Jun. 10, 2021

Code of Ethics 101: How to Monitor and Enforce Compliance With Them (Part Three of Three)

Rule 204A‑1 under the Investment Advisers Act of 1940 – the so-called “code of ethics rule” (Rule) – does not merely require investment advisers to establish written codes of ethics. Rather, the Rule specifically requires advisers to maintain and enforce their codes of ethics. This final part of our three-part series on code of ethics fundamentals focuses on the “maintain” and “enforce” elements of the Rule, covering how to monitor compliance with codes of ethics – including the role of technology – and handle violations by employees. The first article discussed why fund managers need codes of ethics, as well as the consequences of failing to comply with the Rule’s requirements. The second article focused on the “establish” element, explaining what codes of ethics must – and may – include. See our three-part series “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures”: Part One (Jan. 19, 2012); Part Two (Jan. 26, 2012); and Part Three (Feb. 9, 2012).

Key Tax Issues Fund Managers Must Consider

The past year has seen numerous changes to tax law that may affect fund managers, including revisions to various tax provisions proposed by the Biden administration, final regulations relating to carried interest and a new pass-through entity level tax in New York. In addition, fund managers must consider the potential tax implications of the remote work environment. The Hedge Fund Law Report recently spoke with Philip S. Gross, partner at Kleinberg Kaplan, about the aforementioned topics, as well as trends in fund structuring. This article presents Gross’ insights. For additional commentary from Gross, see “2020 Year‑End Tax‑Planning Considerations for Fund Managers” (Dec. 10, 2020); and “Considerations for Hedge Fund Managers When Evaluating Management Shares for Their Cayman Funds” (Jun. 20, 2019). Gross will be participating in the upcoming Private Investment Fund Tax Master Class, a virtual program sponsored by Foundation Research Associates, on June 22‑23, 2021, during which the above and other topics will be explored in much greater detail. For additional information about the program and to register, click here, using the promotional code contained within this article for a 15‑percent discount.

How ILPA’s Model NDA Could Change Preliminary Due Diligence Practices

Investors are typically required to execute non-disclosure agreements (NDAs) before obtaining information to perform due diligence of fund managers. Although the obligation to keep information confidential is relatively straightforward, each manager has a different NDA for investors to review. That forces investors either to accept each NDA without considering its terms or to negotiate each one separately. If investors choose to negotiate, then they will incur costs and delay access to manager information without any certainty about whether they will even invest with that manager. Unfortunately, managers face many of the same cost and time considerations as well. To remedy those fundraising impediments and streamline the NDA process, the Institutional Limited Partners Association (ILPA) released a new model NDA (Model NDA) in January 2021. The Model NDA’s terms are largely uncontroversial, and there is clearly an appetite for such a document – it was downloaded 400 times on its first day of release. To better understand ILPA’s objectives and the Model NDA itself, the Hedge Fund Law Report interviewed representatives from ILPA, investor counsel and fund manager counsel. This article analyzes the rationale for the Model NDA, its key features, its interplay with click-through confidentiality agreements and its potential impact on the private funds industry. For more on NDAs, see our three-part series “Key Legal and Business Considerations for Hedge Fund Managers in Drafting and Negotiating Confidentiality Agreements”: Part One (Apr. 12, 2012); Part Two (Apr. 26, 2012); and Part Three (Jul 19, 2012).

The Evolution, Status and Future of RegTech in the Private Funds Industry (Part One of Two)

The rapid ascent in popularity of private funds in recent years has coincided with increased duties for their respective legal and compliance departments. To stay ahead of those issues, the industry has increasingly turned to regulatory technology (RegTech) to aid in quickly and efficiently performing certain compliance functions. As a sign of RegTech’s value to the industry, the SEC and other regulators have also eagerly adopted technology to become more proficient and effective at monitoring registered funds and managers. The evolution of RegTech and recent trends in the area were examined in an ACA Compliance Group (ACA) program featuring Dan Campbell, partner and managing director; Raj Bakhru, partner and chief innovation officer; and Carlo di Florio, partner and global services officer. This first article in a two-part series outlines the evolution of RegTech in the private funds industry; the current and future scope of its adoption; and ways the SEC is using RegTech. The second article will describe how fund managers can use RegTech for their compliance efforts, as well as emerging technology in this area that managers can use going forward. For additional commentary from ACA, see our two-part series on 2020 SEC activity: “Challenges, Rulemaking and Guidance” (Feb. 4, 2021); and “Examination and Enforcement Trends” (Feb. 18, 2021).

CFTC Accuses Swaps Trader of Price Manipulation, Deceptive Conduct and Making False Statements

The Dodd-Frank Act gave the CFTC additional ammunition to use for combatting fraud in the commodities and derivatives markets. Using that ammunition, the CFTC recently commenced an enforcement action against a swaps trader at an unnamed investment bank, who allegedly manipulated the price of certain swap spreads to obtain better pricing for the bank in a swap transaction with one of the bank’s bond underwriting customers. This article details the facts and circumstances that underpin the action; the specific charges in the CFTC’s civil enforcement complaint; and the relief the CFTC seeks, with insights from David Slovick, partner at Barnes & Thornburg and former Senior Attorney at the CFTC and SEC; and Petal P. Walker, special counsel at WilmerHale and former Chief Counsel to CFTC Commissioner Sharon Bowen. See our two-part review of recent CFTC activity: “Enforcement Actions” (Apr. 15, 2021); and “Regulatory Actions” (Apr. 29, 2021); as well as “Anticipating SEC and CFTC Enforcement Priorities Under the Biden Administration” (Mar. 18, 2021).

Investment Funds Lawyer Brian Daly Joins Akin Gump in New York

Akin Gump announced that Brian Daly has joined the firm as a partner in its investment management practice in New York. Daly’s practice focuses on advising private investment funds on legal, compliance and operational programs, both in the U.S. and Asian markets. His substantial hedge fund industry experience includes more than two decades in private practice and in-house roles for prominent private fund managers. For additional commentary from Daly, see “OCIE Risk Alert on Private Funds: Key Takeaways for Managers (Part Two of Two)” (Aug. 13, 2020); and “Key Considerations for Fund Managers Responding to the Coronavirus Outbreak” (Mar. 26, 2020).