Aug. 28, 2014

Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program

The Regulatory Compliance Association (RCA) recently held its Enforcement, Compliance & Operations (ECO) 2014 Symposium in New York City.  The Symposium addressed numerous relevant issues, including how a hedge fund manager should develop a supervision and remediation process that complies with Rule 206(4)-7 under the Investment Advisers Act of 1940.  The rule requires registered investment advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act; review at least annually the adequacy of those policies and procedures and the effectiveness of their implementation; and designate a person responsible for administering the adopted policies and procedures.  Symposium panelists explained that an effective compliance program must include four key elements.  This article identifies and discusses those elements.  For coverage of other topics from the ECO Symposium, see “RCA Enforcement, Compliance and Operations 2014 Symposium Offers Insight from Top SEC Officials on Custody, Conflicts, Broker Registration, Alternative Mutual Funds and the JOBS Act (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 22 (Jun. 6, 2014); and “RCA ECO 2014 Symposium Offers Insight from Top SEC Officials on Cybersecurity, Reg M, Examinations, Insider Trading Investigations, the Newman Appeal, Expert Networks and Political Intelligence (Part Two of Two), Hedge Fund Law Report, Vol. 7, No. 25 (Jun. 27, 2014).  See also “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).

SEC Continues Pre-Action Probe of Stilwell Inter-Fund Loans

The U.S. District Court for the Southern District of New York recently ordered hedge fund principal Joseph D. Stilwell to show cause why he should not give additional testimony to the SEC in connection with the SEC’s investigation of the circumstances surrounding a number of inter-fund loans between funds advised by Stilwell Value, LLC.  Stilwell first testified about certain inter-fund loans in 2013.  However, the SEC claimed that it received evidence of additional inter-fund loans earlier this year and is seeking to compel Stilwell to give additional testimony.  For more on transactions among hedge funds, see “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).  For more on transactions between hedge fund managers and funds, see “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  For more on loans from hedge funds to managers, see “Important Implications and Recommendations for Hedge Fund Managers in the Aftermath of the SEC’s Settlement with Philip A. Falcone and Harbinger Entities,” Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).

Alternative Investment General Counsel Summit Addresses Examinations, Insider Trading, Political Intelligence and Expert Networks (Part Two of Two)

This is the second article in a two-part series covering ALM’s inaugural Alternative Investment General Counsel Summit in New York – an event at which law firm partners, in-house counsel and regulators discussed best practices on legal issues faced by hedge fund managers.  The first article addressed conflicts of interest raised by dual registration and valuation; the constituent elements of a culture of compliance; the interaction between compensation structures and regulatory developments; AIFMD compliance and timing; presence exam survival strategies; and the role of risk alerts in refining a compliance program.  This article discusses effective responses to regulatory audits and examinations; insider trading; political intelligence; and expert networks.  See also “ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing, OTC Derivatives Reforms, Insider Trading Best Practices, the JOBS Act, AIFMD and Activist Investing (Part Three of Three),” Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).

SEC Action Against Custodian to Fraudulent Hedge Fund Manager Limns the Spectrum of Service Provider Culpability

The SEC recently charged a brokerage firm and its president (Defendants) with helping a hedge fund manager conceal trading losses from investors and misappropriate investor funds.  According to the SEC, the Defendants were necessary to the success of the fraud, and the Defendants received payments from the manager for participating in his scheme.  If the SEC’s factual allegations are accurate, then the Defendants were knowingly complicit in the underlying fraud, and thus effectively participants.  But what if the Defendants were not knowingly complicit but rather received “storm warnings” of the fraud, or identified red flags then did nothing, or not enough?  Or what if red flags could have been uncovered with reasonable investigation, but the Defendants failed to uncover them?  This article describes the factual and legal allegations in this matter, and briefly considers the foregoing questions.  For a stark illustration of the challenges facing a service provider to a fraudulent hedge fund manager, see “Recent Bayou Judgments Highlight a Direct Conflict between Bankruptcy Law and Hedge Fund Due Diligence Best Practices,” Hedge Fund Law Report, Vol. 4, No. 25 (Jul. 27, 2011).

Leading Private Equity Attorney to Join Ropes & Gray in London

On August 27, 2014, Ropes & Gray LLP announced that Phil Sanderson, the former head of Travers Smith’s London private equity team, will be joining the firm as a partner in its London office.  Sanderson has specific expertise in mid-market private equity transactions.  See “SEC Staff Provides Roadmap to Middle-Market Private Fund Adviser Examinations,” Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014).  For insight from the firm, see “Ropes & Gray Attorneys Discuss Implications for U.S. Hedge Fund Managers of the European Market Infrastructure Regulation,” Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014); “Ropes & Gray Attorneys Discuss the Impact on Private Fund Managers of Final Regulations Under the Volcker Rule,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).