The Hedge Fund Law Report

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

Articles By Topic

By Topic: Chief Compliance Officers

  • From Vol. 7 No.28 (Jul. 24, 2014)

    How Much Are Hedge Fund Manager General Counsels and Chief Compliance Officers Paid?

    In a revealing recent interview with The Hedge Fund Law Report, Jason Wachtel, Managing Partner of JW Michaels, provided detailed insight into the structures and levels of compensation of hedge fund manager general counsels and chief compliance officers.  Specifically, Wachtel discussed the “market” for compensation of GCs and CCOs; the role of manager size and candidate experience in determining compensation; compensation of junior legal and compliance personnel; compensation of dual-hatted employees; how compensation of GCs and CCOs of hedge fund managers compares to the compensation of persons in similar roles at private equity fund managers; the relationship among fund performance, examination experience and compensation; how experience as a regulator or prosecutor affects compensation; investments by GCs and CCOs in the manager’s funds; and GC and CCO reporting lines.  See also “Annual Greenwich Associates and Johnson Associates Report Reveals Trends in Compensation of Investment Professionals at Buy-Side Firms,” The Hedge Fund Law Report, Vol. 6, No. 48 (Dec. 19, 2013).

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  • From Vol. 7 No.26 (Jul. 11, 2014)

    Dechert Partners and Venor Capital General Counsel Describe the Scope of Supervisory Liability for Hedge Fund Manager Personnel

    The Regulatory Compliance Association recently presented a PracticeEdge session that addressed when and how a private fund adviser’s chief compliance officer and/or general counsel could be held personally liable for the misconduct of one of the adviser’s employees.  The session featured Dechert LLP partners Catherine Botticelli, Michael J. Gilbert and Adam J. Wasserman; and John Roth, the General Counsel and Chief Compliance Officer of Venor Capital Management.  The speakers covered the regulatory and statutory background of supervisory liability; three characteristics of effective hedge fund manager CCOs; recent enforcement actions; six tips for minimizing the risks and consequences of personal liability for manager personnel; portfolio manager liability; and codes of ethics.  This article summarizes the session.

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  • From Vol. 7 No.25 (Jun. 27, 2014)

    The Role of Outsourced Compliance Consultants in the Hedge Fund Compliance Ecosystem

    Under Advisers Act Rule 206(4)-7, registered hedge fund managers are required to designate a chief compliance officer (CCO), but they are not required to hire an additional executive to serve in that capacity.  Instead, they can assign the CCO role to an existing executive in another role – for example, the general counsel – so long as that person has, in the language of the rule release, “sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.”  See “Simon Lorne, Chief Legal Officer of Millennium Management LLC, Discusses the Evolving Roles, Challenges and Risks Faced by Hedge Fund Manager General Counsels and Chief Compliance Officers,” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013).  However, even a person with sufficient seniority and authority may not have sufficient time to discharge the duties of a CCO effectively, especially in larger or more complex management companies.  Similarly, “single hatted” CCOs – those with the CCO title and no other – may find their resources taxed and their experience bounded in light of the growth or complexity of the management company.  In short, even a well-staffed compliance function at a hedge fund manager may need to be supplemented with external resources.  Not surprisingly, an industry of compliance consultants and outsourced compliance service providers has arisen to serve this demand.  A relatively new entrant into this industry – albeit one affiliated with an old accounting name – is EisnerAmper Compliance and Regulatory Services, LLC, or CARS.  The Hedge Fund Law Report recently conducted an interview with the principals of CARS – Gary Swiman and Carmine Angone – in an effort to understand where CARS and similar services fit within the hedge fund compliance ecosystem.  In particular, we asked Swiman and Angone for their views on: how an outsourced compliance service provider can be effective if it is not on the ground on a day-to-day basis; conflicts inherent in a compliance service provider’s affiliation with an accounting firm, and how to handle those conflicts; pricing of outsourced compliance services, and measuring the effectiveness of such services; assessing hedge fund enterprise risk; mitigating conflicts raised by dual registration as an investment adviser and broker-dealer; allocating expenses at private equity firms; compliance challenges for family offices; anti-money laundering considerations for hedge fund managers; and the skill sets and backgrounds that should be present among the staff at an outsourced compliance firm.

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  • From Vol. 7 No.11 (Mar. 21, 2014)

    New York City Bar’s “Hedge Funds in the Current Environment” Event Focuses on Hedge Fund Structuring, Private Fund Examinations, Compliance Risks and Seeding Arrangements

    On March 5, 2014, the New York City Bar held the most recent edition of its annual “Hedge Funds in the Current Environment” event.  Panelists at the event – including general counsels and chief compliance officers (CCOs) from leading hedge fund managers and partners from top law firms – addressed hedge fund structuring considerations (including the purposes and mechanics of mini-master funds); the myth of the unregulated hedge fund; analogies between regulatory examinations and investor due diligence; seven key areas of regulatory interest in hedge fund examinations; five headline issues confronting CCOs; four pros and seven cons of hedge fund seeding arrangements; and a structuring alternative to seeding ventures.  This article highlights the salient points from the event.  For our coverage of the 2012 edition of this event, 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).

