Feb. 8, 2018

Best Practices for Fund Managers to Develop an Employee Discipline Framework That Fosters Predictability in the Face of Inconsistent Laws (Part One of Three)

Amidst fierce competition to win investment mandates; heightened reporting and due diligence demands from institutional investors; and the increasingly watchful eye of capable regulators looking for violations of law, many private fund advisers have had no choice but to institutionalize their businesses. While SEC-registered advisers are well-versed on the types of policies included in codes of ethics and compliance manuals, many advisers have chosen to go further by adopting other policy-laden documents, including staff handbooks, codes of conduct, IT manuals and operating procedures. No matter how strong a compliance program is, however, some employees will violate the law or firm policy to gain a business advantage or enrich themselves. When that happens, a key step in correcting the problem is employee discipline. This article, the first in a three-part series, discusses the value of having clear practices around discipline and the challenges of applying discipline uniformly across jurisdictions with varying employment laws. The second article will identify effective techniques advisers can use to gather evidence to support a disciplinary action, including the thorny issues of protecting privilege while building a record. The third article will outline steps advisers can take to promote institutional due process when disciplining an employee. See “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017). 

Schulte Roth & Zabel Founding Partner Paul Roth Discusses the History and Future of the Hedge Fund Industry

At the 10th annual Walkers Fundamentals Hedge Fund Seminar, Ingrid Pierce, global managing partner of Walkers Global, engaged in an “armchair conversation” with Paul N. Roth, founding partner of Schulte Roth & Zabel, who is also known as the “dean of the hedge fund bar.” Roth offered insights and lessons from his 50-plus years advising hedge fund managers and investors. This article summarizes the key takeaways from their conversation. For additional insight from Roth and Pierce, respectively, see “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds” (Jul. 25, 2013); and “Eight Recommendations for Hedge Fund Managers That Utilize Most Favored Nation Provisions in Side Letters” (Mar. 31, 2012). For coverage of the Walkers Fundamentals Hedge Fund Seminar from prior years, see: 2016 Seminar; 2015 Seminar; 2014 Seminar; 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

SEC Order Warns Fund “Gatekeepers” That They Remain a Focus of SEC Scrutiny

So-called “gatekeepers” have been in the SEC’s crosshairs for years. Although fund administrators and other service provides are neither required to register with nor directly regulated by the SEC, the Commission has taken action against administrators for causing, or being a cause of, securities law violations by regulated fund managers. The most recent SEC action of this kind ended with a cease-and-desist order against a fund administrator that allegedly calculated the net asset value of a mutual fund it administered by including fake loans held by the fund, even though it allegedly knew that, absent requisite documentation, the fund’s custodian had refused to book those loans as fund assets. This article details the SEC’s allegations and settlement terms. See “What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers” (Oct. 20, 2016). For discussion of SEC concerns about attorneys and accountants as gatekeepers, see “How Can Hedge Fund Managers Update Their Insider Trading Compliance Programs to Reflect the SEC’s Focus on Systemic Violators, Gatekeepers, Trading Patterns, Profitable Trades and Expert Networks?” (Aug. 19, 2011).

FINRA Outlines Its Regulatory and Examination Priorities for 2018

FINRA recently published its 2018 Annual Regulatory and Examination Priorities Letter (Letter) identifying significant areas on which the regulator will focus in the coming year. Topics covered by the letter include ongoing issues such as fraud, customer asset protection, anti-money laundering and best execution, as well as new areas of focus such as technology governance and cryptocurrencies. The Letter, along with the Report on FINRA Examination Findings released in December 2017, serves as a resource to broker-dealers for enhancing their compliance, supervisory and risk-management programs, as well as preparing for FINRA examinations. In addition, the Letter provides valuable insight to fund managers affiliated with, or who employ the services of, FINRA-registered broker-dealers as to the priorities of the regulator. For more on FINRA and its regulatory agenda, see “Reading the Regulatory Tea Leaves: Recent White House and Congressional Action and Insights From SIFMA and FINRA Conferences” (Jul. 20, 2017); and “What the Record Number of 2016 SEC and FINRA Enforcement Actions Indicates About the Regulators’ Possible Enforcement Focus for 2017” (Dec. 15, 2016).

