The Hedge Fund Law Report

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

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By Topic: General Counsels

  • From Vol. 10 No.9 (Mar. 2, 2017)

    Winding Down Funds: How Managers Make the Decision and Communicate It to Investors and Service Providers (Part One of Two)

    A fund manager typically spends most of its time not only contemplating how to maximize returns for investors, but also navigating the array of compliance and regulatory concerns involved in running a private fund. Because the manager is so caught up in thinking about these daily considerations, it may lose sight of the multitude of issues that arise when it comes time to wind down that same fund. If the manager exercises some foresight regarding the fund’s eventual wind-down and puts proper procedures in place, however, the whole process can be both smoother and less fraught with legal and regulatory risks. In a recent interview with The Hedge Fund Law Report, Michael C. Neus, senior fellow in residence with the Program on Corporate Compliance and Enforcement at New York University School of Law and former managing partner and general counsel of Perry Capital, LLC, shared his detailed insights about the various considerations caused by winding down a fund. For additional commentary from Neus, see “Practical Solutions to Some of the Harder Fiduciary Duty and Other Legal Questions Raised by Side Letters” (Feb. 21, 2013). This first article in a two-part series presents Neus’ thoughts on the factors leading to the decision to wind down a fund, which personnel should lead that process and how it should be disclosed to investors and service providers. The second article will explore what types of fees and expenses investors should be charged during the wind-down, as well as how managers can maximize the value of illiquid assets during a liquidation. For more on winding down funds, see “Practical Tips for Fund Managers to Mitigate Litigation Risk From Regulators, Investors and Vendors When Winding Down Funds” (Oct. 27, 2016).

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  • From Vol. 10 No.8 (Feb. 23, 2017)

    What Role Should the GC or CCO Play in the Audit of a Fund’s Financial Statements? 

    The first quarter of the year marks the busy season for finance professionals at private funds. Once the investment manager (or its administrator) finalizes the prior year-end performance for its funds, the firm can officially commence auditing those funds’ financial statements, although preparations have likely been underway for several months. From a regulatory perspective, Rule 206(4)-2 (Custody Rule) of the Investment Advisers Act of 1940 is the driving force behind the flurry with which a hedge fund manager approaches the audit process. See “How Does the Custody Rule Apply to Special Purpose Vehicles Used by Private Equity Funds to Purchase, and Escrow Accounts Used to Sell, Portfolio Companies?” (Jul. 24, 2014); and “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?” (Jan. 20, 2010). Registered commodity pool operators must also adhere to CFTC Regulation 4.22(c), which requires that audited financial reports be delivered to the pool’s investors and filed with the NFA within 90 days of the pool’s fiscal year-end. See “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests” (Dec. 13, 2012). Of course, even without these regulatory requirements, most institutional investors – particularly those that owe a fiduciary duty to their end-investors – insist that funds to which they allocate undergo an annual audit. To assist our subscribers that are currently engaged in the audit process, this article considers the audit from the perspectives of the fund manager’s chief compliance officer and general counsel. Specifically, we analyze the fund’s audit process and explore the extent to which legal and compliance personnel should be part of that process, or whether this is a purely financial function that is outside their purview. 

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  • From Vol. 10 No.7 (Feb. 16, 2017)

    FCA Director of Enforcement Details the Goals and Tenets of the Agency’s Senior Managers Regime and Proposed Modifications to Its “Early Settlement” Program

    Regulatory agencies have traditionally sought to deter misconduct of private funds and other industry actors by levying, and publicizing, substantial fines against offending parties. Although the U.K. Financial Conduct Authority (FCA) has arguably followed suit, levying more than £3 billion in financial penalties over the past five years, the bulk of those actions occurred prior to April 2016, suggesting the agency has more recently adopted a different approach. See “FCA 2016-2017 Regulatory and Supervisory Priorities Include Focus on AML, Cybersecurity and Governance” (Apr. 14, 2016). In a recent speech, Mark Steward, Director of Enforcement and Market Oversight at the FCA, outlined the alternate path the FCA has chosen to deter misconduct. This article details the new measures that have been, or will be, adopted by the FCA, including its pursuit of liability against firm management for misconduct under the Senior Managers Regime and proposed changes to its “early settlement” program to incentivize the resolution of cases by increasing the fairness of proceedings. For additional insight from Steward, see “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016). For further commentary from the FCA, see “FCA Director Lays Out Expectations for Cybersecurity of Financial Services Firms: Identification of Cyber Risks, Detection, Firm Preparedness and Information Sharing” (Sep. 29, 2016); and “FCA Director Emphasizes Regulator’s Focus on Firm’s Culture of Compliance” (Jul. 21, 2016).