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  • From Vol. 7 No.9 (Mar. 7, 2014)

    Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three)

    On January 30, the SEC hosted the 2014 edition of its annual Compliance Outreach Program National Seminar for senior professionals at hedge fund managers and other investment advisers.  Panelists at the seminar included senior SEC officials and CCOs from hedge and private equity fund managers.  The seminar provided candid insight from regulators and conveyed best practices developed in the private sector.  This is the third article in a three-part series summarizing the more noteworthy points made at the seminar.  This article covers: compliance considerations specific to the private equity industry; best practices in fair value pricing; due diligence on pricing services; CCO liability; and outsourcing of compliance functions.  The first article in this series discussed SEC Chairman Mary Jo White’s opening remarks and detailed the compliance, examination and enforcement priorities outlined by the heads of relevant SEC divisions.  And the second article detailed SEC priorities by theme and by SEC division and relayed insights on nine topics of specific interest to private fund advisers: presence examinations, risk assessments, conflicts, co-investments, allocation of expenses, marketing, custody, allocation of investment opportunities and broker-dealer registration.

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  • From Vol. 7 No.8 (Feb. 28, 2014)

    Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Two of Three)

    On January 30, the SEC hosted the 2014 version of its annual Compliance Outreach Program National Seminar for senior professionals at hedge fund managers and other investment advisers.  Panelists at the seminar included senior SEC officials and CCOs from hedge and private equity fund managers.  The seminar provided candid insight from regulators and conveyed best practices developed in the private sector.  This is the second article in a three-part series summarizing the more noteworthy points made at the seminar.  This article covers discussions of SEC priorities by theme and by SEC division and relays insights on nine topics of specific interest to private fund advisers: presence examinations, risk assessments, conflicts, co-investments, allocation of expenses, marketing, custody, allocation of investment opportunities and broker-dealer registration.  The first article discussed SEC Chairman Mary Jo White’s opening remarks and detailed the compliance, examination and enforcement priorities outlined by the heads of relevant SEC divisions.  See “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).  The third article will focus on private equity compliance issues, valuation and CCO liability.

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  • From Vol. 7 No.7 (Feb. 21, 2014)

    Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part One of Three)

    On January 30, the SEC hosted the 2014 version of its annual Compliance Outreach Program National Seminar for senior professionals at hedge fund managers and other investment advisers.  Panelists at the seminar included senior SEC officials and CCOs from hedge and private equity fund managers.  The seminar provided first-person insight into the concerns of regulators with direct jurisdiction over hedge fund managers, and also highlighted private sector best practices.  This is the first article in a three-part series summarizing the more noteworthy points made at the seminar.  This article covers SEC Chairman Mary Jo White’s opening remarks, then details the compliance, examination and enforcement priorities outlined by the heads of the relevant SEC divisions.  See also “SEC Provides Recommendations for Establishing an Effective Risk Management Program for Hedge Fund Managers at Its Compliance Outreach Program National Seminar,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012); “Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    Current and Former Regulators and Prosecutors Particularize the Enforcement Challenges Facing Hedge Fund Managers in 2014

    Current and former regulators and prosecutors from the SEC, CFTC and New York State Attorney General’s (NYSAG) Office recently offered insight on the enforcement landscape confronting hedge fund managers during a session entitled “Current Hedge Fund and Private Equity Fund Enforcement Priorities – The Enforcers’ Perspective,” which was part of PLI’s “Hedge Fund and Private Equity Enforcement & Regulatory Developments 2013” program.  Barry R. Goldsmith, a partner at Gibson, Dunn & Crutcher LLP, moderated the session.  The speakers were Stephen L. Cohen, an Associate Director at the SEC’s Division of Enforcement; Chad Johnson, Chief of the Investor Protection Bureau of the NYSAG’s Office; Colleen P. Mahoney, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, and former SEC acting general counsel and Deputy Director of its Division of Enforcement; and Manal Sultan, Deputy Director and a chief trial attorney for the Division of Enforcement of the CFTC.  As is customary, Cohen, Johnson and Sultan all noted that the views they expressed were not official statements of agency policy.  This article summarizes the salient points raised during the panel discussion.  For details of a 2013 speech by Bruce Karpati, the former Chief of the Asset Management Unit of the SEC’s Division of Enforcement, outlining the SEC’s enforcement priorities for 2013, see “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).

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  • From Vol. 7 No.2 (Jan. 16, 2014)

    Stroock Seminar Identifies Five Strategies for Mitigating the Risk of Supervisory Liability for Hedge Fund Manager CCOs

    Law firm Stroock & Stroock & Lavan LLP (Stroock) recently hosted a seminar on liability risk confronting chief compliance officers (CCOs) at hedge fund management companies.  Panelists addressed lessons learned from recent enforcement actions involving CCO liability; the impact of the SEC’s recently-published frequently asked questions (FAQs) addressing supervisory liability of fund manager CCOs; and best practices that CCOs can implement to mitigate liability risk.  See “What Do the SEC’s Recently Released FAQs on Supervisory Liability Mean for Legal and Compliance Personnel at Broker-Dealers and Hedge Fund Managers?” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).  The panelists included Stroock partner Robert E. Plaze, who previously served as Deputy Director of the SEC’s Division of Investment Management; Stroock partner Tram N. Nguyen, who previously served as Branch Chief of the Private Funds Branch within the Division of Investment Management; William Braverman, general counsel (GC) of asset management and managing director at Neuberger Berman Group LLC; and Ronen Voloshin, associate general counsel and CCO at Monarch Alternative Capital LP.  This article discusses the salient points raised during the seminar and describes the five strategies identified by panelists for mitigating the risk of supervisory liability for manager CCOs.

