The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Privacy

  • From Vol. 11 No.19 (May 10, 2018)

    What Are the GDPR’s Implications for Alternative Investment Managers? (Part Two of Two)

    Now that the effective date for the recast Markets in Financial Instruments Directive has passed, investment managers across the E.U. and beyond have turned their attention to implementing policies and procedures to enable them to comply with the E.U.’s General Data Protection Regulation (GDPR), which is scheduled to become effective on May 25, 2018. Although the GDPR will primarily affect investment managers and private funds domiciled in the E.U., it will also have broad extraterritorial effect, as investment advisers and funds domiciled outside of the E.U. will likely periodically process personal data of natural persons, especially where the investment manager or fund accepts investments from E.U. investors. In this two-part guest series, Oliver Robinson, associate director of the Alternative Investment Management Association, breaks down the key provisions of the GDPR and how they may affect advisers and private funds. This second article discusses the rights of data subjects, the minimum requirements applicable to a processor, the role of a “Data Protection Officer,” the cybersecurity measures required by the GDPR, the obligation to report breaches of the GDPR and parallel legislation introduced in the U.K. in light of Brexit. The first article reviewed the driving forces behind the enactment of the GDPR, its territorial scope, the data-protection principles that apply when processing personal data, the legal bases pursuant to which in-scope firms may process personal data and the rules surrounding cross-border transfers of personal data. For more on the GDPR, see “The Challenges and Benefits of Multi-Factor Authentication in the Financial Sector (Part Two of Two)” (Nov. 9, 2017).

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  • From Vol. 11 No.18 (May 3, 2018)

    Ten Risk Areas for Private Funds in 2018

    A recent program presented by Proskauer Rose examined the key regulatory and litigation risks currently facing private fund managers. Unsurprisingly, near the top of the list were prominent issues on the regulatory radar, including cryptocurrency and blockchain; data privacy; and performance claims. A common theme among many of the risks covered in the presentation is that the law has not yet sufficiently developed to address current business practices. The program featured Proskauer partners Timothy W. Mungovan and Joshua M. Newville; counsel Anthony M. Drenzek; and associate Michael R. Hackett. This article explores the speakers’ insights. For coverage of the 2017 Proskauer presentation, see “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017).

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  • From Vol. 11 No.17 (Apr. 26, 2018)

    What Are the GDPR’s Implications for Alternative Investment Managers? (Part One of Two)

    The E.U.’s General Data Protection Regulation (GDPR) represents the most significant development in E.U. privacy law in two decades and will capture the “processing” of “personal data” by any manager or fund domiciled in the E.U. The GDPR will also capture managers and funds located outside the E.U. that process the data of individuals located in the E.U. in connection with the offering of services to those individuals in the E.U. Because all investment management firms and funds will receive and process personal data in some way, shape or form in relation to their day-to-day business activities, it is vital for fund managers to be aware of the GDPR and its implications. In this two-part guest series, Oliver Robinson, associate director of the Alternative Investment Management Association, breaks down the key provisions of the GDPR and how they may affect advisers and private funds. This first article reviews the driving forces behind the enactment of the GDPR, the territorial scope of the GDPR, the data-protection principles that apply when processing personal data, the legal bases pursuant to which in-scope firms may process personal data and the rules surrounding cross-border transfers of personal data. The second article will discuss the rights of data subjects, minimum requirements applicable to processors, the role of a “Data Protection Officer,” cybersecurity measures required by the GDPR, the obligation to report breaches of the GDPR and parallel legislation introduced in the U.K. in light of Brexit. For more on the GDPR, see “A Fund Manager’s Roadmap to Big Data: Privacy Concerns, Third Parties and Drones (Part Three of Three)” (Jan. 25, 2018).

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  • From Vol. 11 No.16 (Apr. 19, 2018)

    Compliance Corner Q2-2018: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

    The SEC continues to increase its touchpoints with registered investment advisers. In its most recently published Agency Financial Report, the Commission reported that it examined 15 percent of SEC-registered investment advisers during its 2017 fiscal year, up from 11 percent in 2016 and 8 percent five years ago. Given the SEC’s heightened examination coverage, private fund investment advisers should continue to ensure that they are making timely and accurate filings and meeting required compliance deadlines and obligations in order to reduce potential regulatory scrutiny from SEC staff during examinations. This fourth installment of The Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anthony Frattone, director and consultant, respectively, at ACA Compliance Group, highlights regulatory filings and code of ethics reports that must be completed during the second quarter of 2018. In addition, this article discusses compliance deadlines relating to Rule 22e‑4 under the Investment Company Act of 1940 (the Liquidity Risk Management Program Rule) and the E.U. General Data Protection Regulation (GDPR). For more on GDPR, see “A Fund Manager’s Roadmap to Big Data: Privacy Concerns, Third Parties and Drones (Part Three of Three)” (Jan. 25, 2018).

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  • From Vol. 11 No.13 (Mar. 29, 2018)

    What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed?

    Mobile devices, such as smartphones and tablet computers, have significantly enhanced the abilities of hedge fund managers and their personnel to conduct business more effectively and efficiently by, among other things, facilitating performance of job functions outside of the office. These productivity gains, however, come at a cost. The ability to remotely access firm networks and information via mobile devices magnifies the risk of losing control over access to firm information and systems. This loss of control can, in turn, create additional perils, most notably, security concerns for hedge fund managers who closely guard any informational advantage they have over competitors. Additionally, this loss of control may heighten risks that a firm’s network is compromised, which can cause significant damage to a firm’s operations. Therefore, it is imperative that hedge fund managers keep up with the ever-growing risks that arise from the rapidly evolving mobile device technology landscape and adopt policies and solutions designed to minimize the loss of control over access to firm information and systems. This three-part series addresses the concerns raised by mobile devices and outlines policies and procedures, as well as technology solutions, that can help hedge fund managers mitigate the risks posed by the use of mobile devices. The first article provides an overview of the use of mobile devices, including how hedge fund managers have historically addressed that use, and outlines the risks raised by mobile devices, including security risks; risks related to unauthorized trading; and concerns relating to retention and archiving of books and records. The second and third articles discuss principles and detail best practices for establishing mobile device policies and procedures, as well as specific mobile device solutions and technologies designed to address the risks catalogued in the first article. For more on how fund managers can protect against breaches, see our two-part series “The Challenges and Benefits of Multi-Factor Authentication in the Financial Sector”: Part One (Nov. 2, 2017); and Part Two (Nov. 9, 2017).

