Nov. 17, 2016

U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration

The role of regulators increasingly extends beyond conducting examinations and includes sharing data-driven expertise with their regulatory counterparts domestically or abroad to achieve their common goals of protecting investors, preventing problems (such as risk from hedge funds entering the commercial banking space) and facilitating smooth resolution of known issues. These were prominent themes of a panel at Hedgeopolis New York, the annual conference of the Hedge Fund Association (HFA). Moderated by Martin Cornish, a partner at MJ Hudson, the panel featured Jennifer A. Duggins, co-head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Robert Taylor, head of the Hedge Fund Management Department at the U.K. Financial Conduct Authority (FCA); and Garth Ebanks, deputy head of the Investments and Securities Division of the Cayman Islands Monetary Authority (CIMA). This article presents key takeaways from the panel discussion. For coverage of HFA’s May 2016 Global Regulatory Briefing panel, see our two-part series: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016). For guidance from CIMA, see “CIMA Enumerates Best Practices for Hedge Fund Manager AML Programs” (Mar. 17, 2016). For additional commentary from the FCA, see “FCA Director Emphasizes Regulator’s Focus on Firm’s Culture of Compliance” (Jul. 21, 2016); and “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016). 

How Hedge Fund Managers Can Design an ESG Investing Policy (Part Two of Two)

There is no one-size-fits-all approach for private fund advisers that incorporate environmental, social and governance (ESG) factors into their investment processes (ESG investing), in part because many early adopters of ESG investing in the hedge fund space have done so at the request of their investors. Consequently, managers have had to develop a variety of approaches to meet the diverse needs of investors without uniform requirements. Some large institutional investors with ESG investing criteria seek to bypass commingled funds and allocate to separately managed accounts, thereby allowing them to dictate the ESG parameters that apply to their accounts. A benefit to an ESG-sensitive investor of investing in a separately managed account is that it provides transparency into the portfolio to (1) ensure the investment manager adheres to the account’s ESG investment parameters; and (2) evaluate the efficacy of the investment from an ESG perspective. Not all investors, however, have sufficient assets to pursue their mandates through managed accounts, forcing them to allocate to managers applying ESG investing policies to commingled funds. This second article in our two-part series discusses various options available to hedge fund managers when adopting an ESG policy and outlines some of the due diligence inquiries managers with an ESG policy should expect to receive from investors. The first article explored the development of ESG investing and its prevalence in the hedge fund space.

The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management (Part Two of Two)

On August 25, 2016, the SEC adopted much-anticipated amendments to Form ADV, Part 1A and to Rule 204-2 (recordkeeping rule) under the Investment Advisers Act of 1940. These amendments further the SEC’s agenda to gather more information about its registrant base to inform the agency’s risk-based approach to adviser examinations. See “OCIE Director Marc Wyatt Details Use of Technology and Coordination With Other Agencies to Execute OCIE’s Four-Pillar Mission” (Nov. 3, 2016). In a two-part guest series, Michael F. Mavrides and Anthony M. Drenzek, partner and special regulatory counsel, respectively, at Proskauer Rose, review the amendments to Form ADV and the recordkeeping rule and provide practical guidance to SEC-registered investment advisers on the steps to take prior to the compliance date to ensure their firms are prepared to comply with the amended rules. This second article in the series discusses 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 3(c)(1) fund interests to qualified clients; and the recordkeeping requirements regarding performance claims in communications that are distributed to any person. The first article reviewed 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 to consider when pursuing an umbrella registration. For additional commentary from Proskauer partners, see “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview With Proskauer Partner Robert Leonard” (Mar. 5, 2015); and “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters” (Feb. 1, 2013). For more on Form ADV, see “How Can Hedge Fund Managers Rebut the Presumption of Materiality of Certain Disciplinary Events in Form ADV, Part 2?” (Jan. 5, 2012); and “Recent SEC Enforcement Action Demonstrates the SEC’s Focus on the Accuracy and Consistency of Disclosures by Hedge Fund Managers in Form ADV” (Jan. 5, 2012).

