The SEC is broadening its enforcement activities; it filed a record 807 enforcement actions for securities law violations and issued orders for $4.19 billion in penalties and disgorgements in fiscal year 2015, as acknowledged recently by SEC Chair Mary Jo White. A material subset of that activity was in the hedge fund and asset management space. See “SEC Chair’s Testimony Highlights SEC’s Bolstered Presence in Asset Management Space” (Jun. 16, 2016). Accordingly, it is vital for hedge fund managers to understand the practical consequences of the SEC’s enforcement approach, including its effect on market demand and the consequences of SEC action; the regulator’s investigative approach; and areas of scrutiny, including cybersecurity, market integrity and disclosure. These were a few of the topics discussed at the Ninth Annual Advanced Topics in Hedge Fund Practices: Manager and Investor Perspectives conference recently hosted by Morgan, Lewis & Bockius. This article highlights the key insights from several panels featuring partners Jedd Wider, Timothy Levin, Merri Jo Gillette, Amy Greer, Steven Hansen and Jennifer Klass. For additional coverage of the conference, see “How Can Private Fund Managers Grant Preferential Rights? Delaware Chancery Court Decision Stresses Need for Fund Document Integration” (Jun. 30, 2016). For additional insight from Morgan Lewis partners, see “Recent Developments Affect Classifications of Control Groups and Fiduciaries Under ERISA” (Apr. 14, 2016); and “Key Person Provisions in Hedge Fund Documents: Structure, Consequences and Demand From Institutional Investors” (Sep. 17, 2009).

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Cybersecurity remains a hot topic for regulators and investors alike. See “SEC Enforcement Action Illustrates Focus on Investment Adviser Obligation to Secure Client Information” (Jun. 23, 2016). The Hedge Fund Association (HFA) recently presented its Cybersecurity Challenges and Solutions for Emerging Managers symposium, which covered the basics of cybersecurity preparedness, responding to cyber incidents, vendor management, cyber insurance and cloud services. Robert G. Sawyer, a partner at law firm Foley Hoag and regional director of the HFA, moderated the discussion, which featured Colin J. Zick, a partner at Foley Hoag; Rob Fitzgerald, a principal consultant at cybersecurity firm Mandiant/FireEye; William M. Steers, principal/president of global insurance brokerage Gunn, Steers & Company, LLC; and Frederick Howell, Jr., a manager at tax and consulting firm RSM US LLP. This article summarizes the key insights from the symposium. For coverage of another recent HFA program, see our two-part series on the recent Global Regulatory Briefing, offering insight from U.S., U.K. and offshore regulators: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Views on Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016).

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On June 23, 2016, a majority of British voters elected to leave the E.U. (commonly known as the “Brexit”). However, it is not certain at this point how, when or indeed whether the U.K. will actually make its exit. A number of leading law firms with hedge fund practices have formed legal teams devoted to analyzing the Brexit issue, and have published a heavy volume of client alerts and memoranda directed at clients in the hedge funds space. In an effort to help our subscribers understand the key observations and comments offered by law firm partners who have closely followed the issue, and the implications of the vote for hedge fund managers, the Hedge Fund Law Report has conducted interviews with law firm partners focused on Brexit and compiled a summary and analysis of the partners’ insights, along with the law firms’ client memoranda in a two-part series. This article provides a detailed summary of the time frame for any potential changes resulting from the vote, as well as analysis of possible terms under which the U.K. might leave the E.U. and the distinction between a “hard” and “soft” Brexit. The second article will address the options available for fund managers concerned about how they can continue to market and distribute their products in the E.U. For additional coverage of the Brexit’s significance and impact on hedge funds, see “What Today’s Brexit Vote Could Mean for Hedge Fund Managers” (Jun. 23, 2016). Read full article …

