Nov. 7, 2019

Navigating the SEC’s Interpretation Regarding an Investment Adviser’s Standard of Conduct: Three Tools to Systematically Monitor Conflicts of Interest (Part Three of Three)

As conflicts of interest remain of keen interest to regulators and investors, fund managers must continually evolve their practices to identify, monitor and manage those conflicts. This three-part series examines the practical implications of the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers (Interpretation) for private fund managers. This third article addresses best practices for investment advisers to manage their conflicts of interest. The first article provided an overview of the Interpretation and explored six key takeaways for fund managers from the Interpretation. The second article outlined key tools that fund managers may employ to identify their conflicts of interest. See “Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program” (Aug. 28, 2014).

How Private Fund Managers Can Prepare for a Potential Downturn

Anyone who travels on commercial flights should be familiar with the announcement reminding passengers of the aircraft’s various safety procedures in case of emergency. The overall message is generally the same: be prepared in case things go awry. Managers of private funds – especially those advising open-end funds permitting redemptions or withdrawals – should also periodically take a step back from their day-to-day operations to determine what tools are available for the proper functioning of their funds in case of a downturn in the U.S. or global economy. In a guest article, Ira P. Kustin, partner at Paul Hastings, discusses various issues of which private fund managers must be aware in the event of a potential economic downturn, including planning for withdrawal requests; implementing withdrawal suspensions; balancing fiduciary duties to the fund and its investors; and resolving a liquidity crisis. See our two-part series “Reflections on the Tenth Anniversary of the Financial Crisis”: The Collapse and Aftermath (Oct. 11, 2018); and Changes to Compliance Programs, Regulations and Fund Strategies (Nov. 8, 2018). For additional commentary from Kustin, see “How Fund Managers May Address End-of-Life Issues in Closed-End Funds” (Jan. 17, 2019); and “Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures” (May 25, 2017).

Detecting and Avoiding Transaction Reporting Errors Under MiFID

Transaction reporting provides regulators with fundamental data needed for market surveillance. A recent ACA Compliance Group (ACA) presentation examined the transaction reporting regimes under the E.U. Markets in Financial Instruments Directive (MiFID I) and the recast Directive (MiFID II), including enforcement activity under MiFID I; the transition to the reporting regime under MiFID II; common errors and compliance issues under both regimes; monitoring and reconciliation of reporting; and handling of reporting errors. The program was moderated by ACA director Bobby Johal and featured ACA senior principal consultants Matthew Chapman and Charlotte Longman. This article presents the key takeaways from the presentation. For more on MiFID II, see “ACA Panel Reviews Effects of Impending MiFID II on U.S. Advisers” (Dec. 7, 2017); “MiFID II Will Affect Market Structure, Registration and Soft Dollars for Hedge Funds Trading in Europe” (May 19, 2016); and our two-part series “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II”: Part One (Jun. 18, 2015); and Part Two (Jun. 25, 2015).

Advisers Must Thoroughly Investigate Client Complaints to Avoid Claims of Failure to Supervise

Investment advisers are required to adopt and implement policies and procedures reasonably designed to prevent employee violations of the federal securities laws and to supervise employees in connection therewith. An investment adviser recently ran afoul of both of those fundamental requirements by failing to follow up on two client complaints that, the SEC claimed, should have led the adviser to thoroughly investigate one of its representatives who was allegedly defrauding the adviser’s clients by lying to them about the amount of management fees that they were paying and by misappropriating client funds to support an outside business in which he had a financial interest. This article analyzes the settlement order. See “OCIE Issues Risk Alert on Advisers’ Oversight of Employees With a History of Disciplinary Events” (Aug. 29, 2019); and “The Duty to Supervise: Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers (Part One of Three)” (Sep. 6, 2018).

AIMA Survey Examines Evolution in the Ways That Managers Align With Investors

In an era of middling hedge fund returns, aligning investor and manager interests can be an important way to develop long-term investment relationships that outlast short-term underperformance. The Alternative Investment Management Association (AIMA), in collaboration with accounting and consulting firm RSM US LLP, recently asked a sizable sample of hedge fund managers for their views on the best ways to align their interests with those of their investors, focusing on customized investment vehicles; transparency; “skin in the game”; and fee and expense provisions. AIMA’s report describes a revolution in the hedge fund industry based on “customisation, collaboration and communication.” According to Tom Kehoe, global head of research and communications at AIMA, “the industry’s institutional, experienced and sophisticated investor base has driven the change toward bespoke investment mandates, value advisory services and deeper partnerships, all of which help to further strengthen hedge fund alignment with investors.” This article explores AIMA’s key findings, with added insight from Kehoe. For coverage of AIMA’s 2016 survey, see “Key Ways That Managers Align With Investors, Including Alternative Fee Structures, Skin in the Game and Customized Investment Solutions” (Sep. 22, 2016).