The Hedge Fund Law Report

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

Articles By Topic

By Topic: Marketing

  • From Vol. 11 No.20 (May 17, 2018)

    Luxembourg Remains a Significant Point of Entry for Non-E.U. Managers to Raise Capital in the E.U.

    The Association of the Luxembourg Fund Industry (ALFI) recently organized a seminar that offered a current look at the state of cross-border fund marketing in the E.U. and opportunities for non-E.U. managers to gain access to that market through Luxembourg. The seminar, which was hosted by Anouk Agnes, deputy general director of ALFI, featured a keynote address from H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, as well as panel discussions with representatives from financial services, legal and accounting firms, in addition to asset managers. This article summarizes Gramegna’s address and highlights the key points from the portions of the seminar that covered marketing funds in the E.U. and setting up an E.U. alternative investment fund manager. See “Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe” (Mar. 9, 2017).

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  • From Vol. 11 No.18 (May 3, 2018)

    HFLR Cryptocurrency Webinar Examines Regulatory Developments, ICOs, Cryptocurrency Sweep, Custody and Other Compliance Issues

    Blockchain technology and the related cryptocurrency asset class are rapidly evolving and present traps for unwary fund managers. A recent webinar hosted by The Hedge Fund Law Report examined regulatory developments affecting cryptocurrencies; scrutiny of initial coin offerings; the recent SEC examination sweep of firms that trade cryptocurrencies; and custody and other compliance issues faced by advisers who hold digital currencies. The program was moderated by William V. de Cordova, Editor-in-Chief of The Hedge Fund Law Report, and featured Karl A. Cole‑Frieman, partner and co-founder of Cole‑Frieman & Mallon; and Lee A. Schneider, partner at McDermott Will & Emery. This article summarizes the key takeaways from the presentation. For further commentary from Cole-Frieman, see “How Blockchain Will Continue to Revolutionize the Private Funds Sector in 2018” (Jan. 4, 2018). See also our three-part series on blockchain and the financial services industry: “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. 11 No.16 (Apr. 19, 2018)

    Program Highlights Malta’s Fund-Friendly Environment

    A recent program sponsored by FinanceMalta – a public-private venture promoting Malta as a financial center – provided an overview of private fund formation in Malta; the advantages of domiciling funds and managers there; the nation’s regulatory and tax regimes; and its emerging approach to blockchain and cryptocurrency. Thalius Hecksher, global director at TridentTrust, moderated the discussion, which featured Chris Casapinta, executive director of Alter Domus; Adam de Domenico, founder and CEO of Cordium Malta; James Farrugia, partner at GANADO Advocates; Ivan Grech, a representative of FinanceMalta; and Christopher Portelli, associate partner at EY Malta. This article highlights the key points raised by the panelists. For additional commentary from FinanceMalta, see “What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta” (Jan. 26, 2017).

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

    Business and Legal Issues in Raising Capital for Cryptocurrency Funds

    A recent installment of the Cryptocurrency Fund Workshop Series presented by the Capital Fund Law Group offered a capital-raising primer for funds that seek to invest in cryptocurrencies and cryptocurrency-related strategies. The program, which covered both legal and business issues in setting up a cryptocurrency-focused fund, featured John S. Lore and Beth‑ann Roth, managing partner and partner, respectively, at Capital Fund Law Group, along with Alex Mascioli, CEO of North Street Global. This article summarizes their insights. For a look at the technology underlying cryptocurrency, see our three-part series on blockchain and the financial services industry: “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. 11 No.15 (Apr. 12, 2018)

    The Death of Alpha: A True Challenge or a Poor Manager’s Excuse? DMS Summit Discusses Alpha Generation, “2 and 20” Fees, AI and Impact Investing

    DMS Governance (DMS) recently held its second annual Investment Funds Summit, featuring distinguished representatives of both fund managers and fund investors. John D’Agostino, DMS managing director, moderated the program, which included lively debates on whether it is still possible to generate alpha and the viability of the traditional “2 and 20” fee structure, as well as presentations on marketing into the E.U., artificial intelligence and impact investing. This article outlines the key points raised during the program, which included various divergent perspectives on the topics discussed. For further commentary from DMS, see Former General Counsel and Current Independent Director Discusses the Importance of Robust Fund Governance” (Dec. 8, 2016); and “DMS Review Highlights Issues With Regulation, Institutionalization and Customization of Hedge Funds” (May 21, 2015).

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  • From Vol. 11 No.11 (Mar. 15, 2018)

    Understanding Subscription Credit Facilities: Key Concerns Raised by Investors and the SEC (Part Three of Three)

    One of 2017’s most hotly debated topics in the world of private equity involved the use of subscription credit facilities by private funds that employ a capital call structure. This grew into a debate in which seemingly everyone – including bloggers, reporters, investment consultants and even one of the co-founders of Oaktree Capital Management, Howard Marks – wanted to participate. In June 2017, the Institutional Limited Partners Association (ILPA) issued guidance articulating its own views on several issues that comprise this debate, which shined an even brighter spotlight on a topic that was already receiving significant attention. This final article of our three-part series on subscription credit facilities reviews the ILPA guidance and its corresponding effect on these credit facilities, as well as two of the most controversial aspects of these facilities: the impact a subscription credit facility has on a fund’s internal rate of return and the use of these facilities by investment managers for longer-term financing. The first article provided background on the types of funds that frequently use these facilities, recent trends that have emerged regarding this form of financing, basic mechanics of these facilities’ structures and the types of lenders that routinely offer these products. The second article discussed the primary advantages to funds, sponsors and investors of using these facilities and explored the legal documents that govern them. For coverage of ILPA guidance on other issues affecting the private funds industry, see “How Managers May Address Increasing Demands of Limited Partners for Standardized Reporting of Fund Fees and Expenses” (Sep. 1, 2016).

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  • From Vol. 11 No.2 (Jan. 11, 2018)

    HFLR Program Parses OCIE’s Recent Advertising Risk Alert: Misleading Claims of GIPS Compliance, Past Specific Investment Recommendations and Results of SEC’s Touting Initiative (Part Two of Two)

    SEC commentary provides valuable insight to compliance personnel on the hot-button issues being prioritized by the Commission, as well as the sort of conduct that does, and does not, lead to a referral to the SEC’s Division of Enforcement. By staying informed of the SEC’s approach to certain issues, advisers can learn from the mistakes of similarly situated advisers. A recent webinar presented by The Hedge Fund Law Report discussed six deficiencies identified in a National Exam Program Risk Alert that violate Rule 206(4)-1 of the Investment Advisers Act of 1940 – the so-called “Advertising Rule” – as well as other compliance issues that frequently arise with respect to an adviser’s advertising practices. Kara Bingham, Associate Editor of The Hedge Fund Law Report, moderated the discussion, which featured Todd Kaplan, founder and principal of Cloudbreak Compliance Group; Christine M. Lombardo, partner at Morgan Lewis; and Richard F. Kerr, partner at K&L Gates. This article, the second in a two-part series, explores the disclosures required when presenting gross performance in a one-on-one presentation to prospective investors, the circumstances under which claims of compliance with voluntary performance disclosure standards may be deemed misleading, ways to avoid deficiencies when discussing past specific recommendations in advertisements and the results of the touting initiative conducted by the SEC’s Office of Compliance Inspections and Examinations. The first article discussed the broad view that the SEC takes when deciding which communications fall within the definition of an advertisement, as well as four examples of deficiencies frequently found in performance advertising. See “Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues” (Oct. 19, 2017).

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  • From Vol. 11 No.1 (Jan. 4, 2018)

    HFLR Program Parses OCIE’s Recent Advertising Risk Alert: Identifying Advertisements and Common Deficiencies in Performance Advertising (Part One of Two)

    On September 14, 2017, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert that highlighted six common deficiencies under Rule 206(4)-1 of the Investment Advisers Act of 1940 – the so-called “Advertising Rule” – identified by OCIE during examinations of SEC-registered investment advisers. A recent webinar presented by The Hedge Fund Law Report discussed in detail each of the deficiencies, along with other compliance issues that frequently arise with respect to an adviser’s advertising practices. Kara Bingham, Associate Editor of The Hedge Fund Law Report, moderated the discussion, which featured Todd Kaplan, founder and principal of Cloudbreak Compliance Group; Christine M. Lombardo, partner at Morgan Lewis; and Richard F. Kerr, partner at K&L Gates. This article, the first in a two-part series, discusses the broad view the SEC takes when deciding which communications fall within the definition of an advertisement, as well as four examples of deficiencies frequently found in performance advertising. The second article will explore the disclosures required when presenting gross performance in one-on-one presentations to prospective investors, circumstances under which claims of compliance with voluntary performance disclosure standards may be deemed misleading, ways to avoid deficiencies when discussing past specific recommendations in advertisements and the results of the touting initiative conducted by OCIE. See our three-part series on advertising compliance: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods for a Fund Manager to Test Its Advertising Review Procedures” (Sep. 28, 2017).

