Sep. 17, 2015

Are You Listening?  Whether Hedge Fund Managers Should Chaperone Primary Research Calls (Part One of Three)

Insider trading and the potential for misuse of confidential information should be top-of-mind for investment professionals.  With the prevalence of insider trading cases brought over the last five years, the government’s initiative to stamp the practice out has been persistent, aggressive and fruitful, even after the Second Circuit dealt the government a setback in U. S. v. Newman.  See “The Newman/Chiasson Decision Continues to Have Implications for Insider Trading Compliance,” Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015).  Nonetheless, it appears the temptations and incentives to find an edge in a highly competitive trading environment remain as strong as ever.  Against this backdrop, it is all the more critical for compliance departments to monitor information inflows.  In this guest article, Eugene Ingoglia, Partner at Morvillo; Laurence Herman, General Counsel and Managing Director at Gerson Lehrman Group (GLG); and Patrick Gordon, Senior Counsel at GLG, focus on how chaperoning primary research calls can help compliance officers meet these obligations.  This first article in a three-part series provides background on chaperoning, including a discussion of the statutory landscape, primary research and SEC guidance.  The second article will address the potential scope of a chaperoning policy, as well as offer practical guidance in implementing that policy.  The third article will cover specific challenges to chaperoning.  For more on chaperoning, see “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

Implementation of Hedge Fund Audit Holdbacks (Part Two of Two)

Audit holdback provisions allow a fund to retain a portion of a withdrawing investor’s redemption proceeds for a period of time – typically until the fund’s annual audit is completed – to guard against adjustments to the fund’s net asset value (NAV) after the investor has redeemed.  However, when establishing an audit holdback, a hedge fund manager must carefully balance the overall liquidity of the underlying investments and the likelihood of subsequent adjustments to the NAV against the interests of investors and market practice.  This article, the second in a two-part series, discusses the prevalence of holdbacks in the hedge fund industry; investor response to these provisions; and considerations for hedge fund managers in crafting audit holdback terms.  The first article analyzed the mechanics of audit holdbacks; considered common variables found in such provisions; and evaluated potential alternatives to audit holdback structures.  For more on holdbacks, see “The Evolution of Offshore Investment Funds (Part One of Three): In Interview with Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Drafting of Offshore Fund Documents; NAV Adjustments; Clawbacks; Managed Accounts; and Payment-in-Kind Provisions,” Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).

FCA Consults on Implementation of UCITS V Provisions Applicable to Managers

The U.K. Financial Conduct Authority (FCA) has issued a Consultation Paper regarding regulation of authorized investment funds.  The FCA is consulting on proposed rules and guidance relating to the implementation of upcoming changes (commonly referred to as UCITS V) to the European Directive on Undertakings for Collective Investment in Transferable Securities (UCITS).  The proposals are relevant to managers of UCITS and other authorized funds, as well as other entities involved in the U.K. fund management industry.  This article sets out the UCITS regulatory framework and summarizes the FCA’s proposals addressing UCITS management company issues, which include remuneration, transparency and whistleblowing requirements.  For more on UCITS, see “Are Alternative Investment Strategies Within the Spirit of UCITS?,” Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012); and “The Implications of UCITS IV Requirements for Asset Management Functions,” Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  For additional analysis by the FCA, see “FCA Hedge Fund Survey Examines Key Risk Metrics Applicable to Hedge Funds,” Hedge Fund Law Report, Vol. 8, No. 27 (Jul. 9, 2015).

Pricing Information Provided by Brokers to Hedge Fund Managers for Thinly Traded Securities May Not Be Reliable

The SEC has commenced a civil enforcement action in the U.S. District Court for the Southern District of New York against three former traders who were working at a broker-dealer.  The SEC asserts that, in connection with their purchases and sales of residential mortgage-backed securities (RMBS) and manufactured housing asset-backed securities, the defendants repeatedly lied to customers about the prices that potential sellers were asking for such securities; about the bids that potential buyers were making for such securities; and about the compensation that the broker-dealer would receive for brokering trades.  The defendants have also been indicted on criminal securities and wire fraud charges in the U.S. District Court for the District of Connecticut.  The case is a reminder that hedge fund managers should think twice before relying on pricing information provided by brokers with regard to thinly traded securities.  This article summarizes the allegations set forth in the SEC complaint and the relief sought by the SEC.  For discussion of another action involving alleged misrepresentations by a broker in connection with sales of RMBS, see “Puffery or Securities Fraud? Litvak Conviction Sheds Light on Permissible Bounds of Bond Sales Talk and the Evidentiary Power of Bloomberg Chats,” Hedge Fund Law Report, Vol. 7, No. 11 (Mar. 21, 2014).

