Dec. 17, 2015

E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider

With regulatory authorities in the E.U. and elsewhere increasingly focused on market conduct, managing market abuse risks within hedge fund managers has become central to a firm’s culture of compliance.  For hedge fund managers trading on a cross-border (particularly a U.S.-E.U.) basis, divergent regimes make managing such risks more difficult.  In a guest article, Leonard Ng, co-head of the E.U. financial services regulatory group at Sidley, sets out some common scenarios faced by hedge fund managers and addresses how managers might wish to deal with them under the E.U. market abuse regime.  For additional insight from Ng, see “Sidley Austin, Ivaldi Capital and Advise Technologies Share Lessons for U.K. Hedge Fund Managers from the January 2015 AIFMD Annex IV Filing,” Hedge Fund Law Report, Vol. 8, No. 12 (Mar. 27, 2015).  For insight from Ng’s partner, Will Smith, see “Potential Impact on U.S. Hedge Fund Managers of the Reform of the U.K. Tax Regime Relating to Partnerships and Limited Liability Partnerships,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); and our two-part series, “U.K. Disguised Fee Rules May Result in Increased U.K. Taxation of Investment Fees to Individuals Affiliated with Hedge Fund Managers”: Part One, Vol. 8, No. 15 (Apr. 16, 2015); and Part Two, Vol. 8, No. 16 (Apr. 23, 2015).

Hedge Fund GCs and CCOs Face an Expanding Role in Changing E.U. Marketing Environment (Part Two of Two)

As the European regulatory environment grows more complex, hedge funds looking to market in Europe must navigate this increasingly complicated landscape.  To assist their firms with such efforts, hedge fund general counsels (GCs) and chief compliance officers (CCOs) have seen their roles evolve in recent years to encompass responsibility for compliance with the advanced regulatory burdens and demand greater visibility on the investor relations side.  On November 17, 2015, the Hedge Fund Law Report and Dechert LLP co-sponsored a program, “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” which considered issues faced by GCs and CCOs relating to private placements, reverse solicitation, the E.U. marketing “passport,” regulatory changes, UCITS funds and investor relations.  Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the discussion featured Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Dechert partners Karen L. Anderberg and Gus Black.  This second article in our two-part series addresses topics including the extension of the E.U. marketing passport, potential regulatory changes, marketing alternative mutual funds and investor relations.  The first article summarized key takeaways from the panel discussion with respect to marketing funds under the Alternative Investment Fund Managers Directive and reverse solicitation.  For more from Anderberg, see “Dechert Partners Discuss Impact of Volcker Rule on European Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).  For additional insight from Black, see “Dechert Global Alternative Funds Symposium Highlights Trends in European and Global Hedge Fund Marketing,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).

Proper Use of Advisory Committees by Private Fund Managers May Mitigate Conflicts of Interest

Investment adviser conflicts of interest remain a key focus of SEC scrutiny.  See “SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit,” Hedge Fund Law Report, Vol. 8, No. 37 (Sep. 24, 2015); and “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).  In another example of such scrutiny, the SEC recently settled charges that a private equity fund adviser and its principals violated the anti-fraud provisions of the Investment Advisers Act by making loans to portfolio companies, causing different funds to invest in the same companies at different priority levels and violating investment concentration restrictions, in each case without disclosing those transactions to, or securing the consent of, the affected funds’ investor advisory boards.  This article summarizes the alleged misconduct and violations, the adviser’s remedial efforts and the terms of the settlement.  For an overview of the types of conflicts faced by private fund managers, see “RCA Panel Highlights Conflicts of Interest Affecting Fund Managers,” Hedge Fund Law Report, Vol. 8, No. 26 (Jul. 2, 2015).  For conflicts arising out of allocation of expenses, see, e.g., “Specific Disclosure Before Charging Legal Expenses to Funds May Help Investment Advisers Avoid SEC Scrutiny,” Hedge Fund Law Report, Vol. 8, No. 45 (Nov. 19, 2015); and “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends,” Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015).

Distribution and Operational Due Diligence Considerations for Hedge Fund Managers Launching UCITS Funds (Part Two of Two)

As a growing number of hedge fund managers look to Undertakings for Collective Investments in Transferable Securities (UCITS) funds as a means of accessing the European market, those managers must establish a framework for distributing UCITS funds.  While UCITS products are more regulated and transparent than private hedge funds, investors must still conduct thorough operational due diligence before investing in those funds.  At the recent Liquid Alternative Strategies Global conference held in London, speakers delved into these topics as part of a broader discussion about the rise of alternative UCITS as a global investment solution.  This article, the second in a two-part series, focuses on distribution of UCITS products and operational due diligence.  The first article addressed the drivers behind the recent growth in alternative UCITS funds and several key factors that managers should consider when assessing their ability to capitalize on demand for UCITS products.  For more on UCITS, see “U.K. Government Proposes to Implement UCITS V Measures Applicable to Fund Managers,” Hedge Fund Law Report, Vol. 8, No. 43 (Nov. 5, 2015); and “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 operational due diligence, see “PLI ‘Hot Topics’ Panel Addresses Operational Due Diligence and Registered Alternative Funds,” Hedge Fund Law Report, Vol. 8, No. 48 (Dec. 10, 2015); and “FRA Liquid Alts 2015 Conference Highlights Due Diligence Concerns with Alternative Mutual Funds (Part Three of Three),” Hedge Fund Law Report, Vol. 8, No. 19 (May 14, 2015).

