The Hedge Fund Law Report

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By Topic: GIPS

  • From Vol. 9 No.47 (Dec. 1, 2016)

    How Investment Managers Can Advertise Sub-Adviser Performance Without Violating SEC Rules 

    In a series of recent enforcement actions, the SEC has held investment advisers responsible for performance claims included in their marketing materials that they received from sub-advisers and that turned out to be false and misleading. Although the SEC acknowledged that the investment advisers may have been unaware that the performance information was false and misleading, the regulator concluded that they were nevertheless responsible for ensuring that the overall reported performance record from their sub-advisers was compliant with the Investment Advisers Act of 1940. To avoid running afoul of applicable law, investment advisers conveying third-party performance returns should obtain adequate documentation to verify their accuracy and establish policies and procedures that govern what due diligence they will conduct on the sub-advisers’ performance. In a guest article, Daniel G. Viola, partner at Sadis & Goldberg, and Antonella Puca, head of the investment performance attestation practice at RSM US, review the key aspects of the recent enforcement activity of the SEC on performance advertising and provide guidance on how to address some of the SEC’s concerns. For additional insight from Viola, see “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination” (Jan. 28, 2016). For more on performance advertising, see “The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Retaining Performance Records (Part Two of Two)” (Nov. 17, 2016); and “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016).

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  • From Vol. 8 No.27 (Jul. 9, 2015)

    RCA Panel Discusses Pay to Play Rules, GIPS Compliance, Disclosures, Risk Assessments and ERISA Proposals

    Panelists at the recent RCA Enforcement, Compliance & Operations Symposium emphasized the importance of understanding and complying with the various requirements applicable to fund managers.  In particular, speakers discussed compliance with pay to play rules; GIPS compliance and performance reporting; disclosure requirements; and risk assessment requirements.  Additionally, panelists discussed a proposed expansion of the fiduciary definition under ERISA.  This article highlights the key points arising from discussion of the foregoing issues.  For additional coverage of the Symposium, see “RCA Panel Highlights Conflicts of Interest Affecting Fund Managers,” The Hedge Fund Law Report, Vol. 8, No. 26 (Jul. 2, 2015); and “RCA Panel Outlines Keys for Hedge Fund Managers to Implement a Comprehensive Cybersecurity Program,” The Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).

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  • From Vol. 8 No.4 (Jan. 29, 2015)

    CFA Institute’s Jonathan Boersma Explains the Purposes and Mechanics of GIPS Compliance by Hedge Fund Managers

    The CFA Institute created the Global Investment Performance Standards (GIPS) in the late 1980s to standardize the presentation of performance information by investment managers.  See “Top Ten GIPS Compliance Challenges for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014).  Almost 30 years later, the CFA Institute remains central to the implementation, understanding and ongoing refinement of the Standards.  Jonathan Boersma, head of Professional Standards and executive director of GIPS at the CFA Institute, recently sat for a detailed interview with The Hedge Fund Law Report on GIPS considerations for hedge fund managers.  In particular, Boersma addressed the purposes of GIPS; adoption by geography and manager type; investor preferences with respect to GIPS; pricing, purpose and allocation of costs of GIPS verification services; track record portability; whether GIPS permits the use of hypothetical back-tested performance, model fees or presentation of performance gross of fees; cherry picking and valuation; what constitutes a prospective client; withholding for dividends; and when to include a new fund or account in a GIPS-compliant composite.  For additional insight from Boersma, see “Global Investment Performance Standards Facilitate Reliable, Apples-to-Apples Comparisons by Hedge Fund Investors, and Offer Marketing Opportunities for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 9 (Mar. 4, 2010).

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  • From Vol. 7 No.38 (Oct. 10, 2014)

    OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities

    Andrew J. Bowden, the Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), recently spoke at the CFA Institute’s 2014 GIPS Standards Annual Conference.  He noted that the SEC has recently completed GIPS training for its examination staff and that OCIE has been pursuing several important initiatives.  He discussed those initiatives, recent enforcement actions involving performance-reporting issues and the continuing improvement of the SEC’s technological capabilities.  For additional insight from Bowden, see part two of our series on the RCA’s Compliance, Risk & Enforcement 2013 Symposium, held in December 2013, at which Bowden delivered the keynote address.  See also “OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing,” The Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014).

