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    May 12, 2016

What Hedge Fund Managers Can Expect From SEC Remote Examinations (Part One of Two)

In an effort to reach more hedge fund managers and other registered investment advisers, the SEC is conducting more inspections and examinations, reassigning staff to handle increased workload and deploying additional resources, such as its National Exam Analytics Tool and the new Office of Risk and Strategy. See “Effects of Expanding SEC Investment Adviser Examinations” (Mar. 24, 2016). Another tool in the SEC’s arsenal is its ability to review hedge fund managers and investment advisers remotely in lieu of conducting an onsite examination. This process broadens the SEC’s overall reach, while also focusing on particular issues. However, hedge fund managers must remain wary of the unique risks inherent to remote exams. This article, the first in a two-part series, outlines the reasons the SEC conducts remote examinations and delineates the differences between remote and in-person exams. The second article will discuss the risks of a remote exam and best practices for a hedge fund manager in preparing for and enduring a remote exam. For more on preparing for SEC examinations, see “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016); and “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination” (Jan. 28, 2016).

Preparing for Liability: How Hedge Fund Contingency Reserves Can Lead to Inequitable Investor Treatment (Part One of Two)

Hedge fund governing documents generally give the manager broad discretion to establish reserves for contingent liabilities and other items that may ultimately become fund obligations. However, depending on the hedge fund manager’s practice, establishing and releasing contingency reserves may result in inequitable treatment of investors redeeming, subscribing or simply remaining in the fund. In this two-part guest series, S. Brian Farmer and Alina A. Grinblat, partner and associate, respectively, at Hirschler Fleischer, address hedge fund contingency reserves. In this first article, they explain how the reserves operate in practice, highlighting the effect on shareholders in the fund and the unequal treatment that can result. The second article will analyze hedge fund manager motivations for establishing reserves and propose an alternative structure that may avoid investor inequality resulting from those reserves. For additional insight from Farmer, see our two-part series “‘Best Ideas’ Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law”: Part One (Aug. 7, 2014); and Part Two (Aug. 21, 2014).

U.S., U.K. and Offshore Regulators Discuss Best Ways for Hedge Fund Managers to Approach Regulation (Part One of Two)

Hedge fund managers are subject to scrutiny by regulators in numerous jurisdictions – where the manager is based, where the fund is based and where the fund is marketed. In an increasingly global economy, cross-border regulators are cooperating more frequently, sharing information and coordinating efforts to govern the growing hedge fund industry. This month, the Hedge Fund Association presented a Global Regulatory Briefing that featured Emma Bailey, Director of the Investment Supervision and Policy Division of the Guernsey Financial Services Commission; Jennifer A. Duggins, Co-Head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Garth Ebanks, Deputy Head of the Investments and Securities Division of the Cayman Islands Monetary Authority; Ifor Hughes, Assistant Director of Policy in the Policy, Legal and Enforcement department of the Bermuda Monetary Authority; and Robert Taylor, Head of the Investment Management Department at the U.K. Financial Conduct Authority. This first article in a two-part series summarizes the speakers’ commentary on fund regulation in their respective jurisdictions, cooperation among regulators and whether hedge fund regulation is sufficient to address fraud. The second article will highlight the panelists’ insights with respect to cybersecurity, anti-money laundering, the Alternative Investment Fund Managers Directive, advertising and liquidity. For more on cooperation among regulators, see “SEC Chair Emphasizes Enforcement Focus on Strong Remedies and Individual Liability” (Nov. 12, 2015); and “E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers” (Oct. 8, 2015).

Settlement, Prospects, Shareholder Engagement and Proxy Access Considerations for Hedge Fund Managers Pursuing Activist Strategies (Part Two of Two)

As hedge fund managers increasingly engage in activist strategies, those strategies and opportunities are evolving. As they become more standardized, activist campaigns settle more quickly. However, managers must determine their path – the number of seats to seek on the target company’s board, whether to pursue control of the company and the degree to which they will engage with the company. Davis Polk & Wardwell recently presented an overview of the trends, tactics and prospects for shareholder activism and engagement in the U.S., the U.K. and Hong Kong. This second article in a two-part series summarizes the panelists’ insights with respect to timing and settlement of activist campaigns, prospects for activism, trends in shareholder engagement and proxy access. The first article discussed the global market for activist investing, actions companies can take when engaging with activists and disclosure obligations of activist investors, including filing obligations under the Hart-Scott-Rodino Act. For additional insight from Davis Polk practitioners, see “Davis Polk ‘Hedge Funds in the Current Environment’ Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities” (Jun. 14, 2012); and “KPMG Webcast Focuses on Implications of Revised Custody Rule for Hedge Fund Managers in the Areas of Operational Independence, Delivery of Financial Statements, Surprise Examinations and Internal Control Reports” (Apr. 2, 2010).

