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    Oct. 22, 2015

How Hedge Fund Managers Detect and Bear Responsibility for Trade Errors in Practice (Part Two of Two)

Hedge fund managers must closely monitor their operations in an attempt to detect any potential trade errors and resolve them as quickly as possible.  However, once a trade error is detected, the question of who bears responsibility for that error remains.  Will the manager reimburse the hedge fund for any losses that it has incurred in light of the trade error?  Or, will the fund have to bear that burden?  Hedge fund managers must also keep in mind other operational considerations including materiality; applicability of trade error policies across multiple funds and accounts; and regulatory concerns.  In an effort to determine industry best practices for addressing trade errors, the Hedge Fund Law Report conducted a survey of hedge fund managers.  This second article in a two-part series presents the results of that survey with respect to detection of and responsibility for trade errors, as well as other operational considerations.  The first article discussed fundamentals of trade error policies and handling trade errors.  For more on trade errors, see “How Should Hedge Fund Managers Approach the Identification, Prevention, Detection, Handling and Correction of Trade Errors? (Part Three of Three),” Hedge Fund Law Report, Vol. 6, No. 12 (Mar. 21, 2013).

AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated

With the introduction of Europe’s Alternative Investment Fund Managers Directive (AIFMD), non-E.U. alternative investment fund managers (AIFMs) have sought information about what the directive means for them and whether they should avoid Europe altogether.  Generally speaking, the sentiment has been negative, with firms warned about the need to register in – and comply with distinct reporting requirements in – each jurisdiction, as well as the need to disclose sensitive compensation information.  In the end, most U.S. firms have opted to rely on reverse solicitation or simply stay out of Europe for the time being.  In the two years since AIFMD went into effect, much has been learned about how Member State regulators intend to treat non-E.U. AIFMs.  In many ways, AIFMD is easier than expected for non-E.U. AIFMs.  In short, a non-E.U. firm wishing to market in Europe should not let fear of AIFMD get in its way.  In a guest article, Jeanette Turner, managing director and general counsel at Advise Technologies, Tim Slotover, founder of flexGC, and Arne Zeidler, founder and managing director of Zeidler Legal Services, examine the obligations of non-E.U. AIFMs under the National Private Placement Regimes (NPPRs) of individual European countries and explore alternatives to the NPPRs for non-E.U. AIFMs to market their funds in Europe.  On Tuesday, October 27, 2015, from 8:00 a.m. to 10:00 a.m. EDT, Turner, Slotover and Zeidler will expand on the thoughts in this article – as well as other areas of AIFMD that affect non-E.U. hedge fund managers – in a seminar entitled “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think.”  For more information and to register for the panel discussion, click here.  For additional insight from Turner, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015); and “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015).

U.K. Imposes New Statutory Duty of Responsibility on Hedge Fund Senior Managers

The U.K. government issued a policy paper on October 15, 2015, announcing that it will extend a new Senior Managers and Certification Regime (Senior Managers Regime) to all sectors of the financial services industry, including hedge fund managers and other asset managers.  The Senior Managers Regime will increase the personal responsibility imposed on senior management personnel within hedge fund managers and other financial services firms and will be supported by robust enforcement powers for U.K. regulatory authorities.  It will create a new approval regime for senior managerial staff; include a statutory requirement for senior managers to take reasonable care to prevent regulatory breaches; introduce a new certification regime for certain junior staff; and provide new rules of conduct for senior managers, certified persons and other employees of hedge fund managers and other firms operating within the financial services industry.  This article summarizes the policy paper, setting out the background to and rationale for extending the Senior Managers Regime to hedge fund managers and other financial services firms; outlining the regime’s main features as they will apply to hedge fund managers; and noting the likely impact of the new regime on hedge fund managers.  For more on hedge fund manager employee liability, see “Employees of Hedge Fund Managers May Be Liable for Failing to Prevent Fraud,” Hedge Fund Law Report, Vol. 8, No. 30 (Jul. 30, 2015); and “U.K. Appellate Court Holds That Hedge Fund Manager Employees May Be Personally Liable,” Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013). 

Blackstone Settles SEC Charges Over Undisclosed Fee Practices

Undisclosed fee and expense practices in private funds are yet another area rife with potential conflicts of interest, and this has not escaped the SEC’s notice.  See “Acting OCIE Director Discusses the Office’s Focus on Private Equity Managers and Emphasizes the Importance of Disclosure by Advisers,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  Three Blackstone-affiliated investment advisers recently settled SEC charges arising out of failure to disclose (1) accelerating monitoring fees due from portfolio companies on the sale or IPO of such companies and (2) negotiation of a legal fee arrangement that provided much greater discounts to the advisers than to the funds they managed.  In the press release announcing the settlement, SEC Division of Enforcement Director Andrew Ceresney stated, “Full transparency of fees and conflicts of interest is critical in the private equity industry, and we will continue taking action against advisers that do not adequately disclose their fees and expenses, as Blackstone did here.”  This article summarizes the facts underlying the enforcement proceeding, the SEC’s specific charges and the sanctions imposed.  For more on conflicts of interest involving fee and expense allocations, see “RCA Panel Highlights Conflicts of Interest Affecting Fund Managers,” Hedge Fund Law Report, Vol. 8, No. 26 (Jul. 2, 2015).  For a recent enforcement action, see “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure,” Hedge Fund Law Report, Vol. 8, No. 27 (Jul. 9, 2015).

SEC Chief of Staff Offers Nine Key Considerations for Investment Adviser and Broker-Dealer Compliance Officers

Despite myriad changes in financial markets, to investment adviser and broker-dealer regulations and at the SEC itself, the “critical importance of the role” played by compliance professionals has remained steadfast.  So said SEC Chief of Staff Andrew J. Donohue at the National Regulatory Services 30th Annual Fall Investment Adviser and Broker-Dealer Compliance Conference.  Donohue offered his observations about the wide array of challenges compliance professionals face, how the SEC can help overcome those challenges and additional considerations.  This article summarizes Donohue’s speech.  For additional insight from SEC officials on CCO liability, see “SEC Commissioner Speaks Out Against Trend Toward Strict Liability for Compliance Personnel,” Hedge Fund Law Report, Vol. 8, No. 25 (Jun. 25, 2015); and “SEC Commissioner Issues Statement Supporting Hedge Fund Manager Chief Compliance Officers,” Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015).

Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends

A program presented by the Hedge Fund Law Report and ACA Compliance Group (ACA) extracted compliance lessons for hedge fund managers from recent SEC enforcement actions in the areas of conflicts of interest, fees and expenses, chief compliance officer liability, compliance resources and technology.  The program, entitled “What Hedge Fund Managers Need to Know About SEC Enforcement Trends,” was moderated by William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, and featured Barry P. Schwartz, founding partner of ACA, Kent Wegrzyn, managing director of ACA, and Mark Borrelli, a partner at Sidley Austin.  This article summarizes the key takeaways from the program.  For more from the panelists, see our two-part series on “The SEC’s Broken Windows Approach,” Part One, Vol. 8, No. 37 (Sep. 24, 2015); and Part Two, Vol. 8, No. 38 (Oct. 1, 2015).

Steve Lentz Returns to FaegreBD’s Investment Management Practice

Steve G. Lentz recently rejoined Faegre Baker Daniels’ investment management practice as counsel in Minneapolis.  Lentz counsels investment advisory firms – including institutional advisers and advisers to private investment funds – on legal, regulatory and compliance matters.  For insight from FaegreBD, 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).

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