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  • From Vol. 7 No.37 (Oct. 2, 2014)

    Top Ten GIPS Compliance Challenges for Hedge Fund Managers

    The Global Investment Performance Standards (GIPS) are a set of best practices designed to ensure consistency in the presentation of investment performance results.  See “Expert Panel Provides Roadmap for Hedge Fund Managers Looking to Present Performance in Compliance with GIPS,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Though theoretically voluntary, institutional investors often condition investments on, among other things, performance information presented in compliance with GIPS.  Accordingly, GIPS compliance is viewed by many as a de facto requirement for hedge fund managers seeking institutional capital.  See “Is GIPS Compliance and Verification Thereof a De Facto Requirement for Access by Hedge Fund Managers to Institutional Assets?,” The Hedge Fund Law Report, Vol. 7, No. 29 (Aug. 1, 2014).  At the CFA Institute’s 2014 GIPS Standards Annual Conference, Karyn D. Vincent, a Managing Partner of ACA Performance Services, LLC, discussed the top ten GIPS compliance issues that she sees when acting as a GIPS verifier.  Jonathan A. Boersma, CFA, Executive Director of GIPS Standards at the CFA Institute, also participated in the discussion.  See also “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  This article summarizes Vincent’s top ten list, and identifies strategies for incorporating Vincent’s points into the marketing, reporting, disclosure and compliance efforts of hedge fund managers.

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  • From Vol. 7 No.29 (Aug. 1, 2014)

    Is GIPS Compliance and Verification Thereof a De Facto Requirement for Access by Hedge Fund Managers to Institutional Assets?

    First introduced in 1999, the Global Investment Performance Standards (GIPS) were designed and promulgated by the CFA Institute as a way of ensuring that investment managers report their performance in a consistent and transparent way.  A recent survey of investment managers and investment consultants looked at how many firms comply with GIPS and why.  This article summarizes the results of that survey and a related event.  In particular, this article discusses rates of GIPS compliance and verification among investment managers; manager perspectives on electing or eschewing GIPS compliance and verification; consultant and investor perspectives on GIPS compliance and verification; general trends in GIPS compliance; and the impact of those trends on hedge fund managers.  See also “Expert Panel Provides Roadmap for Hedge Fund Managers Looking to Present Performance in Compliance with GIPS,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).

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  • From Vol. 7 No.29 (Aug. 1, 2014)

    ALJ Decision Highlights the Critical Difference between “Audited” and “Verified” Returns in GIPS-Compliant Performance Advertising by Hedge Fund Managers

    This article discusses the facts and legal analysis in a recent decision by an SEC Administrative Law Judge relating to shortcomings in GIPS compliance by a registered investment adviser.  See “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  This article also identifies seven compliance lessons – arising out of the case and related materials – applicable to performance advertising by hedge fund managers.  On the topic of performance advertising, see also “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013); and “Can Hedge Fund Managers Use Gross (Rather Than Net) Results in Performance Advertising? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013).

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  • From Vol. 6 No.30 (Aug. 1, 2013)

    Expert Panel Provides Roadmap for Hedge Fund Managers Looking to Present Performance in Compliance with GIPS

    Historically, there has been little uniformity in how hedge fund managers present performance results.  As a result, hedge fund investors have faced difficulty in comparing returns across managers.  At the same time, the Global Investment Performance Standards (GIPS) – a set of voluntary best practices designed to ensure consistency in the presentation of performance results, and one of the few potential sources of uniformity – have lacked meaningful guidance for hedge fund managers.  This changed in 2012, when the GIPS Executive Committee issued the Guidance Statement on Alternative Investment Strategies and Structures (Guidance Statement) to provide hedge fund-specific guidance.  Since then, institutional investors and their consultants have frequently encouraged hedge fund managers to present performance results in compliance with GIPS.  See “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  Yet despite the Guidance Statement, many hedge fund managers are still struggling to understand and navigate the complexities of GIPS compliance.  Against this backdrop, ACA Compliance Group recently hosted a webinar addressing GIPS compliance, focusing on issues specific to hedge fund managers, such as valuation, construction of GIPS composites, calculation of returns, side pocket reporting and benchmark selection.  Managers that provide more clarity in their performance results may be able to court institutional investors more frequently and effectively.  This article summarizes the main points from the webinar.  For more on the GIPS standards, see “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).

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  • From Vol. 6 No.18 (May 2, 2013)

    Three Recommendations to Help Hedge Fund Managers Avoid False GIPS Compliance Claims in Marketing Materials

    Hedge fund managers engaged in raising capital are increasingly looking to present their performance results in compliance with the Global Investment Performance Standards (GIPS).  GIPS provide prospective investors with additional assurances about the integrity of such performance results.  At the same time, with the passage of the Jumpstart Our Business Startups Act, the SEC has become increasingly concerned about public advertising by private fund managers and has made it a priority to review performance advertising presentations during presence examinations of hedge fund managers.  See “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers at the RCA’s Compliance, Risk & Enforcement 2012 Symposium,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013); and “How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated with the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?,” The Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013).  In a development that may foreshadow heightened scrutiny in this area, the SEC has initiated administrative proceedings against an investment adviser and its principal for allegedly falsely claiming that the investment adviser’s performance results complied with advertising guidelines set forth in GIPS.  Although compliance with the GIPS standards are voluntary, the SEC has made clear that managers who advertise GIPS compliance, but whose advertisements and marketing materials do not actually provide all of the information required by GIPS, are subject to sanction under the anti-fraud provisions and advertising rules contained in the Investment Advisers Act of 1940.  This article summarizes the SEC’s factual and legal allegations in this case and provides three recommendations for hedge fund managers interested in reducing the risk of false GIPS compliance claims.  For an article that identifies some of the hedge fund specific issues related to GIPS-compliant performance presentations, see “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).