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  • From Vol. 6 No.45 (Nov. 21, 2013)

    ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing, OTC Derivatives Reforms, Insider Trading Best Practices, JOBS Act, AIFMD and Activist Investing (Part One of Three)

    On September 30 and October 1, 2013, ALM Events hosted its 7th Annual Hedge Fund General Counsel Summit during which law firm and in-house practitioners shared insights on legal, operational and other challenges faced by hedge fund managers.  This first installment in a three-part series covering the summit highlights the salient points from panel discussions addressing strategies for handling government investigations and issues faced by chief compliance officers, including dual-hatting and supervisory liability.  See “Benefits, Challenges and Recommendations for Persons Simultaneously Serving as General Counsel and Chief Compliance Officer of a Hedge Fund Manager,” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  The second article in the series will address opportunities and challenges associated with distressed debt investing (including participation in Chapter 11 proceedings, claims trading and risks of distressed debt investing); the impact of over-the-counter derivatives reforms on fund managers (including new mandatory clearing, execution and reporting requirements as well as CFTC cross border rules); and best practices for addressing insider trading risks.  The third article will provide regulatory updates on the JOBS Act, the Alternative Investment Fund Managers Directive and new Canadian and U.S. initiatives that will impact activist investing strategies.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    National Futures Association Director of Compliance, Patricia L. Cushing, Discusses the Chief Regulatory Obstacles Faced by Hedge Fund Managers When Marketing Commodity Funds

    Following repeal of the CFTC Rule 4.13(a)(4) commodity pool operator (CPO) registration exemption, numerous hedge fund managers with strategies involving commodities or derivatives registered as CPOs with the CFTC and became members of the National Futures Association (NFA).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Such managers face at least two broad challenges in marketing fund interests.  First, CFTC rules governing commodity pool marketing differ in important ways from SEC rules governing hedge fund marketing.  On CFTC marketing rules, see “CPO Compliance Series: Marketing and Promotional Materials (Part Two of Three),” The Hedge Fund Law Report, Vol. 5, No. 38 (Oct. 4, 2012); on hedge fund marketing, see “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013).  Second, effectively negotiating CFTC marketing and other rules requires a thorough and continuously updated understanding of the views of relevant compliance and enforcement officials.  As an adjunct to the efforts of hedge fund managers on the latter point, The Hedge Fund Law Report recently interviewed Patricia L. Cushing, Director of Compliance at the NFA, which is charged with regulating and examining CPOs.  Our interview with Cushing addressed, among other topics, whether the NFA will increase its scrutiny of marketing by CPOs now that the JOBS Act rules have become effective; the NFA’s emerging enforcement focus areas; most common deficiencies uncovered during reviews of CPO marketing materials; the NFA’s views on the use of past specific recommendations in performance presentations; the NFA’s approach to marketing issues raised by use of social media; best practices for review and approval of marketing materials; best practices for retention of promotional materials disseminated through website, radio and television; the role of the CCO or other supervisors in the marketing review process; and supervisory liability of CCOs.  See “Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Regulation and Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013.  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    What Do the SEC’s Recently Released FAQs on Supervisory Liability Mean for Legal and Compliance Personnel at Broker-Dealers and Hedge Fund Managers?

    The prospect of supervisory liability for legal and compliance personnel at hedge fund managers has occasioned concern among such employees, particularly since there has been a dearth of definitive guidance from the SEC as to when such liability attaches.  On September 30, 2013, the SEC’s Division of Trading and Markets issued a set of frequently asked questions (FAQs) addressing the supervisory liability of compliance and legal personnel at broker-dealers pursuant to Sections 15(b)(4) and 15(b)(6) of the Securities Exchange Act of 1934.  However, as the Investment Advisers Act of 1940 also contains a provision that imposes supervisory liability on compliance and legal personnel at investment advisers, legal experts have already begun to weigh in on the potential impact of the FAQs for investment advisers, including hedge fund managers.  This article summarizes the SEC guidance contained in the FAQs and offers valuable insights from Russell Sacks and Charles Gittleman, partner and of counsel, respectively, at Shearman & Sterling LLP, and Jay Gould, partner at Pillsbury Winthrop Shaw Pittman LLP, on the implications of the FAQs for legal and compliance personnel at broker-dealers and investment advisers.  For a discussion of a recent SEC settlement involving supervisory liability of a chief compliance officer at an investment advisory firm, see “Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).

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  • From Vol. 6 No.40 (Oct. 17, 2013)

    Daniel New, Executive Director of E&Y’s Asset Management Advisory Practice, Discusses Best Practices on “Hot Button” Hedge Fund Compliance Issues: Disclosure, Expense Allocations, Insider Trading, Political Intelligence, CCO Liability, Valuation and More

    The task of serving as chief compliance officer (CCO) of a hedge fund manager is becoming progressively more challenging in light of ever-increasing regulatory obligations, heightened enforcement activity and resource constraints.  CCOs can benefit from understanding the best practices being employed by their peers, and customizing relevant practices to their businesses.  As Executive Director of Ernst & Young’s Asset Management Advisory Practice, Daniel New sees a cross-section of compliance practices at brand-name hedge fund managers.  He sees what works from a compliance perspective, and what needs work.  The Hedge Fund Law Report recently interviewed New on a range of issues regularly encountered by hedge fund manager CCOs.  The interview spanned topics including consistency of fund marketing and disclosure documents; a CCO’s role in preparing and completing Form PF and other regulatory filings; structuring and memorializing annual compliance reviews; allocating expenses between a manager and its funds; insider trading and political intelligence controls; social media use by manager personnel; a CCO’s risk management responsibilities; outsourcing of CCO functions in light of resource constraints; and mitigating rogue trading risks.  The breadth of topics covered reflects the expansiveness of a typical CCO’s portfolio.  The idea behind this interview is to enable CCOs to allocate their scarcest resource – time – more effectively.  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Risk & Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013.  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.39 (Oct. 11, 2013)

    ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two)

    ACA Compliance Group recently released a report and sponsored a webcast describing the results of its most recent survey of hedge fund and private equity fund manager compliance practices.  This article, the second in a two-part series covering the survey results, discusses: insider trading issues (including information barriers, online data rooms, non-disclosure agreements, restricted and watch lists, political intelligence, expert networks and public company contacts); and expense practices (including the use of expense caps, the allocation of expenses among a manager and its funds, expense allocation reasonableness reviews and other expense-related controls).  The first article in this series summarized survey results relating to fund managers’ preparation and completion of regulatory filings (e.g., Form ADV, Form PF and non-U.S. regulatory filings), including a discussion of how many managers are making various regulatory filings; what resources are being used to prepare such filings; how Form PF expenses are being allocated among a manager and its funds; and whether Form PF is being shared with fund investors.  The first article also discussed survey results relating to presence examinations.  See “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013).

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  • From Vol. 6 No.38 (Oct. 3, 2013)

    ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part One of Two)

    ACA Compliance Group (ACA) recently released the second part of its three-part report describing the results of its surveys of hedge fund and private equity fund manager compliance practices, focusing on the completion and preparation of regulatory filings, various insider trading issues and expense practices.  ACA also presented a webcast explaining and expanding on the survey findings.  The report and webcast provided important market color and guidance enabling hedge fund and private equity fund managers to benchmark their compliance practices against those of their peers.  This article, the first of two installments covering the report and webcast, summarizes survey results relating to (1) the present status and focus areas of hedge fund and private equity fund manager presence examinations, and (2) fund managers’ preparation and completion of regulatory filings (e.g., Form ADV, Form PF and non-U.S. regulatory filings), including a discussion of how many managers are making various regulatory filings; what resources are being used to prepare such filings; how Form PF expenses are being allocated among a manager and its funds; and whether Form PF is being shared with fund investors.  The second installment will address insider trading issues (including discussions of information barriers, online data rooms, non-disclosure agreements, restricted and watch lists, political intelligence, expert networks and public company contacts); and expense practices (including the use of expense caps and the allocation of expenses among a manager and its funds).  For coverage of the first part of the ACA compliance report, conducted during the first quarter of this year, see “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. 6 No.37 (Sep. 26, 2013)

    Simon Lorne, Chief Legal Officer of Millennium Management LLC, Discusses the Evolving Roles, Challenges and Risks Faced by Hedge Fund Manager General Counsels and Chief Compliance Officers

    The task of serving as general counsel (GC) or chief compliance officer (CCO) of a hedge fund manager – or both – is becoming increasingly complicated and fraught with legal risk.  As regulatory and other obligations mount, GCs and CCOs face challenges in understanding their roles and devoting sufficient time to fulfilling their responsibilities.  At the same time, the SEC has indicated that it is willing to hold GCs and CCOs personally liable in certain circumstances for regulatory failures of the manager or its employees.  See “Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).  To define the evolving risks to GCs and CCOs and best practices for navigating them, The Hedge Fund Law Report recently interviewed Simon Lorne, Vice Chairman and Chief Legal Officer of Millennium Management LLC.  With decades of hedge fund and securities industry experience to his credit, including service as GC of the SEC, Lorne offers a unique perspective on issues affecting hedge fund manager GCs and CCOs.  Among other things, our interview with Lorne addressed: reporting lines for GCs and CCOs; chief risks facing dual-hatted GCs/CCOs; potential conflicts of interest in simultaneously serving as GC and CCO of a firm; challenges of protecting attorney-client privilege for dual-hatted GCs/CCOs; conflicts of interest in acting simultaneously as GC for the manager and its funds; supervisory liability of GCs and CCOs; outsourcing of the GC and CCO roles; and division of responsibilities between a GC and CCO.  On September 30 and October 1, 2013, Lorne and other industry experts will speak at the Seventh Annual Hedge Fund General Counsel Summit, presented by Corporate Counsel and ALM Events at the University Club in New York City.  For registration and other information regarding the Summit, click here.  A $200 discount on registration for the event is available to HFLR subscribers and trial subscribers.

