The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Electronic Communications

  • From Vol. 9 No.24 (Jun. 16, 2016)

    SEC Chair’s Testimony Highlights SEC’s Bolstered Presence in Asset Management Space

    The Securities and Exchange Commission reached the end of 2015 with a record number of examinations completed and a significantly enhanced presence in several key areas of asset management. See “OCIE Outlines Examination Priorities for 2016” (Jan. 14, 2016). But the Commission’s progress to promote compliance with securities laws and greater transparency and fairness for investors may be stunted by insufficient resources. This point was made by SEC Chair Mary Jo White during her June 14 testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs. This article highlights the portions of White’s testimony most relevant to hedge fund managers. For analysis of prior public statements by White regarding hedge fund issues, see “SEC Chair Outlines Expectations for Fund Directors” (Apr. 7, 2016); “SEC Chair Highlights Two Types of Risks Hedge Fund Managers Must Consider” (Oct. 29, 2015); and “SEC Chair White Describes the SEC’s Game Plan With Respect to the Asset Management Industry” (Dec. 18, 2014).

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  • From Vol. 8 No.39 (Oct. 8, 2015)

    ACA 2015 Compliance Survey Covers Expert Networks, Fund Expenses and Electronic Communications (Part Two of Two)

    ACA Compliance Group recently released the results of its 2015 Alternative Fund Manager Compliance Survey, which considered a variety of compliance issues faced by hedge fund managers and other private fund managers.  The survey results and comparisons to those of the firm’s prior surveys were presented at a recent webinar by Colleen Marencik, a senior principal consultant at ACA Compliance Group, and Tessa Carbone, a consultant at that firm.  This article, the second in a two-part series, summarizes the key findings from the survey and the insights offered by Carbone and Marencik with respect to expert networks and consultants, fund expenses and electronic communications.  The first article addressed the survey demographics, SEC exam experiences, material nonpublic information and restricted lists.  For coverage of prior ACA surveys, see “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013); and “ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority,” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

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  • From Vol. 8 No.3 (Jan. 22, 2015)

    Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Handling Regulatory Examinations and Mitigating Cybersecurity Risks (Part One of Four)

    Participants at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM, zeroed in on the key compliance issues currently facing the hedge fund industry.  This article, the first in a four-part series covering the Summit, contains insight on regulatory priorities, handling regulatory examinations and cybersecurity preparedness from Andrew Bowden, a director at the SEC’s Office of Compliance Inspections and Examinations; Dianne Mattioli, CCO at Hedgemark; Larry Block, managing director, counsel and CCO at Island Capital Group LLC; Cynthia Marian, vice president, CCO and deputy general counsel at Tinicum Inc.; and David Lashway, a partner at Baker & McKenzie LLP.  Future installments in the series will cover: CFTC compliance; proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; conflicting regulatory regimes; marketing considerations; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

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  • From Vol. 7 No.20 (May 23, 2014)

    Six Privacy-Related Topics to Be Covered by a Hedge Fund Manager’s Compliance Policies and Procedures (Part Three of Three)

    This is the final article in our three-part series on employee privacy issues relevant to hedge fund managers.  The first article in this series made the case, using examples, for why hedge fund managers should care about employee privacy.  See “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014).  The second article in this series identified the five primary sources of employee privacy rights.  See “Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees (Part Two of Three),” The Hedge Fund Law Report, Vol. 7, No. 14 (Apr. 11, 2014).  This article discusses six topics that hedge fund managers should cover in their compliance policies and procedures under the general rubric of employee privacy.  The overarching aim of this series is to assist managers in calibrating and communicating their employees’ expectations of privacy – particularly in connection with electronic communications – in a manner consistent with best practices, relevant law and expectations of SEC examiners.

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  • From Vol. 7 No.14 (Apr. 11, 2014)

    Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees (Part Two of Three)

    This is the second article in our three-part series guiding hedge fund managers through the motley patchwork of authority governing employee privacy rights and employer privacy obligations.  The crux of the challenge is as follows: securities regulation and best practices require hedge fund managers to exercise considerable vigilance over employee communications.  To cite one headline example, a hedge fund management company can be held criminally liable for failing to adequately supervise employees that engaged in insider trading, and the DOJ and SEC understand adequate supervision to include continuous and vigorous monitoring of e-mails, chats and other electronic communications.  On the other hand, non-securities regulation and other authority grant employees certain privacy rights in their electronic and other communications.  How can hedge fund managers comply with applicable securities regulation while also complying with applicable privacy regulation – especially where the two regimes conflict?  Outlining an answer to that question is the goal of this series.  This article discusses the five primary sources of employee privacy rights, then offers three best practices for reconciling these often conflicting sources.  The first article in this series detailed six reasons why hedge fund managers need to monitor electronic communications of employees and highlighted two settings in which procedures other than electronic communication monitoring are most effective.  See “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014).  The third article will describe factors bearing on the reasonableness of an employee’s expectation of privacy, the benefits and limits of specific policies regarding electronic communication monitoring and best practices in this area.