Business Emails Must Be Secure to Avoid SEC Enforcement Action 

As it continues to enforce appropriate cybersecurity controls, the SEC initiated administrative proceedings against broker-dealer Craig Scott Capital and its principals for failing to protect confidential consumer information by using personal email addresses for business matters. “The enforcement action, including the fines imposed, reflects how seriously the SEC takes the adoption of and compliance with proper policies and procedures,” Anastasia Rockas, a partner at Skadden, told the Hedge Fund Law Report. This enforcement action is particularly relevant to any hedge fund manager that: has an in-house broker-dealer; has high net worth individuals as clients; manages alternative mutual funds and thus has retail investors; or is subject to any look-through of its institutional clients to underlying individual investors. However, all hedge fund managers should pay close attention given that, as Rockas noted, the “SEC has indicated there will be additional enforcement actions in this space and has designated cybersecurity as an examination priority for 2016.” See “OCIE Risk Alert Provides Cybersecurity Guidance to Investment Advisers and Broker-Dealers” (Sep. 24, 2015). For another case involving penalties for inadequate cybersecurity controls, see “Investment Adviser Penalized for Weak Cyber Policies; OCIE Issues Investor Alert” (Oct. 1, 2015).

U.S. District Court Clarifies Extent of FINRA’s Authority to Enforce Rule 2010

In 2015, FINRA brought disciplinary proceedings against Scottsdale Capital Advisors Corporation and its principals, charging violations of FINRA Rule 2010 which requires that business be conducted with “high standards of commercial honor and just and equitable principles of trade.” The respondents sought to enjoin the FINRA proceeding in U.S. District Court, arguing that FINRA lacked authority to bring the disciplinary proceeding. FINRA, with strong support from the SEC, opposed the injunction, arguing, among other things, that the court lacked jurisdiction over the matter. The scope of FINRA’s authority matters to hedge fund managers because it affects brokerage transactions by funds, fund marketing and access to new issues. This article summarizes the regulatory and factual context of the litigation, the parties’ central arguments and the court’s ruling on the injunction. For coverage of other FINRA enforcement proceedings, see “Impact of Regulation SHO on the Short Sale Activity of Hedge Fund Managers and Broker-Dealers” (Nov. 10, 2011); “FINRA Fines Terra Nova $400,000 for Making Over $1 Million in Improper Soft Dollar Payments to Hedge Fund Managers” (Dec. 10, 2009); and “In FINRA’s First Action Involving Credit Default Swaps, FINRA Fines ICAP $2.8 Million to Settle Price Fixing Claims” (Jul. 16, 2009).

Senior AMU Counsel Joins Ropes & Gray in D.C.

Ropes & Gray recently announced the arrival of Jeremiah Williams as counsel in the firm’s Washington, D.C., securities and futures enforcement practice. Williams joins Ropes & Gray from the SEC, where he served as Senior Counsel in the Asset Management Unit. See “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit” (Mar. 12, 2015). Williams has led many complex investigations involving investment advisers and funds, and he also played a key role in an investigation of retrocessions and share class practices, resulting in a landmark $267 million settlement. For a discussion of that settlement, see “Preference for Investing in Proprietary Hedge Funds Must Be Fully Disclosed by Investment Banks to Avoid Conflicts” (Jan. 7, 2016). For insight from Ropes & Gray partners, see “Implications for U.S. Hedge Fund Managers of the European Market Infrastructure Regulation” (Jul. 18, 2014); “The Impact on Private Fund Managers of Final Regulations Under the Volcker Rule” (Mar. 13, 2014); and “Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities” (Jan. 30, 2014).

Copeland Capital Management Names GC, CCO

Copeland Capital Management has announced that Sofia A. Rosala has joined the firm as general counsel and chief compliance officer. Rosala comes to Copeland from Aberdeen Asset Management, where she served as U.S. counsel and deputy head of compliance. Earlier in her career, Rosala was a senior associate at Morgan, Lewis & Bockius and vice president and corporate counsel at SEI Investments. 

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