Articles By Topic
By Topic: Conflicts of Interest
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From Vol. 6 No.18 (May 2, 2013)
SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points
In a speech at the Regulatory Compliance Association’s Regulation, Operations and Compliance Symposium, held on April 18, 2013, SEC Commissioner Luis Aguilar described the challenges to be tackled by hedge fund managers and regulators in serving investor interests. In particular, Aguilar discussed the elements of a culture of compliance; how the SEC thinks about insider trading at hedge fund management companies; best practices in valuing assets; and internal dynamics at the SEC that may impact whether a hedge fund manager becomes an examination or enforcement target. This article highlights the salient points from Aguilar’s speech.
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From Vol. 6 No.9 (Feb. 28, 2013)
RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part Two of Two)
On December 18, 2012, the Regulatory Compliance Association held its Compliance, Risk & Enforcement Symposium at the Pierre Hotel in New York City. Participants at the event included leading hedge fund industry professionals, and panels focused on topics including insider trading, compliance programs and reviews, SEC examination priorities, hedge fund governance, Form PF and marketing and advertising issues. This article – the second installment in a two-part series covering the Symposium – discusses SEC examination priorities (and practical guidance for addressing areas of concern); recent trends in hedge fund governance; lessons learned from initial Form PF filings and strategies for completing Form PF; and marketing and advertising issues, including a discussion of the JOBS Act and related topics. The first installment covered, among other things: insider trading (including a discussion of manager cooperation, the elements of insider trading, the continuing viability of the mosaic theory, insider trading investigative techniques and the use of expert networks and paid consultants); and compliance programs and reviews (including a discussion of the approach to and framework for hedge fund compliance programs and reviews, and specific policies and procedures designed to address trading risks). See “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).
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From Vol. 6 No.3 (Jan. 17, 2013)
Identifying and Addressing the Primary Conflicts of Interest in the Hedge Fund Management Business
Regulators are increasingly keen on scrutinizing how fund managers address conflicts of interest. Norm Champ, then-Deputy Director of the SEC’s Office of Compliance Inspections and Examinations, spoke about conflicts at a May 2012 seminar held at the New York City Bar Association. See “Davis Polk ‘Hedge Funds in the Current Environment’ Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012). The SEC has indicated that it intends to scrutinize fund managers’ handling of conflicts of interest during “presence examinations” of newly-registered managers to be conducted in the next two years. See “Former SEC Asset Management Unit Co-Chief Robert Kaplan and Former NYS Insurance Superintendent Eric Dinallo, Both Current Debevoise Partners, Discuss the Purpose, Process and Consequences of Presence Examinations of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 48 (Dec. 20, 2012). In addition, the FSA has expressed its own concerns with asset managers’ handling of conflicts of interest by penning a “Dear CEO” letter to asset managers identifying areas where it has particular concerns. See “FSA Report Warns Investment Managers to Revise Their Compliance Policies and Procedures to Address Key Conflicts of Interest,” The Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012). Moreover, regulators have initiated enforcement actions to address conflicts of interest that were not appropriately managed, handled and documented. The most notable of these actions was levied against Harbinger Capital Partners and its principal, Philip Falcone, in the summer of 2012. See “SEC Charges Philip A. Falcone, Harbinger Capital Partners and Related Entities and Individuals with Misappropriation of Client Assets, Granting of Preferential Redemptions and Market Manipulation,” The Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012). Like regulators, hedge fund investors are concerned with conflicts of interest at managers. See “Use of SSAE 16 (SAS 70) Internal Control Reports by Hedge Fund Managers to Credibly Convey the Quality of Internal Controls, Raise Capital and Prepare for Audits,” The Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012). Left unchecked, conflicts can ripen into legal violations and lost investments. Accordingly, hedge fund managers must be vigilant in identifying and addressing conflicts. While the details of conflicts may differ from firm to firm, certain general conflicts pervade the industry. In a guest article, John Ackerley, a Director with Carne Global Financial Services in the Cayman Islands, provides a checklist of those pervasive conflicts, which are also those that matter most to regulators and investors. In addition, Ackerley discusses specific measures that hedge fund managers can take to mitigate such conflicts. Managers can expect questions from regulators and investors on each of the conflicts discussed herein. Therefore, this article can be useful as a reference point in a mock examination, to prepare for marketing meetings and for other purposes.
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From Vol. 5 No.45 (Nov. 29, 2012)
FSA Report Warns Investment Managers to Revise Their Compliance Policies and Procedures to Address Key Conflicts of Interest
In response to a series of thematic reviews of asset managers conducted between June 2011 and February 2012, the U.K.’s Financial Services Authority (FSA) has expressed concern over how asset managers are identifying, evaluating and managing conflicts of interest. In a November 2012 report, the FSA highlighted specific conflicts of concern, including personal trading by employees and other conflicts. The FSA indicated in the report that it expects asset managers to take immediate action to evaluate their conflicts of interest policies and procedures to ensure compliance with FSA principles and rules. The report also requires specific action by the CEOs of certain asset managers by February 28, 2013. This article summarizes key takeaways from the report for U.K.-based hedge fund managers and non-U.K. managers with offices, operations or investments in the U.K.
