The Hedge Fund Law Report

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

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By Topic: Personal Trading

  • From Vol. 10 No.5 (Feb. 2, 2017)

    ACA 2016 Compliance Survey Addresses Custody; Fee Policies and Arrangements; Safeguarding of Assets; and Personal Trading (Part Two of Two)

    In its 2016 Alternative Fund Manager Compliance Survey, ACA Compliance Group (ACA) covered various issues pertinent to hedge fund and illiquid private fund managers. ACAs Brian Lattanzio, a senior compliance analyst and private equity associate, and Danielle Joseph, a senior principal consultant, discussed the survey results in a recent webinar. This article, the second in a two-part series, explores the survey findings concerning the custody of fund assets and certificated securities; procedures around and types of fees charged by illiquid fund managers; steps to safeguard assets; and personal trading. The first article summarized the surveys results pertaining to SEC examinations; compliance staffing and budgeting; compliance reviews, testing and training; and anti-money laundering and sanctions compliance. For additional insights from ACA experts, see Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015); and The SECs Broken Windows Approach: Compliance Resources, CCO Liability and Technology Concerns for Hedge Fund Managers (Part Two of Two)” (Oct. 1, 2015).

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  • From Vol. 8 No.3 (Jan. 22, 2015)

    Top SEC Officials, Law Firm Partners and In-House Counsel Discuss Private Fund Enforcement Priorities, Tender Offer Rules Applicable to Activist Investing, Valuation Challenges, Personal Trade Monitoring and Compliance Testing (Part Four of Four)

    This is the final article in a four-part series covering the Practising Law Institute’s Hedge and Private Fund Enforcement & Regulatory Developments 2014 event.  The first article in this series discussed points made by Julie M. Riewe, Co-Chief of the SEC’s Asset Management Unit, on enforcement trends, principal transactions, conflicts raised by side-by-side management, valuation, allocation of expenses and the potential deterrent value of smaller enforcement actions.  The second article addressed CFTC enforcement concerns and cases, New York Attorney General’s Office initiatives and defense strategies for avoiding and managing government investigations.  The third article focused on best practices for preparing for and responding to SEC inspections and examinations.  This final article in the series summarizes the following additional areas impacting hedge fund managers: (1) current focus areas of the SEC’s Complex Financial Instruments Unit, especially as those focus areas relate to instruments traded by hedge funds; (2) the evolving regulatory ecosystem in which activist managers obtain, manage and deploy investment-sensitive information; and (3) the view of top in-house counsel on hedge fund manager compliance policies that are demonstrably effective.  On activism and information management, see also “‘Best Ideas’ Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part Two of Two),” The Hedge Fund Law Report, Vol. 7, No. 31 (Aug. 21, 2014); “Did Pershing Square and Valeant Violate Insider Trading, Antitrust or Tender Offer Rules in Their Pursuit of Allergan?” The Hedge Fund Law Report, Vol. 7, No. 17 (May 2, 2014).

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  • From Vol. 7 No.46 (Dec. 11, 2014)

    ACA 2014 Compliance Survey Covers SEC Exams, CCOs, Compliance Reviews, Custody, Fees and Personal Trading

    ACA Compliance Group (ACA) recently completed its 2014 Alternative Fund Manager Compliance Survey, which examined managers’ experience with recent SEC examination initiatives, the role of a manager’s chief compliance officer, compliance reviews and testing, custody and safeguarding of assets, fees and personal trading.  On November 14, 2014, Jack Rader and Danielle Joseph, both Senior Principal Consultants at ACA, discussed the survey results.  For coverage of prior ACA surveys, see “ACA Compliance Survey Covers Current Hedge Fund Practices on Marketing, Trading, Counterparties and Valuation,” The Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); “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); “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013); and “ACA Compliance Group Survey Provides Benchmarks for a Range of Hedge Fund Manager Compliance Functions, Including Dual-Hatting, Annual Compliance Reviews, Forensic Testing, Custody, Fees and Signature Authority,” The Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

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  • From Vol. 6 No.30 (Aug. 1, 2013)

    A Roadmap and Recommendations for Hedge Fund Managers Facing Presence Examinations

