Jan. 9, 2020

Key Compliance Considerations for Fund Managers Using Alternative Data

Over 80 percent of hedge funds are using alternative data, including biometric data, geolocation data and web scraping, according to a recent survey conducted by Lowenstein Sandler. Although use of alternative data is expected to increase, stronger privacy regulations – such as the recently enacted California Consumer Privacy Act of 2018 – will affect fund managers’ ability to source and use that data. To explore how fund managers can become comfortable using alternative data, the Hedge Fund Law Report recently spoke to Peter D. Greene, partner at Lowenstein Sandler and author of the survey. This article sets forth Greene’s insights on the key compliance issues raised by using alternative data, including insider trading and privacy concerns; new and prospective regulatory issues in the U.S. and abroad; best practices for mitigating risk and managing third-party data providers; and ways newer forms of alternative data are affecting fund managers. See our three-part series “A Fund Manager’s Roadmap to Big Data”: Its Acquisition and Proper Use (Jan. 11, 2018); MNPI, Web Scraping and Data Quality (Jan. 18, 2018); and Privacy Concerns, Third Parties and Drones (Jan. 25, 2018). To further explore these issues, on Wednesday, January 15, 2020, at 11:00 a.m. EST, the Hedge Fund Law Report will host a complimentary webinar, entitled “Best Practices for Private Fund Managers’ Use of Alternative Data.” Moderated by William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, the panel will feature Adam Reback, director at Optima Partners; Stacey M. Brandenburg, shareholder at ZwillGen; and Jeffrey Neuburger, partner at Proskauer. The discussion will address issues including the pros and cons of generating or purchasing datasets; managing third-party data providers; complying with data privacy laws and cybersecurity guidance; and avoiding insider trading and other risks. To register for the webinar, click here.

How Funds Are Achieving Performance Compensation Equilibrium: Considerations on Hurdles, Benchmarks, High Water Marks and Clawbacks (Part One of Two)

Over the course of the past decade, there has been much press coverage and academic discussion around the traditional “2 and 20” hedge fund compensation model. Although that model has no doubt faced significant pressure from institutional investors, those investors often are more interested in working with private fund managers to create compensation structures that better align interests rather than simply reduce fees. Some of those arrangements represent a resurgence of older practices, while others offer novel and creative solutions. Hurdles, benchmarks, escrows, varying performance periods, clawbacks and management fee offsets are representative of the types of alternative compensation structures and innovative terms that managers are deploying in an effort to attract and retain meaningful capital. In a two-part guest series, Sidley Austin attorneys Janelle Ibeling, Joseph Schwartz and Andrew Krebsbach explore several of these structures and highlight certain challenges and questions of which fund managers and industry practitioners should be aware. This first article analyzes hurdles, benchmarks, high water marks and clawbacks, and the second article will address designated investments, “1 or 30” structures, caps and first loss arrangements. For additional commentary from Ibeling, see “Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two)” (Sep. 25, 2014); and “Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part One of Three)” (Oct. 25, 2013).

Present and Former Regulators Discuss Current SEC and NFA Examination and Enforcement Environment (Part One of Two)

A session at the 2019 National Conference of the National Society of Compliance Professionals (NSCP) offered the perspectives of present and former regulators on the current examination and enforcement environment at the SEC and the NFA. Bruce Karpati, chief compliance officer at Kohlberg Kravis Roberts & Co. L.P. and former Co‑Chief of the Asset Management Unit of the SEC, moderated the discussion, which featured Patricia Cushing, NFA Director of Compliance; Daniel S. Kahl, Associate Director and Chief Counsel of the SEC Office of Compliance Inspections and Examinations; and Anthony S. Kelly, partner at Dechert and former Co‑Chief of the SEC Asset Management Unit. This two-part series summarizes the panelists’ key insights. This first article explores the NFA’s focus on commodity pool operator internal controls; the SEC’s regulatory issues and priorities; notable examination experiences; compliance programs; regulatory resources; responsible investing; and common issues involving private funds. The second article will review cybersecurity, digital assets and data privacy. For coverage of an NSCP survey, see “Surveys Show Cyber Risk Remains High for Investment Advisers and Other Financial Services Firms Despite Preventative Measures” (Jul. 20, 2017).

SEC Annual Report Details Robust Enforcement Efforts, With Continuing Focus on Retail Investors and Cyber Matters

The SEC’s Division of Enforcement (Division) recently released its third Annual Report (Report) covering the Division’s accomplishments in fiscal year (FY) 2019. The Report, which includes a comprehensive introduction by Division Co‑Directors Stephanie Avakian and Steven Peikin, offers perspective into the Division’s priorities and the nature of FY 2019’s 862 enforcement proceedings, which yielded over $4.3 billion in penalties and disgorgement – nearly $1.2 billion of which was distributed to harmed investors. This article discusses the key takeaways from the Report. For coverage of the Division’s past two annual reports, see “SEC Enforcement Division Annual Report Emphasizes Continuing Focus on Retail Investors, Individual Accountability, Cyber Misconduct and Digital Assets” (Dec. 6, 2018); and “SEC Signals Aggressive Stance on Individual Responsibility, Including Potential CCO Liability, in FY 2017 Annual Report” (Dec. 14, 2017).

ACA Program Reviews 2019’s Key Compliance Trends and Issues

A recent ACA Compliance Group (ACA) program provided an overview of SEC examination and enforcement activity, updates from the Division of Investment Management, risk alerts, no‑action letters and rulemaking activities during 2019, with respect to both investment advisers and registered investment companies. This article examines the key takeaways for private fund managers from the program, which featured Erik Olsen and Anne Wallace, ACA managing director and consultant, respectively. For coverage of other recent ACA programs, see “Detecting and Avoiding Transaction Reporting Errors Under MiFID” (Nov. 7, 2019); and “Quant Advisers Face Unique Compliance Issues” (Oct. 10, 2019).

DLA Piper Expands Boston Office with Addition of Litigator Jonathan Sablone

Jonathan Sablone has joined DLA Piper’s litigation practice as a partner in the Boston office. Sablone focuses on litigation involving investment funds and disputes between or among alternative asset funds and investors in those funds, representing offshore liquidators, fund managers, limited partners and institutional investors related to hedge, private equity, venture and real estate funds, as well as investment vehicles in alternative asset classes such as residential and commercial mortgage-backed securities; credit default swaps; and collateralized debt obligations. For another recent hire by the firm, see “Former In‑House Counsel Joins DLA Piper’s L.A. Office” (Oct. 11, 2019).