The Hedge Fund Law Report

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

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By Topic: Mock Examinations

  • From Vol. 10 No.15 (Apr. 13, 2017)

    Private Fund Managers Should Continue Aggressive Compliance Efforts Despite New Administration

    As President Trump’s administration disseminates its economic and fiscal agendas and policies, many see the arrival of an era of lighter regulation after years of record-breaking enforcement activity by the SEC. See “What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers” (Oct. 20, 2016). This is reinforced by the pro-business policies endorsed by President Trump, which were largely codified by the February executive order outlining a set of “core principles” for the economy. See “How the Trump Administration’s Core Principles for Financial Regulation May Benefit the U.S. Funds Industry (Part One of Two)” (Feb. 16, 2017). Despite this sentiment, however, advisers and funds are ill-advised to let their guards down. Amid the general optimism, many questions persist. How will the SEC and other regulatory agencies function in the Trump era? Will budget cuts make a significant difference in an era of technologically enhanced enforcement? Is the SEC’s review of registered investment advisers likely to drop below the current estimated 10 percent? Will the SEC attempt to allocate some of its enforcement functions among other regulators? Are advisers and funds sufficiently preparing for examinations under the new SEC regime? To cast light on these and other urgent questions, The Hedge Fund Law Report has conducted an in-depth interview with Benjamin Kozinn, who recently joined the law firm of Lowenstein Sandler as a partner, and this article sets forth his insights. For commentary from Kozinn’s colleague Matthew A. Magidson, see “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers” (Jul. 25, 2013).

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  • From Vol. 9 No.43 (Nov. 3, 2016)

    Attorney-Consultant Privilege? Specific Circumstances Where Fund Managers May – and May Not – Be Able to Use Kovel Arrangements (Part Three of Three)

    So-called “Kovel arrangements” provide unique opportunities for fund managers and their legal counsel to extend the attorney-client privilege to consultants. The context surrounding a Kovel arrangement plays just as significant a role in determining whether the privilege will be upheld as satisfying the legal requirements of the Kovel doctrine. There are certain circumstances – such as an internal investigation – under which Kovel arrangements are frequently employed by hedge funds and other companies. See “D.C. Circuit Confirms Applicability of Attorney-Client Privilege to Internal Investigations” (Aug. 7, 2014); and “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations” (Feb. 28, 2013). However, there are additional specific situations when this approach can be particularly effective at protecting a hedge fund manager’s operations and processes from being exposed to the public. This final article in a three-part series describes those contexts in which hedge fund managers can benefit from having their attorneys engage consultants via Kovel arrangements, as well as situations where that possibility is tenuous or nonexistent. The first article outlined the Kovel doctrine’s legal requirements and key items to consider before deciding to waive or invoke the privilege. The second article contained practical guidance for maintaining a Kovel arrangement on a daily basis, as well as the provisions to include in an engagement letter with a consultant to ensure the privilege is upheld. For background information on how hedge funds can utilize compliance consultants, see “The Role of Outsourced Compliance Consultants in the Hedge Fund Compliance Ecosystem” (Jun. 27, 2014). 

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  • From Vol. 9 No.35 (Sep. 8, 2016)

    How Studying SEC Enforcement Trends Can Help Hedge Fund Managers Prepare for SEC Examinations and Investigations

    In a recent interview with The Hedge Fund Law Report, Patricia A. Poglinco and Robert G. Van Grover, partners at Seward & Kissel, discussed the types of activities the SEC is targeting when bringing enforcement actions against hedge and other fund managers. They also explored the evolving nature of SEC investigations and what hedge fund managers can do to prepare for these examinations. These are among the issues that Poglinco and Van Grover will explore in greater depth as they each moderate panels at the upcoming “Private Funds Forum” co-hosted by Seward & Kissel and Bloomberg BNA to be held on September 15, 2016. For additional insight from Poglinco, see “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?” (Jan. 22, 2015). For commentary from Van Grover, see “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?” (Sep. 16, 2011); “Implications for Hedge Fund Managers of Recent Insider Trading Enforcement Initiatives (Part One of Three)” (Feb. 25, 2011); and our three-part series entitled “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?”: Part One (Sep. 12, 2013); Part Two (Sep. 19, 2013); and Part Three (Sep. 26, 2013).

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  • From Vol. 8 No.7 (Feb. 19, 2015)

    RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part One of Two)

    Hedge funds are subject to regulatory scrutiny, and enforcement actions against managers have been increasing in frequency and sophistication.  Hedge fund managers therefore need to ensure compliance with the ever-growing panoply of regulations to which they are subject; and registered managers need to prepare for routine and other examinations by regulators.  In order to assist managers with these aims, the Regulatory Compliance Association held its Compliance, Risk and Enforcement 2014 Symposium in New York City.  This article, the first in a two-part series, summarizes the panelists’ discussion on the NFA’s and SEC’s risk-focused tools and technologies; the SEC’s 2015 examination and enforcement priorities; and preparing for SEC examinations.  The second article in the series will cover risks associated with regulatory reporting and emerging AIFMD issues.  See also “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?,” The Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015).  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.

