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    Apr. 11, 2014

Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees (Part Two of Three)

This is the second article in our three-part series guiding hedge fund managers through the motley patchwork of authority governing employee privacy rights and employer privacy obligations.  The crux of the challenge is as follows: securities regulation and best practices require hedge fund managers to exercise considerable vigilance over employee communications.  To cite one headline example, a hedge fund management company can be held criminally liable for failing to adequately supervise employees that engaged in insider trading, and the DOJ and SEC understand adequate supervision to include continuous and vigorous monitoring of e-mails, chats and other electronic communications.  On the other hand, non-securities regulation and other authority grant employees certain privacy rights in their electronic and other communications.  How can hedge fund managers comply with applicable securities regulation while also complying with applicable privacy regulation – especially where the two regimes conflict?  Outlining an answer to that question is the goal of this series.  This article discusses the five primary sources of employee privacy rights, then offers three best practices for reconciling these often conflicting sources.  The first article in this series detailed six reasons why hedge fund managers need to monitor electronic communications of employees and highlighted two settings in which procedures other than electronic communication monitoring are most effective.  See “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three),” Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014).  The third article will describe factors bearing on the reasonableness of an employee’s expectation of privacy, the benefits and limits of specific policies regarding electronic communication monitoring and best practices in this area.

Hedge Fund Incentive Compensation Not Subject to Wage Claim under New York Labor Law

A recent decision by a New York court interpreting the State’s Labor Law is of great significance to hedge fund managers doing business in the State.  The ruling is important to hedge fund firms because it recognizes that incentive-based compensation to financial industry employees – which typically depends on the overall success of the business (or at least of a team of employees) and not on the performance of a single employee – is not the sort of compensation that merits protection under the Labor Law.  In a guest article, Sean R. O’Brien and Sara A. Welch, Managing Partner and Counsel, respectively, at O’Brien LLP, discuss the claims, the ruling and the ramifications and lessons of the decision.

Barclays Surveys Options for Hedge Fund Managers in Alternative Mutual Fund Space

Barclays Bank PLC recently released a survey report describing the opportunities and risks faced by hedge fund managers that launch retail alternative funds.  This article provides a detailed summary of the survey.  For another look at the market for alternative mutual funds and other non-traditional products, see “Deutsche Bank Survey Describes the Contours of the Nontraditional Hedge Fund Product Market: Investor Appetite, Performance, Marketing, Fees and More,” Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

Ares Management IPO Raises Permanent Capital and Creates Liquidity for Founders’ Interests

Alternative investment manager Ares Management is in the process of creating and offering a publicly-traded limited partnership to hold its asset management business.  Its recently filed registration statement on form S-1 indicates that the offering will be for $100 million of limited partnership interests in Ares Management, L.P.  Ares is following in the footsteps of other alternative asset managers, such as Oaktree Capital, which have sought to monetize the value of their management businesses to provide capital for expansion, to assist founders and employees in cashing out and to facilitate succession.  See “Mechanics of a Hedge Fund Manager IPO,” Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012).  See also “Succession Planning Series: Selling a Hedge Fund Founder’s Interest to an Outside Investor (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).  Other fund managers have gone to the public markets as an alternate source of capital for private equity-type investments (see “Anatomy of a Blank Check IPO by a Hedge Fund Manager,” Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014)) and to fund “permanent capital” vehicles for specific purposes, such as the acquisition of mortgage-backed securities (see “Prospectus for Suspended Ellington Financial IPO Details Mechanics of a Hedge Fund Permanent Capital Vehicle,” Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009)).

HFLR Interview Assesses the Mechanics, Revenue Model and Purposes of Hedge Connection

Hedge fund managers generally have been deliberate in availing themselves of the expanded advertising rights under the JOBS Act.  Instead of explicit advertising, managers generally have been more receptive to conversations with the press, to communicating their values (rather than their performance numbers) through various channels and to expanded (but nonetheless cautious) use of the Internet.  See, e.g., “Dan Darchuck of Topturn Capital Discusses the Mechanics and Consequences of Video Advertising by Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No 13 (Apr. 4, 2014).  We have not seen, for example, a rush by hedge fund managers onto Facebook, LinkedIn and Twitter, but managers have become incrementally more detailed in discussions on their own websites, and marginally more receptive to creative web-based marketing solutions.  Hedge Connection is an online fund database and “online community” for hedge fund industry participants.  While not launched in direct response to the JOBS Act (it was started in 2005), the JOBS Act has nonetheless altered Hedge Connection’s role in hedge fund industry networking and marketing.  In an effort to understand the interaction between regulatory trends and online tools for connecting investors, managers and other industry participants, the Hedge Fund Law Report recently interviewed Lisa Vioni, CEO of Hedge Connection.  Our interview covered the mechanics, revenue model and purposes of Hedge Connection; access limitations; and Hedge Connection’s role in the hedge fund marketing ecosystem, in particular, its interaction with third-party marketers and in-house marketing departments.  This interview is relevant for hedge fund industry participants asking themselves in the wake of the JOBS Act: Should the Internet play a more fundamental role in my networking, marketing and related efforts and, if so, what should that role look like?

Lowenstein Sandler Adds Private Equity Partner Christopher Henry

Lowenstein Sandler LLP continued the strengthening of its private equity and mergers and acquisitions practices with the addition of Christopher Henry as a partner.  For insight from Lowenstein, see “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).

Jason Allison Joins Walkers in the Cayman Islands

On April 9, 2014, Walkers announced that Jason Allison has joined the firm’s Cayman Islands office as a partner in the Global Investment Funds Group.  See “2013 Walkers Fundamentals Hedge Fund Seminar Highlights Trends in Cayman Fund Structures and Terms, Cayman and Irish Fund Governance Developments, Conflicts of Interest, Use of Advisory Boards and Fund Borrowing,” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).  Specializing in offshore investment funds, Allison has nearly ten years’ experience advising on Cayman Islands law.  For recent Cayman developments, see “Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors,” Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).

SEC Veteran Bruce Karpati to Join KKR as Chief Compliance Officer

Former SEC official Bruce Karpati will be joining private equity firm Kohlberg Kravis Roberts & Co. as global chief compliance officer later this month, according to recent reports in the Wall Street Journal and the New York Times.  For insight from Karpati, see “SEC Asset Management Unit Chief Bruce Karpati Addresses Private Equity Enforcement Trends, Initiatives and Priorities,” Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013); “Sixth Annual Hedge Fund General Counsel Summit Highlights SEC Enforcement Priorities, Side Letters, Investment Allocations, Expense Allocations, Trade Errors, Record Retention, Fund Marketing, Secondaries, JOBS Act and STOCK Act (Part Two of Two),” Hedge Fund Law Report, Vol. 5, No. 40 (Oct. 18, 2012); and “Enforcement Session at SEC’s Compliance Outreach Program National Seminar Highlights Regulatory Focus on Valuation, Conflicts of Interest and Compliance Shortcomings at Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).

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