Kelli Moll and Lauren Leyden Discuss Hedge Fund Background Checks

Kelli Moll, a partner in Akin Gump’s investment management practice, and Lauren Leyden, counsel in the labor and employment practice, were quoted extensively in a series of articles by The Hedge Fund Law Report on employee background checks in the hedge fund industry.

In the first article, which covers why background checks should be performed, Leyden noted that  they should be part of an ongoing process for all employees, not just at the hiring stage: Doing it “as people get promoted to higher positions makes sense.”

Moll suggested that fund managers test a job candidate’s understanding of insider trading laws, because “it could be useful to ask someone general questions about whether or not he or she understands the rules of the road.”

Throughout the rest of the article, Moll and Leyden discussed issues that include walling off job candidates who may have inside information, whether to review a prospective employee’s contract or other arrangements with their current or former employers and the compliance and monitoring obligations created by the newly implemented Rule 506(d), which disqualifies certain “bad actors” from Regulation D private offerings.

The second article addresses the mechanics of conducting background checks. Leyden and Moll discussed reference letters, which they say no longer have the value they once had, and tax returns, which they said could be problematic if viewed during the hiring process.

Background checks, Leyden advised, can be done “throughout the term of a person’s employment, not just during the pre-hiring phase,” but privacy laws may apply. She said “you need to give [hedge fund employees] notice of the fact that you are doing it, and you need to get their consent and follow the same process as you followed with the initial hire.”

Moll added that this could come up if an investor wants a background check done on an existing employee who might be managing the fund. It “creates issues of privacy,” she said, “because there is a coercion element in asking the employee to submit background information to some third party.”

In the third article, which compares conducting background checks in-house versus outsourcing them, Moll said “most internal people want to do the reference check because they want to hear firsthand what the reference has to say about the person” and they want to be able to ask follow-up questions.

There are, however, reasons for engaging someone outside an organization. Doing too many of them in-house, Leyden said, can cause firms to become subject to the Fair Credit Reporting Act. When the checks are outsourced, Leyden suggested that hedge fund managers “pick a reputable firm that works with people in the financial industry.”

Moll and Leyden also discussed how fund managers can protect themselves when using background check service providers and how to ensure that all compliance issues are addressed.