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  • From Vol. 11 No.10 (Mar. 8, 2018)

    Beware of False Friends: A Hedge Fund Manager’s Guide to Social Engineering Fraud

    Cybercriminals are increasingly relying on social engineering to attack corporate systems. Hedge funds are particularly vulnerable, given that they typically lack extensive in-house cybersecurity expertise; deal with large sums of capital; and have relationships with powerful clients and individuals. Social engineering fraud poses a number of risks to fund managers, including money transfer fraud; theft of passwords or trade secrets; customer-data compromise; revelation of trading positions and plans; and attacks on principals. Fortunately, managers can mitigate these risks by educating and training employees; instituting multi-factor authentication; adopting verification procedures; limiting user access; and monitoring cybersecurity regulations. In addition, managers are increasingly able to rely on insurance to cover social engineering fraud losses. In a guest article, Ron Borys, senior managing director in Crystal & Company’s financial institutions group, and Jordan Arnold, executive managing director in K2 Intelligence’s New York and Los Angeles offices and head of the firm’s private client services and strategic risk and security practices, examine the risks of social engineering fraud, how fund managers can prevent it and how insurance policies can be used to protect against related losses. See “New CFTC Chair Outlines Enforcement Priorities and Approaches to FinTech, Cybersecurity and Swaps Reform” (Nov. 9, 2017); and “SEC Tackles Internal Cybersecurity Issues While Sharpening Cybersecurity Enforcement Focus” (Oct. 5, 2017). For additional commentary from Borys, see “How E&O and D&O Liability Insurance Can Help Hedge Fund Managers Mitigate the Consequences of Regulatory Enforcement Actions” (Jun. 2, 2016).

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  • From Vol. 11 No.4 (Jan. 25, 2018)

    A Fund Manager’s Roadmap to Big Data: Privacy Concerns, Third Parties and Drones (Part Three of Three)

    A fund manager’s use of new technologies and processes to streamline its business and generate improved performance comes with significant risk, which is pronounced when using big data, as few best practices currently exist within the industry. One of the most significant concerns about big data involves the acquisition or use of personally identifiable information (PII). Although PII enjoys broad protection under U.S. law, many state laws impose even more stringent restrictions on the use of personal data, and the E.U. General Data Protection Regulation provides a comprehensive and onerous framework for data tied to E.U. citizens. Managers must also understand how to deal with third-party data vendors, including how to conduct due diligence on and negotiate contractual provisions with those service providers. Finally, as growing numbers of drones are used to capture images, managers must recognize and comply with a web of federal regulations, as well as state laws, surrounding this use. This third article in our three-part series discusses the risks associated with data privacy, the acquisition of data from third parties and the use of drones, as well as recommended methods for mitigating those risks. The first article explored the big-data landscape, along with how fund managers can acquire and use big data in their businesses. The second article analyzed issues and best practices surrounding the acquisition of material nonpublic information; web scraping; and the quality and testability of data. For more on the adoption by fund managers of new technology, see our three-part series on blockchain: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017).

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  • From Vol. 10 No.48 (Dec. 7, 2017)

    Are Hedge Fund Managers Heeding the Message? Information Request List Provides Insight Into SEC Expectations on the Use of Electronic Communications by Advisers and Employees (Part Two of Three)

    Investment advisers frequently use SEC document request lists – either released by the SEC’s Office of Compliance Inspections and Examinations (OCIE) or disseminated by examinees or third parties – to test their ability to efficiently produce documents that may be requested during an actual SEC examination. A document entitled “Information Request List” (Request List), rumored as being used by the SEC to request records in connection with adviser examinations focused on the use of electronic communications by advisers and their employees, has made its way into the public domain. Despite a lack of official confirmation, industry experts that routinely assist clients with SEC examinations agree that the Request List’s substance and form closely resemble those of information requests routinely sent by OCIE. This second article in our three-part series explores the various components of the Request List and analyzes the implications and consequences of certain requests therein. The first article provided background on sweep exams, with particular focus on the putative electronic messaging examination and the potential drivers of SEC focus in this area. The third article will examine best practices for advisers when designing their electronic communications policies, taking into account the items requested in the Request List, as well as how advisers can proactively prepare for future scrutiny in this area. For more on preparing for SEC examinations, see “Mock Audits Are Essential Preparatory Tools for Fund Principals in the Current Regulatory Environment” (Sep. 28, 2017); and “What Hedge Fund Managers Can Expect From SEC Remote Examinations (Part One of Two)” (May 2, 2016).

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  • From Vol. 10 No.40 (Oct. 12, 2017)

    Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Adopting Compliance Policies and Procedures (Part Two of Three)

    Designing compliance policies and procedures that are appropriately tailored to a private fund adviser’s risks is a critical component of a compliance program for an SEC registered investment adviser (RIA). Exempt reporting advisers (ERAs) transitioning to RIA status that have not already devoted the time and resources to developing these policies and procedures will likely find this to be the most time-consuming aspect of the registration process. To assist ERAs with the creation and implementation of appropriate compliance policies and procedures, this second article in our three-part series outlines key policies and procedures that ERAs should consider when drafting their compliance manuals. The first article discussed the circumstances under which an ERA would be required to switch to SEC registration, along with considerations for ERAs building out their compliance programs. The third article will review the regulatory filings required to be filed by RIAs, amendments that ERAs may need to make to their fund offering documents in anticipation of their change in registration status, as well as guidance as to what newly registered advisers should expect from the SEC examination process. See “Hedge Fund Manager Deerfield Fined $4.7 Million for Failing to Adopt Insider Trading Compliance Policies Tailored to the Firm’s Specific Risks” (Sep. 21, 2017).