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  • From Vol. 11 No.1 (Jan. 4, 2018)

    Steps Advisers Can Take to Minimize the Risk That a Routine SEC Examination Ends With a Referral to Enforcement: Five Key Priorities for OCIE (Part One of Two)

    Although there has been much talk of deregulation under the Trump administration, investment advisers remain subject to close SEC scrutiny. A recent program presented by Davis Polk discussed the current SEC examination and enforcement climate affecting advisers, including an overview of five key examination priorities, and offered guidance on preparing for and handling routine examinations conducted by the SEC’s Office of Compliance Inspections and Examinations (OCIE), all with a view toward minimizing the risk of a referral to the SEC’s Division of Enforcement (Enforcement Division). The program featured Davis Polk partners Leor Landa, Amelia T.R. Starr and James H.R. Windels, along with associate Marc J. Tobak. This two-part series summarizes the panel’s insights. This first article discusses five areas identified by the panelists on which OCIE frequently focuses during the examination of investment advisers. The second article will provide guidance on the steps that advisers can take to minimize the likelihood that OCIE will refer certain issues to the Enforcement Division. For more on the current regulatory environment, see our two-part series providing commentary from former senior SEC attorneys: “Chair Clayton’s Priorities and the Current Enforcement Climate” (Dec. 7, 2017); and “Current Regulatory Climate, Adviser Examinations and the Enforcement Referral Process” (Dec. 21, 2017). For coverage of prior Davis Polk programs, see our two-part series on activist hedge funds: “Filing Obligations and Other Operational Considerations” (May 5, 2016); and “Settlement, Prospects, Shareholder Engagement and Proxy Access Considerations” (May 12, 2016).

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  • From Vol. 10 No.48 (Dec. 7, 2017)

    ACA Panel Reviews Effects of Impending MiFID II on U.S. Advisers

    A recent ACA Compliance Group (ACA) program examined the impact that the recast Markets in Financial Instruments Directive (MiFID II) will have on fund managers when it takes effect in January 2018, covering delegated portfolio management; market reforms; third-country managers; research payments; best execution; transaction reporting; marketing and product governance rules; recording of telephone conversations; algorithmic trading; and commodity derivatives. See also our two-part series “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II”: Part One (Jun. 18, 2015); and Part Two (Jun. 25, 2015). The program featured Sally McCarthy and Martin Lovick, ACA director and senior principal consultant, respectively. This article summarizes the key takeaways from their presentation. For further insights from ACA, see “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017); and our coverage of its 2017 fund manager compliance survey: “Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Common Measures to Protect MNPI” (Jun. 1, 2017); and “Variety in Expense Allocation Practices and Business Continuity Measures” (Jun. 8, 2017).

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  • From Vol. 10 No.44 (Nov. 9, 2017)

    ACA Offers Roadmap to Maintaining Books and Records: Document Retention and SEC Expectations (Part Two of Two)

    Investment advisers are faced with the ongoing challenge of ensuring compliance with the numerous rules and regulations governing their books and records. A recent ACA Compliance Group (ACA) program offered a comprehensive overview of the documents and records that investment advisers are required to maintain, focusing on ways advisers can ensure that those records be complete, accessible and in the proper form in the event of an SEC examination. The program featured Beth Manzi, chief operating officer of private fund administrator PEF Services LLC, and Theodore E. Eichenlaub, partner at ACA. This second article in our two-part series considers the electronic storage of records, document destruction, testing of compliance programs and SEC examinations. The first article discussed the regulatory background surrounding the maintenance of adviser-specific records, including corporate and accounting documents; marketing documents; and emails. For additional insights from ACA, see our two-part series “A Roadmap for Advisers to Comply With Marketing and Advertising Regulations”: Part One (Aug. 3, 2017); and Part Two (Aug. 10, 2017).

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  • From Vol. 10 No.43 (Nov. 2, 2017)

    Simmons & Simmons Briefing Covers Revisions to U.K. Fund Documents in Anticipation of MiFID II Deadline and the Potential Impact of Pending U.K. Partnership Taxation Rules

    The January 3, 2018, deadline for compliance with the latest revisions to the Markets in Financial Instruments Directive (MiFID II) is quickly approaching. Additionally, a bill pending in the U.K. Parliament could dramatically affect the taxation of pass-through entities in the U.K. A recent Simmons & Simmons briefing offered guidance to fund managers on preparing for MiFID II and how the pending tax changes could affect their operations. The program was moderated by Simmons partner Devarshi Saksena and featured partners Lucian Firth and Martin Shah and senior lawyer Russell Afifi. This article highlights their key insights. For additional commentary from Simmons on MiFID II, see “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II”: Part One (Jun. 18, 2015); and Part Two (Jun. 25, 2015). See also “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers” (May 28, 2015). For more from Saksena and Firth, see “FCA Amends Its Position on Annex IV Reporting: U.K. and Non-EEA Managers, Including U.S. Managers, Must Now Report Holdings at Master Fund Level” (Apr. 13, 2017).

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  • From Vol. 10 No.43 (Nov. 2, 2017)

    A Roadmap to Maintaining Books and Records: Compliance With Applicable Regulations (Part One of Two)

    Investment advisers are subject to numerous rules and regulations regarding their books and records. A recent ACA Compliance Group (ACA) program, featuring Beth Manzi, chief operating officer of private fund administrator PEF Services LLC, and Theodore E. Eichenlaub, partner at ACA, offered a comprehensive overview of the documents and records that investment advisers are required to maintain. The program also focused on methods for ensuring that those documents and records be complete, accessible and in a proper form in the event of an SEC examination. This article, the first in a two-part series, discusses the regulatory background surrounding the maintenance of adviser-specific records, including corporate and accounting documents; marketing documents; and emails. The second article will consider the electronic storage of records, document destruction, testing of compliance programs and SEC examinations. For additional commentary from ACA, see “How Private Fund Managers Can Avoid Common Pitfalls When Calculating and Advertising Internal Rates of Return” (Sep. 7, 2017); and “Compliance Corner Q4-2017: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter” (Oct. 12, 2017).

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  • From Vol. 10 No.41 (Oct. 19, 2017)

    Risk Alert Highlights Six Most Frequent Advertising Rule Compliance Issues

    Rule 206(4)-1 under the Investment Advisers Act of 1940 prohibits investment advisers from including testimonials, certain past specific recommendations and misleading information in marketing materials. The SEC Office of Compliance Inspections and Examinations (OCIE) recently issued a Risk Alert that discusses the six most frequent advertising issues identified in deficiency letters from more than 1,000 adviser examinations, as well as the results of its 2016 “Touting Initiative,” which focused on nearly 70 advisers’ use of awards, rankings, professional designations and testimonials in their marketing materials. This article summarizes OCIE’s findings. See also our three-part advertising compliance series: “Ten Best Practices for a Fund Manager to Streamline Its Compliance Review” (Sep. 14, 2017); “Five High-Risk Areas to Focus on When Reviewing Marketing Materials” (Sep. 21, 2017); and “Six Methods to Test Advertising Review Procedures” (Sep. 28, 2017).

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  • From Vol. 10 No.38 (Sep. 28, 2017)

    Advertising Compliance Series: Six Methods for a Fund Manager to Test Its Advertising Review Procedures (Part Three of Three)

    Rule 206(4)-7 of the Investment Advisers Act of 1940 (Advisers Act) requires investment advisers to adopt policies and procedures reasonably designed to prevent violations of the Advisers Act and to review the adequacy and effectiveness of those policies and procedures. In addition to complying with the Advisers Act, advisers are also expected to design policies and procedures that can detect violations. Although testing is one of the primary means of detecting violations, building an effective testing program is not an easy task, and in the absence of SEC guidance, chief compliance officers are often left to question whether they have designed and implemented effective testing protocols. To assist advisers with developing their testing programs, this third article in our three-part series explores six different testing mechanisms firms can employ to verify compliance with their advertising procedures. The first article outlined what documents fall within the advertisement definition and outlined ten best practices that managers should consider when designing or evaluating their advertising review procedures. The second article discussed five high-risk areas within marketing materials, provided guidance to compliance officers on what to look for when encountering high-risk content and suggested ways to present that information that meet the needs of both the business development and compliance teams. See “SEC Continues Its Crackdown on Misleading Representations of ‘Skin in the Game’ by Hedge Fund Managers” (Jan. 10, 2013); and “Brockton Retirement Board Files Class Action Lawsuit Against Oppenheimer Fund of Private Equity Funds and Executive Officers for Allegedly False Claims Relating to Fund Performance and Investment Valuations Contained in Fund Marketing Materials” (Apr. 12, 2012).