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From Vol. 5 No.39 (Oct. 11, 2012)
OCIE Warns Newly-Registered Hedge Fund Advisers to Watch Out for “Presence Examinations”
On October 9, 2012, the Securities and Exchange Commission’s (SEC’s) Office of Compliance Inspections and Examinations (OCIE) sent a letter (Letter) to senior management of newly-registered investment advisers (i.e., advisers that registered with the SEC after July 21, 2011), describing the SEC’s National Examination Program, alerting them to upcoming OCIE examinations of newly-registered advisers to private funds to be conducted in the next two years (presence examinations) and highlighting the focal areas of such presence examinations. This article summarizes some key takeaways from the Letter.
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From Vol. 5 No.23 (Jun. 8, 2012)
SEC Sanctions Quantek Asset Management and its Portfolio Manager for Misleading Investors About “Skin in the Game” and Related-Party Transactions
Investments by hedge fund managers in their own funds and related party transactions (such as loans from a fund to a manager) exist at opposite sides of the incentive spectrum. The former – so-called “skin in the game” – is typically thought to align the interests of investors and managers while the latter is seen as pitting the interests of investors and managers in direct conflict. Investors want to know about both, for obviously different reasons. A May 29, 2012 SEC Order Instituting Administrative and Cease-And-Desist Proceedings against Quantek Asset Management LLC (Quantek), Javier Guerra, Bulltick Capital Markets Holdings, LP (Bulltick) and Ralph Patino highlights these and other investor considerations. This article summarizes the SEC’s factual and legal allegations against Quantek, Bulltick, Guerra and Patino, and the settlement among the parties. The SEC’s action follows private actions against the same or similar parties. See, e.g., “Fund of Hedge Funds Aris Multi-Strategy Fund Wins Arbitration Award against Underlying Manager Based on Allegations of Self-Dealing,” The Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011); “British Virgin Islands High Court of Justice Rules that Minority Shareholder in Feeder Hedge Fund that had Permanently Suspended Redemptions Was Not Entitled to Appointment of a Liquidator,” The Hedge Fund Law Report, Vol. 4, No. 9 (Mar. 11, 2011).
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From Vol. 5 No.22 (May 31, 2012)
Three Steps Hedge Fund Managers Can Take to Avoid Liability for Related Party Conflicts of Interest
The interests of hedge fund investors and managers are not always in perfect alignment. One of the principal conflicts with which investors are concerned is the investment of fund assets in companies in which the manager or one of its affiliates has a financial or other interest; consciously or unconsciously, such interests are thought to color the manager’s judgment. For this reason, hedge fund investors and regulators expect managers to disclose (in hedge fund offering documents) all material facts necessary to understand the incentives informing a manager’s investment decision-making. A recent SEC enforcement action demonstrates the agency’s commitment to identifying and interdicting undisclosed conflicts of this nature. Specifically, the SEC’s action alleges that a registered fund manager invested fund assets in two high-risk private technology companies he founded without disclosing the attendant conflicts of interest to investors, and in contravention of fund offering documents which stated that he would invest fund assets primarily in publicly traded securities. This article describes the factual allegations, causes of action and remedies sought by the SEC. This article also provides three recommendations for hedge fund managers aiming to avoid enforcement activity for failing to disclose related party conflicts of interest.
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From Vol. 5 No.21 (May 24, 2012)
SEC and FSA Impose Heavy Fines on Investment Manager for Failing to Address Conflicts of Interest Associated with Side by Side Management of a Registered Fund and a Hedge Fund
Hedge fund managers are increasingly managing multiple products with different investment strategies and fee structures, and global regulators have enhanced their scrutiny of such arrangements. Among other things, regulators are concerned about managers favoring one fund over other funds. For instance, regulators have scrutinized arrangements in which managers allocate more attractive investment opportunities (e.g., initial public offerings) to funds that pay higher fees to the manager. See, e.g., “How Can Hedge Fund Managers Collect the Investor Information Required to Comply with the Prohibition on ‘Spinning’ in FINRA Rule 5131?,” The Hedge Fund Law Report, Vol. 4, No. 23 (Jul. 8, 2011). Regulators are also concerned about investments by different funds at different levels of the capital structure of the same issuer and the conflicts managers face in simultaneously managing such investments to ensure fair treatment for all affected funds. See, e.g., “Identifying and Resolving Conflicts Arising out of Simultaneous Management of Debt and Equity Hedge Funds,” The Hedge Fund Law Report, Vol. 3, No. 10 (Mar. 11, 2010). With this in mind, the U.S. Securities and Exchange Commission and the U.K. Financial Services Authority recently announced the settlement of charges brought by those regulatory agencies against two affiliated institutional investment managers for failing to appropriately address conflict raised by the side by side management of a mutual fund and hedge fund. For more on the SEC’s view on such side by side management arrangements, see “Fifth Street No-Action Letter Outlines Factors the SEC May Consider in Approving Joint Participation in a Restructuring by Registered and Private Funds Managed by the Same Manager,” The Hedge Fund Law Report, Vol. 3, No. 38 (Oct. 1, 2010).
