Key Legal Considerations in Connection with the Movement of Talent from Proprietary Trading Desks to Start-Up or Existing Hedge Fund Managers: The Bank Perspective (Part Two of Three)

Hedge fund industry talent is increasingly mobile, but the consequences of that mobility impact different institutions differently.  In an article in our issue of December 17, 2010, we discussed the implications of that increasing mobility from the talent perspective.  Specifically, that article, among other things: identified seven discrete reasons for the increasing pace of mobility; defined "talent" (including investment and noninvestment talent); defined "proprietary trading" (to the extent it can be defined); identified the various types of institutions from and to which talent is moving; predicted which entities stand to gain the most from the movement of talent; and offered recent examples of talent moves.  See "Key Legal Considerations in Connection with the Movement of Talent from Proprietary Trading Desks to Start-Up or Existing Hedge Fund Managers: The Talent Perspective (Part One of Three)," Hedge Fund Law Report, Vol. 3, No. 49 (Dec. 17, 2010).  Working from the foundation of that article, this article discusses the implications of increasing talent mobility from the bank perspective.  (The third and final article in this series will discuss the relevant issues from the perspective of the hedge fund management company to which the talent migrates.)  In particular, this article discusses the key legal, business and cultural issues to be considered by investment or commercial banks in connection with departing hedge fund talent (ideally well before that talent departs), including: eight distinct methods that banks use to protect trade secrets, confidential information and other intellectual property; business considerations that may impact decisions regarding enforcement of intellectual property rights; and the strategic interaction among non-competition provisions (non-competes), non-solicitation provisions (non-solicits), accrued but unpaid compensation and ownership of performance data.  Before continuing, three points should be noted.  First, many of the issues identified in this article are, in certain ways, the mirror images of issues identified in the first article in this series.  That is, when discussing the movement of talent from bank proprietary (prop) trading desks to hedge fund managers, if an issue is relevant to the talent, it is, almost by definition, relevant to the bank; and vice versa.  However, the weighting, implications and consequences of issues are different for the different parties, thus justifying separate discussions.  By analogy, both hedge fund managers and investors are concerned with the general issue of hedge fund money raising, but their specific areas of concern differ markedly.  Second, while the discussion in this article focuses on the relevant issues from the bank perspective, the intended audience for this article is not just banks.  Rather, the article is written in the conviction that the other constituencies − including talent and the hedge fund management companies to which talent moves − can benefit from a deeper understanding of the bank perspective.  Third, as indicated in the outline of the article above, the legal rights of the parties when talent leaves a bank for a hedge fund manager are powerfully determined by the business facts and circumstances.  In other words, the relevant analysis is often a hybrid legal-business analysis, rather than a pure legal analysis.  For example, assume that the head of commodities prop desk is leaving to start a commodities hedge fund manager, and his employment agreement contains a narrowly drawn, well-crafted non-compete.  Will the bank be able to enforce the non-compete?  A pure legal analysis may say yes, but if the bank is exiting the commodities trading business altogether, the legal analysis may be moot.  Of course, the facts always determine legal outcomes; the point here is to suggest that the universe of relevant facts may be broad, and actions outside of the talent's control may bear directly on the parties' legal rights.

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