Oct. 10, 2019

Six Criteria for Hedge Fund Managers to Evaluate Before Granting an Investor’s Request to Rescind Its Redemption (Part Two of Two)

Investors periodically submit requests to redeem from a fund and thereafter, for any number of reasons, change their minds. Requests to rescind a redemption notice may be welcomed by the hedge fund manager, but decisions regarding rescission requests should not be made in a vacuum. Rather, various factors must be taken into consideration, including whether permitting that investor to remain invested in the fund is in the best interest of the fund as a whole and all its underlying investors. In anticipation of year-end redemptions, this two-part series explores how fund managers should evaluate rescission requests. This second article discusses three factors that fund managers should consider when evaluating rescission requests, as well as how fund managers should document their decision-making processes. The first article analyzed the provisions in a fund’s governing documents that are relevant to those requests, investors’ motivations underlying rescission requests and three additional considerations that fund managers should factor into their decision-making processes. For a discussion of rescission of redemption notices in another context, see “Can a Hedge Fund Retroactively Amend Its Partnership Agreement to ‘Rescind’ an Investor’s Redemption Request?” (May 8, 2014).

SEC Issues Guidance on Proxy Voting Responsibilities of Investment Advisers

When an investment adviser has the authority to vote its client’s securities, the exercise of that authority is subject to the adviser’s broader fiduciary duty to the client in general and to Rule 206(4)‑6 under the Investment Advisers Act of 1940 in particular. The SEC recently issued guidance that stresses that advisers must act in the best interests of their clients when voting client securities and discusses advisers’ responsibilities when vetting and retaining proxy advisory firms. Issued simultaneously with that guidance, the SEC’s interpretation and guidance regarding the applicability of the proxy rules makes clear that proxy advisory firms that provide research and recommendations on voting are engaged in proxy “solicitation” within the meaning of the federal proxy rules and that their recommendations are subject to the anti-fraud provisions of those rules. This article analyzes both sets of guidance. For coverage of other SEC releases, see our two-part series on the exempt offering framework: “Review of the Concept Release” (Sep. 5, 2019); and “Key Takeaways From the Concept Release for Private Fund Managers” (Sep. 12, 2019). See also “Key Takeaways for Private Fund Managers From SEC’s Latest Reg Flex Agenda” (Aug. 15, 2019).

Quant Advisers Face Unique Compliance Issues

Although all investment advisers registered with the SEC are subject to the same legal and regulatory regime, advisers that employ quantitative (quant) investment strategies face certain unique challenges. A recent ACA Compliance Group (ACA) program examined compliance considerations for a quant adviser’s investment methodology, model governance and testing; compliance oversight and control; trade and coding errors; backtesting; and information security. The program featured Michael Abbriano, senior principal consultant at ACA, and Michael Pappacena, partner at ACA Aponix. This article highlights the key points from the presentation. For more on quant investing, see “An Introduction to Quantitative Investing: Dispelling Myths and Misconceptions (Part One of Three)” (Aug. 9, 2018).

Delegation of Investment and Voting Authority to a Fund’s Investment Adviser Does Not Shield the Fund From Liability for Short‑Swing Trading Profits

Section 16(b) of the Securities Exchange Act of 1934 generally provides that, unless an exemption is available, any profit made on purchases and sales, or sales and purchases, of an issuer’s equity securities within a period of less than six months (short-swing profits) by a beneficial owner of more than 10 percent of any class of the issuer’s equity securities inures to the benefit of the issuer. The issuer, or any of its shareholders, may bring suit to recover short-swing profits on behalf of the issuer. In a recent decision by the U.S. District Court for the Eastern District of New York (Court), a hedge fund that beneficially owned more than 10 percent of the common stock of an issuer was held liable under Section 16(b), notwithstanding the fact that it had delegated its voting and investment authority to its investment adviser. This article examines the Court’s decision, which is relevant to advisers whose funds may take more than a 10‑percent stake in companies’ equity securities. For discussion of regulatory reporting of beneficial ownership, see “How Fund Managers Can Navigate Sections 13(d) and 16 of the Exchange Act” (Feb. 28, 2019); “Alleging Dozens of Violations, SEC Charges Leon Cooperman and Omega Advisors With Insider Trading and Failing to Make Regulatory Filings” (Sep. 29, 2016); and “Establishing, Maintaining and Exiting a Minority Equity Position: U.S. Securities Law Considerations for Hedge Funds” (Jan. 15, 2009).

SEC Enforcement Co‑Director Reviews Division Performance

Steven Peikin, Co‑Director of the SEC Division of Enforcement (Division), recently delivered the keynote speech at the Southeastern Securities Conference 2019. In his remarks, Peikin explored the performance of the Division over the prior year, highlighting efforts to protect retail investors; allocation of Division resources, including through innovations like the recent Share Class Self-Disclosure Initiative; and the Division’s adaptation to technological change. Peikin’s address provides valuable insight for fund managers into the workings of the SEC, such as how the Division works with various other groups within the Commission, as well as the evolution of the regulator’s approach to pursuit and enforcement of various violations and penalties. This article highlights the key points from Peikin’s remarks. For coverage of another speech from Peikin, see “What Remedies and Relief Can Fund Managers Expect in SEC Enforcement Actions?” (Jan. 10, 2019).

Former In‑House Counsel Joins DLA Piper’s L.A. Office

Stephen Ballas is the newest partner in DLA Piper’s corporate practice in Los Angeles. Ballas joins the firm from an SEC-registered investment adviser, where he served as general counsel and was a member of the management committee. He has extensive experience in, among other things, strategic and financial-sponsor M&A and investment transactions; capital markets; SEC reporting; investment firm corporate governance and compliance; internal and regulatory investigations; and overall enterprise risk management. For another recent hire by DLA Piper, see “DLA Piper Adds Adam Tope to New York Office” (Sep. 12, 2019).