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  • From Vol. 10 No.38 (Sep. 28, 2017)

    SEC Continues Its Pursuit of Firms That Licensed F‑Squared Indices

    In yet another reminder that fund managers must be scrupulously accurate when making performance claims – and must perform appropriate due diligence when using the track records of third-party advisers – the SEC recently commenced an enforcement action against an investment adviser and its principal (collectively, the Defendants). The SEC’s complaint alleges that the Defendants breached their fiduciary duties and committed fraud by using materially misleading marketing materials created by F‑Squared Investments, Inc. (F‑Squared) for F‑Squared’s “AlphaSector” strategies. Worse, the SEC claims that the Defendants continued to use those materials after the investment adviser’s principal learned that the materials contained fraudulent performance claims, and later sold the business to avoid potential liability for advertising a fraudulent track record. This article summarizes the complaint. For other enforcement actions stemming from third-party advisers licensing F‑Squared’s products, see “SEC Settlements Highlight Need for Managers to Verify Performance Claims of Others Prior to Use” (Sep. 22, 2016); and “Hedge Fund Managers May Be Liable for Performance Claims of Others” (Mar. 3, 2016).

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

    Advertising Compliance Series: Five High-Risk Areas for a Fund Manager to Focus on When Reviewing Marketing Materials (Part Two of Three)

    The chief compliance officer of a small fund manager is likely the individual responsible for reviewing and approving all advertisements, while a larger adviser may employ a team of individuals dedicated to this function. In either case, mere familiarity with the applicable rules is not enough to ensure that the reviewer will identify content that poses risks from a regulatory perspective. Rather, an effective compliance reviewer must understand all aspects of the adviser’s business, its investment strategies and instruments traded, as well as possess a general understanding of how the markets operate. Certain categories of content, because of the very nature of the information being presented, pose greater risks from a regulatory perspective and thus warrant special attention by compliance officers. This second article in our three-part series discusses five of these high-risk areas, provides guidance to compliance officers on what to look for when encountering high-risk content and suggests ways for presenting this information that meet the needs of both the business-development and compliance teams. The first article in the series outlined what documents fall within the advertisement definition and described ten best practices that managers should consider implementing when designing or evaluating their advertising review procedures. The third article will explore six different testing mechanisms firms can employ to verify compliance with their advertising procedures. See “Ten Key Risks Facing Private Fund Managers in 2017” (Apr. 6, 2017); and “K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three)” (Jan. 8, 2015).

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  • From Vol. 10 No.36 (Sep. 14, 2017)

    Advertising Compliance Series: Ten Best Practices for a Fund Manager to Streamline Its Compliance Review (Part One of Three)

    Few tasks create more headaches for compliance officers than reviewing and approving marketing materials. As capital raising has grown more challenging in recent years, compliance officers have become inundated with requests from in-house marketers to review new or modified presentations designed to retain existing investors and secure new allocations. Due to the deliberate nature of the process, compliance is often characterized as a perennial bottleneck, yet the review of advertisements by knowledgeable compliance professionals is critical to minimizing regulatory and litigation risk to the adviser. This three-part series is dedicated to assisting managers with developing and enhancing their advertising compliance policies and practices. This first article discusses what documents fall within the advertisement definition and outlines ten best practices that managers should consider implementing when designing or evaluating their advertising review procedures. The second article will discuss five high-risk areas within marketing materials, provide guidance to compliance officers on what to look for when encountering high-risk content and suggest ways to present this information that meet the needs of both the business development and compliance teams. The third article will explore six different testing mechanisms firms can employ to verify compliance with their advertising procedures. See “A Roadmap for Advisers to Comply With Marketing and Advertising Regulations”: Part One (Aug. 3, 2017); and Part Two (Aug. 10, 2017).

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  • From Vol. 10 No.32 (Aug. 10, 2017)

    A Roadmap for Advisers to Comply With Marketing and Advertising Regulations (Part Two of Two)

    An ongoing challenge for advisers is ensuring compliance with the complex set of regulations that govern their marketing practices. A recent program hosted by ACA Compliance Group (ACA) distilled some of the nuances that arise when applying these regulations to the marketing of interests in private funds. The program featured Mark Lawler, ACA senior principal consultant, Matthew Shepherd, ACA principal consultant, and Erika Roess, senior principal consultant at ACA Performance Services. This second article in a two-part series discusses the permissibility of using backtested performance and partial client lists in advertising materials; portability of track records; compensation of solicitors referring separately managed account clients; marketing to investors in private funds; and compliance with private placement requirements. The first article discussed regulations governing performance advertising, compliance with GIPS, recordkeeping requirements relating to marketing materials and the use of past-specific recommendations. For coverage of other ACA events, see “Hedge Fund Managers Are Advised to Build Robust Infrastructure” (Mar. 3, 2016); and “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015).

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  • From Vol. 10 No.31 (Aug. 3, 2017)

    A Roadmap for Advisers to Comply With Marketing and Advertising Regulations (Part One of Two)

    Advertising by investment advisers is subject to numerous rules and regulations, and rife with potential traps for the unwary. A recent ACA Compliance Group (ACA) program provided a comprehensive overview of the relevant rules and SEC guidance that govern these advertising practices and discussed multiple potential pitfalls. The program featured Mark Lawler, ACA senior principal consultant, Matthew Shepherd, ACA principal consultant, and Erika Roess, senior principal consultant at ACA Performance Services. This article, the first in a two-part series, discusses regulations governing performance advertising, compliance with GIPS, recordkeeping requirements relating to marketing materials and use of past specific recommendations. The second article will consider the permissibility of advertising backtested performance and partial client lists; portability of track records; use of solicitors to raise capital; marketing to investors in private funds; and compliance with private placement requirements. For additional insight from Roess, see “Expert Panel Provides Roadmap for Hedge Fund Managers Looking to Present Performance in Compliance With GIPS” (Aug. 1, 2013).

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  • From Vol. 10 No.30 (Jul. 27, 2017)

    Most Small and Emerging Managers Expect Headcount to Increase in Next Three Years: AIMA/GPP Study Explores Viability, Key Business Terms, Outsourcing and Growth Prospects

    Most small and emerging managers expect their headcount to increase in the next three years, according to a new joint study by The Alternative Investment Management Association (AIMA) and prime broker Global Prime Partners. The survey, which polled 135 small and emerging managers and 25 institutional hedge fund allocators, examines the profitability of small and emerging managers, including the average breakeven point. The survey also explores these managers’ methodologies for balancing fees and costs, outsourcing practices and plans for growth. For additional recent insights from AIMA, see “Study Examines How Hedge Funds Are Adapting to a Less Liquid Market, the Need for Better Liquidity Reporting and the Future Role of Hedge Funds As Price-Makers” (Dec. 15, 2016); “AIMA Survey Identifies Key Ways That Managers Align With Investors, Including Alternative Fee Structures, Skin in the Game and Customized Investment Solutions” (Sep. 22, 2016); and “AIMA (Japan) and Eurekahedge Survey of Investors in Japan Reveals Concerns With Hedge Fund Manager Registration Requirements, the Volcker Rule and Success of ‘Abenomics’” (Jun. 23, 2016).