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  • From Vol. 7 No.13 (Apr. 4, 2014)

    How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three)

    Information is the raw material out of which hedge fund managers fashion their finished products – compelling investment ideas and, one hopes, absolute returns.  As such, managers and their personnel are continuously engaged in collecting, refining and transmitting information, that is, communicating.  Today, the vast majority of such communications occur electronically – via e-mail, chat, text, social media and similar channels.  From an investment perspective, this increases opportunities but at the same time competition.  From a compliance perspective, the proliferation of electronic communications has dramatically expanded the range of opportunities for legal and regulatory violations.  Hedge fund managers are not unique among businesses in contending with the compliance challenges raised by electronic communications, but many of the specific compliance challenges faced by hedge fund managers are industry-specific.  Accordingly, The Hedge Fund Law Report is undertaking a three-part series intended to identify the specific compliance challenges for hedge fund managers raised by electronic communications and to outline best practices for surmounting those challenges.  This article – the first in the series – catalogues six reasons why hedge fund managers need to monitor electronic communications of employees and highlights two settings in which procedures other than electronic communication monitoring are most effective.  Subsequent articles in the series will discuss the sources of employees’ privacy rights, factors bearing on the reasonableness of an employee’s expectation of privacy, the benefits and limits of specific policies regarding electronic communication monitoring and best practices in this area.  See also “Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 12, 2010).

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  • From Vol. 7 No.12 (Mar. 28, 2014)

    Four Imminent Changes to E.U. Data Protection Laws of which Private Fund Managers Should Be Aware

    Private fund managers with any nexus to the E.U. should care about European data protection laws for two broad categories of reasons: because such laws may impact compliance policies and procedures and other operations at the management company itself, and because such laws may impact companies in which managers’ funds invest.  The latter point typically applies differently to hedge and private equity fund managers.  For hedge fund managers, data privacy laws can create buying or selling opportunities (in the presence of dramatic violations, analogous to the Target data breach in the U.S.), can offer a proxy for the general corporate governance climate at an investee company and are engendering the creation of a new (albeit limited) industry focused on compliance.  For private equity fund managers, data protection laws will typically raise costs at European portfolio companies, and – the other side of the cost coin – offer opportunities to reduce per unit costs via economies of scale spread over multiple portfolio companies.  This article offers a short but pointed summary of some of the key elements of E.U. data protection law currently in force, and highlights four forthcoming changes that will alter the contours of that law and the way private fund managers interact with it.  For discussions of separate sets of considerations for U.S. managers with E.U. operations, see “What Should Hedge Fund Managers Understand About Transfer Pricing and How to Manage the Related Risks?,” The Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013) (transfer pricing considerations for U.S. managers with London or E.U. affiliates); “Potential Impact on US Hedge Fund Managers of the Reform of the UK Tax Regime Relating to Partnerships and Limited Liability Partnerships,” The Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014) (U.K. tax considerations for U.S. managers); “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013) (AIFMD considerations for U.S. managers).

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  • From Vol. 7 No.5 (Feb. 6, 2014)

    How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Four of Four)

    This is the fourth article in our four-part series on information barriers in the hedge fund context.  The series aims to help hedge fund managers determine whether they should use information barriers and, if so, how they can establish and enforce such barriers.  In particular, this fourth article discusses the role of employee training and compliance surveillance in the maintenance of robust information barriers, and describes four significant challenges faced by hedge fund managers in structuring, implementing and enforcing information barriers.  The first article provided an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; described four principal benefits available from the use of information barriers; highlighted the types of firms that can benefit most from the implementation of information barriers; and described the types of firms that will find the implementation of information barriers most challenging.  The second article discussed the legal and regulatory basis for information barriers and described the building blocks of effective barriers (including the key players, physical components and technological processes).  The third article described how a firm can limit access to material nonpublic information within the information barrier control environment and outlined policies and procedures designed to bolster the effectiveness of information barriers.

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  • From Vol. 6 No.1 (Jan. 3, 2013)

    How Can Hedge Fund Managers Identify, Mitigate and Insure Against Cyber Security Threats?

    On December 4, 2012, a webcast jointly sponsored by insurance brokerage firm Maloy Risk Services; insurer Chubb & Son; and Internet security software developer Trend Micro, provided an overview of the current cyber “threat landscape,” highlighted the critical need to vet the cyber defenses of third party service providers, and discussed insurance coverage available with respect to cyber attacks.  This article summarizes the key points from the webcast that are most relevant to hedge fund managers and includes a due diligence checklist for managers to verify cyber security measures taken by third party vendors.

