Sep. 24, 2015

Liability and Incentive Fee Considerations Under ERISA for European Hedge Fund Managers (Part One of Three)

As European hedge fund managers recognize the increasing concentration of investment capital in U.S. pension funds subject to the Employee Retirement Income Security Act of 1974 (ERISA), their appetite for unlocking access to such capital has grown.  This has led a number of European managers to actively seek investment from ERISA plans, notwithstanding the heightened compliance obligations which have traditionally deterred them from accepting ERISA plan assets into their funds.  This article, the first in a three-part series, discusses recent trends in ERISA fundraising by hedge fund managers based in the U.K. and other European jurisdictions and looks at the pertinent issues affecting those managers.  Specifically, it examines key difficulties relating to liability standards and incentive fees and analyzes various approaches to overcoming those issues.  The second article will explore issues relating to prohibited transactions, reporting requirements and side letters under the ERISA regime, and the final article will address concerns relating to indicia of ownership requirements, bond documentation and other overarching issues.  For more on ERISA, see “Structuring Hedge Funds to Avoid ERISA While Accommodating Benefit Plan Investors (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); and “What Should Hedge Fund Managers Expect When ERISA Plans Conduct Due Diligence On and Negotiate For Investments in Their Funds?,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).

What Hedge Fund Managers Need to Contemplate When Implementing a Chaperoning Program (Part Two of Three)

As insider trading cases against hedge fund managers continue to mount, as suggested by then director of the SEC’s Office of Compliance Inspections and Examinations Carlo di Florio, hedge fund managers may wish to consider chaperoning primary research calls as a means of monitoring information inflows.  However, while di Florio’s guidance was helpful, any manager attempting to implement chaperoning policies and practices was left with more questions than answers.  Which research interactions should be chaperoned?  Should only expert network calls be chaperoned, or should calls involving direct consulting also be chaperoned?  What about informal interactions with industry contacts?  How frequently should chaperoning occur?  What methods are there for chaperoning?  And what exactly should chaperoning compliance officers be listening for?  In this article, the second in a three-part series, Eugene Ingoglia, Partner at Morvillo; Laurence Herman, General Counsel and Managing Director at Gerson Lehrman Group (GLG); and Patrick Gordon, Senior Counsel at GLG, address the potential scope of a chaperoning policy, as well as offer practical guidance on implementing that policy.  The first article provided background on chaperoning, including a discussion of the statutory landscape, primary research and SEC guidance.  The third article will cover specific challenges to chaperoning.  For more on chaperoning, see “How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Four of Four),” Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).

The SEC’s Broken Windows Approach: Conflicts of Interest and Expense Allocation Concerns for Hedge Fund Managers (Part One of Two)

Pursuing its “broken windows” approach to enforcement, the SEC continues to scrutinize hedge fund managers.  Accordingly, managers must be ever cognizant of SEC enforcement trends and practical lessons that may be gleaned from them.  In connection therewith, the Hedge Fund Law Report recently interviewed Barry P. Schwartz, founding partner of ACA Compliance Group (ACA); Kent Wegrzyn, managing director of ACA; and Mark Borrelli, a partner at Sidley Austin.  This article, the first in a two-part series, sets forth the participants’ thoughts with respect to the SEC’s broken windows approach, conflicts of interest and allocation of fees and expenses.  In the second installment, the interviewees will discuss compliance resources, chief compliance officer liability and technology.  On Thursday, October 1, 2015, from 11:00 a.m. to 12:00 p.m. EDT, Schwartz, Wegrzyn and Borrelli will expand on the topics in this series – as well as other issues that affect hedge fund managers – in a webcast entitled “What Hedge Fund Managers Need to Know about SEC Enforcement Trends,” which will be moderated by William V. de Cordova, Editor-in-Chief of the HFLR.  To register for the webinar, click here.  For more from ACA, 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); and “ACA Compliance Group Clarifies Misconceptions Commonly Held by Fund Managers with Respect to Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit

Igor Rozenblit, co-leader of the Private Funds Unit (PFU) of the SEC Office of Compliance Inspections and Examinations, recently delivered the keynote address at Practising Law Institute’s Hedge Fund Management 2015 program, in which he discussed the PFU and offered valuable insight into its operations and priorities.  In a subsequent segment of that program, he and Scott Weisman, a PwC managing director and former assistant director of the SEC Division of Enforcement, delved further into the operations and concerns of the PFU.  Nora M. Jordan, a partner at Davis Polk, moderated the programs.  This article summarizes the key takeaways from Rozenblit’s remarks.  For additional commentary from Rozenblit, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four),” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

FCA Proposes Changes to Authorized Investment Funds Regulation

In a recently issued Consultation Paper, the U.K. Financial Conduct Authority (FCA) presented three sets of proposals for regulating authorized investment funds in the United Kingdom.  These proposals consist of rules and guidance necessary to implement changes to the European Directive on Undertakings for Collective Investment in Transferable Securities (UCITS); operation of the new European long-term investment fund vehicle; and other changes to fund regulation that the FCA deems necessary.  This article summarizes the changes to the rules and guidance in the FCA Handbook relevant to managers of, and other parties involved with, authorized funds in the U.K., including hedge funds.  For a summary of the proposals in the Consultation Paper relating to UCITS management company issues, including remuneration, transparency and whistleblowing requirements, see “FCA Consults on Implementation of UCITS V Provisions Applicable to Managers,” Hedge Fund Law Report, Vol. 8, No. 36 (Sep. 17, 2015).  For more on UCITS, see “UCITS: An Opportunity for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 2, No. 27 (Jul. 8, 2009); and “Convergence of Hedge Fund Strategies and the UCITS Structure in Europe Mirrors Convergence of Hedge Fund Strategies and Mutual Fund Structures in the United States,” Hedge Fund Law Report, Vol. 2, No. 37 (Sep. 17, 2009).

OCIE Risk Alert Provides Cybersecurity Guidance to Investment Advisers and Broker-Dealers

The SEC Office of Compliance Inspections and Examinations (OCIE) continues to focus on cybersecurity preparedness of broker-dealers and investment advisers.  Building on past initiatives and guidance, OCIE recently announced a second round of examinations “to assess implementation of firm procedures and controls.”  On September 15, 2015, OCIE issued a Risk Alert (Alert) detailing its concerns, as well as sample requests for information, in regard to six focus areas.  This article summarizes the key provisions and explores the implications of the Alert for investment advisers and broker-dealers.  For more on cybersecurity risks, regulations and preparedness, see our series covering K&L Gates-IAA panels addressing “Cybersecurity Laws and Threats Applicable to Investment Managers (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015); and “Cybersecurity Risk Mitigation Frameworks and Techniques for Investment Managers (Part Two of Two),” Vol. 8, No. 17 (Apr. 30, 2015).  See also “ACA Compliance Group Clarifies Misconceptions Commonly Held by Fund Managers with Respect to Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

K&L Gates Adds to Investment Management Practice with Boston Partner Hire

On September 23, 2015, K&L Gates announced the addition of Richard Kerr as a partner in its investment management, hedge funds and alternative investments practice in Boston.  Kerr focuses his practice on counseling investment companies, investment advisers, broker-dealers, banks and other financial institutions on corporate, regulatory and transactional matters.  For insight from the firm, see “K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three),” Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015); and “Key Investment and Operational Restrictions Imposed on Alternative Mutual Funds by the Investment Company Act of 1940 (Part Two of Two),” Vol. 7, No. 25 (Jun. 27, 2014).