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  • From Vol. 10 No.37 (Sep. 21, 2017)

    Key Considerations for Fund Managers When Selecting and Negotiating With a Cloud Service Provider

    Operating an asset management business remains a resource-intensive endeavor, particularly as fund fees have come under pressure from investors. See “Investor Pressure Drives New Performance Compensation Models and Increased Disclosure Obligations for Managers” (Jun. 29, 2017). Some managers have sought to reduce their operational costs by moving at least some of their technological infrastructure – e.g., data storage, trade execution, accounting systems, client-relationship-management systems and disaster recovery services – to the cloud. While hosting these services in the cloud offers cost-effective and convenient technology solutions, fund managers must be cognizant of the potential cybersecurity risks associated with relying upon a cloud solution, including the legal risks that may be lurking in the standard service level agreements with cloud service providers. Considerations of potential risks and liabilities associated with engaging a cloud service provider, along with tips on how to conduct due diligence on a cloud vendor, were addressed at PLI’s Eighteenth Annual Institute on Privacy and Data Security Law. The panel featured Matthew Kelly, vice president and senior corporate counsel at cloud computing company ServiceNow, Inc. This article offers Kelly’s insights as to what an investment manager should and should not expect from cloud service providers, along with key provisions to understand in their service level agreements. For background on how private fund managers are using cloud computing, see “Can Emerging Hedge Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2016); and “Greenwich Associates Report Argues That Hedge Fund Managers Can Use the Cloud to Obtain Greater Computing Power at Lower Cost With Acceptable Risk” (Jun. 6, 2014).

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  • From Vol. 10 No.28 (Jul. 13, 2017)

    Tips and Warnings for Navigating the Big Data Minefield

    Data-gathering and analytics have become valuable tools for private fund managers when making their investment decisions. As technology outpaces the law in this area, however, managers must use caution when acquiring and using data. See “Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping” (Jun. 15, 2017). A recent presentation featuring Proskauer partners Robert G. Leonard, Jeffrey D. Neuburger, Joshua M. Newville and Jonathan E. Richman discussed the evolving methods of collecting data, the risks involved and the ways managers can use big data without running afoul of applicable law. This article summarizes the panelists’ insights. For more from Leonard, see “How Fund Managers Can Prevent or Remedy Improper Fee and Expense Allocations (Part Three of Three)” (Sep. 15, 2016); and “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview With Proskauer Partner Robert Leonard” (Mar. 5, 2015).

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  • From Vol. 10 No.24 (Jun. 15, 2017)

    Best Practices for Private Fund Advisers to Manage the Risks of Big Data and Web Scraping

    On April 13, 2017, craigslist obtained a judgment against RadPad, a third party that collected data through automated means from its site. The $60.5 million judgment was based on various claims relating to RadPad’s use of sophisticated techniques to evade detection and harvest content from craigslist’s site, as well as distribution of unsolicited commercial emails to craigslist users to market RadPad’s own apartment rental listing service. While it is doubtful that craigslist will ever collect this sizeable judgment, the case highlights some of the issues faced by persons, such as hedge fund managers, who collect – or engage others to collect – data through automated means for commercial purposes. In a guest article, Proskauer partners Robert G. Leonard, Jeffrey D. Neuburger and Joshua M. Newville provide an overview of big data and web scraping, outline potential sources of liability to hedge fund managers that collect big data and describe best practices for navigating several areas of potential liability. For additional insight from Newville and other Proskauer partners, see “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017). For further commentary from Leonard, see our two-part series on The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: “Managed Account Disclosure, Umbrella Registration and Outsourced CCOs” (Nov. 3, 2016); and “Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management” (Nov. 17, 2016).

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  • From Vol. 9 No.47 (Dec. 1, 2016)

    Failure to Safeguard Customer Data, Preserve Records and Properly Supervise May Expose Broker-Dealers to FINRA Enforcement Action

    FINRA recently entered into a Letter of Acceptance, Waiver and Consent with a general securities business that has in excess of 1,100 registered representatives in more than 500 branch locations. The action alleged that the firm failed to safeguard customer data, preserve customer records and implement an appropriate supervisory system to prevent these violations. The affected firm has agreed to a censure and to pay a substantial fine. Private fund managers with affiliated broker-dealers should pay particular attention to this ruling, although FINRA’s cybersecurity preparedness expectations outlined in the action should be of interest to all private fund managers. This article outlines the alleged misconduct, the terms of the settlement and the remedial measures the broker is implementing. For coverage of other FINRA enforcement proceedings, see “FINRA Fines Terra Nova $400,000 for Making Over $1 Million in Improper Soft Dollar Payments to Hedge Fund Managers” (Dec. 10, 2009); and “In FINRA’s First Action Involving Credit Default Swaps, FINRA Fines ICAP $2.8 Million to Settle Price Fixing Claims” (Jul. 16, 2009).

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  • From Vol. 9 No.37 (Sep. 22, 2016)

    Seward & Kissel Private Funds Forum Explores How Managers Can Mitigate Improper Dissemination of Sensitive Information (Part One of Two)

    In the current heightened regulatory environment, the SEC has focused on safeguards that managers employ to prevent the dissemination of sensitive information and to ensure it is not used for improper trading. This was among the critical issues addressed by one of the panels at the second annual Private Funds Forum produced by Seward & Kissel and Bloomberg BNA, held on September 15, 2016. Moderated by Seward & Kissel partner Patricia Poglinco, the panel included Rita Glavin and Joseph Morrissey, partners at Seward & Kissel; Laura Roche, chief operating officer and chief financial officer at Roystone Capital Management; and Scott Sherman, general counsel at Tiger Management. This article, the first in a two-part series, reviews the panel’s discussion about risks associated with the inflow and outflow of material nonpublic information, as well as steps that fund managers can take to prevent its improper use. The second article will discuss the types of conflicts of interest targeted by the SEC, the current progress of the SEC’s whistleblower program and the difficulty of prosecuting insider trading. For coverage of the 2015 Seward & Kissel Private Funds Forum, see “Trends in Hedge Fund Seeding Arrangements and Fee Structures” (Jul. 23, 2015); and “Key Trends in Fund Structures” (Jul. 30, 2015). For additional commentary from Glavin, see “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers” (Jun. 13, 2014). For more from Sherman, see “RCA Asset Manager Panel Offers Insights on Hedge Fund Due Diligence” (Apr. 2, 2015).

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  • From Vol. 9 No.25 (Jun. 23, 2016)

    SEC Enforcement Action Illustrates Focus on Investment Adviser Obligation to Secure Client Information 

    Morgan Stanley Smith Barney may have escaped charges under Section 5 of the Federal Trade Commission Act, but it has agreed to pay $1 million to settle charges that it violated the Safeguards Rule. The settlement stems from allegations that an employee transferred data containing personally identifiable information of 730,000 customers to his personal server. That data later appeared on multiple internet sites. There was no harm alleged, and this settlement, coupled with the R.T. Jones and Craig Scott Capital actions, may show that the SEC is picking up enforcement of the Safeguards Rule. This article, with insight from Debevoise partner Jeremy Feigelson, analyzes the settlement and its implications for hedge fund managers and other investment advisers. See also “Practical Steps That Commodity-Focused Hedge Fund Managers Can Take to Combat Cybersecurity Threats” (Mar. 10, 2016).

