May 20, 2021

Code of Ethics 101: Why Fund Managers Need Them (Part One of Three)

Rule 204A‑1 under the Investment Advisers Act of 1940 – the so-called “code of ethics rule” (Rule) – requires investment advisers to establish, maintain and enforce written codes of ethics, which must set standards of conduct expected of certain personnel and address conflicts that arise from personal trading by those employees. The Rule is not especially long or complex, yet advisers continue to violate it. In fact, Rule violations were referenced in recent SEC risk alerts and enforcement actions. This three-part series reviews the fundamentals of codes of ethics, focusing on the three core mandates of the Rule: establish, maintain and enforce. This first article discusses why fund managers need codes of ethics, as well as the consequences of failing to comply with the Rule’s requirements. The second article will focus on the “establish” element of the Rule, explaining what codes of ethics must – and may – include. The third article, focusing on the “maintain” and “enforce” elements, will discuss how to monitor compliance with codes of ethics, including the role of technology, and handle violations by employees. See “Beyond Codes of Ethics: Why Simply Having a Code Is Not Enough” (Feb. 13, 2020).

U.K. Data Protection Regulator Smooths Way for Fund Managers to Transfer Data to the SEC

The adoption of the E.U. General Data Protection Regulation (GDPR) created a quandary for European fund managers and other firms that are subject to SEC examination and recordkeeping requirements. If they responded to SEC requests for information during examinations, they ran the risk of violating the GDPR’s strict controls on data transfers to non‑E.U. countries. On the other hand, if they failed to respond to the SEC, they faced potential enforcement actions. In addition, the U.K. enacted its own version of the GDPR, which perpetuated the issue for U.K. fund managers and other firms post-Brexit. The U.K. Information Commissioner’s Office recently resolved this issue for U.K. firms subject to SEC oversight, confirming that those firms may rely on the “public necessity” exception to the GDPR’s data transfer prohibitions when complying with SEC information requests. This article analyzes the terms of – and rationale for – the relief, with additional commentary from Morrison & Foerster partner Annabel Gillham and counsel Robert S. Litt, who is co‑chair of the firm’s global risk and crisis management group. See “GDPR Lives On in the U.K. Post‑Brexit” (Mar. 4, 2021).

Diversity and Inclusion in Asset Management: Structural Barriers and Investor Impact (Part Two of Two)

In 2020, the coronavirus pandemic and social unrest served to highlight persistent and pervasive social and economic injustice. For example, a lack of diversity and inclusion (D&I) has long been an issue for the predominantly white and male investment management industry. At the Clifford Chance Global Funds Conference 2021, one panel examined the state of D&I in the industry. Fionnuala Oomen, head of strategy and delivery in Clifford Chance’s London private funds group, moderated the discussion, which featured Leana Coopoosamy, inclusion, diversity and wellbeing specialist at Clifford Chance; Alice Jefferis, senior associate at Clifford Chance; Adebanke Adeyemo, GC at Vantage Infrastructure; Justin Onuekwusi, fund manager at Legal & General Investment Management; and Karis Stander, managing director of Investment20/20. This second article in a two-part series covers the panel’s discussion of the structural barriers to D&I, strategies for overcoming those barriers and the impact of investors on D&I. The first article explored key challenges with fostering D&I and the impact of the events of 2020. See “FCA Executive Director Emphasizes Need for Fund Managers to Promote Diversity” (Jan. 24, 2019).

Doing More With Less: Tools for Managing Third‑Party Risk With Scarce Resources

Identification and management of third-party risk is a constant challenge for all companies conducting business overseas – including fund managers and other organizations. At compliance conferences, the speakers up on the dais are almost always from large organizations with significant compliance resources, making benchmarking difficult for the compliance stakeholders at mid-market companies who make up much of the audience. In a guest article originally published in the Hedge Fund Law Report’s sister publication – the Anti-Corruption Report – William Semins and David Peet, partners at K&L Gates, provide practical advice for those who feel that the standards set at those conferences and in other venues are unattainable on their limited budgets back home. Semins and Peet explain that, through dynamic risk assessment, resource allocation and communication, mid‑sized firms can effectively manage third-party risk even with mid-sized resources. Although originally aimed at compliance professionals at mid-market companies, the lessons contained in this article are wholly applicable to compliance staff at mid-sized hedge fund managers that may lack the resources of their larger counterparts. For more on mitigating operational risks, see “Fund Managers Must Supervise Third-Party Service Providers or Risk Regulatory Action” (Nov. 16, 2017); and “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017).

Manager and Investor Interest in ESG Is Growing, According to Recent Global Hedge Fund Study (Part Two of Two)

A majority of hedge fund managers are incorporating environmental, social and governance (ESG) factors into their investment processes, driven at least in part by investor demand. That is one of the findings by the recent Global Hedge Fund Benchmark Study – a survey of more than 300 hedge fund managers and investors conducted by the Alternative Investment Management Association (AIMA), in cooperation with Simmons & Simmons and Seward & Kissel. This two-part series analyzes the study’s key findings, with additional commentary from Tom Kehoe, AIMA’s managing director and global head of research and communications. This second article examines fund launch terms, industry challenges, responsible investing, investment in new technologies and succession planning. The first article reviewed the respondent demographics and the portions of the study relating to performance and outlook; fees charged by funds; and liquidity and redemption terms. For additional insights from AIMA, see “A Recap of AIMA’s 2019 Global Policy & Regulatory Forum” (May 23, 2019); and “Performance, In-Person Communication and Fees Are Key Elements of Hedge Fund Manager Success, According to AIMA/PwC Survey” (Oct. 4, 2018).