Jan. 25, 2018

A Fund Manager’s Roadmap to Big Data: Privacy Concerns, Third Parties and Drones (Part Three of Three)

A fund manager’s use of new technologies and processes to streamline its business and generate improved performance comes with significant risk, which is pronounced when using big data, as few best practices currently exist within the industry. One of the most significant concerns about big data involves the acquisition or use of personally identifiable information (PII). Although PII enjoys broad protection under U.S. law, many state laws impose even more stringent restrictions on the use of personal data, and the E.U. General Data Protection Regulation provides a comprehensive and onerous framework for data tied to E.U. citizens. Managers must also understand how to deal with third-party data vendors, including how to conduct due diligence on and negotiate contractual provisions with those service providers. Finally, as growing numbers of drones are used to capture images, managers must recognize and comply with a web of federal regulations, as well as state laws, surrounding this use. This third article in our three-part series discusses the 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. The first article explored the big-data landscape, along with how fund managers can acquire and use big data in their businesses. The second article analyzed issues and best practices surrounding the acquisition of material nonpublic information; web scraping; and the quality and testability of data. For more on the adoption by fund managers of new technology, see our three-part series on blockchain: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).

Compliance Corner Q1-2018: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

In light of SEC Chair Jay Clayton’s recent statement that the Commission will continue to focus on the compliance programs of private fund advisers, it is important for those advisers to start 2018 on the right note. See “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017). One effective measure that chief compliance officers can take at the start of this calendar year is to create or update a compliance calendar that tracks regulatory filing deadlines, code of ethics reporting requirements and other relevant compliance tasks and responsibilities. This third installment of the Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Manny Halberstam, director and senior compliance analyst, respectively, at ACA Compliance Group, aims to assist advisers with ensuring that their 2018 compliance calendars are current by highlighting regulatory filings and code of ethics reports that must be completed during the first quarter of 2018. In addition to addressing these first-quarter deadlines, this article discusses the treatment of virtual currency tokens held by employees for purposes of code of ethics reporting, along with the SEC’s growing use of data surveillance and analytics as part of its examination process. For additional guidance on the reporting obligations of advisers, see “Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination (Part Three of Three)” (Oct. 19, 2017); and “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016).

SEC Enforcement Action Highlights Highly Specific Regulatory Focus on Conflicts of Interest

The SEC recently issued a cease-and-desist order against a private equity fund adviser, citing several violations of the Investment Advisers Act of 1940 relating to the adviser’s termination of portfolio company monitoring agreements and its acceleration of the payment of future monitoring fees pursuant to those agreements. Given the SEC’s stance against failures to maintain written policies and procedures reasonably designed to prevent securities law violations – as exemplified by several high-profile recent enforcement actions – observers might wonder whether the action is the latest example of a gathering trend. 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). Another reading of the settlement, however, holds that the SEC is in the midst of a sharply aggressive campaign against conflicts of interest, which is a distinct issue from internal policies and procedures and the general state of a firm’s compliance culture. In this light, the policies and procedures-related charges are an “add-on” to the central issue. To help readers understand these issues and what the action portends for the SEC’s focus, this article analyzes the SEC’s order and provides insights from legal professionals with expertise in this area. For more on accelerated monitoring fees, see “Proper Disclosure of Fee and Expense Allocations Is Crucial for Managers to Avoid SEC Enforcement Action” (Sep. 1, 2016); and “Expense Allocation and Fee Practices Fund Managers Should Avoid to Reduce Risk of SEC Scrutiny (Part One of Three)” (Aug. 25, 2016).

RCA Compensation Trends Panel Discusses Strong Market for Private Fund Compliance and Legal Personnel

