Jumping into Summer Themes – Non Competes, Shadow Trading, T+1, and Operational Due Diligence

Industry Insights:

Our newsletter, Jack-of-all-Reads, shares the latest and greatest insights in a brief read on a monthly basis. Please let us know of any comments or questions – we welcome and appreciate your continued partnership.

Industry Insights:

1. FTC’s Non-Compete Ruling. On April 23^rd, the Federal Trade Commission (FTC) announced a rule banning non-competes nationwide with an effective date of August 22, 2024. The rule retroactively voids virtually all existing non-compete clauses in employment agreements, with few exceptions. Additionally, it will ban any new non-competes, regardless of the employee’s salary or status, moving forward. While legal challenges regarding this ruling occur between the FTC and various business groups, managers can still take steps to prepare:
   • What should fund managers do? The ruling requires employers to provide “clear and conspicuous notice” to their employees impacted. This notice must be received by the effective date.
     • Work with counsel to figure out which employees are affected, which are exempt, and how they are going to provide the proper notices required by the ruling.
     • Implement alternative protection methods in their employee contracts that do not violate the FTC’s ban.
2. T+1: Understanding the Expected. The SECs acceleration of the settlement cycle from T+2 to T+1 had an effective date  of May 28^th in the US and May 27^th in Canada, Mexico, and Peru. This rule will enforce completion of allocations, affirmations, and confirmations of trades sent or received within one day of the trade. Service providers have been adjusting their processes to be compliant with the new timeline.
   • What is Changing? Most prime brokers are set to begin sending notifications to clients to inform them that the trade will need to be allocated and confirmed within the allotted time frame. The cut off for afterhours trading will be at 8pm EST on the day of the trade. Managers are ensuring there are systems in place to manage this and decrease the likelihood of mishaps.
   • Being Prepared. Managers should be checking in with their OMS providers and fund admins to ensure all systems are in place and sent to their counterparties on time. Some groups are utilizing vendors such as NYFIX or CTM to assist in these processes. If unaware, reach out to your counterparties for list of action items including steps such as:
     • Make arrangements with your counterparties, prime brokers, and custodians to affirm transactions on trade date.
     • Explore electronic industry trade processing solutions.
     • Update FX liquidity, trading, and settlement arrangements.
3. ODD: Ins and Outs of Current Practices. As we enter new stages of technology and investing, ODD teams are navigating new processes. Through our conversations with ODD professionals as well as the SBAI’s 2024 Operational Due Diligence Survey there are various ways in which the function has evolved.
   • New Assets. As investment teams look to diversify, ODD professionals are working on understanding new asset classes. They’re assessing different types of managers and funds for the first time and having to learn unfamiliar parts of the industry.
   • More Technology. Firms without robust dedicated teams in house are more likely to rely on data tools as well as be early adopters of software and technology. As the majority of ODD professionals feel that they do not have enough time to perform tasks, the movement towards AI is expected to have great implications towards these groups.
   • Counterparties. As managers continue to outsource back office functions, it can provide additional hurdles for those performing ODD to get quality information and full transparency.
   • Onsite. According to the SABI survey, the majority of ODD reviews are still done onsite. Most allocators are performing a full ODD review with new manager relationships, however, a small group are taking a risk based approach.
4. Insider Trading: Shadow Trading Ruling. The SEC won their first shadow trading case on April 5^th after an 8 day long trial. Shadow trading is defined as occurring when an investor invests in one company after hearing material nonpublic information about another company which can affect the performance of the related companies stock.
   • Implications for Managers. The ruling confirmed that this type of trading is a considered an insider trading activity encompassed under an expansion of the existing insider trading rules. Given concerns, there is additional focus on having proper compliance controls and technologies in place.
   • How to Stay Protected. Many groups are specifically looking into technology to monitor expert network calls and some are even revamping their compliance policies.

Please reach out to your Jefferies contact for more information on any of the topics above.

Client Corner:

Increased Software Interest: Analytics and Data. We’ve recently observed an uptick in clients asking about various software and technological solutions to supplement key aspects of the reporting and data aggregation process. As the technological revolution continues, many are looking for ways to stay ahead, and do more with less resources. There has been an increase in emerging managers leveraging these tools as well. Our team has been doing research around the key players in the space, feel free to reach out to Ariel Deljanin to discuss further.

Spotlight on Content and Events:

Pitching 101: Reviewing Industry Best Practices.

As managers focus their attention on the capital raising process, they must begin to evaluate how they want to present and pitch themselves as well as their business. This piece describes the common outlines, frequently asked questions from inventors, and the do’s and don’ts of presenting. 

Contact your Jefferies representative to learn more.

From the Desk of BCS: 2024 H1 Insights. Although many themes from the 2023 Trends Pack are continuing to impact decision makers today, the Jefferies Capital Intelligence team is compiling insights around current key trends impacting the hedge fund industry. Through engaging with clients, the ODD community, and attending conferences, this piece has a focus on combining long-term industry data with current insights to identify emerging trends. Some top of mind topics include managing counterparty and LP relationships, the war on talent, regulatory environment, and capital raising. Stay tuned for the H1 2024 iteration of From the Desk of BCS.

Interesting Service Provider Reads: Highlighting Topical Content from Industry Leaders

Akin Gump – SEC Announces First Off-Channel Communications Enforcement Action Against a Standalone Private Fund Manager and “Round 2” of Marketing Rule Enforcement Actions — Focus on Hypothetical Performance

Lowenstein – ‘Shadow Trading’ is Insider Trading: Jury Establishes Liability in Historic Shadow Trading Case

RQC Group – SEC Issues Risk Alert Providing Initial Observations Regarding Marketing Rule Compliance

Seward & Kissel –2023 New Manager Hedge Fund Study

Jefferies Prime Services Contacts:

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