and federal courts in New York and throughout the U.S., as well as in numerous arbitration and mediation proceedings. His clients include leading financial institutions, such as investment banks; hedge funds; and public and private companies, as well as their senior officers. For additional commentary from BakerHostetler, see our two-part series covering the firm’s regulatory update briefing: “Insight on the SEC Under Chair Clayton, Examinations by OCIE and Implementation of MiFID II” (Jan. 11, 2018); and “Developments in SEC Enforcement and Hot Topics in Taxation Affecting Private Funds” (Jan. 25, 2018).