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

    Ways Fund Managers Can Adjust to Rapidly Changing Regulatory Frameworks in the Middle East and Europe

    Fund managers looking at capital-raising opportunities in the Middle East must develop a nuanced understanding of the many ways regulations in the region differ from those with which the managers may be familiar. While Saudi Arabia, Kuwait, Qatar and Bahrain are brimming with investable assets, managers must understand the importance of Sharia-compliant structures for many family offices in the region. The European alternative investment space may be more familiar to some managers, but regulatory developments there are also affecting funds and the way they do business. Nevertheless, some vehicles, such as Undertakings for Collective Investments in Transferable Securities structures, enjoy enduring popularity. In Europe as in the Middle East, it is essential for fund managers to come to the table armed with knowledge. All these points came across in a panel discussion at the tenth annual Advanced Topics in Hedge Fund Practices Conference: Manager and Investor Perspectives recently hosted by Morgan Lewis and featuring partners Ayman Khaleq and William Yonge. This article presents the key takeaways from the panel discussion. For coverage of another session of the conference, see “Investor Pressure Drives New Performance Compensation Models and Increased Disclosure Obligations for Managers” (Jun. 29, 2017). For coverage of former SEC Chair Christopher Cox’s keynote talk at the conference, see “Hedge Funds’ Image Crisis: Fighting Public Perceptions Against the Backdrop of Potential Financial Sector Reforms” (Jun. 22, 2017).

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  • From Vol. 10 No.26 (Jun. 29, 2017)

    Steps Hedge Fund Managers May Take Today to Avoid Being Deemed a Fiduciary Under the DOL’s New Fiduciary Rule

    In February 2017, many investment advisers were relieved when President Trump ordered the Department of Labor to evaluate the likely impact of the revised fiduciary rule that, in its current form, expands the range of persons considered “fiduciaries” under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The initial set of requirements under the fiduciary rule became applicable on June 9, 2017; therefore, hedge fund managers may need to take steps to ensure they are not deemed fiduciaries under the rule in connection with their marketing activities. In a guest article, K&L Gates partner Robert L. Sichel provides an overview of the fiduciary rule, identifies the types of activities that may trigger fiduciary status thereunder, addresses common misconceptions under the rule and provides a roadmap for how a manager can avoid becoming a fiduciary under the rule in connection with its marketing activity. For a discussion of the evaluation of the fiduciary rule ordered by President Trump, see “Despite the DOL Fiduciary Rule’s Uncertain Future Under the Trump Administration, Managers Should Continue Preparing for Its April 2017 Implementation (Part Two of Two)” (Feb. 23, 2017).

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  • From Vol. 10 No.25 (Jun. 22, 2017)

    Canadian “Alternative Funds” Proposal Would Offer Hedge Fund Managers Access to Retail Investor Market

    Securities regulation in Canada, including the regulation of mutual fund products, is the responsibility of each individual province and territory. Offering a mutual fund product in Canada, therefore, may require compliance with multiple regulatory schemes administered by different authorities. Over the past several years, the Canadian Securities Administrators (CSA) have implemented a modernization project for mutual funds that are prospectus qualified and offered to the retail public (conventional mutual funds). In September 2016, the CSA issued a request for comment regarding a proposal to create a new regulatory framework pursuant to which “Alternative Funds” can be offered broadly to retail investors. In a guest article, Norton Rose Fulbright partners Michael Bunn and Mark A. Convery describe how the proposal would transform the Canadian market by expanding the investments and strategies that may be pursued by mutual funds and by making these funds available to investors that do not otherwise meet the sophistication criteria for investing in Canadian hedge funds. For more on the current regulatory environment in Canada, see our two-part series on “How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws”: Part One (Apr. 27, 2017); and Part Two (May 4, 2017). For a discussion of the current regulatory environment in Canada, see “Fund Managers Looking to Canadian Market Must Be Aware of Nuances of Canada’s Regulatory Regime” (May 18, 2017).

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  • From Vol. 10 No.25 (Jun. 22, 2017)

    Anatomy of a Private Equity Fund Startup

    A recent Latham & Watkins program provided a soup-to-nuts overview of the steps to establish a private equity fund, covering the initial planning phase; development of fund infrastructure; and offering and closing process. The program featured David J. Greene and Amy R. Rigdon, partner and associate, respectively, at the firm. This article highlights the key points raised during the presentation, outlining the above three components of forming a private equity fund, along with issues and considerations that may arise during each phase of the process. For another look at the startup process, see “Establishing a Hedge Fund Manager in Seventeen Steps” (Aug. 27, 2015).

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  • From Vol. 10 No.20 (May 18, 2017)

    Fund Managers Looking to Canadian Market Must Be Aware of Nuances of Canada’s Regulatory Regime

    Having emerged from the global financial crisis relatively unscathed, Canada enjoys a reputation for having a stable and prosperous economy and a base of sophisticated investors interested in opportunities presented by U.S. fund managers. Although there are many political, economic and cultural similarities between the U.S. and Canada, stateside fund managers seeking to market in Canada must pay close attention to the differences between the countries’ regulatory regimes. Specifically, missteps in navigating certain Canadian registration requirements can lead to hefty fees and fines that are easily avoidable. Additionally, fund managers may have to contend with unique cultural and language issues presented by certain provinces, such as Québec. To help readers understand the myriad regulatory and cultural particularities that come into play when marketing funds in Canada, The Hedge Fund Law Report interviewed three partners at Canadian law firm McMillan: Leila Rafi, Michael Burns and Margaret C. McNee. For more on issues faced by U.S. fund managers marketing to Canadian investors, see our two-part series “How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws”: Part One (Apr. 27, 2017); and Part Two (May 4, 2017). 

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  • From Vol. 10 No.18 (May 4, 2017)

    How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws (Part Two of Two)

    The decision by a U.S. adviser to market to Canada-based investors is often driven by the desire to obtain sizeable allocations from large institutional investors, including government pension plans. This choice, however, should not be made in a vacuum, as steps need to be taken by a firm’s legal, compliance and finance professionals to ensure that advisers comply with Canadian laws when marketing funds and selling their interests. In this two-part series, The Hedge Fund Law Report has identified certain pre-sale considerations (e.g., registration issues and additional disclosures to be provided to prospective purchasers) and post-sale obligations (e.g., regulatory filings and associated fees) for advisers marketing in Canada. This second installment explores when Canadian investment adviser registration requirements are triggered and what they entail; how Canada’s prospectus requirement applies in a private placement; when a U.S. manager must attach a Canadian “wrapper” to its fund’s private placement memorandum; payment of the Ontario capital markets participation fee; and other ongoing reporting requirements. The first article discussed two registration requirements that all advisers to private funds should consider prior to marketing their funds to Canadian investors. For additional insights on doing business in Canada’s funds market, see “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools” (Dec. 4, 2014).

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  • From Vol. 10 No.17 (Apr. 27, 2017)

    How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws (Part One of Two)

    Over the past decade, several factors have caused U.S. private fund advisers to become considerably more aware that many countries have laws restricting a foreign adviser’s ability to market to investors in those jurisdictions. See “K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). Canada is one such country that has long since maintained a comprehensive regulatory framework applicable to both Canadian-based and foreign asset managers seeking to raise capital from local investors. While non-resident advisers generally view compliance with Canada’s rules as manageable, they must still contend with a number of regulatory hurdles. In this two-part series, The Hedge Fund Law Report has identified the key registration issues, as well as ongoing regulatory and filing obligations, that may apply to non-Canadian managers seeking to raise capital in Canada. This first installment discusses two registration requirements that all private fund advisers should consider prior to marketing their funds to Canadian investors. The second article will explore a third registration requirement triggered in the managed account context, as well as a variety of additional rules U.S. managers may need to comply with when marketing their funds. For additional insight about Canada’s regulation of the fund industry, see “AIMA Canada Handbook Provides Roadmap for Hedge Fund Managers Doing Business in Canada” (Sep. 13, 2012).

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  • From Vol. 10 No.14 (Apr. 6, 2017)

    Dechert Partners Discuss How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect 

    With the U.K.’s recent trigger of Article 50 setting in motion a two-year negotiation period for its departure from the E.U., private fund managers are left scrambling for solutions to replace the passporting rights upon which they currently rely to market their funds throughout the E.U. Fortunately, other European jurisdictions – such as Luxembourg, Germany and Ireland – have bolstered their infrastructures and processes to accommodate redomiciled funds and allow private fund managers to continue to access Europe. Each of these jurisdictions presents its own unique opportunities and challenges, however. These issues were analyzed in depth during the opening session of Dechert’s recent Global Alternative Funds Symposium. Moderated by Gus Black, a London-based partner of the firm, the panel featured Joseph Glatt, general counsel, secretary and vice president of Apollo Capital Management; and Dechert partners Patrick Goebel (Luxembourg), Jeff Mackey (Dublin) and Hans Stamm (Munich). This article presents the key takeaways from the panel discussion. For additional insights from Dechert attorneys, see our two-part series on navigating Europe post-Brexit: “Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg” (Nov. 10, 2016); and “Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures” (Nov. 17, 2016).