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  • From Vol. 6 No.33 (Aug. 22, 2013)

    Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers

    For hedge fund manager general counsels (GCs) or chief compliance officers (CCOs) – or persons serving in both roles simultaneously – the prospect of liability for supervisory failures is real and frightening.  Two factors in particular make this a perilous area for GCs and CCOs: ambiguities in the caselaw mixed with the limited decision-making authority typically associated with the roles – a state of affairs that some view as overweight on downside and underweight on upside.  One of the more productive prophylactic measures that professionals can take in the area of GC and CCO supervisory liability is developing a real command of the handful of cases addressing the topic – understanding the facts, and how regulators and courts have applied relevant law and regulation to the facts.  A recent SEC settlement is instructive in this regard, taking its place among the narrow but important group of matters focused on CCO supervisory liability.  In the matter, the SEC alleged that the CCO of an investment advisory firm failed reasonably to supervise a rogue employee – and thereby violated the Investment Advisers Act of 1940 – by failing reasonably to implement the firm’s policies relating to custody, transaction reviews, books and records, e-mail and annual office audits.  This article provides a deeper discussion of the facts of the matter, the SEC’s legal claims and the terms of the settlement.  For articles discussing other matters in this genre, see “Scope of Supervisory Liability of Senior Legal and Compliance Professionals at Hedge Fund Managers Remains Uncertain after SEC Dismissal of Urban Action,” The Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012); “FSA Imposes Fine and Statutory Ban on Compliance Officer of Investment Advisory Firm for Failure to Safeguard Client Assets,” The Hedge Fund Law Report, Vol. 5, No. 20 (May 17, 2012); and “SEC Administrative Law Judge Holds that a Broker-Dealer’s General Counsel Could Be Held Liable as a Supervisor of a Financial Adviser Over Whom He Had No Actual Supervisory Authority,” The Hedge Fund Law Report, Vol. 3, No. 42 (Oct. 29, 2010).

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  • From Vol. 6 No.19 (May 9, 2013)

    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

    On April 16, 2013, ACA Compliance Group hosted a webinar in which it discussed findings from its recent survey of hedge and private equity fund managers regarding annual compliance reviews, forensic testing, risk management, custody, safeguarding of client assets, fee calculations and resources dedicated to compliance.  This article summarizes the survey findings and the practical takeaways from those findings as communicated by ACA in the course of the webinar.

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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.10 (Mar. 7, 2013)

    Ropes & Gray Partners Share Insights Gleaned from Successfully Navigating Presence Examinations with Hedge Fund Manager Clients

    On October 9, 2012, the Office of Compliance Inspections and Examinations (OCIE) of the SEC announced that it was going to conduct “focused, risk-based examinations of investment advisers to private funds that recently registered with the [SEC]” (Presence Exams).  See “OCIE Warns Newly-Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  On February 12, 2013, three partners at Ropes & Gray LLP presented a webinar entitled “SEC Presence Exams – Issues for Hedge Fund Managers,” to share their experience on how OCIE has conducted Presence Exams; their perspectives on hot-button areas of SEC investigations; and their tips for navigating a Presence Exam successfully.  This article summarizes the key points from the webinar.  See also “SEC’s National Examination Program Publishes Official List of Priorities for 2013 Examinations of Hedge Fund Managers and Other Regulated Entities,” The Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013).

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  • From Vol. 5 No.35 (Sep. 13, 2012)

    Are the General Counsel and Chief Compliance Officer of a Hedge Fund Manager Considered “Knowledgeable Employees” of the Manager?

    Allowing employees to invest in a hedge fund manager’s funds can have both direct and indirect benefits for the manager and the employees, including aligning the interests of the employees with those of the manager and fund investors.  However, because most hedge funds elect not to register as investment companies pursuant to the Investment Company Act of 1940 (Company Act), they typically must comply with the requirements of the exclusions from investment company registration found in Section 3(c)(1) (which basically prohibits more than 100 beneficial owners in the fund) and Section 3(c)(7) (which limits investors in the fund to “qualified purchasers”) of the Company Act.  These exclusions can restrict employee investments in the manager’s funds.  However, Rule 3c-5 under the Company Act permits “knowledgeable employees” of a fund and certain of its affiliates to acquire securities issued by the fund without being counted towards the 100-beneficial owner threshold for Section 3(c)(1) funds and without having to qualify as qualified purchasers with respect to Section 3(c)(7) funds.  Investment and business personnel – portfolio managers, directors, officers and other senior business employees – typically fall squarely within the definition of knowledgeable employee, and in any case are often qualified purchasers as well.  However, a recurring question at hedge fund managers – particularly in the so-called “back office” – is whether the general counsel (GC) and chief compliance officer (CCO) of the manager constitute knowledgeable employees of the manager.  This question arises for at least three reasons.  First, GCs and CCOs – at least those who believe in what they are doing and where they are doing it – often want to invest in the funds of their manager-employers.  Second, investments by GCs and CCOs are good for the manager – they align employee incentives and fund investment goals.  (Some argue that fund investments by the GC and CCO can result in lax compliance, for example, that a GC or CCO invested in the fund would be more inclined to permit insider trading to increase fund returns.  We do not find that argument credible.  Smart GCs and CCOs know that lax compliance diminishes long-term returns.)  Third, many GCs and CCOs are close to being qualified purchasers, but are not quite there.  Such GCs and CCOs would not be able to invest in 3(c)(7) funds unless they fit within the knowledgeable employee definition.  In short, hedge fund investments by GCs and CCOs are usually a win-win.  But do the federal securities laws and rules permit such investments?  That is the fundamental question that this article seeks to answer.  More specifically, this article discusses: the benefits to a hedge fund manager of employee investments in manager funds; the interaction between Sections 3(c)(1) and 3(c)(7) of the Company Act and the knowledgeable employee definition; the operation of Rule 3c-5 of the Company Act and who generally qualifies as a knowledgeable employee; categories of hedge fund manager employees that are typically considered knowledgeable employees; consequences of making an incorrect knowledgeable employee determination; whether in-house counsel and compliance staff constitute knowledgeable employees; whether “dual-hatted” GCs/CCOs constitute knowledgeable employees; factors bearing on the analysis; and how the size of the firm impacts the knowledgeable employee calculus.