    In the fall of 2012, the SEC unleashed its latest tactic aimed at identifying potential issues and deficiencies for newly registered investment advisers – the “presence examination.”  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).  These “focused, risk-based” examinations came on the heels of the recent influx of SEC registrants (resulting from Dodd-Frank legislation) and are driven in large part by the limited resources available to the SEC staff.  Namely, of the more than 4,000 private fund advisers registered with the SEC (as of April 2013), more than 1,500 registered since July 21, 2010, representing an increase of more than 50 percent in registered private fund advisers.  Through the Presence Examination initiative, the SEC is looking to reach as many of these new registrants as possible, substituting mini risk-based examinations in lieu of traditional “full-blown” examinations, which have historically proved ineffective at reaching the masses.  As of April 2013, approximately 20 percent of all advisers that have been registered for more than three years had never been examined.  In an April 16, 2013 speech at the 2013 NASAA Public Policy conference, SEC Commissioner Elisse B. Walter noted that the Presence Exam initiative creates a way to “meaningfully engage, assess risk, and establish a presence and credibility” with new registrants, serving as a reminder that “we’re out here, keeping an eye on things.”  Many newly registered private fund managers will face presence examinations in the next two years.  In a guest article, Jillian Timmermans, a Partner and Vice President at Cordium, provides a roadmap and practical recommendations that will help such managers navigate the presence examination process more effectively.

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part Three of Three)

    One of the principal challenges many hedge fund managers face is effectively and efficiently enforcing a firm’s compliance policies and procedures given limited compliance resources.  This problem has been historically acute with respect to personal trading compliance because of the significant manual effort required to ensure compliance with applicable rules and in-house personal trading requirements.  Nonetheless, in the past decade, technology vendors have made significant progress in developing personal trading compliance solutions that can significantly enhance the effectiveness and efficiency of personal trading compliance programs, at relatively modest prices.  Technological solutions can facilitate personal trading reporting as well as enforcement of a firm’s personal trading restrictions and prohibitions.  Furthermore, vendors can now tailor such solutions to meet the needs of hedge fund managers with varying operational requirements.  As such, hedge fund managers should explore and understand the various personal trading compliance solutions available to them to determine whether any such solutions will further advance the goals of their personal trading compliance programs.  This is the third article in a three-part series on personal trading policies and procedures for hedge fund managers.  The first article in this series discussed general considerations for hedge fund managers in developing effective personal trading policies; the scope of persons that may be covered by such personal trading policies; and the reporting obligations imposed on registered hedge fund managers by Rule 204A-1 under the Investment Advisers Act of 1940 (Advisers Act).  See “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  The second article discussed various personal trading restrictions and prohibitions, including limitations on the number of brokerage firms covered persons can use to effect personal trades; pre-clearance requirements for personal trades; blackout periods during which personal trades cannot be effected; holding periods applicable to securities owned by covered persons; and other types of personal trading restrictions and prohibitions.  See “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part Two of Three),” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  This third article in the series describes various solutions designed to facilitate monitoring of personal trading compliance by hedge fund managers.  Specifically, this article discusses various technological solutions designed to facilitate personal trading reporting, including the various methods for obtaining electronic personal trading data (instead of paper data) from broker-dealers; various solutions for automating personal trade monitoring; automated trade pre-clearance solutions; and a summary of key considerations for hedge fund managers when evaluating personal trading compliance solutions.  See generally “How Hedge Fund Managers Can Use Technology to Enhance Their Compliance Programs,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 5 No.4 (Jan. 26, 2012)

    Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part Two of Three)