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  • From Vol. 7 No.45 (Dec. 4, 2014)

    Weil Attorneys Discuss U.S. and E.U. Cybersecurity Risks and Compliance Issues Relevant to Private Fund Managers

    The recent, widely-publicized cybersecurity breaches at major public companies such as Target, Home Depot and JPMorgan Chase have placed cybersecurity issues on the radar of both regulators and private fund managers.  Cyber breaches can give rise to regulatory, reputational and enterprise risk.  In that regard, a recent panel discussion considered the current regulatory climate on cybersecurity in both the U.S. and the E.U., and the key cybersecurity risks and compliance issues facing private fund managers.  Speakers at the discussion included Weil, Gotshal & Manges LLP partners Barry Fishley and Kyle C. Krpata, and counsel Paul A. Ferrillo.  For a comprehensive look at cybersecurity for private fund managers, see “Cybersecurity for Hedge Fund Managers: Compliance Best Practices, SEC Examinations and Cyber-Liability Insurance,” The Hedge Fund Law Report, Vol. 7, No. 25 (Jun. 27, 2014).  For a discussion of specific cybersecurity threats, see “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014).

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  • From Vol. 7 No.20 (May 23, 2014)

    Six Privacy-Related Topics to Be Covered by a Hedge Fund Manager’s Compliance Policies and Procedures (Part Three of Three)

    This is the final article in our three-part series on employee privacy issues relevant to hedge fund managers.  The first article in this series made the case, using examples, for why hedge fund managers should care about employee privacy.  See “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014).  The second article in this series identified the five primary sources of employee privacy rights.  See “Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees (Part Two of Three),” The Hedge Fund Law Report, Vol. 7, No. 14 (Apr. 11, 2014).  This article discusses six topics that hedge fund managers should cover in their compliance policies and procedures under the general rubric of employee privacy.  The overarching aim of this series is to assist managers in calibrating and communicating their employees’ expectations of privacy – particularly in connection with electronic communications – in a manner consistent with best practices, relevant law and expectations of SEC examiners.

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  • From Vol. 7 No.14 (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),” The 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.

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  • From Vol. 7 No.13 (Apr. 4, 2014)

    How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three)

    Information is the raw material out of which hedge fund managers fashion their finished products – compelling investment ideas and, one hopes, absolute returns.  As such, managers and their personnel are continuously engaged in collecting, refining and transmitting information, that is, communicating.  Today, the vast majority of such communications occur electronically – via e-mail, chat, text, social media and similar channels.  From an investment perspective, this increases opportunities but at the same time competition.  From a compliance perspective, the proliferation of electronic communications has dramatically expanded the range of opportunities for legal and regulatory violations.  Hedge fund managers are not unique among businesses in contending with the compliance challenges raised by electronic communications, but many of the specific compliance challenges faced by hedge fund managers are industry-specific.  Accordingly, The Hedge Fund Law Report is undertaking a three-part series intended to identify the specific compliance challenges for hedge fund managers raised by electronic communications and to outline best practices for surmounting those challenges.  This article – the first in the series – catalogues six reasons why hedge fund managers need to monitor electronic communications of employees and highlights two settings in which procedures other than electronic communication monitoring are most effective.  Subsequent articles in the series will discuss the sources of employees’ privacy rights, 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.  See also “Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 12, 2010).

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  • From Vol. 7 No.12 (Mar. 28, 2014)

    Four Imminent Changes to E.U. Data Protection Laws of which Private Fund Managers Should Be Aware

    Private fund managers with any nexus to the E.U. should care about European data protection laws for two broad categories of reasons: because such laws may impact compliance policies and procedures and other operations at the management company itself, and because such laws may impact companies in which managers’ funds invest.  The latter point typically applies differently to hedge and private equity fund managers.  For hedge fund managers, data privacy laws can create buying or selling opportunities (in the presence of dramatic violations, analogous to the Target data breach in the U.S.), can offer a proxy for the general corporate governance climate at an investee company and are engendering the creation of a new (albeit limited) industry focused on compliance.  For private equity fund managers, data protection laws will typically raise costs at European portfolio companies, and – the other side of the cost coin – offer opportunities to reduce per unit costs via economies of scale spread over multiple portfolio companies.  This article offers a short but pointed summary of some of the key elements of E.U. data protection law currently in force, and highlights four forthcoming changes that will alter the contours of that law and the way private fund managers interact with it.  For discussions of separate sets of considerations for U.S. managers with E.U. operations, see “What Should Hedge Fund Managers Understand About Transfer Pricing and How to Manage the Related Risks?,” The Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013) (transfer pricing considerations for U.S. managers with London or E.U. affiliates); “Potential Impact on US Hedge Fund Managers of the Reform of the UK Tax Regime Relating to Partnerships and Limited Liability Partnerships,” The Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014) (U.K. tax considerations for U.S. managers); “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013) (AIFMD considerations for U.S. managers).

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  • From Vol. 6 No.39 (Oct. 11, 2013)

    Why and How Should Hedge Fund Managers Conduct Background Checks on Prospective Employees? (Part Two of Three)

    This is the second article in our three-part series on employee background checks in the hedge fund industry.  The occasion for this series is a growing recognition in the industry that people can be either the best asset of a manager or a manager’s worst liability.  The potential value of people is implicit in the impressive returns of some managers; the road of good returns invariably leads back to human insight.  And – less pleasantly – the industry graveyard is littered with management companies laid low by human foibles rather than investment mistakes.  See, e.g., “Former Rajaratnam Prosecutor Reed Brodsky Discusses the Application of Insider Trading Doctrine to Hedge Fund Research and Trading Practices,” The Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013); and “Rajaratnam Prosecutor and Dechert Partner Jonathan Streeter Discusses How the Government Builds and Prosecutes an Insider Trading Case against a Hedge Fund Manager,” The Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012).  How can managers obtain the data necessary to identify aspects of a prospective employee’s background that are or may become problematic?  The high-level answer is: By conducting background checks.  But since a background check is a capacious concept – covering everything from a Google search to a private investigation – managers can benefit from more detail on the topic.  This series is designed to provide that detail.  In particular, the first article in this series outlined the case for conducting background checks, cataloging the wide range of regulatory and other risks presented by employees (including discussions of insider trading, Rule 506(d), pay to play, track record portability, restrictive covenants and other topics).  See “Why and How Should Hedge Fund Managers Conduct Background Checks on Prospective Employees? (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 38 (Oct. 3, 2013).  This article discusses the mechanics of conducting a background check, including four specific activities that managers or their service providers should undertake; identifies three common mistakes made by hedge fund managers in conducting background checks; and details four legal risks in conducting background checks.  The final article in this series will weigh the benefits and burdens of outsourcing background checks versus conducting them in-house.