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  • From Vol. 5 No.15 (Apr. 12, 2012)

    What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed?  (Part One of Three)

    Mobile devices, such as smartphones and tablet computers, have significantly enhanced the ability of hedge fund managers and their personnel to conduct business more effectively and efficiently by, among other things, facilitating performance of job functions outside of the office.  However, such productivity gains come at a cost.  The ability to remotely access firm networks and information via mobile devices magnifies the risk of losing some control over access to firm information and firm systems.  Such loss of control can, in turn, create additional perils, most notably, security concerns for hedge fund managers who closely guard any informational advantage they have over competitors.  Additionally, such loss of control over access may heighten risks that a firm’s network is compromised, which can cause significant damage to a firm’s operations.  As such, it is imperative for hedge fund managers to keep up with the ever-growing risks that arise from the rapidly evolving mobile device technology landscape and to adopt policies and solutions designed to minimize the loss of control over access to firm information and systems.  This is the first article in a three-part series designed to address the concerns raised by mobile devices and to outline policies and procedures as well as technology solutions that can help hedge fund managers mitigate the risks posed by the use of mobile devices.  This first article provides an overview of the use of mobile devices and how hedge fund managers have historically addressed the use of mobile devices.  In particular, this article surveys the various risks for hedge fund managers raised by mobile devices, including security risks, risks related to unauthorized trading and risks related to the downloading of malware and viruses.  This article also addresses concerns relating to retention and archiving of books and records, and advertising and communications.  The second and third installments in this three-part series will discuss principles and detail best practices for establishing mobile device policies and procedures as well as specific mobile device solutions and technologies designed to address the risks catalogued in this article.

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Does Social Media Have a Place in the Hedge Fund Industry?

    While social media has captivated society and propelled it deeper into the communication age, the hedge fund industry has not yet embraced it on a meaningful scale.  See “Legal Considerations for Hedge Fund Managers that Use Social Media,” The Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011).  In fact, a recent survey of hedge fund managers found that the vast majority of hedge fund managers are simply not using social media.  On the one hand, it is surprising that hedge fund managers have been slow to explore social media given the otherwise cutting edge nature of the hedge fund industry.  On the other hand, many compliance professionals are simply stretched too thin by the introduction of new regulatory challenges arising from the Dodd-Frank Act, and thus are unable to devote resources to exploring this new frontier.  In reality, there appears to be very little dialogue regarding whether social media could be used effectively in the hedge fund industry, and if so, how to do so in compliance with applicable laws and regulations.  Therefore, in a guest article, John Herbert Roth, Counsel and Chief Compliance Officer of Venor Capital Management LP, initiates that dialogue by asking whether social media can have a place in the hedge fund industry, and then proposing a comprehensive framework within which hedge fund managers may think about social media and its compliance implications.  See also “SEC Enforcement Action and Bulletins Shine Spotlight on Use of Social Media by Investment Advisers,” The Hedge Fund Law Report, Vol. 5, No. 2 (Jan. 12, 2012).

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Survey Highlights Compliance Professionals’ Attitudes and Practices Concerning Electronic Communications Compliance

    Electronic communications compliance has become more important for hedge fund managers in recent years as the amount of business done electronically and the amount of regulatory focus on electronic communications compliance have grown significantly.  At the same time, compliance professionals have struggled to keep up with ever-changing circumstances that make electronic communications compliance, including the capture and archiving of electronic communications, even more difficult.  In May 2011, Smarsh, Inc. published a report (Report) that detailed the findings of a survey of compliance professionals at various types of financial institutions, including investment advisers and broker-dealers, designed to identify trends in and opinions about electronic communications compliance.  The survey comprised 29 questions which were asked of 223 individuals with direct compliance supervisory responsibilities, including C-level management personnel, chief compliance officers and compliance staff members.  This article summarizes some of the key findings of the Report and lessons for hedge fund managers.  See also “Does Social Media Have a Place in the Hedge Fund Industry?,” above, in this issue of The Hedge Fund Law Report.

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  • From Vol. 3 No.44 (Nov. 12, 2010)

    Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers

    Electronic communications technologies – phone, e-mail, instant messaging, social media and others described in this article – are essential to the efficient operations of hedge fund managers, but at the same time pose considerable regulatory and litigation, reputational and trading risks.  Hedge fund managers cannot live without electronic communications, but may not survive if such communications are not properly handled.  Moreover, electronic communications are among the most difficult categories of information to contain – they are indelible, pervasive and often determine the outcome of private and government litigation.  Yet more often than not, such communications are drafted under the mistaken impression that they are as easy to erase as they are to create.  Despite a lengthy list of cases illustrating the error in this view, hedge fund manager personnel continue to create and send electronic communications that would fail the commonly used litmus test: “If you wouldn’t want it on the cover of the Wall Street Journal, don’t send it.”  The intent of this article is to assist hedge fund managers in creating, refining and enforcing electronic communications policies and procedures.  To do so, this article first catalogues the various types of electronic communications technologies used by hedge fund manager personnel, as well as the categories of communications that may be made with such technologies.  Next, the article identifies specific risks arising out of the various communications and technologies.  Notably, the range of risks posed by electronic communications in the hedge fund context is significantly broader than the risk of embarrassment or bad evidence at trial – other risks relate to loss of trading advantages, insider trading charges, spoliation sanctions and more.  Incorporating the discussion of communications, technologies and risks, the article then discusses the key elements of electronic communications policies and procedures for hedge fund managers.

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