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  • From Vol. 4 No.44 (Dec. 8, 2011)

    A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers

    The Hedge Fund Law Report and others have reported on the post-crisis ascendance of non-performance factors in hedge fund due diligence and investment decision-making.  In short, before 2008, hedge fund allocations were driven largely by a manager’s past performance.  After 2008, factors such as transparency, liquidity and robust risk management surpassed performance in the hierarchy of concerns of institutional hedge fund investors.  See “Survey by SEI and Greenwich Associates Identifies the Primary Decision Factors and Concerns of Institutional Investors When Investing in Hedge Funds,” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 11, 2011).  However, we do not wish to overstate the case or the duration of the trend.  The long-term lesson of the crisis likely will be that robust risk management, appropriate liquidity and transparency and well-developed infrastructure are necessary to justify a hedge fund investment, but not sufficient.  Hedge fund managers without institutional caliber businesses will often be passed over, but as between two managers with good businesses, the deciding factor will often be past performance.  Thus the immediate and important question for hedge fund managers: how can managers present performance information in a manner that maximizes capital raising efforts while complying with relevant law and standards?  An increasingly common answer to this question in the hedge fund community is: by complying with the Global Investment Performance Standards (GIPS), an evolving set of practice standards designed to ensure consistency and uniformity in the presentation of investment performance results.  Compliance with GIPS is ostensibly voluntary, but in practice, more and more institutional hedge fund investors are asking to see GIPS-compliant performance information.  Accordingly, GIPS compliance is becoming a de facto requirement for hedge fund managers, and hedge fund managers are actively seeking to become GIPS compliant.  The main challenge for hedge fund managers is that GIPS were originally designed for a long-only world.  They have been an imperfect fit for managers with complex investment structures, side pockets, illiquid or hard-to-value assets and other typical elements of the hedge fund business.  Sensitive to this, the GIPS Executive Committee recently promulgated guidance specific to alternative investment managers, and service providers have adapted their businesses to help hedge fund managers comply with GIPS and certify such compliance.  However, despite the guidance and available assistance, GIPS compliance remains a challenge for hedge fund managers.  This article aims to assist hedge fund managers in rising to that challenge and surmounting it.  To do so, this article starts by providing a comprehensive overview of GIPS.  The article then identifies five discrete categories of benefits of GIPS compliance and two categories of burdens of compliance.  Next, and most importantly, this article provides a step-by-step process by which hedge fund managers can become GIPS compliant.  In the course of this discussion, this article details the material points from two recent webinars and one recent white paper promulgated by leading GIPS service providers.  Reading this article will enable a hedge fund manager to, among other things: revise its marketing materials to comply with GIPS; organize its front, middle and back offices to collect the data necessary to support a GIPS-compliant presentation; manage service providers with a view to GIPS compliance; ask the right questions of outside counsel; determine whether to engage a specific GIPS compliance service provider; define the scope of any such engagement; and respond effectively to due diligence inquiries on GIPS.

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  • From Vol. 4 No.26 (Aug. 4, 2011)

    SEC Wins Summary Judgment in Its Fraud Suit Against Investment Adviser Locke Capital and Its Principal, Leila C. Jenkins, Who Fabricated a Non-Existent “Massive Swiss Banking Client” to Attract Investors

    Defendant Leila C. Jenkins (Jenkins) was the founder and sole owner of investment adviser Locke Capital Management, Inc. (Locke).  In 2009, the Securities and Exchange Commission (SEC) brought a civil enforcement action against Locke and Jenkins, alleging that they had fabricated a “massive Swiss banking client” to trick potential investors into believing that they had more than a billion dollars under management, when in fact they did not.  The initial misstatement of assets under management by the defendants, along with Jenkins’ clumsy efforts to conceal the deception, supported fraud and other charges under the Securities Act of 1933, the Securities and Exchange Act of 1934 and the Investment Advisers Act of 1940.  The U.S. District Court for the District of Rhode Island granted the SEC’s motion for summary judgment on all charges, directed the defendants to disgorge profits, imposed penalties and enjoined them from future securities laws violations.  This article summarizes the decision, which has important implications for hedge fund operational due diligence.