Under proposed regulations, SEC-registered investment advisers will not be able to simply rely on their existing anti-money laundering (AML) programs and will have to adopt a more formal approach than the risk-based AML programs many have implemented to date. Even those SEC-registered investment advisers that already have robust AML procedures in place will need to address certain key areas if the regulations are adopted in the form proposed. In a two-part guest series, William P. Barry, Kimberly Versace and Jamie Schafer, partner, counsel and associate, respectively, at Richards Kibbe & Orbe, analyze the anticipated role of investment advisers in the U.S. AML regulatory framework. The first article discussed the genesis and impact of the proposed regulations that would apply to investment advisers. This article recommends steps investment advisers should take now to protect themselves in anticipation of the new regulations and ensure they can meet their AML compliance obligations. For more on the proposed AML regulations, see “How Hedge Fund Managers Can Establish an AML Program Under FinCEN’s Proposed Rule (Part Two of Two)” (Nov. 12, 2015). For additional insight from practitioners at RK&O, see the two-part series entitled “Convertible Preferred Stock: How Preferred Is It?”: Part One (Dec. 19, 2013); and Part Two (Jan. 9, 2014). Read full article …

The 2008 collapse of Lehman Brothers highlighted the significant risk to hedge fund managers from the collapse of a prime broker or significant counterparty. See “Lesson From Lehman Brothers for Hedge Fund Managers: The Effect of a Bankruptcy Filing on the Value of the Debtor’s Derivative Book” (Jul. 12, 2012); and “How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?” (Aug. 5, 2009). In theory, client funds in the hands of a broker-dealer should be sacrosanct. Specifically, Rule 15c3-3 under the Securities Exchange Act of 1934 (Exchange Act), commonly known as the Customer Protection Rule (Rule), requires broker-dealers to segregate the net cash owed to their clients and to safeguard client securities. A recent SEC settlement order indicates that two Merrill Lynch entities failed on both counts, engineering riskless “leveraged conversion trades” that artificially created client margin account balances that they could net against the cash they were required to reserve for clients and subjecting tens of billions in client securities to a clearing bank’s lien. Separately, in a move that echoes the SEC’s focus on private fund CCO liability, the SEC has commenced an enforcement action against William Tirrell, the Merrill Lynch executive responsible for compliance with the Rule. See “SEC Enforcement Director Assures CCOs They Need Not Fear SEC Action Absent Wrongdoing” (Nov. 19, 2015). The settlement is a reminder that fund managers must be cognizant of how prime brokers and other counterparties may be using their assets. This article summarizes the key elements of the Merrill Lynch settlement and the related action against Tirrell. See also “Factors to Be Considered by a Hedge Fund Manager When Selecting a Prime Broker” (Dec. 4, 2014).  Read full article …

In a recent keynote address at the InvestoRegulation Conference in London, SEC Chief of Staff Andrew J. Donohue discussed the Commission’s reach within the global securities industry and the importance of international cooperation on key issues. Donohue also outlined several SEC initiatives of particular relevance to the investment management industry. This article highlights those portions of Donohue’s address most relevant to hedge fund managers, including the SEC’s focus on cybersecurity; anticipated requirements for hedge fund managers to plan for transitions or disruptions to their businesses; and emphasis on individual liability. For additional insight from Donohue, see “SEC Chief of Staff Shares Fifteen-Step Plan for Adjusting to Compliance Responsibilities” (May 26, 2016); and “SEC Chief of Staff Offers Nine Key Considerations for Investment Adviser and Broker-Dealer Compliance Officers” (Oct. 22, 2015).  Read full article …

Paul Hastings has expanded its investment management practice with the hiring of Tram Nguyen and Yousuf Dhamee as partners in New York and Los Angeles, respectively. Formerly a Branch Chief of the Private Funds Branch within the SEC’s Division of Investment Management, Nguyen advises hedge and private equity funds on structuring, formation, fundraising and regulatory matters. For insight from Nguyen, see “Aligning Employee and Investor Interests Under the Volcker Rule” (Jun. 2, 2014); and “Stroock Seminar Identifies Five Strategies for Mitigating the Risk of Supervisory Liability for Hedge Fund Manager CCOs” (Jan. 16, 2014). Dhamee counsels investment advisers on structuring and distributing hedge funds, private equity funds, registered funds and bespoke products, as well as forming and operating investment adviser businesses. For commentary from Dhamee, see our two-part series on the use of target returns by hedge fund managers: “Common Practices, Benefits and Drawbacks” (Apr. 23, 2015); and “Legal Risks” (Apr. 30, 2015); as well as our two-part series on tiered management fees: “Help Attracting Institutional Investors” (Jun. 25, 2015); and “Practical Considerations” (Jul. 9, 2015).  Read full article …