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    Apr. 30, 2015

Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era

Currently, U.S. and other non-European managers wishing to market alternative investment funds (AIFs) in Europe may only do so by way of any available national private placement regime or otherwise by “reverse enquiry” at the initiative of the relevant investor (subject to local rules).  By the end of July 2015, the European Securities and Markets Authority has to provide advice to the European Commission as to whether the “marketing passport” under the Alternative Investment Fund Managers Directive, currently available only to European Economic Area (EEA) alternative investment fund managers of EEA AIFs, should be extended.  In a guest article, Simon Whiteside, a partner at Simmons & Simmons LLP, examines what would be the consequences for U.S. and other non-European fund managers were the passport to become available to them, and also looks at what other options they would have for marketing AIFs throughout the EEA.  For additional insight from Whiteside, see “Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD,” Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015); “Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 Annex IV Filings (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015); and Part Two of Two, Vol. 8, No. 8 (Feb. 26, 2015).  For insight from Simmons & Simmons more generally, see “Structures and Characteristics of Alternative Investment Funds,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).

Legal Risks for Hedge Fund Managers of Using Target Returns (Part Two of Two)

In addition to the potentially negative consequences – including the loss of investor credibility, potential investor dissatisfaction, client redemptions and reputational harm – that can result from it, the use of target returns or performance targets by hedge fund managers in offering documents or marketing materials also gives rise to legal and regulatory risks.  See “Aite Group Report Identifies the Building Blocks of Institutional Credibility for Hedge Fund Managers: Operational Efficiency, Robust Risk Management, Integrated Technology and More,” Hedge Fund Law Report, Vol. 6, No. 36 (Sep. 19, 2013).  Hedge fund managers need to consider these potential legal and regulatory risks, along with the potential benefits and other consequences, when deciding to use target returns.  This article, the second in a two-part series, analyzes the legal risks associated with target returns and weighs the benefits of using target returns against those risks.  The first article discussed common practices for the use of target returns by hedge funds; analyzed reasons for using target returns; and highlighted some potential drawbacks of using target returns.

FRA Liquid Alts 2015 Conference Highlights the Keys to Successfully Launching an Alternative Mutual Fund (Part One of Three)

The liquid alternatives (or alternative mutual fund) space has expanded significantly in recent years.  In 2014, Barclays estimated that alternative mutual funds have grown at an annual compound rate of 20% since 2008.  See “Barclays Surveys Options for Hedge Fund Managers in Alternative Mutual Fund Space,” Hedge Fund Law Report, Vol. 7, No. 14 (Apr. 11, 2014).  Offerings of alternative mutual funds by hedge fund managers have increased by 27% since 2013.  As more hedge fund managers look to launch alternative mutual funds, they need to understand how to successfully launch a fund under the Investment Company Act of 1940 (’40 Act) as well as the common structures of alternative mutual funds.  Additionally, regulators are interested in ensuring alternative mutual funds meet regulatory requirements and managers of those funds are operating within the confines of applicable regulations.  Finally, investors need to know what to look for in a manager when conducting due diligence. These issues were among those discussed at the recent Liquid Alts 2015 conference hosted by Financial Research Associates, LLC.  This article, the first in a three-part series, focuses on the panel discussion of the keys to successfully launching and operating an alternative mutual fund.  The second article will discuss ’40 Act fund structures and regulatory issues with liquid alternative funds.  The third article will review issues investors should consider while conducting due diligence on an alternative mutual fund.  For more on alternative mutual funds, see “FRA Compliance Master Class Highlights Operational and Regulatory Issues for Hedge Fund Managers Considering Launching Alternative Mutual Funds,” Hedge Fund Law Report, Vol. 8, No. 13 (Apr. 2, 2015).

The Newman/Chiasson Decision Continues to Have Implications for Insider Trading Compliance

Whether a fund can trade on material nonpublic information is one of the more challenging calls faced by hedge fund compliance personnel.  Last December, a panel of the U.S. Court of Appeals for the Second Circuit dismissed the insider trading case against Todd Newman and Anthony Chiasson, hedge fund portfolio managers and remote tippees who had traded on inside information about Dell and Nvidia.  That Court recently denied the government’s request to reconsider the decision.  Thus, absent a successful appeal to the Supreme Court, to win a conviction against a remote tippee in tipper-tippee insider trading cases in the Second Circuit, the government must prove that the tippee knew that the insider had received a benefit from the improper tip and that the benefit was “of some consequence.”  See “Second Circuit Overturns Newman and Chiasson Convictions, Raising Government’s Burden of Proof in Tippee Liability Insider Trading Cases,” Hedge Fund Law Report, Vol. 7, No. 47 (Dec. 18, 2014).  A panel of experts from the law firm Richards Kibbe & Orbe (RK&O) recently discussed the implications of that decision for compliance with insider trading rules and explored how a subsequent district court decision in a civil insider trading action applied the principles enunciated in U.S. v. Newman and Chiasson.  The program was moderated by Lee S. Richards, III, RK&O partner and former Assistant U.S. Attorney in the Southern District of New York.  The other panelists were RK&O partners Scott C. Budlong; Michael D. Mann, a former Director of International Affairs and Associate Director in the SEC’s Division of Enforcement; and David B. Massey, a former Assistant U.S. Attorney in the Southern District of New York.  This article summarizes the key takeaways from the program.