    Carefully conceived personal trading restrictions and prohibitions (such as pre-clearance of personal trades and blackout periods) are some of the most valuable tools available to a hedge fund manager to detect and prevent personal trading fraud, including insider trading and front-running.  Such policies prove the adage that an ounce of prevention is worth a pound of cure.  Contrast such personal trading restrictions and prohibitions with the reporting obligations mandated by Rule 204A-1 under the Investment Advisers Act of 1940 (Advisers Act) which only require a firm to review its covered persons’ trades retroactively.  Once a trade has been effected, a firm has few remedial options other than breaking the trade (if it is discovered in time) or disciplining the covered person (potentially including requiring him or her to disgorge any profits).  More often than not, once a personal trading violation has occurred, the damage has been done.  As such, unless a hedge fund manager flatly prohibits all personal trading by its covered persons, it will need to adopt some personal trading restrictions and prohibitions to prevent personal trading fraud.  Unfortunately, the securities laws and rules (including Rule 204A-1) provide only limited guidance in this regard.  This is the second article in a three-part series on personal trading policies and procedures for hedge fund managers.  The first article in this series discussed general considerations for hedge fund managers in developing effective personal trading policies; the scope of persons that may be covered by such personal trading policies; and the reporting obligations imposed on registered hedge fund managers by Rule 204A-1.  See “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  This article discusses various personal trading restrictions and prohibitions, including limitations on the number of brokerage firms covered persons can use to effect personal trades; pre-clearance requirements for personal trades; blackout periods during which personal trades cannot be effected; holding periods applicable to securities owned by covered persons; and other types of personal trading restrictions and prohibitions.  The third article in this series will describe various solutions designed to facilitate monitoring of personal trading compliance by hedge fund managers.

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  • From Vol. 5 No.3 (Jan. 19, 2012)

    Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three)

    Most hedge fund managers implement personal trading policies and procedures, that is, rules governing trading by management company personnel for their own accounts rather than for funds or accounts managed by the management company.  Hedge fund managers implement such policies and procedures for either or both of two reasons: because they have to or because they should.  Some hedge fund managers have to implement such policies because they are registered (or required to be registered) with the SEC as investment advisers, and Rule 204A-1 under the Investment Advisers Act of 1940 (Advisers Act) requires registered investment advisers to establish, maintain and enforce codes of ethics that include personal trading policies designed to detect and prevent fraud in connection with personal trading.  Even managers that are not registered and are not required to register frequently implement personal trading policies and procedures as a matter of prudence.  This is because personal trading by management company personnel can violate laws and rules other than Rule 204A-1.  For example, personal trading can – and in the recent past, frequently has – resulted in insider trading violations.  The specific violator in such cases is typically the individual trader, but such violations adversely affect (often dramatically) the management company that employs the violator.  Also, personal trading can result in “front running,” in which an employee of the manager buys or sells a security before engaging in a similar transaction for a managed fund or account.  Similarly, personal trading can result in management company personnel usurping investment opportunities that legally belong to the manager’s funds or accounts.  On usurpation, see “SEC Enforcement Action Against a Private Equity Fund Manager Partner Calls into Question the Value of Self-Reporting in the Private Funds Context,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  Advisers Act Rule 204A-1 provides minimum standards for registered hedge fund managers in crafting personal trading policies.  But the rule is spare with respect to detail, leaving registered hedge fund managers relatively wide latitude in designing policies and procedures.  That latitude, of course, is constrained by other law and practice, the reality of SEC examinations and expectations on the part of increasingly sophisticated investors.  By the same token, even unregistered hedge fund managers typically look to practice under Rule 204A-1 as a guideline in crafting their own personal trading policies and procedures.  Moreover, once personal trading policies and procedures are in place, they must be, in the language of Rule 204A-1, “maintained” and “enforced” – yet the rule offers little in the way of guidance with respect to maintenance and enforcement.  Accordingly, market practice looms large in the design and implementation of personal trading policies and procedures.  Yet here, as in other areas of hedge fund operations, market practice is challenging to discern reliably.  With an increasing number of hedge fund managers facing an imminent registration deadline, and with substantially all managers facing heightened operating expectations from investors and regulators, The Hedge Fund Law Report is publishing a three-part series of articles that seeks to shed light on market practice with respect to personal trading policies and procedures of hedge fund managers.  This article is the first in the series and addresses: the overarching considerations in establishing a personal trading program; the scope of persons that can and should be covered by the personal trading program; and the reporting obligations that apply to covered persons, including a discussion of the securities covered by the reporting requirements and available exceptions from the reporting requirements.  The second article in this series will highlight various personal trading restrictions, including discussions of restrictions on the number of brokerage firms where covered persons can hold covered securities, the requirement to pre-clear certain transactions, holding periods for investments, blackout periods during which trades cannot be executed and other types of trading restrictions and prohibitions.  The third article in this series will survey recent technological developments designed to facilitate a hedge fund manager’s monitoring of compliance with its personal trading policies and procedures.

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