May 26, 2016

Hedge Fund Service Providers Must Exercise Caution When Communicating With Investors or Face Liability

A recent unanimous decision reinstated a hedge-fund investor’s negligent misrepresentation claim against a fund manager’s outside counsel. Although some coverage suggests that the decision represents a departure from New York law’s established “near-privity” requirement for negligent misrepresentation claims, the decision is consistent with prior case law. It also serves as a reminder of the care that hedge-fund service providers must exercise in dealing with a fund’s investors and potential investors. In a guest article, Anne E. Beaumont and Nora Bojar, partner and associate, respectively, at Friedman Kaplan Seiler & Adelman, discuss the case, negligent misrepresentation claims by hedge fund investors against service providers and lessons for hedge fund service providers. For additional insight from Beaumont, see “BDC Finance v. Barclays: Derivatives Collateral Calls in a Chaotic Market” (Mar. 19, 2015); “Eighteen Major Banks Agree to Adopt FSB/ISDA Resolution Stay Protocol That Postpones Exercise of Right to Terminate Derivatives on Bank Counterparty Failure” (Nov. 20, 2014); “The 1992 ISDA Master Agreement Says Notice Can Be Given Using an ‘Electronic Messaging System’; If You Think That Means ‘Email,’ Think Again” (May 23, 2014); and “Five Steps for Proactively Managing OTC Derivatives Documentation Risk” (Apr. 25, 2014).

Cyber Insurance Providers May Play a Key Role in Assisting Hedge Fund Managers Mitigate Cyber Incidents

Cyber threats in the alternative investment industry are growing increasingly larger and more sophisticated, requiring hedge fund managers to maintain sufficient infrastructure to prevent and respond to any breaches. See “Hedge Fund Managers Are Advised to Build Robust Infrastructure” (Mar. 3, 2016); and “Essential Tools for Hedge Fund Managers to Combat Escalating Cyber Threats” (Feb. 4, 2016). A key component of that infrastructure is a cyber insurance policy to reimburse the hedge fund manager for costs incurred defending against a cyber attack and loss of data caused by the attack. A recent alternative asset manager forum sponsored by insurance advisory and brokerage firm Crystal & Company offered a look at the current cyber threat landscape, cybersecurity preparedness, breach response and cyber-liability insurance from the insurance, legal and forensic perspectives. The panel was moderated by Sandy Crystal, executive vice president at Crystal & Company, and featured Austin Berglas, a senior managing director and head of cyber defense at investigation and consultancy firm K2 Intelligence; Christopher Liu, head of cyber risk in AIG Property & Casualty’s financial institutions group; Paul Miskovich, a senior vice president at AXIS Insurance; and John F. Mullen, managing partner of Lewis Brisbois Bisgaard & Smith. This article summarizes the panelists’ key insights. For more on the cost of cyber threats, see “Cybersecurity and Outsourcing Remain Key and Potentially Costly Operational Issues for Hedge Fund Managers” (May 5, 2016).

SEC Chief of Staff Shares Fifteen-Step Plan for Adjusting to Compliance Responsibilities

In a keynote speech delivered last week, SEC Chief of Staff Andrew J. Donohue shared his thoughts and observations on compliance based on his extensive experience in the investment management industry, including his service at the SEC. Donohue offered advice about the role of compliance and suggested a 15-step plan for compliance personnel to adjust to ever-evolving duties. His remarks provide a valuable guide for hedge fund chief compliance officers (CCOs) as to best practices for maintaining a robust compliance program. This article highlights the key takeaways from his speech. For earlier guidance from Donohue, see “SEC Chief of Staff Offers Nine Key Considerations for Investment Adviser and Broker-Dealer Compliance Officers” (Oct. 22, 2015). For further insight from SEC officials on CCO liability, see “SEC Commissioner Speaks Out Against Trend Toward Strict Liability for Compliance Personnel” (Jun. 25, 2015); “SEC Commissioner Issues Statement Supporting Hedge Fund Manager Chief Compliance Officers” (Jul. 16, 2015); and “Commissioner Gallagher’s Dissent in SEC Enforcement Action Against Hedge Fund Manager Misses the Mark” (Jul. 30, 2015).

DLA Piper Compliance Survey Offers Perspectives to Hedge Fund Managers on CCO Liability and Compliance Program Benchmarks

Exposure to personal liability for hedge fund chief compliance officers (CCOs) increases with growing demands and responsibilities. Despite the SEC’s attempts to quell the debate, questions linger about the extent of CCO liability. See “SEC Enforcement Director Assures CCOs They Need Not Fear SEC Action Absent Wrongdoing” (Nov. 19, 2015). Global law firm DLA Piper recently released the results of its first-ever compliance survey, which uncovered considerable concern over CCO liability and explored other topics of interest to compliance professionals including resources, testing and budgets; reporting; training; disaster recovery and cybersecurity; and key compliance risks. Although the survey was not specifically aimed at the hedge fund sector, the results provide valuable insight to hedge fund CCOs on these issues. This article summarizes DLA Piper’s findings. For an article discussing another compliance survey, see “ACA 2014 Compliance Survey Covers SEC Exams, CCOs, Compliance Reviews, Custody, Fees and Personal Trading” (Dec. 11, 2014).

Bailey Duquette Welcomes New Partner

David I. Greenberger recently joined Bailey Duquette P.C. as a partner. Greenberger’s practice focuses on representing individuals and entities in the hedge fund, financial services and private equity industries in employment, business tort, contractual, commercial, appellate and regulatory matters. For more on hedge fund manager employment issues, see “Employees of Hedge Fund Managers May Be Liable for Failing to Prevent Fraud” (Jul. 30, 2015); “Hedge Fund Managers Have Some Recourse Against Firm Employees That Engage in Insider Trading” (Apr. 5, 2012); and our series on “How Can/Do Hedge Fund Managers Legally Penalize Employee Wrongdoing?”: Part One (Apr. 7, 2016); and Part Two (Apr. 14, 2016).

Alex Brainis Joins Appleby’s Investment Funds Group in Cayman

Offshore law firm Appleby has announced the arrival of Alex Brainis, who has joined the firm’s Cayman office as a partner in its investment funds group. Throughout the course of his legal career, Brainis has focused heavily on corporate and commercial matters. For insight from Appleby partners, see “Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters” (May 28, 2015); “How May Investors in Cayman Islands Hedge Funds in Liquidation Protect Their Interests If Dissatisfied With the Liquidators’ Conduct of the Liquidation?” (Sep. 11, 2014).