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  • From Vol. 10 No.12 (Mar. 23, 2017)

    Best Practices for Investment Advisers Using Social Media to Mitigate Advertising Rule Violations and Other Risks

    The advent of Twitter, Facebook, LinkedIn and other widely popular social media forums has had a dramatic impact on society at large, including the investment funds industry. Yet investment advisers and firms may not fully grasp the compliance and operational risks that new technologies and sites can pose. Questions abound as to whether social media can be used to provide material information to certain investors at the expense of others; when the line is crossed from informational content to marketing a fund; and whether the social media accounts of individual employees and representatives need to be monitored for compliance purposes. These issues were the subject of a recent Regulatory Compliance Association (RCA) PracticEdge session that offered insights from Heather Traeger, chief compliance officer for the Teacher Retirement System of Texas; Parisa Haghshenas, a Branch Chief in the Chief Counsel’s Office of the SEC’s Division of Investment Management; Catherine Courtney Gordon, counsel at Morgan Lewis; and Isabelle Sajous, associate general counsel and deputy chief compliance officer at Cramer Rosenthal McGlynn. This article highlights the key takeaways from the session. For coverage of other RCA panels, see “Risks With Investment Allocation, Trade Execution, Soft Dollars, Client Solicitation and Valuation” (Apr. 14, 2016); and “Issues Pertaining to the Custody Rule, ERISA, Client Agreements, Fees, Codes of Ethics and Confidentiality” (Apr. 7, 2016). On May 18, 2017, RCA will host its annual Enforcement, Compliance & Operations Symposium in New York City. For additional information or to register for the symposium, click here.

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  • From Vol. 10 No.10 (Mar. 9, 2017)

    Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe

    Obtaining European investors has been perceived as prohibitively difficult and costly for U.S. fund managers; consequently, many avoided marketing in the region in favor of pursuing the ample funds available from U.S. investors. As fund managers have recently confronted an increasingly difficult fundraising environment in the U.S., however, many have more seriously considered approaching European investors. See “How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds” (Aug. 4, 2016). Unfortunately, after avoiding the region for so long, many U.S. fund managers have a limited understanding of the array of requirements for them to validly market in Europe. To help our readers navigate these choppy waters, The Hedge Fund Law Report has identified the six most pervasive misconceptions expressed by U.S. fund managers about marketing to European investors. This article outlines, and suggests ways to correct, those common misconceptions, including with respect to European domiciliation requirements; the slippery standards for when managers have marketed to, or reverse solicited, investors; and the availability of the E.U.’s Alternative Investment Fund Managers Directive (AIFMD) third-country passport and each country’s national private placement regime. For more on marketing in Europe, see “Four Approaches to Fund Marketing and Distribution Under the AIFMD” (Jun. 2, 2014); and our two-part series “Application of AIFMD to Non-E.U. Alternative Investment Fund Managers”: Part One (May 23, 2013); and Part Two (Jun. 13, 2013).

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  • From Vol. 10 No.10 (Mar. 9, 2017)

    Jersey Offers Range of Marketing and Distribution Options, Operational Support for Investment Funds

    While the global funds industry eagerly anticipates the form Brexit will take and which countries will enjoy third-country passporting rights under the Alternative Investment Fund Managers Directive (AIFMD), offshore jurisdictions increasingly seek to lure funds by positioning themselves as reputable financial centers with robust legal and financial services infrastructures. Amid these developments and trends, the island of Jersey holds considerable appeal due to its receipt of a favorable assessment on the equivalence of its legal regime with that of the E.U.; network of management firms to assist fund managers with reporting and compliance; and tax-neutral environment beneficial to certain fund structures established in the jurisdiction. Yet myriad questions face funds that seek to do business there. What is the status of the third-country AIFMD passport? How does Jersey’s reputation compare to other offshore jurisdictions such as the Cayman Islands or Guernsey? How should fund managers go about doing business in Jersey? What administrative, operational and strategic approaches are ideal for a given type of fund? To cast light on these questions and help fund managers make informed decisions about setting up and operating in Jersey, The Hedge Fund Law Report has conducted an in-depth interview with Emily Haithwaite, who recently joined Ogier as a partner. For more on Jersey, see “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions” (Aug. 6, 2015).

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  • From Vol. 10 No.9 (Mar. 2, 2017)

    Post-Brexit Environment Requires Fund Managers to Combine Granular Knowledge of Europe’s Varied Funds Markets With Appropriately Targeted Marketing Campaigns

    There are several issues that hedge fund managers must take into account prior to marketing and distributing their products in Europe. They need to consider various fund products, structures and regulatory requirements across the multiple jurisdictions in Europe. These factors have to be weighed together with the impact of recent developments – such as Brexit and the Panama Papers revelations – on European investors’ appetites for those products. See “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016). These topics were addressed in a recent panel discussion that took place under the auspices of the Hedge Fund Association. Moderated by Michael Delano, an audit partner for PwC Luxembourg, the panel featured Guillaume Touze, founder and managing director of Quadra Capital; Jérôme Wigny, a partner at Elvinger Hoss Prussen; and Carl Verbrugge, a capital partner at Lombard Odier Group. This article presents the primary takeaways from the panel discussion. For more on marketing in Europe, see “Marketing Strategies for U.S. Hedge Fund Managers Under AIFMD (Part One of Two)” (Jul. 21, 2016); and “Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)” (Jul. 14, 2016).

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  • From Vol. 10 No.8 (Feb. 23, 2017)

    How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll

    As the personal wealth of many mainland Chinese citizens has continued to grow, U.S. and European asset managers are eager to enter that market. Accessing Chinese capital, however, is fraught with barriers to entry, including severe restrictions by the Chinese government on capital outflows by investors. Managers may be able to reach some of these investors through Hong Kong, but that capital raising and asset management activity may trigger a licensing requirement with the Hong Kong Securities and Futures Commission, which is seen as much more hands-on than the SEC and the U.K. Financial Conduct Authority. See “K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). In a recent interview with The Hedge Fund Law Report, Robert Woll, a partner in Mayer Brown’s Hong Kong office, provided an update on the state of the alternative asset management industry in both China and Hong Kong, particularly as it relates to managers establishing a presence in these jurisdictions and marketing to investors. For insight from other Mayer Brown attorneys, see our three-part series on how funds can use subscription credit facilities: “Provide Funds With Needed Liquidity but Require Advance Planning by Managers” (Jun. 2, 2016); “Offer Hedge Funds and Managers Greater Flexibility” (Jun. 9, 2016); and “Operational Challenges for Private Fund Managers” (Jun. 16, 2016).

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  • From Vol. 10 No.2 (Jan. 12, 2017)

    How New Swiss Regulations Affect the Ability of Private Fund Managers to Market to Swiss Investors

    Switzerland is in the process of adopting a new regime to regulate the financial services industry and its various participants. Two key pieces of Swiss legislation that are undergoing the legislative process will affect Swiss-based financial service provider operations and how financial service providers located outside Switzerland provide services to Swiss clients. Non-Swiss private fund managers will be most interested in the revised approach proposed to Switzerland’s distribution rules, which impact how a fund may be marketed to Swiss investors. To help provide clarity surrounding the Swiss regulatory environment and the expected impact of this new legislation on the private funds industry, The Hedge Fund Law Report interviewed Dr. Vaïk Müller, an attorney-at-law based in Geneva. Müller’s views are particularly relevant to private fund managers that previously prepared their funds for distribution into Switzerland – with the appointment of a Swiss representative and a Swiss paying agent – as the legislation may reduce their regulatory burden in the future. The new legislation is also relevant for private fund managers that are not currently set up to distribute their funds to Swiss-based investors, as the regulations may, to a certain extent, facilitate their ability to market into Switzerland. For additional insight from Müller, see “New Swiss Regulations Require Appointment of Local Agents and Increased Disclosure in Hedge Fund Documents” (May 14, 2015). For coverage of additional Swiss regulations, see “What U.S. and Other Non-Swiss Portfolio Managers Need to Know About Managing Assets of Swiss Occupational Benefit Plans” (Sep. 22, 2016).

