This post from James Morphy is based on a client memorandum by Sullivan & Cromwell LLP.
Two private sector committees, the Asset Managers’ Committee and the Investors’ Committee, established by the President’s Working Group on Financial Markets, recently released their final reports on best practice guidelines for hedge fund managers and investors. Drafts of each report were originally released on April 15, 2008, and were open to public comment for 60 days. The final reports have been modified in response to comments received during the comment period and to address interim developments in global financial markets. This memorandum describes the recommendations in the reports (also described in our April 18, 2008 memorandum to clients) and reflects revisions to the final reports. Both final reports, as well as a letter describing the comments to the Asset Managers’ Committee report, are available here. Sullivan & Cromwell LLP acted as counsel to the Asset Managers’ Committee, along with Schulte Roth & Zabel LLP, in the development and issuance of its report.
BACKGROUND
In February 2007, the President’s Working Group on Financial Markets released a set of principles to guide financial regulators as they addressed the rapid growth of private pools of capital, including hedge funds. These principles concentrated specifically on investor protection and systemic risk concerns. In September 2007, the President’s Working Group tasked two private sector committees with developing best practices for their respective stakeholder groups, based on these initial principles.
The Asset Managers’ Committee (“AMC”), comprised of representatives from ten leading U.S. hedge funds, focused its recommendations on five areas: disclosure, valuation, risk management, trading and business operations, and compliance, conflicts and business practices. The Investors’ Committee (“IC”), comprised of public and private pension funds, endowments, foundations, hedge funds, labor organizations and hedge fund consultants, focused its recommendations on fiduciaries considering hedge fund allocations and individuals executing and administering hedge fund programs.
The reports make recommendations specific to their respective stakeholder groups (i.e., hedge fund managers and investors, respectively), but also encourage use of the reports together as a means to increase the accountability of each stakeholder group to the other. Investors are encouraged to use the AMC report as a basis for due diligence on hedge fund managers, while hedge fund managers are encouraged to use the IC report to guide their interaction with investors.