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  • From Vol. 9 No.29 (Jul. 21, 2016)

    FCA Director Emphasizes Regulator’s Focus on Firm’s Culture of Compliance 

    On July 12, 2016, Jonathan Davidson, Director of Supervision – retail and authorisations of the U.K. Financial Conduct Authority (FCA), spoke at the 2nd Annual Culture and Conduct Forum for the Financial Services Industry in London. In his remarks, Davidson outlined the FCA’s ambitions for firm culture in the financial service industry; the responsibility of leaders to encourage personal responsibility and impress the value of good culture upon all staff; and the view that a strong culture that builds trust in firms and markets is in the economic self-interest of firms and their shareholders. Davidson also discussed the Senior Managers and Certification Regime that will eventually apply to hedge fund managers and the FCA’s expectations thereof. See “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016). This article highlights the elements of Davidson’s remarks most applicable to hedge fund managers with respect to developing an appropriate culture of conduct and compliance. For commentary from Davidson’s colleagues at the FCA on other legal and regulatory issues, see “Focus on Hedge Fund Managers and Market Liquidity May Be Overemphasized, Argues FCA Director” (Mar. 31, 2016); “FCA Acting Chief Calls for Hedge Fund Managers to Take Greater Responsibility for Implementing MiFID II” (Feb. 18, 2016); and “Hedge Fund Managers Must Prepare for Benchmark Regulation” (Feb. 11, 2016).

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  • From Vol. 9 No.22 (Jun. 2, 2016)

    FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime

    Mark Steward, Director of Enforcement and Market Oversight at the U.K. Financial Conduct Authority (FCA), delivered a speech at the recent Thomson Reuters Annual Compliance & Risk Summit in London. In his remarks, Steward outlined the strategic direction of the FCA and discussed several key initiatives undertaken by the regulator, including the Senior Managers and Certification Regime; the requirement of skill, care and diligence found in the Conduct Rules; enforcement decision-making; and the broad span of work undertaken by the FCA. Steward’s speech provides valuable guidance to hedge fund managers as to the priorities and focus of the FCA, particularly as the regulator imposes increased responsibility for improving firm culture and governance on managers and other financial institutions. For more from Steward’s colleagues at the FCA, see “Focus on Hedge Fund Managers and Market Liquidity May Be Overemphasized, Argues FCA Director” (Mar. 31, 2016); “FCA Acting Chief Calls for Hedge Fund Managers to Take Greater Responsibility for Implementing MiFID II” (Feb. 18, 2016); and “Hedge Fund Managers Must Prepare for Benchmark Regulation” (Feb. 11, 2016).

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  • From Vol. 9 No.5 (Feb. 4, 2016)

    Hedge Fund Legal Personnel May Fall Under U.K. Senior Managers Regime

    In late 2015, the U.K. government announced that it would extend the new Senior Managers and Certification Regime (Senior Managers Regime) to all sectors of the financial services industry, including hedge fund managers and other asset managers. Under the Senior Managers Regime, senior management personnel within hedge fund managers and other financial services firms will be subject to increased personal responsibility, robustly enforced by U.K. regulatory authorities. See “U.K. Imposes New Statutory Duty of Responsibility on Hedge Fund Senior Managers” (Oct. 22, 2015). The U.K. Financial Conduct Authority (FCA) recently published a statement addressing uncertainty as to whether a firm’s legal function would be subject to the Senior Managers Regime. This article summarizes the FCA’s position and discusses the impact of the announcement on legal personnel of hedge fund managers. For more on hedge fund manager employee liability, see “Employees of Hedge Fund Managers May Be Liable for Failing to Prevent Fraud” (Jul. 30, 2015); and “U.K. Appellate Court Holds That Hedge Fund Manager Employees May Be Personally Liable” (Feb. 28, 2013).