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  • From Vol. 6 No.17 (Apr. 25, 2013)

    New SEC and CFTC Rules Require Certain Hedge Fund Managers to Establish Policies and Procedures to Combat Identity Theft

    On April 10, 2013, the SEC and the U.S. Commodity Futures Trading Commission (CFTC) jointly adopted rules to require certain hedge fund managers and other financial institutions to implement programs designed to detect and address identity theft, which is “fraud committed or attempted using the identifying information of another person without authority.”  More specifically, certain hedge fund managers that are registered or required to be registered with the SEC as investment advisers, as well as certain commodity pool operators and commodity trading advisors (as defined in CFTC regulations) will be subject to the new identity theft rules.  See “CPO Compliance Series: Registration Obligations of Principals and Associated Persons (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  SEC Commissioner Luis Aguilar recently observed, “investment advisers registered under the Investment Adviser Act, particularly the private fund and hedge fund advisers that are recent registrants with the SEC, might not have existing identity theft red-flag programs, and will need to pay particular attention to the rules being adopted.”  This article discusses: (1) which hedge fund managers will be subject to the new rules; (2) the required elements of identity theft programs; and (3) some steps that covered entities must take to administer their identity theft programs.

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  • From Vol. 6 No.1 (Jan. 3, 2013)

    How Can Hedge Fund Managers Identify, Mitigate and Insure Against Cyber Security Threats?

    On December 4, 2012, a webcast jointly sponsored by insurance brokerage firm Maloy Risk Services; insurer Chubb & Son; and Internet security software developer Trend Micro, provided an overview of the current cyber “threat landscape,” highlighted the critical need to vet the cyber defenses of third party service providers, and discussed insurance coverage available with respect to cyber attacks.  This article summarizes the key points from the webcast that are most relevant to hedge fund managers and includes a due diligence checklist for managers to verify cyber security measures taken by third party vendors.

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  • From Vol. 5 No.32 (Aug. 16, 2012)

    Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part Two of Two)

    Over the past several years, U.S. investors have broadened their alternative investment horizons by exploring investment opportunities with Asia-based fund managers.  Asia-based fund managers provide a unique perspective on alternatives which translates to differing investment strategies that appeal to U.S. investors seeking uncorrelated returns or “alpha.”  Nonetheless, Asia-based fund managers that seek to attract U.S. investor capital must recognize the intricate regulations that govern investment manager and fund operations in the U.S. and other jurisdictions, such as the Cayman Islands where many funds are organized to attract U.S. investors.  This is the second article in a two-part series designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. investors.  The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP.  This article describes in detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers are concerned with or should consider when soliciting U.S. taxable and U.S. tax-exempt investors.  The first article described the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers.  See “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).

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  • From Vol. 5 No.17 (Apr. 26, 2012)

    What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part Three of Three)

    For hedge fund managers, mobile devices are pervasive, unavoidable, valuable and dangerous.  Substantially everyone that works at a hedge fund management company has some sort of mobile device – personal or company-issued or both – and those devices are becoming more sophisticated every day.  On the positive side, mobile devices can raze the obstacles created by time and place; they enable employees to be productive on the go or at off hours.  But on the negative side, mobile devices introduce a number of competitive and regulatory challenges for hedge fund managers: they increase the odds that confidential data will leak; they facilitate the knowing or negligent misuse of material nonpublic information; they raise questions with regard to recordkeeping obligations; and so on.  This article is the last in a three-part series intended to help hedge fund managers identify and address – via policies, procedures and technology – the thorniest business and legal questions raised by mobile devices.  The first article in this series highlighted the risks to hedge fund managers posed by mobile devices, including susceptibility of critical information to leakage or theft, unauthorized trading, penetration of systems by malware and viruses and other potential harms.  See “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 15 (Apr. 12, 2012).  The second article offered concrete suggestions on how hedge fund managers can anticipate and address those risks using policies, procedures and technology solutions.  Specifically, that second article identified three suggested steps that managers should take before crafting their mobile device policies and procedures, and made specific recommendations regarding the content of such policies and procedures.  See “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part Two of Three),” The Hedge Fund Law Report. Vol. 5, No. 16 (Apr. 19, 2012).  This article discusses additional specific suggestions on crafting policies and procedures and deploying technology to address the risks posed by mobile devices.  In particular, this article details: how hedge fund managers can prevent access to data on mobile devices by unauthorized persons; how managers may prevent firm personnel from exceeding authorized levels of data access; technology solutions for monitoring mobile devices; archiving data on mobile devices to comply with books and records policies and laws; and policies governing social media access via mobile devices.  See “SEC Risk Alert Discusses When Social Media Interactions May Constitute Prohibited Hedge Fund Client Testimonials,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).

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  • From Vol. 5 No.15 (Apr. 12, 2012)

    What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed?  (Part One of Three)

    Mobile devices, such as smartphones and tablet computers, have significantly enhanced the ability of hedge fund managers and their personnel to conduct business more effectively and efficiently by, among other things, facilitating performance of job functions outside of the office.  However, such productivity gains come at a cost.  The ability to remotely access firm networks and information via mobile devices magnifies the risk of losing some control over access to firm information and firm systems.  Such loss of control can, in turn, create additional perils, most notably, security concerns for hedge fund managers who closely guard any informational advantage they have over competitors.  Additionally, such loss of control over access may heighten risks that a firm’s network is compromised, which can cause significant damage to a firm’s operations.  As such, it is imperative for hedge fund managers to keep up with the ever-growing risks that arise from the rapidly evolving mobile device technology landscape and to adopt policies and solutions designed to minimize the loss of control over access to firm information and systems.  This is the first article in a three-part series designed to address the concerns raised by mobile devices and to outline policies and procedures as well as technology solutions that can help hedge fund managers mitigate the risks posed by the use of mobile devices.  This first article provides an overview of the use of mobile devices and how hedge fund managers have historically addressed the use of mobile devices.  In particular, this article surveys the various risks for hedge fund managers raised by mobile devices, including security risks, risks related to unauthorized trading and risks related to the downloading of malware and viruses.  This article also addresses concerns relating to retention and archiving of books and records, and advertising and communications.  The second and third installments in this three-part series will discuss principles and detail best practices for establishing mobile device policies and procedures as well as specific mobile device solutions and technologies designed to address the risks catalogued in this article.