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  • From Vol. 9 No.49 (Dec. 15, 2016)

    Investor Gatekeepers Advise Emerging Managers on How to Stand Out When Pitching and Marketing Their Funds

    As emerging managers pitch their funds to investment committees, they must be fully aware of how the competitive marketing environment has increased the need for them to distinguish themselves from competitors. See “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016); and “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013). Part of this process includes having a nuanced grasp of the criteria – e.g., their track record, pitchbook length and pedigree – investment committees will consider before ultimately selecting or rejecting them. Further, it is vital for managers to remember that the industry is driven by interpersonal relations and that poor first impressions can doom a fund’s prospects. These were among the points discussed during a panel at the Hedge Fund Association’s (HFA) recent Hedgeopolis New York Conference. Moderated by Holly Singer, president of HS Marketing, LLC, the panel featured Meredith Jones, partner and head of emerging manager research for Aon Hewitt Investment Consulting; Sean Cover, director of treasury and investment operations for the Wildlife Conservation Society; and Thomas Pacilio, senior director of RSM U.S. Wealth Management. This article presents the key points communicated by the panelists. For additional coverage of the HFA conference, see “U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration” (Nov. 17, 2016). For insight from another HFA panel, see “Procedures for Hedge Fund Managers to Safeguard Trade Secrets From Rogue Employees” (Jul. 21, 2016).

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  • From Vol. 9 No.48 (Dec. 8, 2016)

    Ernst & Young’s 2016 Global Hedge Fund and Investor Survey Examines Marketing Strategies, Talent Management, Prime Brokerage and Operational Matters (Part Two of Two)

    Ernst & Young (EY) recently released the results of its tenth annual Global Hedge Fund and Investor Survey. Among other topics, the survey examined marketing strategies, operational efficiency, prime brokerage and talent management. This article, the second in a two-part series, describes the survey’s key findings in these respective areas. The first article detailed the survey’s results concerning investor allocation preferences, product customization, manager growth strategies, industry risks, pressure on management fees and trends in non-traditional products. For coverage of previous EY surveys, see “Continued Divergence of Expectations Between Managers and Investors” (Nov. 21, 2012); “Juxtaposition of the Views of Hedge Fund Managers and Investors on Hedge Fund Succession Planning, Governance, Administration, Expense Pass-Throughs and Due Diligence” (Jan. 5, 2012); and “Hedge Fund Industry Has ‘Weathered the Storm’” (Nov. 19, 2009).

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  • From Vol. 9 No.47 (Dec. 1, 2016)

    How Investment Managers Can Advertise Sub-Adviser Performance Without Violating SEC Rules 

    In a series of recent enforcement actions, the SEC has held investment advisers responsible for performance claims included in their marketing materials that they received from sub-advisers and that turned out to be false and misleading. Although the SEC acknowledged that the investment advisers may have been unaware that the performance information was false and misleading, the regulator concluded that they were nevertheless responsible for ensuring that the overall reported performance record from their sub-advisers was compliant with the Investment Advisers Act of 1940. To avoid running afoul of applicable law, investment advisers conveying third-party performance returns should obtain adequate documentation to verify their accuracy and establish policies and procedures that govern what due diligence they will conduct on the sub-advisers’ performance. In a guest article, Daniel G. Viola, partner at Sadis & Goldberg, and Antonella Puca, head of the investment performance attestation practice at RSM US, review the key aspects of the recent enforcement activity of the SEC on performance advertising and provide guidance on how to address some of the SEC’s concerns. For additional insight from Viola, see “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination” (Jan. 28, 2016). For more on performance advertising, see “The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Retaining Performance Records (Part Two of Two)” (Nov. 17, 2016); and “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016).

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  • From Vol. 9 No.45 (Nov. 17, 2016)

    Dechert Partners Discuss Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures (Part Two of Two)

    Brexit looms at a time ripe with new opportunities and challenges for managers seeking to market in the E.U. and around the world. On the one hand, managers must reconsider the types of vehicles and jurisdictions to use to preserve access to the E.U. markets. Additionally, new legislation – such as the impending Packaged Retail and Insurance-based Investment Products (PRIIPs) initiative – may present new barriers to managers marketing in Europe. On the other hand, however, global markets are opening up as certain vehicles, such as Undertakings for Collective Investment in Transferable Securities (UCITS), are increasingly welcomed by local regulators. These issues were discussed at a seminar entitled “Current and Future Developments: UCITS, AIFs, Brexit and Global Fund Distribution,” presented by Dechert’s financial services group on October 13, 2016. Moderated by Dechert partner Chris D. Christian, the seminar featured partners Richard L. Heffner, Karen L. Anderberg, Marc Seimetz, Mark Browne and Angelo Lercara. This article, the second in a two-part series, describes the increased usage of UCITS structures and the potential effect of impending PRIIPs legislation, as well as options for managers to domicile a fund in Germany or Ireland to market in the E.U. The first article in the series analyzed Brexit’s impact on structuring considerations, as well as the viability of domiciling funds in Luxembourg to access E.U. markets. For further commentary from Dechert attorneys, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016); and “What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs” (Nov. 12, 2015).

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  • From Vol. 9 No.45 (Nov. 17, 2016)

    U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration

    The role of regulators increasingly extends beyond conducting examinations and includes sharing data-driven expertise with their regulatory counterparts domestically or abroad to achieve their common goals of protecting investors, preventing problems (such as risk from hedge funds entering the commercial banking space) and facilitating smooth resolution of known issues. These were prominent themes of a panel at Hedgeopolis New York, the annual conference of the Hedge Fund Association (HFA). Moderated by Martin Cornish, a partner at MJ Hudson, the panel featured Jennifer A. Duggins, co-head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Robert Taylor, head of the Hedge Fund Management Department at the U.K. Financial Conduct Authority (FCA); and Garth Ebanks, deputy head of the Investments and Securities Division of the Cayman Islands Monetary Authority (CIMA). This article presents key takeaways from the panel discussion. For coverage of HFA’s May 2016 Global Regulatory Briefing panel, see our two-part series: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016). For guidance from CIMA, see “CIMA Enumerates Best Practices for Hedge Fund Manager AML Programs” (Mar. 17, 2016). For additional commentary from the FCA, see “FCA Director Emphasizes Regulator’s Focus on Firm’s Culture of Compliance” (Jul. 21, 2016); and “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016). 

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  • From Vol. 9 No.44 (Nov. 10, 2016)

    Dechert Partners Outline Post-Brexit Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg (Part One of Two)

    The likelihood of a “hard” Brexit poses many challenges for fund managers launching, marketing and distributing fund products in Europe. Nonetheless, funds have many options when it comes to cross-border transactions. Redomiciling a fund is far from the sole – or even the most obvious – choice. With a nuanced grasp of several structuring and regulatory options available in Europe, fund managers can make good use of opportunities available in Ireland, Luxembourg, Germany and other jurisdictions. For additional Brexit analysis, see our two-part series: “Effect of Hard vs. Soft Brexit on Hedge Fund Managers” (Jul. 7, 2016); and “Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World” (Jul. 14, 2016). These points were highlighted during a recent seminar presented by Dechert’s financial services group. Moderated by Dechert partner Chris D. Christian, the seminar featured partners Richard L. Heffner, Jr., Karen L. Anderberg, Marc Seimetz, Mark Browne and Angelo Lercara. This article, the first in a two-part series, presents the points raised during the seminar concerning structuring considerations in light of the impending Brexit, as well as the viability of Luxembourg as a domicile for managers to access E.U. markets. The second article will discuss the viability of domiciling a fund in Ireland or Germany to market in the E.U., as well as the rising prominence of Undertakings for Collective Investment in Transferable Securities structures. For additional commentary from Dechert attorneys, see “Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016); “Dechert Global Alternative Funds Symposium Evaluates Liquid Alternative Funds and Fund Governance Trends” (Jun. 25, 2015); and “Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013).

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  • From Vol. 9 No.40 (Oct. 13, 2016)

    How Developments With California’s Pension Plan Disclosure Law, the SEC’s Rules and FINRA’s CAB License May Impact Hedge Fund Managers and Third-Party Marketers

    Hedge fund managers and many service providers have faced a wave of new regulatory requirements since the 2008 global financial crisis. This is particularly true for third-party marketers engaged by hedge fund managers to solicit clients and fund investors, which may be subject to a barrage of regulations at the federal, state and local level depending on the nature of their business. To explore some of the latest regulatory challenges faced by funds and their marketers, The Hedge Fund Law Report recently interviewed Susan E. Bryant, counsel at Verrill Dana LLP, and Richard M. Morris, partner at Herrick, Feinstein LLP. This article sets forth the participants’ thoughts on a host of issues, including new disclosure requirements for state pension plan investors; recent enforcement trends; and new rules adopted by the SEC, FINRA, Municipal Securities Rulemaking Board (MSRB) and state regulators. On Thursday, October 20, 2016, from 10:30 a.m. to 11:30 a.m. EDT, Morris and Bryant will expand on the topics in this article – as well as other issues that affect hedge fund managers and third-party marketers – during a panel moderated by Kara Bingham, Associate Editor of the HFLR, at the Third Party Marketers Association (3PM) 2016 Annual Conference. For more information on the conference, click here. To take advantage of the HFLR’s $300 discount when registering for the conference, click the link available in the article. For prior coverage of a conference sponsored by 3PM, see “Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation” (Dec. 1, 2011).

