REGULATORY IMPLICATIONS FOR HEDGE FUNDS:
WHAT DOES THIS MEAN FOR YOUR
PERSONAL LIABILITY?
Ashley Kovas, Martin Lovick, Adam Palmer, and Martin Woods
The views and opinions expressed in this paper are those of the authors and do not
necessarily reflect the official policy or position of Thomson Reuters.
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
2
Executive Summary
Hedge funds came into the regulatory spotlight in the early 2000s because of
the exponential growth in their assets under management and the lingering
memories of the near-collapse of Long-Term Capital Management (LTCM) in 1998.
Some regulators made a lot of the unregulated character of the funds. In fact this
allegation was always somewhat less than the truth – the activity of managing
assets for another (including a fund) has always been a regulated activity in the
UK and the U.S., so Mayfair and New York-based hedge fund managers have
always been inside the regulatory net, though the funds themselves of course are
established offshore. In fact, the badge of regulation has always been something of
value to hedge fund managers to counter the Wild West image of the industry.
Some regulators remained stubbornly concerned about the
activities of hedge funds. The German authorities were outraged
when hedge fund activity was directed towards taking over the
Deutsche Boerse. Hedge funds became characterised, by some
in Europe as a plague of locusts. Some commentators put a
portion of the blame for the 2008 financial crisis on the hedge
fund industry thereby opening Pandora’s Big Box of Regulation.
Banks fared worst from this, as would be expected, but hedge
fund regulation was tightened significantly, particularly through
the EU’s AIFMD and EMIR legislation.
The crisis caused a rethink in the UK about how regulation
should be done. There was a sudden realisation that fining
firms for regulatory misdeeds was not enough to prevent the
crisis and so the FCA moved to a strategy of taking enforcement
action against individuals, on the basis that the actions of
firms are no more than the collective actions of firms’ senior
management. The FCA now routinely looks at whether it can
act against individuals, particularly where the firm’s business
strategy is considered to be harmful to consumers or markets.
The penalties can be severe, with fines or even banning orders,
effectively preventing a person from working in financial services
at all. It is important that hedge fund principals and senior
managers understand what the FCA’s expectations are of them
and we will provide an introduction to this hot topic.
‘Hedge fund’ remains an undefined term and the fear of the
unknown has contributed to at least some of the desire to
regulate. Hedge funds are characterised by the use of cutting
edge investment management techniques including the use of
derivatives and leverage with the intention to add ‘alpha’, that
most mysterious and unique golden egg which regular run-ofthe-mill funds cannot offer. How you add alpha has to be, by its
nature, a secret which has led the hedge fund industry to lionise
certain individuals who seemed to provide the impossible. On
occasion what was provided was indeed impossible – epitomised
in the fall from grace of Bernie Madoff. We will look at the
implications of Madoff and other scandals for regulation.
Lastly we will take a look at MiFID II, the next avalanche of new
regulation which is due to come into force in January 2017. A
lot of the detailed regulation that MiFID II will require is not yet
finalised, but we will look at some of the areas which will be
covered including best execution and transaction reporting.
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
3
The FCA: Personal liability for hedge fund managers BY ASHLEY KOVAS
AFTER THE FINANCIAL CRISIS:
THE CHANGING APPROACH TO REGULATION
”There is a view that people are not frightened of the
FSA. I can assure you that this is a view I am determined
to correct. People should be very frightened of the FSA”.
These were the words of Hector Sants who was then the Chief
Executive of the Financial Services Authority in a 2009 speech
which defined the FSA’s change in style following the financial
crisis which had begun in 2008.
Elsewhere in his speech, Mr Sants spoke about a new style of
regulatory supervision which was to be “intrusive” and “direct”.
The regulator would in future be looking to second-guess the
strategies of firms and make “judgments on the judgments of
others”. The new regime would be “outcomes-focused”, meaning
that the regulator would concentrate on what would be the likely
result of the firm’s actions. The “old” regulatory approach, which
relied on assessing whether a firm had complied with detailed
rules, was considered outmoded because it was backwardlooking. It told you what had gone wrong yesterday, whereas
the new approach was firmly fixed on the future, to get firms
to anticipate and deal in advance with the future effect of their
actions on consumers and markets.