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part Three of Three)

    One of the principal challenges many hedge fund managers face is effectively and efficiently enforcing a firm’s compliance policies and procedures given limited compliance resources.  This problem has been historically acute with respect to personal trading compliance because of the significant manual effort required to ensure compliance with applicable rules and in-house personal trading requirements.  Nonetheless, in the past decade, technology vendors have made significant progress in developing personal trading compliance solutions that can significantly enhance the effectiveness and efficiency of personal trading compliance programs, at relatively modest prices.  Technological solutions can facilitate personal trading reporting as well as enforcement of a firm’s personal trading restrictions and prohibitions.  Furthermore, vendors can now tailor such solutions to meet the needs of hedge fund managers with varying operational requirements.  As such, hedge fund managers should explore and understand the various personal trading compliance solutions available to them to determine whether any such solutions will further advance the goals of their personal trading compliance programs.  This is the third article in a three-part series on personal trading policies and procedures for hedge fund managers.  The first article in this series discussed general considerations for hedge fund managers in developing effective personal trading policies; the scope of persons that may be covered by such personal trading policies; and the reporting obligations imposed on registered hedge fund managers by Rule 204A-1 under the Investment Advisers Act of 1940 (Advisers Act).  See “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  The second article discussed various personal trading restrictions and prohibitions, including limitations on the number of brokerage firms covered persons can use to effect personal trades; pre-clearance requirements for personal trades; blackout periods during which personal trades cannot be effected; holding periods applicable to securities owned by covered persons; and other types of personal trading restrictions and prohibitions.  See “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part Two of Three),” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  This third article in the series describes various solutions designed to facilitate monitoring of personal trading compliance by hedge fund managers.  Specifically, this article discusses various technological solutions designed to facilitate personal trading reporting, including the various methods for obtaining electronic personal trading data (instead of paper data) from broker-dealers; various solutions for automating personal trade monitoring; automated trade pre-clearance solutions; and a summary of key considerations for hedge fund managers when evaluating personal trading compliance solutions.  See generally “How Hedge Fund Managers Can Use Technology to Enhance Their Compliance Programs,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 4 No.15 (May 6, 2011)

    New Jersey Appellate Court Holds that Limited Partnership Agreements Covering State Pension Fund Private Equity Investments are Exempt from Disclosure under New Jersey’s Open Public Records Act

    The Appellate Division of the New Jersey Superior Court has handed down a ruling preventing the disclosure of private equity limited partnership agreements (LP agreements) to union representatives who sought copies of those agreements.  Plaintiffs are two state employee unions whose pension funds were partly invested in private equity funds by New Jersey’s pension manager.  The plaintiffs sought disclosure of the LP agreements both under New Jersey’s Open Public Records Act (OPRA) and under common law principles of public access to government documents.  OPRA grants broad public access to “government records” but enumerates several exemptions from disclosure.  Cf. “Repeal of Dodd-Frank Confidentiality Protection for SEC: What Investment Advisers Lost and What Remains,” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010).  The New Jersey Treasurer argued that the LP agreements were exempt as both proprietary commercial/financial information and as trade secrets.  The Treasurer also argued that the common law right to disclosure of the documents was outweighed by the State’s interest in preserving the confidentiality of the LP agreements.  The Court agreed with the State and prevented disclosure.  We summarize the Court’s reasoning.  For a discussion of a North Carolina case in which a nonprofit corporation was permitted to pursue its claim for records pertaining to state hedge fund investments in the context of a “pay to play” investigation, see “North Carolina Supreme Court Rules that State Pension Fund May Have to Disclose Information about Pension Fund’s Hedge Fund Investments, Including Hedge Fund and Manager Names, Identity of Manager Principals, Positions, Returns and Fees,” The Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010).  See generally “Delaware High Court Affirms Order Compelling Defunct Hedge Fund Parkcentral Global to Divulge Its List of Limited Partners to Another Limited Partner in Order to Facilitate Future Litigation Against the Fund and Its Affiliates,” The Hedge Fund Law Report, Vol. 3, No. 33 (Aug. 20, 2010).

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  • From Vol. 4 No.13 (Apr. 21, 2011)

    For Registered Hedge Fund Managers, Inadequate Drafting or Enforcement of Privacy Policies and Procedures May Violate Regulation S-P, Even Absent Harm to Investors

    Section 403 of the Dodd-Frank Act will repeal, as of July 21, 2011, the private adviser exemption in Section 203(b)(3) of the Advisers Act.  Thus, under the Advisers Act and the proposed rules thereunder with respect to registration, (1) hedge fund advisers with at least $150 million in AUM in the U.S. that manage solely private funds and (2) hedge fund managers with AUM in the U.S. between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle will have to register with the SEC.  The compliance date for hedge fund adviser registration currently is July 21, 2011.  However, in a letter dated April 8, 2011, Robert Plaze, Associate Director of the SEC’s Division of Investment Management, indicated that the SEC may extend the registration compliance date until the first quarter of 2012.  See “SEC Anticipates Extension of Compliance Dates for Hedge Fund Adviser Registration and Mid-Sized Adviser Deregistration,” The Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011).  As registered investment advisers, formerly unregistered hedge fund managers will face a range of new regulatory obligations.  Among other things, registered hedge fund managers will be subject to examination by the SEC – or by FINRA, depending on how regulatory turf wars play out – and will be required to complete Form ADV, file Part 1A of Form ADV and file the brochure(s) required by Part 2A of Form ADV electronically with the Investment Adviser Registration Depository.  On examinations, see Part 1, Part 2 and Part 3 of our three-part series on what hedge fund managers need to know to prepare for, handle and survive SEC examinations.  On Form ADV, see “Application of Brochure Delivery and Public Filing Requirements of New Form ADV to Offshore and Domestic Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011).  In addition, registered hedge fund managers will have to comply with certain provisions of Regulation S-P, the SEC rule governing privacy of consumer financial information.  Many of the provisions of Regulation S-P are substantially similar to Federal Trade Commission privacy rules that, even before Dodd-Frank, applied to unregistered hedge fund managers.  Also, as a practical matter, even unregistered hedge fund managers have in many cases operated as if they were registered (including with respect to privacy of investor information) in order to accommodate the infrastructure demands of institutional investors.  However, the direct application of Regulation S-P to registered hedge fund advisers will constitute a regulatory change, and will require managers to revisit and revise (even if marginally) their privacy policies and procedures.  As hedge fund managers undertake such a revision process, they would do well to keep in mind a recent settlement order in an SEC administrative proceeding against the former chief compliance officer of a defunct broker-dealer.  This article discusses the legal context of the order, summarizes the factual and legal findings in the order and highlights the more notable privacy points for hedge fund managers.