ALM General Counsel Summit Highlights Key Elements of a Robust Cybersecurity Compliance Program

Cybersecurity is a growing concern for hedge fund compliance departments.  The SEC has emphasized the need for registrants to ensure that their cybersecurity policies are robust and periodically reviewed.  See “SEC Guidance Update Suggests a Three-Step Framework for Investment Manager Cybersecurity Programs,” Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015).  Accordingly, firms are under increasing pressure to implement policies to prevent incidents and address breaches when they occur.  Cybersecurity was one of the topics addressed by speakers at Corporate Counsel’s Ninth Annual Hedge Fund General Counsel and Compliance Officer Summit.  This article summarizes the relevant panel discussions.  For additional coverage of the Summit, see “ALM General Counsel Summit Reveals How Hedge Fund Managers Can Adopt a Robust Compliance Program and Address FCPA Risks,” Hedge Fund Law Report, Vol. 8, No. 47 (Dec. 3, 2015); and “ALM General Counsel Summit Reveals How Hedge Fund Managers Can Prepare for SEC Examinations,” Hedge Fund Law Report, Vol. 8, No. 45 (Nov. 19, 2015).

Self-Evaluation Policies Are Insufficient for Political Intelligence Firms to Avoid MNPI Violations

Information obtained by political intelligence firms from government sources may constitute material nonpublic information (MNPI) and may give rise to insider trading liability.  See “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls,” Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).  The SEC recently charged a political intelligence firm with failing to have adequate policies governing the receipt and dissemination of MNPI by its employees, and with failing to enforce the policies that it did have.  This article summarizes the relevant policies and procedures, alleged deficiencies and events that sparked the enforcement action.  In the press release announcing the settlement, Andrew J. Ceresney, the Director of the SEC Division of Enforcement, cautioned, “Government employees routinely possess and generate confidential market-moving information.  When political intelligence firms . . . obtain information from government employees, they must take the necessary steps to prevent the dissemination of potentially material nonpublic information obtained in the course of their research.”  However, bringing insider trading cases based on the use of political intelligence may be challenging.  See “RCA ECO 2014 Symposium Offers Insight from Top SEC Officials on Cybersecurity, Reg M, Examinations, Insider Trading Investigations, the Newman Appeal, Expert Networks and Political Intelligence (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 25 (Jun. 27, 2014).  For more on political intelligence, see “GAO Report Dissects the Mechanics of the Political Intelligence Market and Highlights Insider Trading Risks for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 17 (Apr. 25, 2013).

SRZ Announces Addition of Investment Management Attorney Jason L. Behrens

Schulte Roth & Zabel recently welcomed Jason L. Behrens as special counsel in the firm’s New York office.  Behrens has represented a wide variety of fund sponsors, asset managers and institutional investors in all stages of private equity funds, real estate funds, secondaries funds, funds of funds and other alternative asset classes, both domestically and internationally.  For HFLR articles authored by SRZ partners, see “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations,” Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013); and “Hedge Fund Names: What a Hedge Fund Manager Should Do Before It Starts Using a Name,” Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).  For additional commentary from SRZ partners, see “Hedge Fund Industry Experts Discuss Presence Examinations Priorities, SEC Investigations and How an Admission in an SEC Settlement May Affect Insurance Coverage,” Hedge Fund Law Report, Vol. 7, No. 26 (Jul. 11, 2014); and “Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target? An Interview with Marc Weingarten, Co-Head of the Global Shareholder Activism Practice at SRZ,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

Michael Athanason Joins BRG as Managing Director in New York

Global strategic advisory and expert consulting firm Berkeley Research Group recently announced that Michael Athanason has joined the firm as a managing director.  Athanason joins the BRG Capstone group in New York.  He will lead the private funds group valuation team and will assist in building the firm’s position in alternative investment valuation services.  See “Is the Use of an Independent Valuation Firm Superior to a Manager’s Internal Valuation Process?,” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015).  For insight from BRG, see “Understanding the Regulatory Regime Governing the Use of Social Media by Hedge Fund Managers and Broker-Dealers,” Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012); and “How Can Fund Managers Address the Regulatory, Compliance, Privacy and Ethics Issues Raised by Social Media?,” Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).

The HFLR Will Not Publish During Holiday Weeks and Will Resume Regular Publication in January

Please note that the Hedge Fund Law Report will not publish issues during the upcoming holiday weeks and will resume its normal weekly publication schedule during the week starting January 4, 2016.