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  • From Vol. 9 No.39 (Oct. 6, 2016)

    Trends in Irish Fund Launches and the Challenges – and Solutions – for Non-E.U. Fund Managers Using These Vehicles

    Fund managers outside the E.U. are increasingly looking to Ireland’s thriving funds market as a way to access potential E.U. investors. Regulatory changes have allowed fund managers to take advantage of innovative approaches and strategies, resulting in record numbers of cross-border fund launches in the jurisdiction. A recent report published by Maples and Calder found, among other things, that there has been a sizable increase in Irish fund launches recently, along with a trend toward the use of tax transparent vehicles. This article analyzes the report, together with insight from partners at law firms at the forefront of fund interactions with Irish and E.U. regulators concerning how non-E.U. fund managers can circumvent obstacles – such as marketing, regulatory and remuneration issues – in order to take advantage of these vehicles. For more on issues pertinent to Irish fund vehicles, see “Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA” (Feb. 12, 2015); and “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014). For additional insight from Maples and Calder, see “Tax, Legal and Operational Advantages of the Irish Collective Asset-Management Vehicle Structure for Hedge Funds” (Aug. 13, 2015); “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands” (Sep. 4, 2014); and “Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments” (Nov. 29, 2012).

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  • From Vol. 9 No.37 (Sep. 22, 2016)

    SEC Settlements Highlight Need for Managers to Verify Performance Claims of Others Prior to Use

    In February 2016, the SEC settled claims that investment adviser Cantella & Co. improperly relied on and disseminated materially misleading marketing materials prepared by F-Squared Investments, Inc. (F-Squared) for its so-called “AlphaSector” strategies. See “Hedge Fund Managers May Be Liable for Performance Claims of Others” (Mar. 3, 2016). The fallout from F-Squared’s improper use of backtesting in those marketing materials continues to spread to others who used its services. The SEC recently settled 13 additional enforcement proceedings against advisers who allegedly disseminated some or all of F-Squared’s erroneous claims without attempting to confirm their veracity. This article summarizes the allegations contained in the settlement orders, along with the terms of each settlement. For more on performance advertising, see “Liquidity and Performance Representations Present Potential Pitfalls for Hedge Fund Managers” (Mar. 31, 2016); and our two-part series entitled “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule?”: Part One (Dec. 5, 2013); and Part Two (Dec. 12, 2013). For other performance advertising issues, see our articles on GIPS compliance claims; testimonials and social media; the use of gross performance results; and the use of other firms’ track records.

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  • From Vol. 9 No.35 (Sep. 8, 2016)

    D.C. Circuit Delivers Significant Victory for the SEC in Upholding the Use of Administrative Law Judges in Enforcement Proceedings

    On August 9, 2016, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) ruled in favor of the SEC, rejecting a challenge to the constitutionality of the agency’s practice of bringing enforcement actions in front of administrative law judges (ALJs). In finding for the SEC against a registered investment adviser, the D.C. Circuit validated a long-standing practice utilized by the SEC to try certain enforcement cases in administrative proceedings. In addition to reviewing the D.C. Circuit’s decision, this article provides background on the SEC’s history of bringing contested cases before ALJs, discusses some of the recent criticism surrounding these tribunals and explores ways the decision may influence the SEC’s enforcement of hedge fund managers. For additional discussion of the SEC’s use of administrative proceedings, see “Four Insider Trading Enforcement Trends with Direct Impact on Hedge Fund Trading Strategies (Part One of Three)” (Nov. 13, 2014); and “Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part Two of Two)” (Feb. 6, 2014).

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  • From Vol. 9 No.32 (Aug. 11, 2016)

    Causes of ESMA’s Recommended Delay to Extend AIFMD Passport and Its Impact on Non-E.U. Fund Managers (Part Two of Two)

    The European Securities and Markets Authority (ESMA) is responsible for advising the E.U. on whether to extend the marketing passport under the Alternative Investment Fund Managers Directive (AIFMD) and which jurisdictions should receive this opportunity. While ESMA positively recommended several countries in its latest advice (Advice), it ultimately cautioned the E.U. not to extend the passport at this time. ESMA’s Advice and the looming prospect of another postponement of the highly-anticipated AIFMD passport has prompted questions about what caused this delay, as well as how non-E.U. alternative investment fund managers (AIFMs) desiring to market in the E.U. should proceed. Additionally, the Advice has raised doubts about how prominently the passport will factor into those non-E.U. AIFMs’ efforts when it becomes more broadly available, or whether they will continue to rely on national private placement regimes to market in individual E.U. member states. This second article in our two-part series provides industry commentary on issues that likely factored into ESMA’s Advice and discusses the potential implications of the Advice on hedge fund managers. The first article summarized the criteria ESMA used to evaluate the candidates and details the obstacles it identified for the seven jurisdictions for which it did not recommend extending the passport. See “AIFMD Has Increased Compliance Burden on Hedge Fund Managers (Part One of Two)” (Apr. 28, 2016); “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated” (Oct. 22, 2015); and “Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD” (Jan. 8, 2015).

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  • From Vol. 9 No.31 (Aug. 4, 2016)

    ESMA Limits Positive Recommendation for AIFMD Passport Extension to Only Five Non-E.U. Countries; Excludes U.S., Citing Uneven Playing Field (Part One of Two)

    E.U. alternative investment fund managers (AIFMs) are able to market their alternative investment funds (AIFs) to citizens in all E.U. member states under the Alternative Investment Fund Managers Directive (AIFMD). The European Securities and Markets Authority (ESMA) was tasked with providing advice on the viability of extending an AIFMD marketing passport to non-E.U. AIFMs and AIFs. In its initial advice in 2015, ESMA issued positive recommendations for several countries but ultimately advocated for delaying a decision on extending the marketing passport. See “ESMA Opinion Highlights Issues Regarding the Functioning of the AIFMD Passport” (Aug. 13, 2015); and “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions” (Aug. 6, 2015). In its latest advice issued on July 18, 2016, ESMA provided positive recommendations for extending the AIFMD passport to five countries, but identified significant obstacles to the candidacies of seven other countries, including the U.S. However, as in its 2015 advice, ESMA recommended that the AIFMD passport not be extended until ESMA has identified a “sufficient number” of acceptable candidates. This article, the first in a two-part series, summarizes the criteria ESMA used to evaluate the candidates and details the obstacles it identified for the seven jurisdictions to which it did not recommend extending the passport. The second article will provide industry commentary on issues that likely factored into ESMA’s advice and discuss the potential implications of the advice on hedge fund managers. See also “Marketing Strategies for U.S. Hedge Fund Managers under AIFMD (Part One of Two)” (Jul. 21, 2016); “Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)(July 14, 2016); and “European Commissioner Addresses Disproportionate Regulation, Difficulties of Hedge Funds to Rely on AIFMD Passport and Increased Compliance Burden” (May 5, 2016).

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  • From Vol. 9 No.31 (Aug. 4, 2016)

    How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds

    Fund managers struggling to raise capital in a hedge fund sector plagued by an outflow of money may seek to employ creative methods to build a fundraising edge. As they do so, it is critically important for managers to be attentive to the nuances of SEC definitions, rules and regulations so as to avoid incurring large civil penalties and settlements. See “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016); and “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013). These issues were the focus of a panel discussion that took place during the Ninth Annual Advanced Topics in Hedge Fund Practices: Manager and Investor Perspectives conference presented by Morgan, Lewis & Bockius on June 9, 2016. The panelists were Morgan Lewis partners Stephen C. Tirrell, Steven M. Giordano and Ethan W. Johnson. This article summarizes the takeaways from the discussion. For coverage of other panels at the conference, see “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016); and “How Can Private Fund Managers Grant Preferential Rights? Delaware Chancery Court Decision Stresses Need for Fund Document Integration” (Jun. 30, 2016). For additional insight from Morgan Lewis partners, see our two-part series on Singapore-based hedge fund managers: “How to Structure” (Jul. 16, 2015); and “Licensing and International Regulation” (Jul. 23, 2015); as well as “Key Person Provisions in Hedge Fund Documents: Structure, Consequences and Demand From Institutional Investors” (Sep. 17, 2009).

