On January 29, 2009, Senators Carl Levin (D-Michigan) and Charles Grassley (R-Iowa) introduced a bill that would, if enacted, require certain hedge and other private funds to register with the SEC, file an annual disclosure document, maintain books and records in accordance with SEC rules and co-operate with SEC information or examination requests.  The Hedge Fund Transparency Act (HFTA), as the bill is titled, would apply to funds currently excluded from the definition of “investment company” under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, and that have at least $50 million in assets under management.  That is, it would apply to many hedge funds, and also to many private equity, venture capital and other private funds (and thus the words “hedge fund” in the title of the act suggest that the bill is more limited than it in fact is).  In exchange for registering and performing the other required actions, covered funds would remain exempt from regulation as investment companies.  In addition, the HFTA would require hedge funds to establish anti-money laundering programs and report suspicious transactions.  We provide a comprehensive overview of the mechanics of the bill, discuss whether it includes or presages a hedge fund adviser registration requirement and report on responses to the bill from hedge fund industry participants and Washington insiders. Read full article …

On January 16, 2009, two private sector committees, the Asset Managers’ Committee and Investors’ Committee of the President’s Working Group on Financial Markets released their final best practices reports.  Drafts of each report were originally released on April 15, 2008 (as we reported in our April 29, 2008 issue) and were open to public comment for 60 days.  The President’s Working Group modified the reports in response to comments received during the comment period and to address interim developments in global financial markets.  Overall, the reports provide a comprehensive set of best practices for hedge fund managers and investors that are designed to reduce systemic risk and improve investor protection.  We provide a detailed discussion of the material provisions of both reports. Read full article …

Hedge funds being structured and launched today are incorporating lessons learned during the market turbulence of the last year, and especially of the last two quarters.  In particular, managers are structuring new funds so that the duration and liquidity of the fund matches as closely as possible the duration and liquidity of the assets in the fund’s portfolio.  For example, hedge funds with a mandate to invest in less liquid assets – such as distressed debt, shares of private companies, real estate and certain other hard assets – are incorporating fund terms more traditionally associated with private equity funds.  One goal of these so-called “hybrid” funds is to avoid a disorderly liquidation of assets at inopportune times.  Another goal is alignment of expectations – to let investors assess the fund’s liquidity profile at the time of investment rather than after an investment is made.  Yet another goal is to do directly – retain assets and avoid sales at distressed prices – what various managers have been forced to do indirectly, via side pockets, gates, redemption suspensions and similar tools.  We explore the rationale for employing a hybrid structure, the range of hybrid terms and structures (including components derived from traditional private equity and hedge fund models) and the strategies for which hybrids may be particularly well suited. Read full article …

As the ground continues to swell, especially in Washington, around the ideas of transparency and accountability in hedge fund practices, the Asset Managers’ Committee of the President’s Working Group on Financial Markets released on January 16, 2009 its final report on best practices for the hedge fund industry.  To complement the detailed discussion of the Asset Managers’ Committee Report included in this issue of the Hedge Fund Law Report (see above), we delve deeper into three areas of the Asset Managers’ Committee Report, in the conviction that they can have a fundamental effect on hedge funds and their managers if the best practices outlined in the Report become law or rule, or acquire, de facto, the force of law or rule: valuation, side letters and private placement memorandum updates. Read full article …

On January 5, 2009, the United States District Court for the Southern District of New York ruled that investors seeking to recover over $550 million in losses stemming from the liquidation of British Virgin Islands-based hedge funds Lancer Offshore, Inc. and OmniFund Ltd. could proceed with certain claims against the funds’ administrators and affiliated parties.  The ruling allows the plaintiffs to continue to press their claim that Citco Group, parent firm of the funds’ administrator, was a “culpable participant,” and hence liable, in the funds’ collapse.  In this follow-up to an article published in our December 16, 2008 issue, we detail the factual background of the case and the court’s holding and legal analysis. Read full article …

On January 13, 2009, ACF Master Trust, an employee benefit plan for ACF Industries LLC that is affiliated with Carl Icahn, filed a lawsuit against Steel Partners II (Offshore) Ltd., a Cayman Islands based hedge fund and others, alleging fraud and breach of contract based on a reorganization of one of the fund’s investments allegedly undertaken in response to the fund’s recent losses and the ensuing wave of redemptions.  Our discussion includes details of the specific PPM provisions at issue and the mechanics of the reorganization, as well as a summary of the allegations and defenses based on a review of the pleadings. Read full article …