Hedge fund managers should demonstrate a vigorous commitment to preventing and detecting securities law violations, especially in an environment with increasing SEC enforcement activity and heightened fund investor due diligence of managers.  See “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examinations and Enforcement Priorities for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  Therefore, at the first signs of red flags, a hedge fund manager must strongly consider whether to initiate an internal investigation, which can facilitate the accomplishment of various goals, including potentially deterring any nefarious activity; demonstrating the firm’s independent commitment to good compliance; and, if the wrongdoing has already occurred, preventing or mitigating any charges that could be brought against the manager.  See “For Hedge Fund Managers in a Heightened Enforcement Environment, Internal Investigations Can Help Prevent or Mitigate Criminal and Civil Charges,” Hedge Fund Law Report, Vol. 2, No. 47 (Nov. 25, 2009).  However, if not conducted properly, internal investigations can present their own risks, including inadvertent disclosure of the investigation; waiver of the attorney-client privilege; and accusations of improper handling or even obstruction of justice.  To mitigate these risks, hedge fund managers should adopt a carefully-conceived plan for conducting internal investigations.  In a guest article, Sung-Hee Suh and Nelida Lara, partner and associate, respectively, at Schulte Roth & Zabel LLP, offer ten recommendations designed to help hedge fund managers conduct successful internal investigations. Read full article …

On December 18, 2012, the Regulatory Compliance Association held its Compliance, Risk & Enforcement Symposium at the Pierre Hotel in New York City.  Participants at the event included leading hedge fund industry professionals, and panels focused on topics including insider trading, compliance programs and reviews, SEC examination priorities, hedge fund governance, Form PF and marketing and advertising issues.  This article – the second installment in a two-part series covering the Symposium – discusses SEC examination priorities (and practical guidance for addressing areas of concern); recent trends in hedge fund governance; lessons learned from initial Form PF filings and strategies for completing Form PF; and marketing and advertising issues, including a discussion of the JOBS Act and related topics.  The first installment covered, among other things: insider trading (including a discussion of manager cooperation, the elements of insider trading, the continuing viability of the mosaic theory, insider trading investigative techniques and the use of expert networks and paid consultants); and compliance programs and reviews (including a discussion of the approach to and framework for hedge fund compliance programs and reviews, and specific policies and procedures designed to address trading risks).  See “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013). Read full article …

The best hedge fund managers are often great salespeople, and a good bit of their sales efforts are often directed internally – in particular, at persuading non-investment professionals to buy into their view of the world.  This is fine so long as that view is compelling and legitimate.  But this becomes problematic for all involved when that view is fraudulent.  A recent U.K. appellate court decision indicates that employees of hedge fund managers may be liable in cases where they accept at face value – and relay to third parties – representations from a manager principal that they knew or should have known to be false.  “He told me so” is not a valid defense to a suit for negligence; and employees with limited authority can be hit with effectively unlimited liability. Read full article …

On February 21, 2013, the SEC’s National Examination Program (NEP) published its list of priorities for examinations of investment advisers (including hedge fund managers) and other regulated entities for 2013.  The NEP list not only addresses presence examinations of newly registered investment advisers, but also discusses focus areas for examinations of previously-registered advisers.  Also, unlike prior speeches addressing adviser examination priorities for 2013, this announcement reflects an official SEC statement on the matter.  This article offers a deep dive into the SEC’s thinking on each of the specified examination priorities. Read full article …

The Dodd-Frank Act established a comprehensive new regime of central clearing and trade execution requirements for certain over the counter swap transactions.  In anticipation of the effectiveness of that new regime, the Securities Industry and Financial Markets Association (SIFMA) requested an advisory opinion from the U.S. Department of Labor (DOL) on the applicability of the Employee Retirement Income Security Act of 1974 (ERISA) to certain elements of the central clearing of swaps entered into by pension plans and other entities deemed to hold “plan assets,” including hedge funds deemed to be “plan asset funds” (ERISA plans).  SIFMA was concerned that margin held by clearing members might be considered “plan assets” and that clearing members might be deemed ERISA fiduciaries or “parties in interest” to an ERISA plan subject to ERISA’s prohibited transaction rules.  In response, the DOL recently issued an advisory opinion (Opinion) addressing these issues.  The Opinion impacts plan asset hedge funds, which are subject to ERISA’s substantive provisions.  See “How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions? (Part Three of Three),” Hedge Fund Law Report, Vol. 3, No. 24 (Jun. 18, 2010).  This article summarizes the Opinion and its implications for ERISA plans, including plan asset hedge funds. Read full article …

A U.K. trial court recently handed down a decision in a suit brought by a hedge fund manager and its principal against a bank and one of its relationship managers for damages resulting from approximately £15.5 million in losses suffered in an alleged Ponzi scheme in which they invested that maintained accounts at the bank.  The plaintiffs claimed that the bank and the relationship manager, which handled several accounts used in the Ponzi scheme, were liable for negligence, deceit and other misconduct and for failing to reveal information about the accounts to the plaintiffs.  Importantly, the court’s decision in this case highlights the extent to which a bank and its employees are obligated to discover and disclose information about their customers’ accounts to hedge fund managers.  This article summarizes the factual background, legal analysis and decision in this case. Read full article …

International law firm Withers Bergman LLP recently announced the appointment of investment management specialist Matthew Feargrieve to establish a pan-European investment funds practice.  For insight from Feargrieve on the Swiss hedge fund industry, see “The Changing Face of Alternative Asset Management in Switzerland,” Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012). Read full article …

On February 26, 2013, Katten Muchin Rosenman LLP announced that Darius J. Goldman has joined the firm as a partner in its Financial Services Practice.  Goldman represents commercial banks, investment banks and hedge funds in their purchase or sale of trade claims, private securities, bank debt and other investments in domestic and international companies undergoing financial distress.  See “What Happens to a Claims Trade If a U.S. Bankruptcy Court and a Foreign Court Disagree on the Validity of the Trade?,” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013). Read full article …