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  • From Vol. 8 No.49 (Dec. 17, 2015)

    Hedge Fund GCs and CCOs Face an Expanding Role in Changing E.U. Marketing Environment (Part Two of Two)

    As the European regulatory environment grows more complex, hedge funds looking to market in Europe must navigate this increasingly complicated landscape.  To assist their firms with such efforts, hedge fund general counsels (GCs) and chief compliance officers (CCOs) have seen their roles evolve in recent years to encompass responsibility for compliance with the advanced regulatory burdens and demand greater visibility on the investor relations side.  On November 17, 2015, The Hedge Fund Law Report and Dechert LLP co-sponsored a program, “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” which considered issues faced by GCs and CCOs relating to private placements, reverse solicitation, the E.U. marketing “passport,” regulatory changes, UCITS funds and investor relations.  Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the discussion featured Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Dechert partners Karen L. Anderberg and Gus Black.  This second article in our two-part series addresses topics including the extension of the E.U. marketing passport, potential regulatory changes, marketing alternative mutual funds and investor relations.  The first article summarized key takeaways from the panel discussion with respect to marketing funds under the Alternative Investment Fund Managers Directive and reverse solicitation.  For more from Anderberg, see “Dechert Partners Discuss Impact of Volcker Rule on European Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).  For additional insight from Black, see “Dechert Global Alternative Funds Symposium Highlights Trends in European and Global Hedge Fund Marketing,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).

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  • From Vol. 8 No.48 (Dec. 10, 2015)

    Hedge Fund GCs and CCOs Face Risks in Changing E.U. Marketing Environment (Part One of Two)

    Hedge funds looking to market in Europe are faced with an increasingly complex regulatory environment – encompassing the Alternative Investment Fund Managers Directive (AIFMD), the Markets in Financial Instruments Directive, as well as a panoply of local regulations.  Hedge fund general counsels (GCs) and chief compliance officers (CCOs) must adapt to these changes and ensure that their firms appropriately solicit and engage with investors.  On November 17, 2015, The Hedge Fund Law Report and Dechert LLP co-sponsored a program, “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” which considered issues faced by GCs and CCOs relating to private placements, reverse solicitation, the E.U. marketing “passport,” regulatory changes, UCITS funds and investor relations.  Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the discussion featured Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Dechert partners Karen L. Anderberg and Gus Black.  This article, the first in a two-part series, summarizes the key takeaways from the panel discussion with respect to marketing funds under the AIFMD and reverse solicitation.  The second article will address topics including the extension of the E.U. marketing passport, potential regulatory changes, marketing alternative mutual funds and investor relations.  For more from the panelists, see “What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs,” The Hedge Fund Law Report, Vol. 8, No. 44 (Nov. 12, 2015).

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  • From Vol. 8 No.44 (Nov. 12, 2015)

    What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs

    Hedge funds looking to market in Europe face an increasingly complex regulatory environment, and hedge fund GCs and CCOs must adapt to these changes to ensure their firms appropriately solicit and engage with investors.  In a recent interview with The Hedge Fund Law Report, Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Karen Anderberg, a partner at Dechert, discussed implications of the changes in the European regulatory environment on hedge fund GCs and CCOs; challenges for hedge fund managers pursuing private and retail investors in Europe; and the evolving role of hedge fund GCs and CCOs with respect to marketing.  These experts, along with Dechert partner Gus Black, will expand on the topics in this article – as well as other issues affecting hedge fund GCs and CCOs – in a panel co-sponsored by The Hedge Fund Law Report and Dechert.  Entitled “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” the panel will be held in London on November 17, 2015, at 5:30 p.m. GMT.  For more information, click here.  To register, click here.  For more from Dechert, see “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates,” The Hedge Fund Law Report, Vol. 8, No. 20 (May 21, 2015); and our recent two-part series on the Supreme Court’s Denial of Cert in Newman: Part One, Vol. 8, No. 42 (Oct. 29, 2015); and Part Two, Vol. 8, No. 43 (Nov. 5, 2015). 

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  • 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. 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. 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.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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