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From Vol. 5 No.7 (Feb. 16, 2012)
Enforcement Session at SEC’s Compliance Outreach Program National Seminar Highlights Regulatory Focus on Valuation, Conflicts of Interest and Compliance Shortcomings at Hedge Fund Managers
On January 31, 2012, the SEC hosted its annual “Compliance Outreach Program National Seminar” (Seminar). (The program was previously called “CCOutreach,” but it has been “rebranded,” as the SEC explained in a press release, to be more inclusive of all senior personnel at firms.) The Seminar included five sessions. One of those sessions – and the focus of this article – was entitled “Enforcement-Related Matters” (Session). The purpose of the Session was to inform fund industry participants about the SEC’s recent risk analytic initiatives and to provide insight into the SEC’s areas of focus and enforcement priorities. The Session was conducted by: Rosalind Tyson, Regional Director of the SEC’s Los Angeles Regional Office; Barbara Chretien-Dar, Assistant Director of the SEC’s Division of Investment Management; and Bruce Karpati and Robert Kaplan, Co-Chiefs of the Asset Management Unit of the SEC’s Division of Enforcement. The Session provided valuable insight into the SEC’s current regulatory priorities, which are or are likely to become areas of focus for investors. This insight, in turn, can help hedge funds managers deploy limited compliance resources to address the areas of greatest concern for both regulators and investors. Specifically, the Session: (1) explained how and when risk-based examinations are initiated and their potential progression to investigations; (2) identified the main current focus areas for enforcement staff; and (3) discussed enforcement actions based on these main focus areas. This article discusses each of the foregoing topics in detail.
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From Vol. 4 No.40 (Nov. 10, 2011)
Business Issues with Legal Consequences: A Wide-Ranging Interview with Dechert Partner George Mazin about the Most Important Challenges Facing Hedge Fund Managers
The Hedge Fund Law Report recently had the privilege of interviewing George J. Mazin, a Partner at Dechert LLP, and a deservedly well-regarded member of the hedge fund bar. As evidenced by the text of our interview, which is included in this issue of The Hedge Fund Law Report, George has an aptitude for identifying the legal consequences of business issues, and explaining them clearly. He also has the kind of market color that only comes with years – decades – in the trenches, and experience across business cycles. Our interview was wide-ranging, reflecting the diversity of George’s experience, which in turn reflects the range of legal issues relevant to hedge fund managers. In particular, our interview covered: valuation considerations in connection with affiliate transactions; valuations based on fraudulent sales and rigged dealer bids; manager overrides of third-party valuations; whether side pockets remain viable in new hedge fund launches; how even non-ERISA hedge funds can analogize the ERISA model of independent pricing; effective valuation testing programs; the interaction between GAAP and the custody rule; GAAP exceptions to audit opinions; use of counterparty confirmations by the SEC; delayed audits; custody of derivatives and limited partnership interests; insider trading policies with respect to market chatter and channel checking; how to grant side letters in light of selective disclosure considerations; how algorithmic or high-speed trading firms can prepare for regulatory examinations; legal considerations in connection with loans from a hedge fund to a manager; best practices in connection with principal trades; and whether side-by-side investing by manager personnel can pass muster under fiduciary duty and related principles. This interview was conducted in connection with the Regulatory Compliance Association’s Fall 2011 Asset Management Thought Leadership Symposium, which is taking place today at the Pierre Hotel in New York.
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From Vol. 4 No.36 (Oct. 13, 2011)
SEC Enforcement Action Against a Private Equity Fund Manager Partner Calls into Question the Value of Self-Reporting in the Private Funds Context
The SEC recently brought an enforcement action against a partner of a private equity fund manager for allegedly usurping investment opportunities that belonged – under fiduciary duty principles and fund and manager documents – to the manager’s funds. According to the order in the matter (Order), the manager had robust compliance policies and procedures in place, conducted an internal investigation and self-reported the partner’s alleged bad acts to the SEC. The Enforcement Division brought an action against the partner, but did not name the firm itself in the action. From the perspective of the manager, the fact that it was not named is a good thing, but the fact of the action itself is a bad thing. For other private fund managers contemplating self-reporting, the important question raised by this matter is the extent to which self-reporting dissuaded the SEC from charging the manager in addition to the partner. In an effort to answer that question – or at least to refine and particularize it – this article describes the factual and legal allegations in the Order, then discusses the implications of the matter for hedge and private equity fund managers.
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