• |

    Nov. 3, 2016

The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Managed Account Disclosure, Umbrella Registration and Outsourced CCOs (Part One of Two)

On August 25, 2016, the SEC adopted amendments to Form ADV, Part 1A, and to Rule 204-2 under the Investment Advisers Act of 1940 (Advisers Act), the so-called “recordkeeping rule.” The amendments were previously proposed on May 20, 2015. See “A Roadmap to the SEC’s Proposed Changes to Form ADV” (Jun. 4, 2015). The amendments to Form ADV provide several points of clarification and elicit new or additional information from investment advisers, while the amendments to Rule 204-2 impose additional recordkeeping requirements on investment advisers with respect to communications that contain performance claims. These changes are designed to better protect clients and investors from fraudulent or otherwise misleading performance information. In a two-part guest series, Michael F. Mavrides and Anthony M. Drenzek, partner and special regulatory counsel, respectively, from Proskauer Rose discuss the practical implications of the amendments and highlight important steps legal and compliance personnel can take to ensure they are prepared in advance of the compliance date. This first article discusses the detailed disclosures that advisers will be required to provide with respect to managed account clients and the firm’s chief compliance officer, as well as factors a registrant should consider with respect to pursuing an umbrella registration. The second article will address the new disclosure requirements relating to an adviser’s use of social media; office locations; the amount of an adviser’s proprietary assets and assets under management; the sale of interests in 3(c)(1) funds to qualified clients; and the recordkeeping requirements regarding performance claims in communications that are distributed to any person. For additional insight from Mavrides, see “Key Legal and Operational Considerations in Connection With Preparing, Filing and Updating Form PF (Part Two of Three)” (Nov. 10, 2011); as well as our two part-series on remote examinations: Part One (May 12, 2016); and Part Two (May 19, 2016). For more on Form ADV, see “When and How Can Hedge Fund Managers Permissibly Disguise the Identities of Their Hedge Funds in Form ADV and Form PF?” (Dec. 1, 2012); and “ALJ Decision Against Investment Adviser Who Received Undisclosed Compensation From a Hedge Fund Manager It Recommended to Clients Highlights SEC Scrutiny of Forms ADV” (May 3, 2012).

OCIE Director Marc Wyatt Details Use of Technology and Coordination With Other Agencies to Execute OCIE’s Four-Pillar Mission

Like many governmental agencies, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has an expansive mandate and limited resources, requiring it to allocate those resources in an informed and careful manner. Despite this fact, compliance officers at fund managers and broker-dealers should not underestimate the risk of OCIE scrutinizing their actions. This is especially true as OCIE enhances its technological sophistication, as well as its ability to detect risks within the market and among individual market players, as it pursues the “Four Pillars” of its mission. These themes were conveyed in a keynote speech by Marc Wyatt, OCIE’s Director, on October 17, 2016, at the National Society of Compliance Professionals 2016 National Conference in Washington, D.C. This article analyzes key takeaways from the speech. For coverage of Wyatt’s first speech as acting director of OCIE, see “Acting OCIE Director Discusses the Office’s Focus on Private Equity Managers and Emphasizes the Importance of Disclosure by Advisers” (May 28, 2015). For analysis of a speech by Wyatt’s predecessor, see “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities” (Oct. 10, 2014).

Five Compliance Lessons Private Fund Managers Can Glean From Och-Ziff’s FCPA Settlement

Private fund managers should pay attention to Och-Ziff’s recent settlements with both the SEC and DOJ for violations of the Foreign Corrupt Practices Act (FCPA). Since the SEC launched a unit dedicated to enforcing compliance with the FCPA in 2010, many in the industry have speculated that it was only a matter of time until private funds became the focus of the SEC from an FCPA perspective. See “Private Equity FCPA Enforcement: High Risk or Hype?” (Feb. 19, 2015); and “The SEC’s Investigation of FCPA Violations and Sovereign Wealth Funds – Implications for Hedge Funds" (Feb. 3, 2011). Although its initial interest in FCPA compliance by private funds centered on a manager’s dealings with sovereign wealth funds, as the Och-Ziff settlements demonstrate, the SEC has expanded its review to cover investment transactions, particularly those conducted in high-risk jurisdictions. This change of focus has likely left some hedge funds, private equity firms, banks and other financial firms unprepared and potentially exposed from an anti-corruption perspective, as these institutions have historically focused the majority of their compliance resources related to foreign activities on anti-money laundering and sanctions programs. The details of the case, along with the terms of the company’s settlement, offer five key compliance lessons for firms in this industry. For details on the facts underlying the case and the terms of the settlement see our companion article “Recent SEC and DOJ Settlements With Och-Ziff and Two Executives Underscore FCPA Compliance Risks to Private Fund Managers” (Oct. 27, 2016).