The Financial Conduct Authority (FCA) took over the conduct
side of regulation from 2013 and has pursued much of the FSA’s
agenda. Shortly after it was created, CEO Martin Wheatley
launched the FCA’s work on “behavioural economics”, indicating
that the FCA is keen to understand the factors that cause
people to behave in the way that they do. Although aimed in
particular at understanding the roots of consumer behaviour,
the regulator’s focus on cultural change in firms suggests that
behaviour in firms is also relevant.
As part of its focus on behaviour, the FCA realised that it needed
to adjust its approach to enforcement. In the past, the FSA’s
approach had generally been to take action against the firm
when problems occurred. However, this may not be sufficient
to change the behaviour of the people who work in firms, even
at senior level. The idea of the “rolling bad apple” developed:
executives could be involved with regulatory failings at one firm
and then move on to perpetrate similar failings elsewhere. The
FCA realised that the actions of a firm are no more than the
collective actions of people representing the firm.
THE APPROVED PERSONS REGIME
The FCA has always had the power to take enforcement action
against individuals within firms as well as against the firms
themselves. Under the “approved persons” regime, individuals
who carry on certain “controlled functions” within firms must
be individually approved by the regulator in order to do so. For
example, being a “director” or “partner” of a regulated firm
requires approval, as does being the Chief Executive or the
Compliance Officer. Acquiring approved person status opens
a senior executive to the possibility of personal enforcement
action. The FCA can, in appropriate circumstances, issue a
financial penalty against individual approved persons. In
extreme situations the regulator can prohibit an approved
person from holding a controlled function with any regulated
firm. When the FCA issues such a prohibition, the career of the
person censured is to all intents and purposes over, at least in
financial services. And the pain caused by the financial penalties
can be severe also.
The standards imposed by the FCA can be extreme. In late
2014, the FCA issued a prohibition order against Jonathan
Burrows. Mr Burrows was a Managing Director at Blackrock
Asset Management. In 2013, he was stopped at the ticket gates
in Cannon Street Station where he “admitted to evading his rail
fare on a number of occasions”. The FCA concluded that “by
knowingly evading the fare for his train journey on a number of
occasions Mr Burrows has demonstrated a lack of honesty and
integrity and, as such, he has failed to meet the FCA’s Fit and
Proper Test for Approved Persons”. This case shows that the
conduct of an approved person is relevant even outside his day
to day role.
THE FCA STANDARDS
When assessing a person’s fitness and propriety for an approved
person role, the FCA will have regard to the applicant’s:
• honesty, integrity and reputation
• competence and capability
• financial soundness
Where a firm is a significant market player, the FCA will
interview applicants for approved person roles. These
interviews are extremely important for the FCA in forming its
view of the applicant’s fitness and propriety and they can be
gruelling in style. There are many anecdotal cases where the
FCA has said that it is minded not to approve the candidate
concerned, leading the nominating firm to withdraw the
application – once the FCA has announced its intention not to
approve the individual most firms take the view that they would
prefer not to have the adverse publicity that a public decision
would entail. Even where approval is forthcoming, it is not
unusual for it to come with conditions attached to it, perhaps
requiring the applicant to take a particular training course,
or to familiarise himself or herself with various aspects of the
firm’s business.
Once approved, the individual must comply with the FCA’s
Statements of Principle and Code of Practice for Approved
Persons. Any actions against approved persons will be based on
the Statements of Principle which are as follows:
1. A
n approved person must act with integrity in carrying out his
accountable functions.
2. A
n approved person must act with due skill, care and
diligence in carrying out his accountable functions.
3. A
n approved person must observe proper standards of
market conduct in carrying out his accountable functions.
4. A
n approved person must deal with the FCA, the PRA and
other regulators in an open and cooperative way and must
disclose appropriately any information of which the FCA or
PRA would reasonably expect notice.
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
5. A
n approved person performing an accountable significantinfluence function must take reasonable steps to ensure
that the business of the firm for which he is responsible
in his accountable function is organised so that it can be
controlled effectively.
6. A
n approved person performing an accountable significantinfluence function must exercise due skill, care and
diligence in managing the business of the firm for which he is
responsible in his accountable function.
7. An approved person performing an accountable significantinfluence function must take reasonable steps to ensure that
the business for which he is responsible in his accountable
function complies with the relevant requirements and
standards of the regulatory system.