Dechert Partners Discuss Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures (Part Two of Two)

Brexit looms at a time ripe with new opportunities and challenges for managers seeking to market in the E.U. and around the world. On the one hand, managers must reconsider the types of vehicles and jurisdictions to use to preserve access to the E.U. markets. Additionally, new legislation – such as the impending Packaged Retail and Insurance-based Investment Products (PRIIPs) initiative – may present new barriers to managers marketing in Europe. On the other hand, however, global markets are opening up as certain vehicles, such as Undertakings for Collective Investment in Transferable Securities (UCITS), are increasingly welcomed by local regulators. These issues were discussed at a seminar entitled “Current and Future Developments: UCITS, AIFs, Brexit and Global Fund Distribution,” presented by Dechert’s financial services group on October 13, 2016. Moderated by Dechert partner Chris D. Christian, the seminar featured partners Richard L. Heffner, Karen L. Anderberg, Marc Seimetz, Mark Browne and Angelo Lercara. This article, the second in a two-part series, describes the increased usage of UCITS structures and the potential effect of impending PRIIPs legislation, as well as options for managers to domicile a fund in Germany or Ireland to market in the E.U. The first article in the series analyzed Brexit’s impact on structuring considerations, as well as the viability of domiciling funds in Luxembourg to access E.U. markets. For further commentary from Dechert attorneys, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016); and “What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs” (Nov. 12, 2015).

Trending Issues in Employment Law for Private Fund Managers: Non-Compete Agreements, Intellectual Property, Whistleblowers and Cybersecurity

Attracting, compensating and retaining talented employees is a critical part of a fund manager’s business. Managers routinely use non-compete agreements and other measures to ensure that employees do not harm the manager’s business when they depart. A recent program presented by EisnerAmper offered an overview of the law of non-compete agreements and insight into other common employment issues that private fund managers face, including portability of track records, status of employees, protection of intellectual property and cybersecurity. Moderated by EisnerAmper director Frank L. Napolitani, the program featured Cole-Frieman & Mallon partner John Araneo. This article highlights the key takeaways from the presentation. For additional insight from EisnerAmper, see our three-part series on how hedge funds can mitigate FIN 48 exposure in certain jurisdictions: Europe (Mar. 17, 2016); China (Mar. 24, 2016); and Australia and Mexico (Mar. 31, 2016); as well as our two-part series on hedge fund audit holdbacks: “Operational Considerations” (Sep. 10, 2015); and “Implementation” (Sep. 17, 2015).

Lax Annual Compliance Review Procedures May Draw SEC Enforcement Action

Rule 206(4)-7 promulgated under the Investment Advisers Act of 1940 requires registered investment advisers to conduct an annual compliance review to ensure their compliance policies and procedures are adequate and have been implemented effectively. A recent study found that an alarming number of registered private fund advisers routinely fail to conduct these required annual reviews. See “Survey Reveals Compliance Weaknesses of Hedge Fund Managers Relative to Other Financial Services Firms, Including CCO Qualifications and Frequency of Annual Compliance Reviews” (Sep. 15, 2016). A recent SEC enforcement proceeding is a timely reminder of the need to conduct such reviews. The SEC found that since registering with the SEC in 2010, an investment adviser failed to conduct a single annual compliance review. This article summarizes the underlying facts and the SEC’s specific findings alleged in the settlement order. For more on conducting annual compliance reviews, see “Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program” (Aug. 28, 2014); “PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance” (Jun. 13, 2013); as well as our two-part series “How Hedge Fund Managers Should Approach Preparing for, Conducting and Documenting the Annual Compliance Review”: Part One (Mar. 22, 2012); and Part Two (Mar. 29, 2012).

Elizabeth Shea Fries Joins Sidley Austin in Boston 

Sidley Austin has expanded its investment funds, advisers and derivatives practice in Boston with the hiring of Elizabeth Shea Fries. Fries advises investment funds, investment managers, broker-dealers and banks on alternative investments, financial services, mergers and acquisitions, fiduciary matters and regulatory compliance. For insight from Fries, see our three-part series on managing the conflicts of interest associated with the simultaneous management of hedge funds and private equity funds: Part One (May 7, 2015); Part Two (May 14, 2015); and Part Three (May 21, 2015). For coverage of another recent addition to Sidley Austin’s funds practice, see “Sidley Austin Adds Investment Funds Partner in Boston” (Apr. 7, 2016). For commentary from other Sidley Austin partners, see “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct.  2, 2015); “Sidley Austin, Ivaldi Capital and Advise Technologies Share Lessons for U.K. Hedge Fund Managers From the January 2015 AIFMD Annex IV Filing” (Mar. 27, 2015); and “Sidley Partners Discuss Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two)” (Sep. 25, 2014). 

FisherBroyles Adds Lynette Ashby As Partner in New York

Lynette Ashby has joined the cloud-based law firm of FisherBroyles as a partner in the New York office. Ashby represents fund managers in the formation of private funds, including hedge funds, funds of funds, ERISA funds, private equity funds and vehicles structured to comply with the Alternative Investment Fund Managers Directive (AIFMD). She also counsels clients on a broad array of investment advisory issues, such as conflicts of interest, marketing, insider trading, anti-money laundering compliance, trade allocation, trade errors, expense allocation, valuation, pay to play rules, cybersecurity and Form ADV.