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  • From Vol. 5 No.23 (Jun. 8, 2012)

    RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part Two of Two)

    On April 16, 2012, the Regulatory Compliance Association held its Regulation and Risk Thought Leadership Symposium (RCA Symposium) in New York City at the Pierre Hotel.  The RCA Symposium brought together leading practitioners and regulators in a series of panel discussions, each of which offered unique insight on various topics of relevance for hedge fund managers.  This is the second article in a two-part series summarizing the highlights from the RCA Symposium.  This second article discusses the sessions covering: the new paradigm of regulatory enforcement and white-collar prosecution; chief compliance officer and general counsel liability; and re-evaluation of the operating model for third party relationships.  The first article discussed the sessions covering: fund governance issues; interpreting, preparing for and completing Form PF; and enterprise risk management for hedge fund managers.  See “RCA Symposium Focuses on Hedge Fund Governance, Form PF, Enterprise Risk Management, Regulatory Enforcement, Criminal Prosecution, CCO and GC Liability and Third Party Relationships (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 22 (May 31, 2012).

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  • From Vol. 5 No.21 (May 24, 2012)

    New York Court of Appeals Holds that the Chief Compliance Officer of a Hedge Fund Manager May be Fired for Internal Reporting

    Even in the best of circumstances, administering the compliance program of a hedge fund manager presents intellectual, logistical and personal challenges for chief compliance officers (CCOs).  However, the inherent difficulties of the job are compounded when senior management of a manager is not committed to a culture of compliance.  Specifically, CCOs that discover conduct that merits reporting may be disinclined to report internally where they fear retaliation.  See “Sullivan v. Harnisch and SEC Proposed Whistleblower Rules Bolster Internal Compliance Programs While Creating Catch-22 for Compliance Officers,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  This disinclination may be compounded by a recent New York Court of Appeals decision generally holding that CCOs of New York-based hedge fund managers are not exempt from the “employment-at-will” doctrine and can be dismissed for internal reporting of suspected wrongdoing.  Among other ramifications, this decision may further incentivize external reporting and whistleblowing – precisely the sort of incentives that the industry and individual managers have been working to mitigate.  See “How Can Hedge Fund Managers Incentivize Employees to Report Compliance Issues Internally in Light of the SEC’s Whistleblower Bounty Program?,” The Hedge Fund Law Report, Vol. 5, No. 20 (May 17, 2012).

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  • From Vol. 5 No.20 (May 17, 2012)

    FSA Imposes Fine and Statutory Ban on Compliance Officer of Investment Advisory Firm for Failure to Safeguard Client Assets

    Serving as the compliance officer of a hedge fund manager is becoming increasingly challenging, particularly considering the growing list of regulatory responsibilities being imposed on such compliance officers and the ominous prospect of personal liability for the failings of a manager’s compliance program.  The U.S. Securities and Exchange Commission (SEC) has made it clear that compliance officers can be held personally liable for the failings of their firms’ compliance programs in certain circumstances, as evidenced by the SEC’s enforcement action brought against Wunderlich Securities, Inc.  However, the exact scope of such personal liability continues to be a moving target.  See “Scope of Supervisory Liability of Senior Legal and Compliance Professionals at Hedge Fund Managers Remains Uncertain after SEC Dismissal of Urban Action,” The Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012).  Like the SEC, the U.K.’s Financial Services Authority (FSA) is also flexing its muscles in this area, as it recently levied fines against an advisory firm and its compliance officer and imposed a statutory ban on the compliance officer for his and the firm’s failure to safeguard client assets.  The statutory ban prohibits the compliance officer from serving as a compliance officer in the future and from having responsibility for client assets.  The FSA action is noteworthy in at least two respects, both described in this article.  More generally, this article discusses the factual allegations, compliance violations and sanctions imposed against the firm and the compliance officer.

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  • From Vol. 5 No.19 (May 10, 2012)

    Benefits, Challenges and Recommendations for Persons Simultaneously Serving as General Counsel and Chief Compliance Officer of a Hedge Fund Manager

    As a result of law, regulation, investor pressure or the gravitational pull of best practices – or a combination of these forces – more and more hedge fund managers feel the need to have a general counsel (GC) and a chief compliance officer (CCO).  For managers with both titles on the organization chart, the question inevitably arises: Should different people serve in the different roles, or should one person serve in both roles?  There are advantages and disadvantages to both approaches.  A so-called “dual-hatted” employee serving as both GC and CCO is typically less expensive from a compensation perspective, but the volume of work at a larger or more complex manager may be more than one person can handle.  But the analysis extends well beyond compensation and quantity of work.  The decision to dual-hat implicates attorney-client privilege issues, examination preparedness, the reliability of internal controls, the effectiveness of marketing and investor relations and other issues.  At a fundamental level, the decision will inform the scope and depth of the manager’s “culture of compliance” – and it is not necessarily the case that a hedge fund manager with a dual-hatted GC/CCO has an inferior culture of compliance.  The analysis is more refined, and often turns on the structure and strategy of the manager, and effectiveness and ethics at the individual level.  The goal of this article is to help hedge fund managers think through the issues raised by dual-hatting.  For managers considering dual-hatting, this article provides a roadmap to the relevant questions.  For managers that have already made a decision with respect to dual-hatting – whether for or against – this article highlights relevant issues and strategies for addressing them.  In particular, this article discusses: the roles and responsibilities of the GC and CCO; the benefits and costs of having one employee wear both hats; recommendations for hedge fund managers that wish to employ such arrangements; and alternative solutions for hedge fund managers that choose not to use such arrangements.  This article also includes specific compensation ranges for hedge fund manager GCs, CCOs and dual-hatted employees.