The Code itself goes into more detail about what the Principles mean.
Statement of Principle 7, which requires compliance with the
regulatory system is frequently cited in enforcement cases
against individuals and deserves special mention. The effect
of this Statement of Principle is to make individual senior
managers responsible for compliance in their respective business
areas. This is not the Compliance Officer’s responsibility: his role is
fundamentally about compliance oversight, rather than securing
compliance itself.
The Code clarifies that an approved person breaches Statement
of Principle 7 in a number of circumstances, including:
• Failing to take reasonable steps to implement (either
personally or through a compliance department or other
departments) adequate and appropriate systems of control
to comply with the relevant requirements and standards of the
regulatory system in respect of the regulated activities of the
firm in question.
• Failing to take reasonable steps to inform himself about
the reason why significant breaches (whether suspected or
actual) of the relevant requirements and standards of the
regulatory system in respect of the regulated activities of
the firm in question may have arisen (taking account of the
systems and procedures in place).
• Failing to take reasonable steps to ensure that procedures
and systems of control are reviewed and, if appropriate,
improved, following the identification of significant breaches
(whether suspected or actual) of the relevant requirements
and standards of the regulatory system relating to the
regulated activities of the firm in question.
WHEN THINGS GO WRONG
Of course, there will always be some enforcement actions against
individuals where it is clear that the individual was determined
to do wrong. However, there is often a scent of tragedy about
regulatory actions against individuals, leading to the thought
that the people in question would not have done what they did
if they had understood the likely outcome. Few people go into
the approved person role intending to run the serious risk
of personal enforcement. This in turn suggests that many
approved persons are unaware of the standards that apply and
how strictly they will be interpreted.
There are many cases on record where the FCA has taken action
against individuals and the recent Swinton case is a useful
example. The firm itself received a financial penalty of £7.4 million
in 2013. The firm’s core products were motor and home insurance
products and Swinton was found to have operated a business
strategy to maximise the sale of insurance add-on products
attached to the core products. The FCA said that:
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“... the root cause of [the regulatory] failings was the
aggressive sales strategy that Swinton adopted... which
focused on maximising sales at the expense of treating
customers fairly and putting them at the heart of its
business”.
The firm had failed to give customers “adequate information
about the add-on products at the point of sale or communicate
with customers in a clear, fair and non-misleading way”. Some
customers did not even realise they had purchased an add-on
product until the firm started taking payment from their bank
account. It was suggested in the FCA Notice that the strategy
was introduced “to address a general decline in [Swinton’s]
income from sales of core products”. Most sales were made by
telephone and there were failings found in the structure of call
scripts and also in the monitoring of calls.
In 2014 the FCA took action against three senior Swinton
executives. The CEO was given a financial penalty of £412,700
along with a prohibition order banning him from holding the
Chief Executive controlled function, though he remains eligible
to perform other controlled functions. Swinton’s Finance
Director and Marketing Director were given financial penalties of
£208,600 and £306,700 respectively and each was banned from
holding any controlled function for significant influence in any
regulated firm. That in effect makes them ineligible for any senior
position in financial services. Neither of them had understood that
the firm’s profit maximisation strategy would lead to a culture that
was overly focused on sales and which would put at risk the fair
treatment of customers.
LESSONS TO LEARN
There are a number of things approved persons can do to reduce
the risk of a personal FCA enforcement action being made
against them.
1. M
ake sure they know in detail what the code requires of them.
There is a significant amount of detail in the Code of Conduct
on what behaviour is considered not to meet the Statements
of Principle. In addition, there is the Code of Market Practice to
consider, which sets out the limits of what amounts to market
abuse in the UK. The Codes are under continuous review, so
regular refresher training is advisable.
2. A
pproved persons should be sure they understand the
scope of the role they perform. The FCA will hold senior
managers accountable for their areas of responsibility so it
is important to ensure there is a definitive job description
in place that clearly sets out their responsibilities. The
approved person should understand how his role fits with
the roles of other senior executives, ensuring that there are
no unexplained gaps in responsibilities.
3. A
personal risk map may be a good idea, to be constructed
based on the individual approved person’s responsibilities and
how they interact with the FCA’s principal areas of concern.