Attorney-Consultant Privilege? Specific Circumstances Where Fund Managers May – and May Not – Be Able to Use Kovel Arrangements (Part Three of Three)

So-called “Kovel arrangements” provide unique opportunities for fund managers and their legal counsel to extend the attorney-client privilege to consultants. The context surrounding a Kovel arrangement plays just as significant a role in determining whether the privilege will be upheld as satisfying the legal requirements of the Kovel doctrine. There are certain circumstances – such as an internal investigation – under which Kovel arrangements are frequently employed by hedge funds and other companies. See “D.C. Circuit Confirms Applicability of Attorney-Client Privilege to Internal Investigations” (Aug. 7, 2014); and “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations” (Feb. 28, 2013). However, there are additional specific situations when this approach can be particularly effective at protecting a hedge fund manager’s operations and processes from being exposed to the public. This final article in a three-part series describes those contexts in which hedge fund managers can benefit from having their attorneys engage consultants via Kovel arrangements, as well as situations where that possibility is tenuous or nonexistent. The first article outlined the Kovel doctrine’s legal requirements and key items to consider before deciding to waive or invoke the privilege. The second article contained practical guidance for maintaining a Kovel arrangement on a daily basis, as well as the provisions to include in an engagement letter with a consultant to ensure the privilege is upheld. For background information on how hedge funds can utilize compliance consultants, see “The Role of Outsourced Compliance Consultants in the Hedge Fund Compliance Ecosystem” (Jun. 27, 2014). 

General Insider Trading Policies and Procedures May Be Insufficient for Hedge Fund Managers to Avert SEC Enforcement Action

In a recently settled enforcement action, the SEC has again driven home its admonition that, “if the nature of a particular broker dealer’s or investment adviser’s business exposes employees to persons in possession of material nonpublic information on a regular basis, a general policy that those employees self-evaluate information they receive is insufficient” to meet the firm’s duty under the federal securities laws to take reasonable steps to prevent the misuse of material nonpublic information (MNPI). See “SEC Continues to Focus on Insider Trading and Fund Valuation” (Jun. 30, 2016). In this action, a hedge fund manager and its senior analyst allegedly failed to supervise an analyst who provided them with MNPI about a pending acquisition of a publicly traded company. This article summarizes the SEC settlement order and lessons for fund managers who wish to avoid being subject to similar SEC enforcement scrutiny. For more on insider trading issues, see our two-part coverage of the Seward & Kissel Private Funds Forum: “How Managers Can Mitigate Improper Dissemination of Sensitive Information” (Sep. 22, 2016); and “How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading” (Sep. 29, 2016).

Current Trends in Operational Due Diligence and Background Checks

Operational due diligence is an important part of the investment process. Investors are concerned not only with a manager’s performance but also with the security and stability of its operations. At the recent Third Party Marketers Association (3PM) 2016 Annual Conference, marketers and operational due diligence professionals offered insights into the types of operational due diligence they conduct and how hedge fund managers can prepare for due diligence inquiries. Although the presentation was geared toward third-party marketers, its lessons apply equally to investors because the process by which a third-party marketer investigates a potential client is analogous to how an investor evaluates a hedge fund manager with which it is considering investing. Introduced by Steven Jafarzadeh and moderated by Mark Sullivan, both managing directors and partners at alternative asset placement agent platform Stonehaven, LLC, the program featured Lauri Martin Haas, founder and principal of operational due diligence firm PRISM LLC, and Kenneth S. Springer, founder and president of business investigations firm Corporate Resolutions Inc. This article highlights the key takeaways from the panel. For coverage of another 3PM annual conference, see “Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation” (Dec. 1, 2011). For additional insight from Springer, see “Can Hedge Fund Managers Use Whistleblower Hotlines to Help Create and Demonstrate a Culture of Compliance?” (Jul. 23, 2010); and “Implications for Hedge Funds of New Whistleblower Initiatives by FINRA and the SEC: An Interview With Kenneth Springer of Corporate Resolutions Inc.” (Mar. 11, 2009).

DLA Piper Adds Finance Partner to Its Mexico City Office

DLA Piper has lured finance partner Edgar Romo to its offices in Mexico City. Romo advises private equity funds, investment banks and real estate developers in numerous types of transactions, including M&A, joint ventures, strategic partnerships and the incorporation of companies and financial institutions in Mexico. For more on operating in Mexico, see “How Hedge Funds Can Mitigate FIN 48 Exposure in Australia and Mexico (Part Three of Three)” (Mar. 31, 2016). For coverage of other recent hires at the firm, see “Investment Funds and Corporate Partner Joins DLA Piper in New York” (Oct. 13, 2016); “DLA Piper Hires Private Equity Real Estate Funds Partner in Chicago” (Oct. 6, 2016); and “DLA Piper Expands Investment Management Practice in Philadelphia” (Jun. 16, 2016). 

Most-Read Articles