May 21, 2015

How Hedge Fund Managers Can Protect Privileged Internal Investigations Without Violating SEC Whistleblower Rule 21F-17

The protection of whistleblowers is a priority for the SEC.  As hedge fund managers are subject to sanctions for retaliating against whistleblowers, it is important for managers to ensure that internal investigations are properly carried out and that internal reporting is properly incentivized.  See “Sanctions against Private Fund Manager for Retaliating against Whistleblower Highlight the Importance of Incentivizing Internal Reporting,” Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).  Furthermore, with the addition in 2010 by the Dodd-Frank Act of Section 21F – the “Securities Whistleblower Incentives and Protection” provision – to the Securities and Exchange Act of 1934, and the SEC’s subsequent adoption of Rule 21F-17 to implement Section 21F’s whistleblower protections in 2011, hedge fund managers have been put on notice that the actual or threatened enforcement of confidentiality agreements could result in violations of the Rule.  On April 1, 2015, in connection with charges that KBR, Inc. violated Rule 21F-17, the SEC announced its “first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process.”  In a guest article, Thomas K. Cauley, Jr., Courtney A. Rosen and William B. Bruce, of Sidley Austin, analyze the SEC enforcement action against KBR and recommend how hedge fund managers and other entities can tailor their confidentiality agreements to avoid violating Rule 21F-17(a), while at the same time preserving attorney-client privilege during internal investigations.  For more on whistleblowers, see “RCA Session Offers Insights on Dodd-Frank Whistleblower Regime, Incentives, Anti-Retaliation Protections and Risks,” Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).  For additional insight from Cauley and Rosen, see “Rules Against ‘Spoofing’ and Other Disruptive Trading in Futures, Swaps and Options,” Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “Derivative Actions and Books and Records Demands Involving Hedge Funds,” Hedge Fund Law Report, Vol. 7, No. 39 (Oct. 17, 2014); and “Contractual Provisions That Matter in Litigation between a Fund Manager and an Investor,” Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014).

How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part Three of Three)

Simultaneously managing a hedge fund and a private equity fund is fraught with potential conflicts of interest, both structural and operational.  These considerations become even more complex when applied to offshore concerns.  It is crucial for managers to identify and eliminate or mitigate and disclose such conflicts, especially in light of the SEC's continued focus on them.  See “ACA Compliance Professionals and SEC Veteran John H. Walsh Share Insights on SEC Priorities for 2015,” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015).  This article, the third in a three-part series, addresses offshore concerns and ways to mitigate conflicts of interest arising out of the simultaneous management of hedge funds and private equity funds.  The first article explored the structural considerations that give rise to potential conflicts; conflicts involving the investments held by each fund; and conflicts with the allocation of investment and disposition opportunities between affiliated hedge funds and private equity funds.  The second article discussed operational conflicts arising out of simultaneous management of hedge funds and private equity funds, including conflicts involving the possession of material nonpublic information, valuation, allocation of expenses, personal trading and investors.  See also “How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part Three of Three),” Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates

In the dynamic and ever-changing hedge fund industry, it is vital for hedge fund managers to understand current trends with respect to fund structures and terms in order to best market to and raise capital from investors and anticipate likely changes in the hedge fund marketplace.  Recent trends have managers rethinking the kinds of expenses that should be appropriately allocated to funds; the structures of gates and redemption provisions; and acceptable fee terms for their funds.  Navigating these trends was a key issue discussed during the Dechert Alternative Funds Symposium recently held in New York City.  This article summarizes the salient points raised on the foregoing topics.  See also “Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014).