4. A
pproved persons should agree with the compliance
department what work compliance does and what they
must do for themselves. Statement of Principle 7 presumes
senior managers are responsible for compliance in their areas
of responsibility but it is clear that reliance can be placed
on the compliance function to assist. However, this requires
agreement and documentation.
Following on from the important issue of personal liability, let’s
consider if you really know your hedge fund and how regulators
are tackling fraud and increasing trust.
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
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Do you know the modern day hedge fund? BY MARTIN WOODS
CAN WE RELY ON REGULATED FUND MANAGERS?
What’s to know? Hedge funds are now an established business
within mainstream financial services. There was once a time
when the very mention of a hedge fund caused temperatures
to rise, anxiety to kick-in and risks to increase. Why were
these reactions generated? Primarily because the funds were
unregulated and unregulated investment funds were/are all too
often associated with fraud. Hedge funds are now an established
investment offered and managed by global banks. Investors
include institutional bodies and funds invest in funds. Some
funds are effectively funds of funds. Nonetheless, the funds,
although offered by regulated businesses, remain unregulated.
Consequently there is a wide disparity in relation to how other
regulated businesses interact with hedge funds.
Whilst the funds themselves remain unregulated, the managers
are usually regulated. Indeed, most independent fund managers
immediately recognised the importance of regulation in securing
the confidence and trust of investors. Thus in the 1990s these
managers beat a path to London and New York, in pursuit of
regulation. Today, it is similar to the path and objectives of those
seeking to offer and trade cyber currencies, such as Bitcoin,
within mainstream finance.
MADOFF
Notwithstanding the regulated status of the fund managers,
there have been major issues and fraud, perhaps the most
famous of which was Madoff Securities, the regulated fund
manager owned and controlled by the now infamous Bernie
Madoff. Madoff was convicted of fraud and he is now serving a
substantial prison sentence — he will die in prison. It is alleged
that he defrauded investors of sums between $40 billion and
$60 billion. Effectively, the hedge funds managed by Madoff
were ‘Ponzi’ frauds and it was only because of the onset of the
global financial crisis that Madoff’s fraud came to light, as he
was unable to access new capital to maintain the fraud.
Many investors did not know that they were actually invested
with Madoff, as the funds of funds model enabled other fund
managers to place investments with Madoff, unbeknown to
the original investors. Subsequently there have been multiple
instances of litigation alleging that fund managers did not
undertake adequate due diligence in respect of Madoff’s
investment strategy as well as his accounting process. There
was never a question of the fund managers not knowing their
investors, within what was essentially a financial services
supply chain. Thus, whilst Madoff may not have known
the identity of some of the investors of funds which had
invested with him, he was able to rely upon the regulated
fund managers of the other funds to have applied client due
diligence (CDD) and ongoing screening.
Examples such as this have led to a situation where anxieties
continue to prevail. Questions abound as to how funds and
investors are regulated; how the investors are identified; whether
the investors are the subject of CDD; whether they are screened
against sanctions and politically exposed persons (PEPs) lists; and
who the directors/partners of these funds are.
Given the regulated status of the majority of fund managers,
can they be relied upon? The fund managers are subject to
the same anti-money laundering (AML) laws and regulations,
as well as the same know your customer (KYC) requirements,
thus they need to know their investors. It is a crime for fund
managers to launder money; it is a crime for fund managers to
breach sanctions and therefore, these regulated fund managers
implement their own systems and controls.
Notwithstanding all of the above, some regulated firms/
counterparties continue to act with anxiety and apply enhanced
levels of due diligence, based upon a notion that hedge funds
continue to present an increased level of risk, including AML/
KYC risk. Some major firms determine that it is necessary to
request “full” KYC and due diligence, even when such hedge
funds are managed by major global financial service businesses
regulated in multiple G7 jurisdictions.
It is as though the thinking is the hedge fund found the fund
manager, effectively, the fund was walking along the road
seeking a manager and behold, the fund stumbled upon a
major global financial services business who agreed to regulate
them. Of course this farcical charade is a long way from reality.
It is the regulated fund manager who drives the process and
the relationships and requests the funds to be incorporated.