Cordium and Aite Group Survey Benchmarks Use of “Regtech” by Asset Management Firms

Private fund managers face a potentially overwhelming stream of compliance requirements and regulatory filing obligations, but technological solutions may assist managers in meeting those obligations and streamlining compliance processes. In 2017, Cordium and Aite Group surveyed executives in the securities and asset management industry to assess their use of “regtech,” which the authors of the study defined as “any technology that is targeted at supporting the compliance function.” Their white paper discussing the results of the study posits that, in order to manage regulatory compliance in an efficient manner, managers must “move from a reactive approach to a more proactive and strategic stance” that incorporates technological solutions. This article highlights the principle takeaways from the study. For additional insight from Aite Group, see “Report Identifies the Building Blocks of Institutional Credibility for Hedge Fund Managers: Operational Efficiency, Robust Risk Management, Integrated Technology and More” (Sep. 19, 2013); and “Report Maps Outsourcing Landscape for Hedge Fund Managers, Including Outsourced Services Offered, Trends, Goals, Drawbacks and Provider Profiles” (Nov. 15, 2012). For further commentary from Cordium, see our three-part series on electronic communications: “SEC Takes Steps to Drill Down” (Nov. 30, 2017); “Information Request List Provides Insight Into SEC Expectations” (Dec. 7, 2017); and “Six Key Issues to Address in Electronic Communication Policies and Guidance on Preparing for Future Scrutiny” (Dec. 14, 2017).

Virtual Currencies Present Significant Risk and Opportunity, Demanding Focus From Regulators, According to CFTC Chair

The meteoric rise of the value of cryptocurrencies like bitcoin demands a special focus from regulators, CFTC Chairman J. Christopher Giancarlo stated in recent remarks to the ABA Derivatives and Futures Section Conference in Naples, Florida. The Chairman noted that virtual currencies represent both significant risk and opportunity for investors, discussed the role of the CFTC and other regulators in overseeing virtual currencies and outlined the CFTC staff review checklist of virtual currency futures markets. In addition, Giancarlo examined the importance of mutual cross-border regulatory deference, using the E.U.’s and CFTC’s approach to margin rules to illustrate the benefits of global regulatory cooperation. This article summarizes the portions of the speech most relevant to fund managers. For more from Giancarlo, see “New CFTC Chair Outlines Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform” (Nov. 9, 2017).

Fried Frank Recruits Asset Management and Derivatives Partner

Fried Frank has hired Darren Littlejohn, an asset management and derivatives attorney, as a partner in the firm’s New York office. Littlejohn’s experience also includes serving as a managing director and senior counsel in the legal division of Goldman Sachs. He advises fund managers, investment banks and companies on regulatory issues affecting the structuring and operation of private funds and derivatives instruments. For coverage of another recent hire at the firm, see “Adam Summers Joins Fried Frank in New York” (Jun. 15, 2017). For analysis of other commentary by Fried Frank partners, see our two-part series on AIFMD: “Marketing Strategies for U.S. Hedge Fund Managers” (Jul. 21, 2016); and “Navigating Dual AIFMD and CFTC Compliance” (Jul. 28, 2016); as well as “Application to Hedge Fund Managers of the Internal Control Report Requirement of the Amended Custody Rule” (Feb. 11, 2010).

Jay Baris Joins Shearman & Sterling in New York

Investment funds lawyer Jay Baris has moved to Shearman & Sterling, joining as a partner. Baris advises investment funds, investment advisers and broker-dealers on the structuring of fund vehicles and regulatory compliance matters. Baris has also started to focus on issues related to blockchain, including working with clients to understand the SEC’s Office of Compliance Inspections and Examinations’ position on cryptocurrency issues. See “How Blockchain Will Continue to Revolutionize the Private Funds Sector in 2018” (Jan. 4, 2018). For coverage of another recent hire at the firm, see “Former SEC Chief of Staff Rejoins Shearman & Sterling” (May 4, 2017).