Feb. 6, 2020

Former CFTC Chairman J. Christopher Giancarlo Discusses Technology, LabCFTC, Project KISS and the CFTC’s Enforcement Manual (Part Two of Two)

J. Christopher Giancarlo served at the CFTC for five years, first as a Commissioner and later as CFTC Chair. Since the end of his term in July 2019, Giancarlo has announced several initiatives and projects that he plans to pursue as senior counsel in the New York office of Willkie Farr & Gallagher. The Hedge Fund Law Report recently spoke to Giancarlo in connection with his new position. This second article in our two-part series covers Giancarlo’s views on technology, including cryptocurrency and blockchain; the launches of LabCFTC and Project KISS; and the release of the CFTC’s enforcement manual. In the first article, Giancarlo discussed his post‑CFTC plans; his accomplishments at the CFTC; the relationship between the CFTC and the SEC; harmonization with the SEC and foreign regulators; and the CFTC’s approach to rulemaking. For more from Giancarlo, see “Women in Derivatives Event Features Address by CFTC Chair Giancarlo and Panel Discussion on the Intersection of Technology and Regulation” (Jul. 12, 2018).

How Fund Managers May Increase the Likelihood That H‑1B Sponsorship for Quants and Data Scientist Employees Will Be Approved

Hedge funds need financial quantitative analysts (quants) and data scientists to compete in an ever-changing market. Those with the most desirable educational backgrounds to fill those roles are often foreign nationals who require sponsorship to work in the U.S. The work-authorized sponsorship category most widely used by fund managers for foreign nationals applying for quant and data scientist roles is the H‑1B. Although sponsoring foreign nationals for H‑1B status had been relatively easy, 60 percent of H‑1B cases are now being questioned and subjected to lengthy requests by the U.S. Citizenship and Immigration Services – and one-third of all H‑1B cases ultimately are denied. Questioning and denials are especially prevalent for positions that allow degrees in multiple fields, such as quants and data scientists. Despite those grim denial rates, hedge funds should not give up on hiring foreign-born talent. In a guest article, Megan R. Naughton and Jennifer L. Shanley, partner and associate, respectively, at Robinson+Cole, provide recommendations and best practices that fund managers can use to develop a strategy for H‑1B sponsorship for quants and data scientists. As H‑1B cap season quickly approaches, it is critical for fund managers to confirm how each sponsored position will qualify. See “EY 2019 Survey Explores Growing Importance of Talent Management, Diversity and Inclusion; Use of Technology, Big Data and AI; and Cybersecurity (Part Two of Two)” (Dec. 19, 2019).

Best Practices for Using Alternative Data: Data Gathering and Managing Data Providers (Part One of Two)

In the continuing quest for alpha, hedge fund managers are increasingly seeking nontraditional data sets to inform their investment decisions. A recent webinar presented by the Hedge Fund Law Report, entitled “Best Practices for Private Fund Managers’ Use of Alternative Data,” took an in-depth look at the regulatory and compliance issues involved in collecting and using alternative data. William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, moderated the program, which featured Stacey M. Brandenburg, shareholder at ZwillGen; Jeffrey D. Neuburger, partner at Proskauer; and Adam J. Reback, director at Optima Partners. This first article in our two-part series covers the portions of the webinar that explored data gathering and managing third-party data providers, including due diligence, contract provisions and associated issues. The second article will detail issues relating to insider trading, regulatory risk, data privacy laws, cybersecurity and web scraping. See our three-part series on the opportunities and risks presented by big data: “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).

Recent Case Illustrates How Not to Respond When SEC Examiners Voice Concerns

If SEC officials raise legitimate concerns with a fund manager during an examination, the manager should not ignore those concerns; mislead the examiners about remedial efforts; and conceal the concerns from investors and auditors. A hedge fund manager and its two principals are currently facing charges in federal court for taking that misguided approach. The SEC Division of Enforcement recently commenced an enforcement action in the U.S. District Court for the Northern District of Illinois against the manager and its principals, alleging that they represented to investors that the adviser valued fund assets in accordance with generally accepted accounting principles when, in fact, it used a “homemade, irregular” model designed to inflate the values of structured notes held by its funds. The defendants allegedly made misrepresentations to not only investors about their valuation practices – even after SEC examiners expressed concerns – but also exam staff about their remedial efforts. In addition, the SEC claimed that the defendants ignored the advice of outside valuation firms and kept their auditor in the dark about an SEC deficiency letter. This article analyzes the SEC’s complaint, which seeks civil penalties and injunctive relief. Although the facts alleged in the complaint, if proven, establish egregious misconduct by the defendants, the action is nevertheless an important reminder of the need for advisers to act in accordance with their representations to investors, be scrupulously honest with the SEC and follow through with representations regarding remedial efforts. See “How Managers Can Navigate the Thin Line Between SEC Examinations and Enforcement” (Nov. 14, 2019).

SEC Chair Reviews Efforts to Modernize Regulatory Framework (Part Two of Two)

SEC Chairman Jay Clayton recently delivered a speech that reviewed the SEC’s actions over the preceding year, including its “organic and transparent” approach to agenda setting and progress with respect to the SEC’s Fall 2018 Regulatory Flexibility (Reg Flex) agenda. In addition, Clayton looked forward, providing a preview of the Fall 2019 Reg Flex Agenda. This two-part series provides the highlights from Clayton’s speech. This article outlines the SEC’s engagement agenda with a particular focus on market monitoring; discusses how the SEC’s mission, market realities, statutory constructs and other factors inform its efforts; and examines the relationship between the SEC’s scope of authority, actions and independence. The first article explored Clayton’s discussion of the SEC’s rulemaking agenda and summarized the items on the Fall 2019 Reg Flex short-term and long-term agendas of particular interest to private fund managers. For coverage of another speech by Clayton, see “Approach to Dodd-Frank Rulemaking and Expectations for Fund ‘Gatekeepers’” (Feb. 15, 2018).

Lowenstein Sandler Announces New Partner in Investment Management Group

Max Karpel has joined Lowenstein Sandler as a partner in the investment management group. Based in New York, Karpel’s practice will focus on the structuring and restructuring of investment management businesses and on advising family offices. For commentary from other Lowenstein partners, see “What Legal, Regulatory and Operational Challenges Do Single‑Asset Funds Present for Managers?” (Dec. 12, 2019); and our three-part series on artificial intelligence for fund managers: “How to Use It to Streamline Operations” (Sep. 5, 2019); “Government Guidance, Service-Provider Negotiations and Risks of Bias” (Sep. 12, 2019); and “Automating the Legal Department and Maintaining Privacy” (Sep. 19, 2019).