Furthermore, the funds are not incorporated in isolation, they
are a component, indeed a vital one, of a wider strategy. The
funds become legal vehicles through which parties are invited
to invest in a secure, protected, albeit, often high risk and well
regulated environment.
The investment strategies and criteria for investors are
commonly articulated within comprehensive prospectus
documents. The criteria ordinarily incorporate a minimum
investment sum, together with strict KYC requirements. KYC,
know your investor is core to a regulated fund manager’s
process. These processes are often outsourced to established,
administration agents who have robust contractual obligations
to ensure there is a robust application of KYC . As with major
global financial service firms, the fund managers can outsource
the process, but not their responsibility or accountability.
Nonetheless many counterparties continue to request copies of
all corporate documents for hedge funds, together with copies
of personal identity documents of the directors/partners of
the actual hedge funds, even though such persons are often
partners of major law firms. Some go further and request to
be provided with names/identity of any 10% to 25% investors
in the fund. Not surprisingly, many fund managers reject
such requests. Complying with such requests could actually
be against the law, if only contract law. Thus, there are some
instances where a KYC stand-off results in no business being
conducted, leading the fund manager to find an alternative,
more accommodating, perhaps more sophisticated counterparty
to trade with.
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
IT’S DOWN TO THE REGULATOR
Hedge funds have grown up, but not everyone in the industry
treats them as a mature partner, with whom they are
comfortable conducting business. On one level the analysis
is simple, the fund managers are global financial services
businesses, high street names and therefore they can be relied
upon to have performed appropriate CDD, to know their clients
and to apply ongoing sanctions screening. On the other hand,
there are smaller regulated fund managers, concentrated in
London and New York, whose regulated status is critical to the
business model and survival. Such fund managers are known to
the regulators, who have determined that the people running
these businesses are “fit and proper”, they have the required
competence and financial credibility and further that they
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have no criminal record. Thus, having successfully navigated
the multiple obstacles which stand in the way of securing a
regulated status, a counterparty can rely upon the fund manager
and leverage the due diligence applied to the fund manager by
the regulator.
To those of you resisting this proposal, perhaps the actual
allocation of risk will persuade you to this way of thinking. There
are several forms of risk here, but the primary risk must rest with
a regulator who, having undertaken due diligence, then confers
regulated status to a firm and individuals. In the event that
it transpires that the firm and individuals undertake criminal
conduct, the primary risk rests with the regulator.
Turning to imminent regulatory changes, let’s outline some
important issues that hedge fund managers need to be aware of.
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
7
Five things that will change your life under MiFID II BY MARTIN LOVICK AND ADAM PALMER
With not long to go live – January 3rd, 2017 – we have seen
the two primary pieces of legislation, the Markets in Financial
Instruments Directive (MiFID II) and the Markets in Financial
Instruments Regulation (MiFIR in force from July 2014), and a
full round of the secondary implementing measures from the
European Securities and Markets Authority (ESMA), in December
2014. Whilst there are some important issues, such as the use
of dealing commissions (softing) still to be settled (we expect
further detail from ESMA and the FCA in due course), the overall
picture is becoming clearer. In this summary of the MiFID II
reforms from the perspective of buy-side managers, here are the
“top five” areas that will need addressing:
1. T
he recording of telephones and electronic
communications: investment manager exemption to end
Not strictly speaking a MiFID II reform, but a
bombshell delivered by the FCA in March 2015 in its
Discussion Paper (DP15/3) on the conduct of business
and organisation issues arising from MiFID II. Current
FCA rules allow for discretionary investment managers to
dis-apply the recording requirement where a conversation or
communication is with another firm itself subject to the
obligation (e.g. an FCA-regulated broking firm) or with firms not
subject to the obligation, provided these are made only on an
infrequent basis and represent a small proportion of the total
relevant communications. The FCA proposes to remove both
these exemptions, citing the need for a “level playing field” with
similar firms. Note also that MiFID II extends the definition of
“relevant conversations” that must be recorded to include all
those intended to result in a client transaction (previously, those
that did), and to increase the retention period from six months to
five years. So the recording obligation is getting broader and the
retention period longer. If adopted, this will impose significant
new technology requirements on many investment managers
who currently do not need to record such communications.