K&L Gates-IAA Panel Addresses Regulatory Compliance and Practical Elements of Cybersecurity Testing (Part One of Two)

Cybersecurity is one important element of a fund manager’s overall regulatory compliance responsibilities.  Although not explicitly required by SEC regulations, it is clear that managers are expected to test for cybersecurity vulnerabilities and preparedness.  Such testing was recently considered in depth at a program sponsored by K&L Gates and the Investment Adviser Association (IAA).  The program was the third installment of the sponsors’ Investment Management Cybersecurity Seminar Series and was moderated by Mark C. Amorosi, a partner at K&L Gates.  The other speakers were Laura L. Grossman, assistant general counsel at IAA; Jason Harrell, corporate senior information risk officer at BNY Mellon; Jeromie Jackson, director of security & analytics at Nth Generation; and K&L Gates partners Jeffrey B. Maletta and Andras P. Teleki.  This article, the first in a two-part series, summarizes the panelists’ discussion of the legal and compliance framework for cybersecurity testing; testing considerations; and how to leverage OCIE’s recent cybersecurity examination initiative to improve cybersecurity compliance and testing.  The second article will discuss testing approaches; vulnerability assessments; penetration testing; and recent SEC and private litigation on cybersecurity matters.  For coverage of the first installment of the series, in which Amorosi, Grossman and Teleki also participated, see “K&L Gates-IAA Panel Provides Comprehensive Overview of Cybersecurity Laws and Threats Applicable to Investment Managers (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015); and “K&L Gates-IAA Panel Provides Comprehensive Overview of Cybersecurity Risk Mitigation Frameworks and Techniques for Investment Managers (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015).

Deutsche Bank Alternative Investment Survey Reveals Investor Appetite for Hedge Funds and Other Alternative Investments and Strategies, and Criteria for Investing in Hedge Funds (Part One of Two)

Deutsche Bank Global Prime Finance (DB) has released the results of its 13th annual Alternative Investment Survey.  This article, the first of two-part coverage, describes the survey methodology and demographics and summarizes the portions of the survey that deal with allocations to alternative investments in general, and to hedge funds in particular; allocation plans by strategy and region; and investor preferences regarding hedge fund track record, minimum size, and initial and target investment ticket sizes.  The second article in the series will discuss the portions of the survey that address fees and liquidity trends; trends among intermediaries; and early stage investing and seeding.  For coverage of DB’s November 2013 survey, see “Deutsche Bank Survey Describes the Contours of the Nontraditional Hedge Fund Product Market: Investor Appetite, Performance, Marketing, Fees and More,” Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).  For coverage of other recent surveys of investor preferences with regard to alternative investments, see “Credit Suisse Hedge Fund Survey Considers Factors in Institutional Investors’ Investment and Redemption Decisions, Appetite for Alternative UCITS and Anticipated 2015 Hedge Fund Investments by Strategy and Region,” Hedge Fund Law Report, Vol. 8, No. 12 (Mar. 27, 2015); and “Ernst & Young’s 2014 Global Hedge Fund and Investor Survey Considers Growth Areas for Hedge Fund Managers, Related Costs and Challenges, Operating Expenses and Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

DMS Review Highlights Issues with Regulation, Institutionalization and Customization of Hedge Funds

As hedge funds proliferate in an increasingly complex regulatory and marketing environment, there are numerous governance issues that hedge fund managers must address.  In its recently released Fund Governance Review 2015 (Review), DMS Offshore Investment Services examines key themes for maintaining sound fund governance practices with respect to regulation, institutionalization and customization.  This article summarizes the main points in the Review.  For another survey of fund governance issues, see “2013 Walkers Fundamentals Hedge Fund Seminar Highlights Trends in Cayman Fund Structures and Terms, Cayman and Irish Fund Governance Developments, Conflicts of Interest, Use of Advisory Boards and Fund Borrowing,” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

Untracht Early Expands Assurance Area with the Addition of Senior Manager Richard M. Fuchs

Accounting firm Untracht Early recently announced the addition of Richard M. Fuchs as a Senior Assurance Manager at its New Jersey headquarters.  Fuchs specializes in providing accounting, assurance and consulting services to registered investment advisers, broker-dealers, private equity firms and hedge funds (including offshore entities).  See “Key Tax Issues Facing Offshore Hedge Funds: FDAPI, ECI, FIRPTA, the Portfolio Interest Exemption and ‘Season and Sell’ Techniques,” Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015).  He also has performed audits of employee benefit plans such as defined contribution plans and defined benefit plans.  See “Structuring Private Funds to Avoid ERISA While Accommodating Benefit Plan Investors (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015); and Part Two of Two, Vol. 8, No. 6 (Feb. 12, 2015).