Jul. 25, 2019

Best Practices for Hedge Fund Managers to Mitigate the Conflicts Arising From Managed Accounts: Dealing With Enhanced Transparency and Liquidity (Part Two of Three)

The challenge for a hedge fund manager advising both a managed account and commingled fund with the same or overlapping investment strategies is that the liquidity and transparency terms retained by the managed account owner may adversely affect investors in the commingled fund. This three-part series examines why the management of both a commingled fund and a managed account with the same – or similar – investment strategy presents conflicts of interest for a fund manager. This second article analyzes how the enhanced transparency and liquidity rights typically retained by separately managed account clients, when compared to investors in the commingled fund, give rise to conflicts of interest for an investment manager and suggests several best practices for mitigating those conflicts of interest. The first article explored the increased use of separately managed accounts by institutional investors; ways separately managed accounts differ from single investor funds; and the general conflicts of interest that can arise for an investment manager when managing multiple client accounts. The third article will review the risks that can arise when investment managers make allocation decisions between a commingled fund and managed account client, and suggest several best practices for managing those conflicts. For more on managing conflicts of interest, see our three-part series on the simultaneous management of hedge funds and alternative mutual funds following the same strategy: “Investment Allocation Conflicts” (Apr. 2, 2015); “Operational Conflicts” (Apr. 9, 2015); and “How to Mitigate Conflicts” (Apr. 16, 2015).

How CCOs Can Use a Sample OCIE Information Request Letter to Improve Their Compliance Programs

When the SEC’s Office of Compliance Inspections and Examinations (OCIE) decides to examine an investment adviser, the examination process is typically started by an OCIE staff member calling the adviser’s chief compliance officer (CCO) and then sending the CCO an initial document or information request letter. The number of items requested can be extensive; the period of time covered by the requests can be quite lengthy; and the information requested may be spread across various documents and databases. Thus, although many of the items requested are documents that advisers are required to maintain by Rule 204‑2 under the Investment Advisers Act of 1940, responding to this request letter can be challenging – especially when given a fairly short deadline. Peter Wilson, managing director at Duff & Phelps and former CCO of an SEC-registered investment adviser, spoke to the Hedge Fund Law Report about OCIE information request letters and about a redacted letter recently sent to a client that he provided to the HFLR in redacted form. This article presents Wilson’s perspective on the evolution of these letters; how they are prepared; and how CCOs can use sample letters to improve their compliance programs and prepare for the receipt of information request letters from OCIE in the future. For more on information requests from OCIE, see “Practical Guidance From Former SEC Examiners on Preparing for and Surviving SEC Examinations” (Sep. 1, 2016).

Compliance Corner Q3‑2019: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

The SEC has repeatedly demonstrated how seriously it takes an investment adviser’s obligation to make timely and accurate filings, as evidenced by the Commission’s filings-centric examination sweeps and subsequent enforcement actions. In addition, the SEC staff also uses forensic tools to identify advisers that should be making required filings but have not done so. The actions taken by the SEC serve as a clear reminder that hedge fund managers should ensure they identify and complete all filings required of them and the private funds they control. This ninth installment of the Hedge Fund Law Report’s quarterly compliance update, authored by consultants Anne Wallace, John Mrakovcic and Chris Ray at ACA Compliance Group, highlights upcoming filing deadlines for the third quarter and discusses certain filing obligations of fund managers and their private funds. In addition to the upcoming filing requirements, this article discusses the Regulation S‑P Risk Alert and Network Storage Risk Alert recently issued by the Commission in April and May, respectively. For more on Regulation S‑P, see “SEC Officials Flesh Out Cybersecurity Enforcement and Examination Priorities (Part One of Two)” (May 11, 2017).

How Fund Managers Can Navigate U.S. and Cayman Islands AML Requirements (Part One of Two)

Although SEC-registered investment advisers are not currently required by U.S. regulation to have anti-money laundering (AML) controls, having those controls is viewed as a best practice. Additionally, Cayman Islands regulators recently tightened funds’ AML obligations, and a rule proposed by the Financial Crimes Enforcement Network would require advisers to implement AML controls. A recent Hedge Fund Law Report program delved into best practices for AML compliance by private fund managers. The program was moderated by Kara Bingham, Senior Editor of the Hedge Fund Law Report, and featured Sarah Curran, director at Promontory Financial Group; Lucy Frew, partner at Walkers; and Seetha Ramachandran, partner at Proskauer. This first article in our two-part series reviews the current U.S. AML requirements and provides an update on the recently amended Cayman Islands AML regime. The second article will address common AML controls adopted by fund managers, ways the SEC reviews an adviser’s AML program, day-to-day challenges that fund managers face when implementing their AML controls and best practices when delegating AML responsibilities to a fund administrator. See “Lessons Private Fund Managers Can Learn From U.S. Bancorp’s Settlement of AML Violations” (Apr. 26, 2018); and “Do Hedge Funds Really Pose a Money Laundering Threat? A Decade of Regulatory False Starts Raises Questions” (Feb. 16, 2012).

Brexit and Sustainable Investing Remain Key Considerations in Luxembourg Funds Space (Part Two of Two)

The Association of the Luxembourg Fund Industry (ALFI) held a recent seminar that looked at the state of the Luxembourg investment management industry and how U.S. managers can market and manage funds in the E.U. The program was hosted by ALFI chairwoman Denise Voss and featured panel discussions with representatives from financial services, asset management, legal and accounting firms. This second article in a two-part series analyzes the impact of Brexit on cross-border investment management, available means of fund distribution and sustainable investments. The first article explored the structuring and marketing of private funds, as well as the establishment of fund management companies, in the E.U. See our interview with Voss and ALFI’s director general, “Luxembourg Fund Structures, FinTech and Brexit” (Jun. 20, 2019).

Former Federal Prosecutor and SEC Official Ferdose al‑Taie Joins Akerman

Akerman LLP has added partner Ferdose al‑Taie – a former federal prosecutor at the DOJ and Senior Counsel at the SEC’s Division of Enforcement – to its litigation, white collar crime and government investigations practices. Al‑Taie represents investment advisers, hedge funds, private equity firms, startups and individuals, as well as publicly traded and privately held companies. See “What Remedies and Relief Can Fund Managers Expect in SEC Enforcement Actions?” (Jan. 10, 2019).