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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. 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. 4 No.43 (Dec. 1, 2011)

    Recent FSA Settlement Helps Define the Scope of Potential Liability of the Chief Compliance Officer of a U.K. Hedge Fund Manager

    In the heightened global regulatory climate, chief compliance officers of hedge fund managers are rightfully concerned about being held liable for their own acts or omissions, or for those of other employees of the management company.  See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager’s Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011).  A recent investigation and settlement by the U.K. FSA helps to define the scope of potential CCO liability and the standard of care applicable to CCOs presented with “red flags.”  See also “To Whom Should the Chief Compliance Officer of a Hedge Fund Manager Report?,” The Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011).

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  • From Vol. 4 No.22 (Jul. 1, 2011)

    To Whom Should the Chief Compliance Officer of a Hedge Fund Manager Report?

    As we and others reported, at an open meeting held on June 22, 2011, the SEC delayed the date by which many hedge fund managers will have to register as investment advisers.  The new registration deadline is March 30, 2012.  See “SEC Delays Registration Deadline for Hedge Fund Advisers, and Clarifies the Scope and Limits of Registration Exemptions for Private Fund Advisers, Foreign Private Advisers and Family Offices,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).  One of the consequences of registration is that registered hedge fund managers will have to designate a chief compliance officer (CCO) to administer their compliance policies and procedures.  See “Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).  The rule requiring registered investment advisers to designate a CCO – SEC Rule 206(4)-7 – provides that the CCO of a registered hedge fund manager “should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and procedures.”  However, the rule does not prescribe any specific institutional designs that would be sufficient to confer the required “seniority and authority” on a CCO.  That is, the rule requires a CCO to have authority, but it does not tell hedge fund managers what specific steps to take to ensure that the CCO has such authority.  Accordingly, hedge fund managers confronted with a new registration requirement are facing the question that is the title of this article: to whom should the CCO of a hedge fund manager report?  The answer to this question has important consequences for the effectiveness of a CCO within a hedge fund management company and for the CCO’s professional security, and is by no means intuitive.  Industry practice varies considerably on the topic, though sources interviewed by The Hedge Fund Law Report voiced agreement on certain fundamental principles.  This article offers insight on the appropriate design of CCO reporting lines within a hedge fund management company.  At a general level, this article addresses two questions: How can CCO reporting lines be structured to protect the management company?  And: How can CCO reporting lines be structured to protect the CCO?  To address those general questions, this article analyzes: what “reporting” means in the hedge fund context; the benefits and burdens to a hedge fund management company of the typical CCO reporting lines; related industry precedents for CCO reporting; how reporting lines can be structured to protect the CCO; terms that should be included in CCO employment agreements, compliance manuals and codes of ethics to protect the CCO; and the pros and cons of whistleblowing under the recently finalized rule.  This article concludes with a ten-step roadmap for reporting that can serve as a template for hedge fund manager CCOs that discover violations or potential violations, regardless of how their reporting lines are structured.

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  • From Vol. 4 No.18 (Jun. 1, 2011)

    Is a Hedge Fund Manager Required to Disclose the Existence or Substance of SEC Examination Deficiency Letters to Investors or Potential Investors?

    Following an examination of a registered hedge fund manager by the SEC staff, the staff typically issues a deficiency letter to the manager listing compliance shortcomings identified by the staff during the examination.  See “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Three of Three),” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011).  Quickly, comprehensively and conclusively remedying compliance shortcomings identified in a deficiency letter should be a first order of business for any hedge fund manager – that is the easy part, a point that few would dispute.  However, considerably more ambiguity surrounds the question of whether and to what extent hedge fund managers must disclose to investors and potential investors various aspects of SEC examinations – including their existence, scope, focus and outcome.  More particularly, hedge fund managers that receive deficiency letters routinely ask: must we disclose the fact of receipt of this deficiency letter or its contents to investors or potential investors?  And does the answer depend on whether potential investors have requested information about or contained in a deficiency letter in due diligence or in a request for proposal (RFP)?  The answers to these questions generally have been governed by a “materiality” standard – the same standard that, at a certain level of generality, governs all disclosure questions.  The consensus guidance has been: disclose whatever is material.  But this is more of a reframing of the question than an answer.  The practical question in this context is how to assess materiality in the interest of disclosing adequately, avoiding anti-fraud or breach of fiduciary duty claims and ensuring best investor relations practices.  A recently issued SEC order (Order) settling administrative proceedings against a registered investment adviser provides limited guidance on the foregoing questions.  This article describes the facts recited in the Order, the SEC’s legal analysis and how that analysis can inform decision-making of hedge fund managers considering whether and to what extent to disclose the existence or substance of deficiency letters to investors or potential investors.  This analysis has particular relevance for hedge fund managers seeking to grow institutional assets under management by responding to RFPs.