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  • From Vol. 3 No.44 (Nov. 12, 2010)

    Key Elements of Electronic Communications Policies and Procedures for Hedge Fund Managers

    Electronic communications technologies – phone, e-mail, instant messaging, social media and others described in this article – are essential to the efficient operations of hedge fund managers, but at the same time pose considerable regulatory and litigation, reputational and trading risks.  Hedge fund managers cannot live without electronic communications, but may not survive if such communications are not properly handled.  Moreover, electronic communications are among the most difficult categories of information to contain – they are indelible, pervasive and often determine the outcome of private and government litigation.  Yet more often than not, such communications are drafted under the mistaken impression that they are as easy to erase as they are to create.  Despite a lengthy list of cases illustrating the error in this view, hedge fund manager personnel continue to create and send electronic communications that would fail the commonly used litmus test: “If you wouldn’t want it on the cover of the Wall Street Journal, don’t send it.”  The intent of this article is to assist hedge fund managers in creating, refining and enforcing electronic communications policies and procedures.  To do so, this article first catalogues the various types of electronic communications technologies used by hedge fund manager personnel, as well as the categories of communications that may be made with such technologies.  Next, the article identifies specific risks arising out of the various communications and technologies.  Notably, the range of risks posed by electronic communications in the hedge fund context is significantly broader than the risk of embarrassment or bad evidence at trial – other risks relate to loss of trading advantages, insider trading charges, spoliation sanctions and more.  Incorporating the discussion of communications, technologies and risks, the article then discusses the key elements of electronic communications policies and procedures for hedge fund managers.

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  • From Vol. 3 No.35 (Sep. 10, 2010)

    Hedge Fund Manager Elliott Management Withdraws Petition Seeking Discovery from Absolute Return + Alpha Regarding Identity of Source of Leaked Investor Letter

    On August 31, 2010, hedge fund manager Elliott Management Corporation, along with its managed hedge funds Elliott Associates, L.P. and Elliott International, L.P. (collectively, Elliott), withdrew their petition seeking pre-litigation discovery from hedge fund industry publication Absolute Return + Alpha (Publisher).  Elliott had sought discovery regarding, among other things, the identity of a source that provided Elliott’s June 30, 2010 investor letter to the Publisher.  That copyrighted investor letter contained confidential information regarding Elliott’s investments, trading positions and performance, and Elliott argued in court papers that public disclosure of the information would undermine its negotiations with trading counterparties.  Accordingly, when the Publisher told Elliott that it was going to publish the letter, Elliott sought an emergency order permitting it to take a deposition of the Publisher and conduct other pre-action discovery to find the source of the disclosure.  In an unfiled affidavit, the Publisher argued, among other things, that the New York Reporter’s Shield Law provided it with an absolute privilege to report information obtained from a confidential source without revealing the identity of the source, even if the information was copyrighted and confidential. Although Elliott withdrew its petition before the court had an opportunity to issue a substantive opinion, the petition itself is noteworthy for various reasons.  First, it details five measures taken by a sophisticated hedge fund manager to protect the confidentiality of position and performance information in an investor letter.  (Those five measures are detailed in this article.)  Second, it illustrates the challenge faced by a manager in the event of an unauthorized disclosure of an investor letter.  Had the matter proceeded and had Elliott obtained the identity of the source, Elliott presumably would have faced the unpalatable option of suing one of its own investors for damages arising out of this disclosure (though any such damages would be hard to quantify) or an injunction against further disclosures of information in the June 30 letter or future letters.  Alternatively, or in addition, Elliott might have brought an action against the Publisher, though in the absence of a confidentiality agreement or any other relevant contract between Elliott and the Publisher, the basis of any such claim is not immediately apparent.  This article details the thorough and rigorous process that Elliott used to ensure the confidentiality of its investor letters, and the legal steps it undertook to maintain that confidentiality when, despite those efforts, the content of one of those letters leaked.

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  • From Vol. 3 No.33 (Aug. 20, 2010)

    Delaware High Court Affirms Order Compelling Defunct Hedge Fund Parkcentral Global to Divulge Its List of Limited Partners to Another Limited Partner in Order to Facilitate Future Litigation Against the Fund and Its Affiliates

    On August 12, 2010, the Delaware Supreme Court unanimously affirmed a Chancery Court order compelling hedge fund Parkcentral Global, L.P., to disclose its list of names and addresses of its limited partners to Brown Investment Management, L.P., one of its limited partners.  Brown, which had lost its entire investment in Parkcentral when the fund collapsed, had sought the list in order to contact other limited partners with regard to potential litigation against the fund’s general partner, Parkcentral Capital Management, L.P. (the General Partner), and its auditors.  As previously reported in the Hedge Fund Law Report, the Chancery Court ruled in Brown’s favor.  See “Delaware Chancery Court Permits Limited Partner in Defunct Hedge Fund Parkcentral Global to Obtain a List of Names and Addresses of Other Limited Partners in the Fund,” The Hedge Fund Law Report, Vol. 3, No. 23 (Jun. 11, 2010).  The Supreme Court agreed.  Reviewing a provision of the fund’s Limited Partnership Agreement, which mirrored Title 6, § 17-305 of the Delaware Revised Uniform Limited Partnership Act, it found that the limited partner had a contractual right of access to the shareholder list, which the General Partner could not unilaterally restrict, and that no federal law or regulation preempted Delaware law on this issue of disclosure.  We detail the background of the action and the Court’s legal analysis.