2. Paying for research: an end to bundled commissions
MiFID II prohibits firms from accepting “fees,
commissions or any monetary or non-monetary
benefits paid or provided by any third party” – in other
words, “inducements” which (as currently interpreted)
includes original, meaningful research. At first sight, this points
to a total ban on all dealing commission arrangements to pay for
company research. Although ESMA’s Technical Advice on this
subject (published in December 2014) was initially viewed as a
retreat from a total ban, its current proposals still amount to a
radical break with past practise. There will be two permissible
methods of paying for company research: either the investment
manager pays for research itself, or it is paid for out of a
“Research Payment Account”. This type of account will have to
be operated under strict conditions, including a research budget,
based on a reasonable assessment of need, to be pre-agreed
with, and funded by, the client, and a regular assessment of the
quality of research purchased. Above all, there must be no link
between execution volumes and research spend. Opinions vary
on whether this spells the end for how Commission Sharing
Agreements (CSA) are currently structured – in our opinion (and
more importantly the FCA’s) it does.
3. Best execution: new data, new disclosures
Best execution was a concept introduced to the EU by
the first MiFID, but its impact has been patchy, at best.
There are difficulties around the objective
measurement of best execution in nearly all asset
classes save liquid shares (where, by definition, poor execution is
unlikely). Hedge fund managers also struggled to see why their
performance in this narrow area should be under the microscope
when they have every incentive to achieve the best possible
returns for their clients. MiFID II should enhance this regime in
two ways: first, in the new transparency and publication
requirements across a wide range of instruments. These will
include a “consolidated tape” of transactions across all EU
trading venues, thus greatly enhancing the market participants’
ability to see what is trading and at what price. The execution
venues themselves will have to publish annually the quality of
execution provided, assessed by factors such as price, costs,
speed and likelihood of execution, giving investment managers
hard data on which to base their execution venue decisions.
Firms themselves (including investment managers) will also
have to justify these decisions by publishing annually their top
five execution venues in terms of volume and information on
the quality of execution actually obtained, thus adding another
layer of transparency to underlying investors.
4. T
ransaction reporting: new data fields and delegation
becomes harder
Note: transaction reporting under MiFID should not be
confused with the reporting of derivatives transactions
under the European Markets Infrastructure Regulation
(EMIR) – EMIR reporting is concerned with systemic
risk, whereas MiFID transaction reporting was introduced primarily
to assist in the investigation of possible market abuse. Under
MiFID II, MiFIR broadens the scope of transaction reporting to all
financial instruments traded on an EU trading venue, plus those
whose underlying is such an instrument. The previously exempt
bonds, interest rates, commodity and FX derivatives thus all come
into scope, plus all OTC derivative contracts traded on the new
Organised Trading Facilities (OTF). The number of data field
increases from the original 23 to 81. These include short sale flags
and the ID of either the individual trader or the algorithm
responsible for the decision to trade. Delegation of transaction
reporting will still be permitted, but this is likely to be harder,
particularly in view of the ID requirement. Many investment
managers are expected to conclude that taking transaction
reporting back in-house is a cleaner solution. At the very least an
investment manager will need to understand how its
counterparties will comply with the new reporting requirements.
5. Transparency and how this will affect you
MiFID II greatly expands the scope of financial
instruments caught by pre- and post-trade
transparency requirements. Equity-like instruments
such as depositary receipts, exchange traded funds (ETF) and
certificates are included for the first time, as are bonds,
structured finance products, emission allowances and
derivatives traded on a trading venue. Trading a UK
government bond, for example, post January 2017, will look
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
much more like trading a UK share does now in terms of a
visible order book and trade tape. There will still be exemptions
for the publishing and reporting of illiquid shares, large orders
and transactions (similar to the current MiFID regime for
equities). Where this gets interesting (and controversial) is in
the calibration of thresholds for such waivers, and particularly
the definition of what is liquid. If ESMA gets this wrong, market
makers in certain instruments will conclude that greater
transparency shifts the risk/reward balance to the point where
they withdraw liquidity altogether. If they go too far in either
direction, investors could end up paying more, not less, for
executing their strategies.