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  • From Vol. 4 No.12 (Apr. 11, 2011)

    GIPS Committee Provides Eagerly-Anticipated Guidance on Presentation of Hedge Fund Performance Information for Master-Feeder Structures, Side Pockets, Illiquid Assets and Other Assets, Strategies and Structures

    As established by the CFA Institute in 1999, the “Global Investment Performance Standards” (GIPS) for the presentation of investment performance information aims to create ethical, global and industry-wide methods of communicating investment results to prospective clients.  On March 15, 2011, the GIPS Executive Committee released its “Exposure Draft of the Guidance Statement on Alternative Investment Strategies and Structures” (Guidance Statement) in an effort to provide dedicated guidance to firms that manage hedge funds, funds-of-funds, master-feeder funds and other alternative investment strategies so they may better understand and meet the GIPS standards.  The Executive Committee decided to produce these standards due to the perception among many alternative investment firms that the lack of such guidance complicated compliance with GIPS.  Accordingly, the GIPS standards, which focus on the underlying GIPS principles of “fair representation and full disclosure,” provide a framework that substantially all hedge fund and other private fund managers can apply to a variety of assets, structures and strategies.  The exposure draft is open for public comment until June 15, 2011.  This article provides a comprehensive summary of the exposure draft, focusing on the items most relevant to presentation of hedge fund performance information.

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  • From Vol. 3 No.19 (May 14, 2010)

    NICSA’s "Trends in Hedge Fund Operations" Seminar Focuses on Liquidity, Managed Accounts, Third-Party Administration, Due Diligence, GIPS Standards and Related Topics

    On April 28, 2010, the National Investment Company Service Association, a not-for-profit trade association providing educational programming and information exchange within the operations sector of the worldwide investment industry, sponsored a webinar entitled "Trends in Hedge Fund Operations."  Speakers at the webinar focused on a range of issues of current relevance to hedge fund operations, including: fund-level and investor-level gates; side pockets; the frequency of use of managed accounts; the use of independent, third-party administrators; in-house administration; hybrid arrangements between third-party and in-house administration, including the use of agreed-upon procedures letters; investor due diligence and audit trends; GIPS standards; and the evolution of hedge fund technology.  This article summarizes the key points discussed during the webinar.

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  • From Vol. 3 No.9 (Mar. 4, 2010)

    Global Investment Performance Standards Facilitate Reliable, Apples-to-Apples Comparisons by Hedge Fund Investors, and Offer Marketing Opportunities for Hedge Fund Managers

    Various factors – including the closing of investment bank proprietary trading desks and layoffs at hedge fund managers – have contributed to a quickening pace of hedge fund entrepreneurship.  See “What Is Proprietary Trading, and Why Does Its Definition Matter to Hedge Fund Managers?,” The Hedge Fund Law Report, Vol. 3, No. 8 (Feb. 25, 2010).  At the same time, a noteworthy proportion of the assets that redeemed from hedge funds over the past two years are looking to return, along with new assets.  In short, both the supply of hedge fund management options and the demand for such management by institutional investors are increasing.  As a swelling pool of assets evaluates a growing number of managers, performance remains one of the key determinants of where assets get allocated.  See “How Can Start-Up Hedge Fund Managers Use Past Performance Information to Market New Funds?,” The Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009).  (Performance used to be the key determinant of allocations, now it is merely primus inter pares; transparency and liquidity also loom large.  See “Hedge Funds Using 3WayNAV to Enhance Visibility into Portfolio Liquidity,” The Hedge Fund Law Report, Vol. 3, No. 2 (Jan. 13, 2010); “Rolling Lock-Up Periods Enable Hedge Fund Managers to Pursue Less Liquid Strategies While Managing Investors’ Liquidity Expectations,” The Hedge Fund Law Report, Vol. 3, No. 2 (Jan. 13, 2010).)  For hedge fund managers in this environment, the reliability, comparability and utility of performance data are, collectively, as important as the levels of performance.  That is, investors want to know that the numbers are accurate; they want to be able to compare them to numbers from other funds following the same strategy, funds following different strategies and funds organized in different jurisdictions; and they want to be able to plug the numbers into their own models and perform analytics.  The Global Investment Performance Standards (GIPS standards), promulgated by the CFA Institute, facilitate these three values – reliability, comparability and utility.  The GIPS standards are legally voluntary but, increasingly, practically required guidelines establishing a consistent method for presentation by investment advisers of performance and valuation data.  While not designed specifically with hedge fund managers in mind, hedge fund managers are increasingly adopting the guidelines, retaining third parties to verify their adoption and using their adoption offensively in marketing to institutional investors.  To assist hedge fund managers in determining whether the benefits of compliance with the GIPS standards outweigh the burdens, this article details: what the GIPS standards are; their specific application to hedge fund managers; recent revisions of the GIPS standards; interaction of the GIPS standards with conflicting country or state laws; specific steps required to become compliant; the third party verification regime; the benefits and burdens to hedge fund managers of compliance; and practical strategies for mitigating the burdens.

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