CFTC Requires Most Registered Commodity Pool Operators, Commodity Trading Advisors and Introducing Brokers to Join the NFA

The Dodd-Frank Act requires hedge fund managers that engage in certain swap-related activities to register with the CFTC as either commodity pool operators (CPOs), commodity trading advisors (CTAs) or introducing brokers (IBs).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Until now, such CFTC registrants have generally only been required to join the National Futures Association (NFA) if they were also engaged in commodities futures transactions.  To ensure that registrants engaging only in swap-related activities join the NFA – and thereby become “subject to the same level of comprehensive NFA oversight” – the CFTC recently adopted Final Rule 170.17 (Rule), which requires all registered CPOs and IBs, as well as many registered CTAs, to join the NFA.  This article summarizes the Rule, the relevant regulatory background and the CFTC’s rationale for adopting it.  For more on the impact of Dodd-Frank on hedge fund managers, see “How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?,” Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).

ACA 2015 Compliance Survey Covers SEC Exams, MNPI and Restricted Lists (Part One of Two)

ACA Compliance Group recently released the results of its 2015 Alternative Fund Manager Compliance Survey, which considered a variety of compliance issues faced by private fund managers, including hedge fund managers.  At a recent webinar, Colleen Marencik, a senior principal consultant at ACA Compliance Group, and Tessa Carbone, a consultant at that firm, discussed the survey results and offered comparisons of this year’s results with those of the firm’s prior surveys.  This article, the first in a two-part series, summarizes the key findings from the survey and the insights offered by Carbone and Marencik with respect to the survey demographics; SEC exam experiences; material nonpublic information; and restricted lists.  The second article will address expert networks and consultants, fund expenses and electronic communications.  For coverage of prior ACA surveys, see “ACA 2014 Compliance Survey Covers SEC Exams, CCOs, Compliance Reviews, Custody, Fees and Personal Trading,” Hedge Fund Law Report, Vol. 7, No. 46 (Dec. 11, 2014); “ACA Compliance Survey Covers Current Hedge Fund Practices on Marketing, Trading, Counterparties and Valuation,” Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); and “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013).

Funds Specialist Joins Mourant Ozannes

Mourant Ozannes recently welcomed Tim Morgan as a partner in the firm’s Jersey office.  Morgan advises on listed and non-listed investment funds as well as on related corporate, finance and restructuring issues.  He is a committee member of the Jersey Funds Association and, as deputy chairman, has worked closely with industry peers on Jersey’s AIFMD implementation, recently representing Jersey’s position to European regulators.  See “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions,” Hedge Fund Law Report, Vol. 8, No. 31 (Aug. 6, 2015).  For insight from the firm, see “Redeemed Investors Have Priority With Respect to Payment from Liquidating Cayman Islands Hedge Fund,” Hedge Fund Law Report, Vol. 8, No. 35 (Sep. 10, 2015); “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators,” Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012); and “Cayman Islands Developments Impacting Fund Governance, Master Fund Registration and the Insolvency Regime: An Interview with Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes,” Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012).

Stradley Ronon Welcomes Roger S. Wise

On September 15, 2015, Stradley Ronon announced that investment management and corporate transactions tax lawyer Roger S. Wise has joined the firm as a partner in its Washington, D.C. office.  Wise counsels clients on tax issues affecting the investment management and financial services industries, including structuring hedge funds; open- and closed-end mutual funds; real estate funds (including REITs); private equity funds; insurance products; and financial transactions.  For insight from the firm, see “FRA Liquid Alts 2015 Conference Highlights ’40 Act Fund Structures and Regulatory Concerns with Alternative Mutual Funds (Part Two of Three),” Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015); “Eight Important Regulatory and Operational Differences Between Managing Hedge Funds and Alternative Mutual Funds,” Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014); and “How Can Hedge Fund Managers Use Advisory Committees to Manage Conflicts of Interest and Mitigate Operational Risks? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 17 (Apr. 25, 2013).