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  • From Vol. 3 No.23 (Jun. 11, 2010)

    Delaware Chancery Court Permits Limited Partner in Defunct Hedge Fund Parkcentral Global to Obtain a List of Names and Addresses of Other Limited Partners in the Fund

    In early 2008, plaintiff Brown Investment Management, L.P. (Brown) and its affiliates purchased an aggregate $16 million of limited partnership interests in defendant hedge fund Parkcentral Global, L.P. (Fund).  Despite the Fund’s representations that it would not invest more than five percent of its assets in any one of its investment strategies, and that it sought to preserve capital and garner returns comparable to long term equities, throughout 2008 the Fund suffered “catastrophic” losses, resulting in its collapse.  Brown’s lost its entire investment and the entire Parkcentral fund complex ceased to do business.  In 2009, following the commencement of a class action against the Fund in Texas, Brown requested a list of the Fund’s limited partners so that it could communicate with other limited partners about the collapse and their potential remedies.  When the Fund refused, Brown sued to compel disclosure under the Delaware limited partnership law.  The Delaware Court of Chancery ruled in favor of Brown, based on its reasoning that investors in Delaware business entities have a statutory right to access a list of their fellow investors and that Delaware public policy favors the prompt production of the list.  The Fund then appealed and sought a stay of execution of the Court’s disclosure order.  The Court refused to stay execution of its disclosure order.  We outline the background of the case and the Court’s reasoning.  Also, we discuss the 2002 decision of the Delaware Court of Chancery in Arbor Place L.P. v. Encore Opportunity Fund, L.L.C., which involved similar facts and legal questions in the context of a Delaware LLC.  In addition, we address whether, in the view of the Delaware courts, the privacy provisions of the Gramm-Leach-Bliley Act of 1999 preempt Delaware law regarding access by limited partners or members to the names and addresses of other limited partners or members of, respectively, Delaware LPs or LLCs.

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  • From Vol. 3 No.22 (Jun. 3, 2010)

    White & Case LLP and Mesirow Financial Consulting, LLC Host Program on “EU Data Privacy Compliance: Practical Strategies for Processing Imported European Data Legally,” Focusing on Compliance by U.S.-Based Multinational Companies with Europe’s Draconian Data Privacy Laws

    Hedge fund managers operating globally face a variety of overlapping legal regimes.  Few of those regimes are as cumbersome, counterintuitive and rife with pitfalls as the European Union laws relating to data privacy.  EU privacy laws go well beyond U.S. privacy laws, and in some case can even give rise to conflicting obligations.  To help explicate this complicated terrain for global hedge fund managers and other types of U.S.-based companies with international operations, White & Case LLP and Mesirow Financial Consulting, LLC hosted a seminar on May 25, 2010 entitled “EU Data Privacy Compliance: Practical Strategies for Processing Imported European Data Legally.”  This article outlines the key topics discussed at the seminar, focusing on those most relevant to hedge fund managers, including the details of the EU data privacy directive, specific strategies for transferring data from the EU to the U.S., specific compliance strategies for U.S.-based global hedge fund managers and the interaction of EU data privacy laws and Sarbanes-Oxley requirements.

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  • From Vol. 3 No.2 (Jan. 13, 2010)

    How Hedge Fund Managers Can Comply with the New Massachusetts Privacy Law

    A new Massachusetts state law establishes rigorous standards applicable to companies, including hedge fund managers, regarding safeguarding personal information of residents of the Commonwealth of Massachusetts.  In a guest article, Jayesh Punater, President & CEO of Gravitas Technology, a technology service provider to the alternative investment industry, suggests specific steps that affected hedge fund managers can take to comply with the new law.

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  • From Vol. 2 No.48 (Dec. 3, 2009)

    As the Pace of Enforcement Activity Quickens, Hedge Fund Managers Refocus on the Law and Technology of Data Storage

    With the dramatic expansion of the range and ease of communication technologies has come an expansion of the channels through which inside information and other illegal or inappropriate information may pass.  For hedge fund manager chief compliance officers and others at hedge fund managers tasked with enforcing insider trading and other laws, the proliferation of communication technologies has made life both harder and easier: harder because there is a greater volume of information to monitor, and easier because the technology for monitoring has never been more accessible.  In addition, the cost of storage of data and documents has fallen precipitously, causing expectations to rise on the part of regulators and prosecutors with respect to the volume and duration of storage.  This article examines data retention issues in the hedge fund context.  In particular, the article discusses: the relevant statutes and guidelines with respect to data storage; the law on spoliation of evidence; adverse inference instructions; how spoliation and adverse inference considerations may apply in the context of employees that leave a firm to set up a competitor; treatment of data storage in hedge fund manager compliance manuals; and employee training with respect to data storage.

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  • From Vol. 2 No.22 (Jun. 3, 2009)

    SIFMA and MFA Object to Proposed NASDAQ Sponsored Access Rule 4611

    On January 22, 2009, the Nasdaq Stock Market LLC published proposed amendments to Nasdaq Rule 4611(d) to modify the requirements for members who provide “sponsored access” to Nasdaq’s execution system.  Sponsored access occurs when an exchange member provides its clients, often hedge funds, with direct electronic access to the exchange using the member's identifier.  Under this arrangement, the customer receives a dedicated line or port to the exchange's execution system, so that its orders do not first pass through the member's systems before reaching the exchange.  Nasdaq’s proposed amendments aim to ensure that the exchange, as well as members assuming responsibility for their customers’ trading activity, retains effective oversight.  Key industry groups, however, have voiced objections.  Those industry groups include The Managed Funds Association and The Securities Industry & Financial Markets Association.  We detail the proposed rule and the industry response.

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  • From Vol. 1 No.2 (Mar. 11, 2008)

    SEC, at open meeting, votes unanimously to propose new rules restricting naked short sales and streamlining the ETF approval process, and to amend the rules relating to privacy of investor data

    • At an open meeting on March 4, 2008, the SEC voted unanimously to: (1) propose a rule cracking down on short selling, (2) propose two rules to streamline the ETF approval process and (3) amend Regulation S-P, dealing with the privacy of investor data.
    • Our reporter, Jonathan Pollard, attended the open meeting and spoke to lawyers and regulators in attendance, and others.
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  • From Vol. 1 No.2 (Mar. 11, 2008)

    One hedge fund manager sues another for alleged theft of intellectual property

    • Elliott Management Corporation, a major structured credit manager, developed proprietary software and alleges that Cedar Hill Capital Partners hired an employee and contractor of Elliott to steal the underlying source code and executable code.
    • TRO issued in state action based on same allegations.
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