8
However, the broad structure is now largely fixed and the direction
of travel is clear. When MiFID came into force in November
2007, its impact was quickly lost in the travails of 2008 and
the protections it sought to implement looked outdated very
quickly. However, MiFID II is not just about updating legislation
to reflect market developments - the opportunity has also been
taken to reflect on the financial crisis and so to address two areas
that were seen lacking: transparency (both for the client and
regulators) and protecting the interests of clients. It is those areas
where the impact of MiFID II will be felt most by the investment
management community.
We know well, from previous experience, that the devil is in
the detail and European legislative packages in their final
implemented form can look vastly different from what was
originally proposed. There is scope for further evolution between
now and 2017 and there are unlikely to be prizes for first movers.
Closing thoughts
The growth in importance of hedge funds has led to an increase in regulation.
Hedge fund managers may now find themselves on the wrong end of a personal
enforcement action from the FCA pour encourager les autres. Investing some effort
in managing this personal risk is time well spent. Grappling with the detail of existing
(AIFMD, EMIR) legislation as well as responding to new regulation (MiFID II) is a
tiresome distraction but ignoring it is likely to be a poor strategy.
However, dealing with regulation requires a demystification of the industry. The term
‘hedge fund’ means so much and so little and it carries a lot of baggage – possibly
the time has come to consciously define a narrower series of fund-types that are more
understandable and less frightening to observers of the industry.
Regulatory Implications for Hedge Funds: What Does This Mean for Your Personal Liability?
9
About the Authors
ASHLEY KOVAS
ADAM PALMER
Ashley Kovas has been involved in financial
services regulation since 1987 when he was
involved with implementing the Financial
Services Act 1986. Since then he has worked
in compliance and regulatory roles in the
asset management, banking and insurance
industries. He spent eight years at the FSA, where he published
‘Hedge Funds and the FSA’ (DP16), the FSA’s first publication
on hedge funds. He was latterly Manager of the Collective
Investment Schemes Policy Team where he was responsible for
almost all aspects of the COLL Sourcebook.
Adam Palmer is a Managing Director with
ACA Compliance Europe. In this role, he
maintains a portfolio of clients and manages
a team of consultants providing FCA and
SEC compliance support to UK regulated
companies including hedge funds, private
equity and long-only managers and broker-dealers. Previously,
Adam worked for Permal and was VP Legal and Compliance
for Centaurus Capital. Before then he held a Senior Consultant
position at a leading compliance consultancy. Adam started
his career at Fidelity Investments and has held the Compliance
Oversight and MLRO functions for a UK regulated firm.
Ashley is now a Senior Regulatory Intelligence Expert at Thomson
Reuters where he analyses and writes on up-coming regulatory
change. He also works as an independent regulatory consultant.
Adam received his Masters in Commercial and Corporate
Law (LLM) from UCL. He holds the Investment Management
Certificate and contributes frequently to industry publications
and working groups.
MARTIN LOVICK
Martin Lovick is a Consultant with ACA
Compliance (Europe) Limited. In this role,
he works with a number of FCA-regulated
clients, including hedge fund managers,
broker dealers and market makers. He
leads the client communications team
which advises on major regulatory developments, such as best
execution and dealing commissions, as well as analysing new
European legislation such as MiFID II and EMIR.
Before working in compliance, Martin ran his own equity
options firm, a local market maker on LIFFE. Before that he was
Director, Proprietary Trading at Phillips and Drew, and was also
Portfolio Manager at Manufacturers Life where he started his
career. He holds the CFA Investment Management Certificate
and an MSCI Diploma in Investment Compliance. He earned his
MBA from Manchester Business School and read Modern History
at Oxford University.
MARTIN WOODS
Martin Woods serves as the Head of Financial
Crime for regulated transaction businesses
within Thomson Reuters. He is an anti-money
laundering subject matter expert. As a former
detective in the National Crime Squad,
Martin investigated and arrested money
launderers. He is an innovator in financial crime and anti-money
laundering systems and controls.
Recently he advised upon the drafting of the Global Policy
and Standards for Thomson Reuters’ Org ID KYC Managed
Service. He has previously been engaged by a number of parties,
including the United Nations to advise upon and support
investigation and litigation strategies. He was called by the UK
Parliament to submit evidence to the Parliamentary Commission
on Banking Standards in respect of the conduct and behaviour
of bankers. He has previously delivered training to the FSA on
the subject of anti-money laundering and hedge funds.
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superior returns.
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