The market for compliance and legal personnel is dynamic, with strong demand for skilled personnel. The Regulatory Compliance Association recently presented a program devoted to current compensation and hiring trends for compliance and legal professionals at private funds, traditional asset managers and sell-side firms based on the recent placement experience of executive recruiting firm JW Michaels & Co. (JWM). The program featured Jason M.E. Wachtel, founder and managing partner of JWM; Justin M. Mandel, JWM managing director and head of compliance; David Sawits, JWM vice president; and Mitch Avnet, founder and managing partner of Compliance Risk Concepts. This article explores the key takeaways from the presentation. For more on compensation of legal and compliance personnel at fund managers, see our series of two-part interviews with David Claypoole: “How Have Industry Developments Affected the Value of Legal and Compliance Staff?” (Feb. 2, 2017); “Will Industry Deregulation Affect the Value of Legal and Compliance Staff?” (Feb. 16, 2017); “What Is the Value of Legal and Compliance Staff?” (Mar. 12, 2015); and “Trends in Legal and Compliance Hiring and Staffing” (Mar. 19, 2015). For additional surveys on hedge fund personnel compensation, see our coverage of the reports by HedgeFundCompensationReport.com: 2015 Report and 2013 Report; and our coverage of the Greenwich Associates/Johnson Associates annual compensation studies: 2014 Compensation Study; 2013 Compensation Study; 2012 Compensation Study; and 2011 Compensation Study.

In Further Fallout From FCPA Probe, Former Och‑Ziff Executive Is Indicted for Fraud and Obstruction of Justice Arising From Undisclosed Conflicts of Interest

In 2016, Och‑Ziff Capital Management (Och‑Ziff) and two of its executives entered into a settlement with the SEC and DOJ arising out of their alleged violations of the Foreign Corrupt Practices Act (FCPA) when pursuing investment opportunities in Africa. The fallout from that FCPA probe continues. A grand jury in the U.S. District Court for the Eastern District of New York recently returned an indictment against Michael L. Cohen, a former senior executive at Och‑Ziff. The indictment charges Cohen with multiple counts of investment adviser fraud, wire fraud, obstruction of justice and conspiracy based on alleged misrepresentations he made to an investor about conflicts of interest when seeking the investor’s consent to a transaction. In a press release announcing the unsealing of the indictment, federal prosecutors and representatives from the Internal Revenue Service and Federal Bureau of Investigation reiterated their commitment to holding accountable individuals who commit fraud, violate the public trust, breach fiduciary duties or engage in other corrupt activities. The indictment, therefore, is another reminder that fund managers must be scrupulous in identifying and managing conflicts of interest, which remain a perennial enforcement priority. This article summarizes the substantive allegations in the indictment. For coverage of the Och‑Ziff FCPA settlement, see “Recent SEC and DOJ Settlements With Och‑Ziff and Two Executives Underscore FCPA Compliance Risks to Private Fund Managers” (Oct. 27, 2016). For coverage of the SEC FCPA enforcement action against Cohen, see “SEC Brings Enforcement Action for FCPA Violations Against Two Och‑Ziff Employees” (Feb. 16, 2017).

BakerHostetler Briefing Provides Regulatory Update: Developments in SEC Enforcement and Hot Topics in Taxation Affecting Private Funds (Part Two of Two)

Since the enactment of the Dodd-Frank Act in 2010, compliance officers in the financial services industry have been working franticly to analyze and implement the multitude of rules and regulations that flowed from its passage. Although some in the industry have been hopeful that the Trump administration would herald a regulatory-lite approach by the SEC, only time will tell whether the administration’s anti-regulatory posture will trickle down to the regulatory agencies, their leadership and, in the case of the SEC, the staff of the Office of Compliance Inspections and Examinations. A recent program sponsored by BakerHostetler considered the impact of the new administration, as well as the leadership of SEC Chair Jay Clayton, on the regulation of investment advisers. The program was moderated by Marc D. Powers, partner at BakerHostetler and national leader of the firm’s securities litigation, regulatory enforcement and hedge fund industry practices; and featured Walter Van Dorn, partner and head of BakerHostetler’s international capital markets practice; Jonathan A. Forman, counsel at BakerHostetler; Simcha B. David, partner at EisnerAmper; and Andrew N. Siegel, then-partner, chief compliance officer and chief regulatory counsel at Perella Weinberg Partners. This second article in our two-part series discusses hot topics in the area of SEC enforcement, as well as the tax aspects of loan origination and cryptocurrencies. The first article reviewed recent regulatory initiatives undertaken by the SEC that impact investment advisers, whether the change in leadership at the SEC will affect the examination environment and the implementation of MiFID II. For more from Powers and Forman, see “BakerHostetler Panel Analyzes the Trump Effect on the SEC’s Initiatives and Enforcement Efforts” (May 4, 2017); and “‘Gatekeeper’ Actions by the SEC and Investors Against Administrators Challenge Private Fund Industry” (Sep. 8, 2016).