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  • From Vol. 4 No.10 (Mar. 18, 2011)

    Sullivan v. Harnisch and SEC Proposed Whistleblower Rules Bolster Internal Compliance Programs While Creating Catch-22 for Compliance Officers

    Congress’s passage of the Dodd-Frank Act in July 2010 raised many concerns that its whistleblower program would harm hedge fund internal compliance programs by giving incentives for employees to bypass internal compliance and instead report wrongdoing directly to the SEC for a whistleblower award.  But the recent case Sullivan v. Harnisch has bolstered internal compliance programs by confirming that a hedge fund can require its compliance officer to internally report fraud, and even validly fire him in retaliation (under New York law).  See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager’s Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011).  Similarly, the SEC has proposed new rules making legal, audit and compliance employees effectively ineligible for a whistleblower award unless they first report internally and their employer fails to respond properly, without clarifying whether there is a federal remedy for retaliation.  These developments will certainly bolster hedge fund internal compliance programs, but leave key employees in a Catch-22 of being required to report wrongdoing internally while having no legal remedy for retaliatory firing.  In a guest article, Samuel J. Lieberman and Jennifer Rossan, Of Counsel and Partner, respectively, in the Litigation Group at Sadis & Goldberg LLP, detail: the facts, holding, context and implications of Sullivan v. Harnisch; the mechanics and consequences of the proposed whistleblower rule for hedge fund compliance, legal and audit employees; case law interpreting a relevant provision under the False Claims Act; the dynamics of the Catch-22 created by Sullivan and the proposed whistleblower rule; and how that Catch-22 will impact internal compliance programs at hedge fund managers.

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  • From Vol. 4 No.7 (Feb. 25, 2011)

    Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?

    The Dodd-Frank Act (Dodd-Frank) will require hedge fund managers to appoint a chief compliance officer (CCO) for two reasons – an explicit reason and an implicit reason.  Explicitly, Dodd-Frank will require registration (by July 21, 2011) by hedge fund managers with assets under management in the U.S.: (1) of at least $150 million that manage solely private funds; or (2) between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle (for example, a managed account).  Registered hedge fund managers will be subject to SEC Rule 206(4)-7, which requires, among other things, registered investment advisers to “designate” (note: not “hire”) a CCO to administer their compliance policies and procedures.  Implicitly, Dodd-Frank is not only the cause of major regulatory change, but also the effect of a changed regulatory mindset.  Post-Dodd-Frank, there is more regulation – considerably more – and more vigorous enforcement of new and existing regulation.  Much of that regulation applies with equal force to registered and unregistered hedge fund managers.  Most notably, insider trading and anti-fraud rules apply to hedge fund managers regardless of their registration status.  See “How Can Hedge Fund Managers Avoid Insider Trading Violations When Using Expert Networks?  (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  Recognizing this, even hedge fund managers beneath the relevant AUM thresholds are considering the appointment of a CCO (if they do not already have one).  For hedge fund managers considering the appointment of a CCO – and even for managers that currently have a CCO but are reevaluating how they staff the role – there are three basic approaches: (1) hire a new internal person to serve exclusively as CCO; (2) add the CCO title and duties to the existing portfolio of a current internal person, such as the general counsel (GC), chief operating officer (COO) or chief financial officer (CFO); or (3) outsource the role to a third-party compliance consulting or similar firm.  Which of these approaches makes sense, individually or in combination, depends on the size, strategy, complexity, resources, history and culture of the management company, among other factors.  In short, deciding who to designate as your CCO is a complex decision, and an increasingly important one.  The CCO is often the last bastion before a major compliance or operational failure, and as recent events demonstrate, those sorts of failures typically pose more franchise risk than bad investment calls.  See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager's Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011).  The basic purpose of this article is to identify the pros and cons of each of the three foregoing approaches to designating a CCO.  To do so, this article discusses: what Rule 206(4)-7 specifically requires and does not require; the relative benefits and burdens of hiring a dedicated CCO, assigning the role to an existing person and outsourcing the role; hybrid approaches that incorporate the best elements of outsourcing and internal work; counterintuitive insights with respect to the demand for compliance professionals in the current environment; and – perhaps most importantly to anyone in, considering or hiring for a CCO role – specific compensation numbers for compliance professionals at hedge fund managers, employees at hedge fund managers who add a CCO role to other roles and dedicated CCOs, and the “market” for fees payable to outsourced CCO firms.  (We thank David Claypoole, Founder and President of Parks Legal Placement LLC, for providing this detailed insight on CCO compensation numbers.)

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  • From Vol. 4 No.2 (Jan. 14, 2011)

    Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager's Principal, CEO or CIO?

    On December 29, 2010, the First Department of the New York State Appellate Division reversed a trial court order and dismissed a breach of implied contract claim brought by Joseph Sullivan, the Chief Compliance Officer of hedge fund manager Peconic Partners LLC, against his former employer and its CEO, William F. Harnisch.  Sullivan had accused Harnisch of terminating his at-will employment in retaliation for his investigation into Harnisch's alleged "front running" scheme.  In dismissing this claim, the Appellate Division recognized that the Peconic Code of Ethics, which Sullivan was required to follow, required "on pains of termination" that he investigate that alleged violation.  Nonetheless, the Appellate Division found that this language did not create a contractual promise not to terminate Sullivan, and that no recognized exception to the employment-at-will doctrine otherwise protected him from termination without cause.  We detail the background of the action and the court's pertinent legal analysis.  Also, we provide a critical analysis of the opinion, discuss its implications for whistleblower law and practice and identify a key provision that must be included in hedge fund manager compliance manuals and codes of ethics in order to protect the chief compliance officer.

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