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  • From Vol. 4 No.46 (Dec. 21, 2011)

    RCA Asset Management Thought Leadership Symposium Highlights Regulators’ Examination and Enforcement Priorities, the New SEC Examination Paradigm and Liability Concerns for CCOs and General Counsels

    On November 10, 2011, the Regulatory Compliance Association held its Annual Fall Asset Management Thought Leadership Symposium (RCA Symposium) in New York City.  Panelists repeatedly emphasized the trend towards increased regulatory scrutiny of hedge fund managers.  The SEC’s Division of Enforcement (Enforcement Division) anecdotally confirmed this sentiment the day before the RCA Symposium when it announced that it had filed a record 735 enforcement actions against a variety of market professionals during fiscal year 2011.  Through these actions, the SEC has demonstrated its willingness to hold not only firms liable for their compliance failures, but also those individuals that provided inadequate oversight of their firms’ compliance programs.  See “Three Recent SEC Orders Demonstrate a Renewed Emphasis on Investment Adviser Compliance Policies and Procedures by the Enforcement Division,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  Speakers at the RCA Symposium addressed numerous topics, including: examination and enforcement priorities for the SEC and the NFA; the different types of SEC and NFA examinations; recent examination experiences and advice on preparing for examinations; the reality of CCO and GC liability for compliance failures; and the need for operational changes in light of new regulations impacting hedge fund managers.  This article summarizes key points discussed during the RCA Symposium on each of the foregoing topics.

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  • From Vol. 4 No.26 (Aug. 4, 2011)

    Legal and Practical Considerations in Connection with Mock Examinations of Hedge Fund Managers

    SEC rulemaking implementing the Dodd-Frank Act will require many previously unregistered hedge fund managers to register by 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 more onerous consequences of registration is that registered hedge fund managers are subject to routine SEC examinations.  See “Key Insights for Registered Hedge Fund Managers from the SEC’s Recently Released Study on Investment Adviser Examinations,” The Hedge Fund Law Report, Vol. 4, No. 5 (Jun. 23, 2011).  (While unregistered hedge fund managers typically are not subject to routine SEC examinations, the SEC has authority to issue subpoenas even to unregistered hedge fund managers in cases where the agency suspects fraud on the part of the manager or any of its employees.)  Earlier this year, we conducted a series of interviews with experienced veterans of hedge fund manager examinations.  See Part 1, Part 2 and Part 3 of our examinations series.  One of the key themes that emerged from those interviews is that a large part of the examination “battle” is won or lost before an examination begins.  In other words, preparation is paramount in surviving an examination.  And preparation cannot start upon receipt of notification of an examination.  According to Part 1 of our examinations series, the longest lead time that a hedge fund manager realistically can expect between notification and commencement of an examination is one week.  However, as discussed more fully below, one week is typically the minimum duration of a mock examination – and that is not counting preparation for the mock examination and responding to any findings, which together would lengthen that one-week period considerably.  In sum, preparation is key and notice is short.  The implication is that the time to prepare for an examination is as soon as possible, ideally, now.  While there are few certainties in law, one proposition that is reasonably close to certain is that you do not want the SEC to discover any compliance, operational or similar shortcoming for the first time in the course of an examination.  Rather, you want to know about any such shortcoming well in advance of an SEC visit, so that you can correct the shortcoming before the SEC shows up.  In turn, the most effective way to determine what the SEC would uncover is to go through an SEC exam without having the SEC present.  How can managers do that?  Through mock examinations – in essence, an exercise in which a third party (often a compliance consultant or law firm) goes through many of the same motions as the SEC examination staff, but with different goals and consequences.  The goal of a mock exam is to prepare a hedge fund manager for an SEC exam, whereas the goal of an SEC exam is to protect the investing public through enforcement of the federal securities laws.  The consequence of discovery of a bad fact in the course of a mock examination is an opportunity to correct, whereas the consequence of discovery of a bad fact in the course of an SEC examination could be a referral to the SEC’s Enforcement Division or, worse, to the DOJ.  To maximize the value and effectiveness of our subscribers’ preparation for SEC and other regulatory examinations, we have undertaken an analysis of many of the most important considerations for hedge fund managers in connection with mock examinations.  This article embodies our analysis.  In particular, this article discusses: the seven overlapping goals of mock examinations of hedge fund managers; the types of entities that provide mock examinations; four areas of expertise that a hedge fund manager should look for in a mock examination provider; the market for the costs of a mock examination, including cost levels and inputs that determine costs; the substance and process of a mock examination, that is, what exactly goes on during the course of one; 13 topics that are currently of interest to SEC examiners, and that therefore play a large role in determining the scope and substance of a mock examination; whether or not a mock examination report should be written, or delivered exclusively orally; contractual and legal strategies for maintaining the confidentiality of mock examinations; and considerations with respect to the timing and level of disclosure to hedge fund investors of the fact or findings of a mock examination.

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