Oct. 1, 2015

Prohibited Transaction, Reporting and Side Letter Considerations Under ERISA for European Hedge Fund Managers (Part Two of Three)

A growing number of European hedge fund managers are actively seeking injections of capital from U.S. investors subject to the Employee Retirement Income Security Act of 1974 (ERISA).  Hedge fund managers wishing to “cross-over” their funds into the ERISA regulatory sphere must, however, be cognizant of the increased and complex tangle of regulations and compliance obligations which have often deterred European managers from pursuing ERISA assets.  This second article in a three-part series examines particular issues U.K. and other European managers face stemming from prohibited transactions rules and reporting requirements under the ERISA regime and offers approaches to side letters for European managers raising capital from ERISA plans.  The first article analyzed the pertinent issues affecting European managers relating to liability standards and incentive fees.  The final article in the series will address concerns relating to indicia of ownership requirements, bond documentation and other issues.  See also “Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse (Part Five of Five),” Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014); and “RCA PracticeEdge Session Highlights the Key Points of Intersection between ERISA and Hedge Fund Investments and Operations,” Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).

Investment Adviser Penalized for Weak Cyber Policies; OCIE Issues Investor Alert

To date, the SEC’s focus on cybersecurity has largely been relegated to providing guidance to registrants and learning about the state of cybersecurity preparedness through examinations.  See “OCIE Risk Alert Provides Cybersecurity Guidance to Investment Advisers and Broker-Dealers,” Hedge Fund Law Report, Vol. 8, No. 37 (Sep. 24, 2015).  One sign that the SEC may take action against firms that fail to follow that guidance, regardless of whether harm is alleged, is the recent settlement with investment adviser R.T. Jones Capital Equities Management, Inc.  The firm suffered a cybersecurity breach that compromised information of over 100,000 retirement plan participants and has agreed to pay a $75,000 fine to settle the charges that it violated the Safeguards Rule under Regulation S-P.  The SEC released a related Investor Alert offering guidance to individual investors who believe that their personally identifiable information has been compromised.  This article provides the highlights of the SEC’s order and Investor Alert.  For more on cybersecurity risks, regulations and preparedness, see our series covering a K&L Gates-IAA panel 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).

The SEC’s Broken Windows Approach:  Compliance Resources, CCO Liability and Technology Concerns for Hedge Fund Managers (Part Two of Two)

Under its “broken windows” approach to enforcement, the SEC has filed a record number of enforcement actions against hedge fund managers, investment advisers and other industry participants.  With the rise in enforcement activity comes a similar increase in opportunity for hedge fund managers to learn practical lessons.  To distill some of these lessons, 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 second in a two-part series, sets forth the participants’ thoughts with respect to compliance resources, chief compliance officer (CCO) liability and technology.  In the first article, the interviewees discussed the SEC’s broken windows approach, conflicts of interest and allocation of fees and expenses.  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 webcast, click here.  For more from ACA, see “ACA Webcasts Detail Exempt Reporting Adviser Qualifications and Compliance Obligations,” Hedge Fund Law Report, Vol. 5, No. 10 (Mar. 8, 2012).

Challenges Hedge Fund Managers May Encounter When Implementing a Chaperoning Program (Part Three of Three)

Hedge fund managers planning to chaperone primary research calls in order to monitor information inflows are faced with numerous challenges.  Beyond the logistical issues surrounding the creation and implementation of a chaperoning program, managers may encounter challenges when operating that program, including issues regarding complexity, recordkeeping and cost.  These practical issues must be weighed against the benefits of chaperoning.  In this article, the third 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, examine specific challenges that hedge fund managers may encounter when implementing a chaperoning program, weighed against the benefits gained from chaperoning.  The first article provided background on chaperoning, including a discussion of the statutory landscape, primary research and SEC guidance.  The second article addressed the potential scope of a chaperoning policy and offered practical guidance in implementing that policy.  For more on chaperoning, see “Strategies for Avoiding Insider Trading Violations: A Perspective Informed by SEC Service, Private Law Firm Practice and Work as General Counsel of a Hedge Fund Manager,” Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).

European Regulator Issues Guidance to Market Participants on Penalties for Settlement Failures

The European Securities and Markets Authority (ESMA) recently published a Final Report (Report) containing technical advice under the E.U. regulation on improving securities settlement in the European Union and on central securities depositories (CSD Regulation).  The Report addresses two areas relating to delegated acts required under the CSD Regulation: penalties for settlement failures and the importance of a CSD.  This article provides the background to the Report and examines ESMA’s advice on penalties for settlement failures.  The advice is important for hedge fund managers and other participants in the E.U. securities market because penalties are meant to deter settlement failures and encourage prompt resolution of failures by market participants, thereby improving settlement efficiency within the E.U.  Implementing a cash penalty system will also affect the bottom line for market participants, stemming from the implementation, operation and monitoring of the system by CSDs and regulators, as well as payment of the penalties.  For more on CSDs, see “EMIR Offers Three Models of Asset Segregation to Fund Managers That Trade OTC Derivatives,” Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

ESMA Chair Highlights Upcoming Focus on Supervisory Convergence

In his annual statement to the members of the Economic & Monetary Affairs Committee of the European Parliament, Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), highlighted ESMA’s achievements over the past twelve months and set out its goals for the upcoming year, giving hedge fund managers and other industry participants valuable insight into the ongoing focus of the European regulator.  Maijoor emphasized ESMA’s founding objectives and described an expected shift in attention for the upcoming year.  This article identifies the key observations and themes embodied by Maijoor’s statement.  For more on ESMA activities, 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); and “ESMA Releases Final Report on MiFID II Technical Standards for Hedge Fund Management Firms,” Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015).

FaegreBD Adds Partner Zeke Johnson to Investment Management Offering

On September 23, 2015, Faegre Baker Daniels announced that Ezekial (Zeke) Johnson has joined as a partner, advising global investment managers on the Investment Advisers Act, the Commodity Exchange Act, Regulation D and Dodd-Frank.  For insight from the firm, see “What Are Hybrid Gates, and Should You Consider Them When Launching Your Next Hedge Fund?,” Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011); “Investors Demand More Specificity in Hedge Fund Governing Documents Regarding Circumstances in which Liquidity Management Tools May Be Used,” Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009); and “How Can Hedge Fund Managers Prevent or Mitigate Revocations of Redemption Requests?,” Hedge Fund Law Report, Vol. 2, No. 21 (May 27, 2009).