K&L Gates-IAA Panel Provides Comprehensive Overview of Cybersecurity Risk Mitigation Frameworks and Techniques for Investment Managers (Part Two of Two)

A strong cybersecurity program is an investment manager’s primary defense against cyber breaches and their resultant costs.  As the frequency of large cyber breaches and the costs of responding to them increase, mitigating cybersecurity risks becomes of paramount importance.  A recent program sponsored by K&L Gates and the Investment Adviser Association (IAA) surveyed the current cyber threat environment and SEC cybersecurity initiatives; summarized applicable laws and regulations that bear on cybersecurity; considered the growing cybersecurity risks faced by investment managers; and offered specific strategies for mitigating those risks.  The program was moderated by Mark C. Amorosi, a partner at K&L Gates, and featured a panel consisting of Jeffrey Bedser, CEO of iThreat Cyber Group; Laura L. Grossman, Assistant General Counsel of the IAA; Andras P. Teleki, a partner at K&L Gates; and E.J. Yerzak, Vice President at Ascendant Compliance Management.  This article, the second in a two-part series, discusses the panel’s views on mitigating cybersecurity risks.  The first article summarized the key points raised by the panel relating to the costs of cyber breaches; applicable laws and regulations; and cyber threats.  For more on cybersecurity, see “Benchmarking and Best Practices for Hedge Fund Manager Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015).

Influential Proxy Adviser Expresses Cautious Support for Activist Director Compensation and Explores Potential Issues with Similar Arrangements

Activist hedge fund managers frequently nominate directors to serve on the boards of target companies and seek to compensate those director nominees in order to attract top talent and ensure that those nominees perform.  However, special compensation arrangements have led to growing debate, with supporters asserting that these arrangements align the interests of activist nominees and shareholders and opponents arguing that they instead engender short-term thinking and result in dysfunctional boards.  See “Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target?  An Interview with Marc Weingarten, Co-Head of the Global Shareholder Activism Practice at Schulte Roth & Zabel,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).  In a recent report, an influential proxy adviser expresses its support “with caution” for a compensation arrangement involving directors that an activist investor placed on the board of a target company.  After discussing the background and details of the director compensation arrangement, the report analyzes the merits of the arrangement in light of certain potential objections and then highlights several additional factors shareholders may wish to consider when evaluating future compensation arrangements.  This article examines the key points in the report with respect to the activist-nominated directors and their compensation structure.

Squire Patton Boggs Boosts Family Office and Tax Practice with Senior Hire in Hong Kong

On April 27, 2015, Squire Patton Boggs announced the appointment of senior tax fund and trust lawyer Patricia Woo as Of Counsel in its Hong Kong office.  Woo was previously at King & Wood Mallesons.  She is experienced in helping ultra-high-net-worth families set up and operate family offices, and in fund formation, succession and tax planning matters.  See “Benefits and Burdens for Hedge Fund Managers in Establishing or Converting to a Family Office,” Hedge Fund Law Report, Vol. 7, No. 22 (Jun. 6, 2014).  Her expertise includes the establishment of internal hedge funds and private equity funds and handling complicated restructuring of existing trusts and funds.  See “Why and How Do Family Offices and Foundations Invest in Hedge Funds?,” Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).

Louise Freestone Joins Travers Thorp Alberga in Cayman Islands

Travers Thorp Alberga recently announced the addition of former Herbert Smith partner and FourWinds Capital Management general counsel Louise Freestone to its corporate and funds team.  Freestone was a partner at legacy Herbert Smith until 2008, when she joined investment management company FourWinds as general counsel.  Her expertise as general counsel includes structuring, launching and managing private equity and hedge funds and other pooled investment vehicles in the natural resources and commodities sector.  For more about investments in the natural resources sector, see “Tax and Structuring Considerations for Funds Organized to Invest in Master Limited Partnerships,” Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  For more about commodities, see “Rules Against ‘Spoofing’ and Other Disruptive Trading in Futures, Swaps and Options,” Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); and “National Futures Association Director of Compliance, Patricia L. Cushing, Discusses the Chief Regulatory Obstacles Faced by Hedge Fund Managers When Marketing Commodity Funds,” Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).

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