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  • From Vol. 9 No.30 (Jul. 28, 2016)

    How Hedge Fund Managers Can Navigate Dual AIFMD and CFTC Compliance (Part Two of Two)

    Both the Alternative Investment Fund Managers Directive (AIFMD) and the regulations of the U.S. Commodity Futures Trading Commission (CFTC) regulate hedge fund and other private fund managers. Depending on where a hedge fund manager is located and what investors it solicits, the manager may be subject to AIFMD and also required to register with the CFTC. Consequently, that manager would need to ensure that it is able to comply with both regimes. See “Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss CFTC Compliance, Conflicting Regulatory Regimes and Best Marketing Practices (Part Two of Four)” (Jan. 29, 2015). A recent program sponsored by the Futures Industry Association (FIA) provided an overview of the intersection of AIFMD and CFTC regulations, along with other regulatory issues. Michael Sorrell, an associate general counsel at the FIA, moderated the discussion, which featured Fried Frank partners Gregg Beechey, William J. Breslin and David S. Mitchell. This article, the second in a two-part series, summarizes the speakers’ key insights with respect to the intersection of CFTC regulation with AIFMD, as well as the impact on AIFMD of the U.K.’s vote to leave the E.U. The first article addressed the current options available to U.S. managers to market their funds in the E.U. For additional insight from Fried Frank partners, see “Application to Hedge Fund Managers of the Internal Control Report Requirement of the Amended Custody Rule” (Feb. 11, 2010); and “Hedge Fund Manager Fiduciary Duty, SEC Subpoena Power, Hybrid Hedge Fund Structures, Managed Account Platforms, Codes of Ethics and More” (Feb. 4, 2010).

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  • From Vol. 9 No.29 (Jul. 21, 2016)

    Marketing Strategies for U.S. Hedge Fund Managers Under AIFMD (Part One of Two) 

    The Alternative Investment Fund Managers Directive (AIFMD) established a comprehensive regime that governs how and when hedge and other private fund managers may offer their products to investors in the E.U. Consequently, U.S. hedge fund managers looking to raise capital from European investors must choose a regulatory compliance strategy that is appropriate in light of the manager’s size, European presence and anticipated reach. A recent program sponsored by the Futures Industry Association (FIA) provided an overview of the marketing environment under AIFMD, along with other regulatory issues. Michael Sorrell, an associate general counsel at the FIA, moderated the discussion, which featured Fried Frank partners Gregg Beechey, William J. Breslin and David S. Mitchell. This article, the first in a two-part series, summarizes the speakers’ key insights with respect to the current options available to U.S. managers to market their funds in the E.U. The second article will address the intersection of CFTC regulation with AIFMD. For additional insight from Fried Frank partners, see “The SEC’s Proposed Custody Rule Changes: An Analysis of the Impact on Hedge Fund Managers” (Jun. 24, 2009). For more on AIFMD, see our two-part series on compliance by hedge fund managers: “Increased Compliance Burden” (Apr. 28, 2016); and “AIFMD’s Depositary Requirement” (May 5, 2016).

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  • From Vol. 9 No.28 (Jul. 14, 2016)

    Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)

    The June 23, 2016, referendum vote in Britain to leave the E.U. – commonly referred to as “Brexit” – will undoubtedly have a significant impact on a number of business sectors, including U.S. hedge and other private fund managers with U.K. affiliates. Some U.S. private fund managers, in connection with the adoption of the Alternative Investment Fund Managers Directive (AIFMD), established U.K. affiliates to take advantage of the AIFMD passport regime and market to investors in the European Economic Area. See “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era” (Apr. 30, 2015). Whether such advisers will be able to continue to rely on the AIFMD and other E.U. passports will be determined over the next few years as the U.K. negotiates its exit terms from the Union. In an effort to help our subscribers understand the implications of the vote for hedge fund managers, The Hedge Fund Law Report conducted interviews with law firm partners focused on Brexit and compiled a summary and analysis of the partners’ insights, along with the client advice memoranda of leading law firms with hedge fund practices, in a two-part series. This second article addresses the options available for fund managers concerned about how they can continue to market and distribute their products in the E.U. The first article provided a detailed summary of the time frame for any potential changes resulting from the vote, as well as analysis of possible terms under which the U.K. might leave the E.U. and the distinction between a “hard” and “soft” Brexit. For additional coverage of Brexit and its impact on hedge funds, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016).

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  • From Vol. 9 No.25 (Jun. 23, 2016)

    What Today’s Brexit Vote Could Mean for Hedge Fund Managers

    On June 24, 2016, the world will learn the decision of U.K. citizens to stay in or leave the E.U. If the “Brexit” becomes a reality, hedge fund managers based or operating in the U.K. could face repercussions, including changing regulations and restricted access to markets for their hedge funds. Although the U.K. would remain in the E.U. for at least two years while working out the details of an exit, hedge fund managers should still take certain steps to prepare for and mitigate the impact of departure. This article analyzes the potential implications of the Brexit on hedge fund managers and steps that hedge fund managers should take to prepare. For more on the Brexit, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016); and “European Commissioner Emphasizes Need for Proportionate Regulation to Promote the CMU” (Mar. 17, 2016).

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  • From Vol. 9 No.25 (Jun. 23, 2016)

    Capital-Raising Opportunities, Regulatory Hurdles and Cultural Challenges Faced by Hedge Fund Managers in China and the Middle East

    As programs facilitating investment in China’s stock markets become more widely available to investors and asset managers in Western countries, it is critically important for hedge fund managers to be aware of the possibilities and limits of various investment strategies and to keep pace with China’s liberalization. Similarly, the Middle East presents a patchwork of jurisdictions, imposing various regulations on managers looking to raise capital. The capital-raising opportunities, regulatory hurdles and cultural challenges faced by hedge fund managers looking to access these regions were discussed as part of the Dechert Global Alternative Funds Symposium held in New York on April 6. Moderated by Dechert partner Angelyn Lim, the panel featured partners Karl Paulson Egbert and Christopher Gardner, as well as Dianna Raedle, chief executive officer and president of Deer Isle Capital. This article highlights the key takeaways from the panel discussion. For coverage of last year’s Symposium, see “Portfolio Management and Global Trends for Private Equity and Real Estate Funds” (Jul. 2, 2015); and “Trends in European and Global Hedge Fund Marketing” (May 28, 2015).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    Marketing and Reporting Considerations for Emerging Hedge Fund Managers

    In order to survive and flourish in a market dominated by large, well-established competitors, emerging hedge fund managers must be well versed in the risks and potential dangers of raising funds and be mindful of regulatory compliance blunders, such as incomplete disclosures, insufficient controls and inadequate policies and procedures. See “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013). Pepper Hamilton recently hosted a symposium focusing on a number of these risks and offering practical solutions. Moderated by partner Irwin Latner, the panel discussion featured Adil Abdulali, senior managing director of risk management for Protégé Partners; Christopher Edgar, managing director, capital solutions, for Convergex Prime Services; Andrew Goodman, a partner at Infusion Global Partners; and Chris Lombardy, a managing director at Duff & Phelps. This article highlights the key points raised by the panel. Other articles addressing issues faced by emerging managers include: “Establishing a Hedge Fund Manager in Seventeen Steps” (Aug. 27, 2015); and “Stars in Transition: A New Generation of Private Fund Managers” (Dec. 10, 2009).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    Practical Issues Faced by U.S.-Based Managers When Establishing U.K.-Listed Funds (Part One of Two)

    U.K.-listed closed-end funds have become an increasingly popular source of permanent capital for the global asset management industry. Used for all manner of investment strategies, these vehicles are ideally suited for illiquid strategies such as private equity, and have also been used as feeder funds into single-manager hedge funds. Over the past several years, U.S.-based managers have been coming to London for the relatively greater regulatory flexibility offered by the U.K.-listed funds markets as compared to U.S. public securities markets. In a two-part guest series, Tim West and Dinesh Banani, partners at Herbert Smith Freehills, provide a practical overview of key issues facing U.S.-based managers considering establishing a fund listed in the U.K. This first article explores listing and eligibility requirements for popular U.K. listing venues; continuing obligations for U.K.-listed funds; structuring and jurisdictional considerations; and marketing under the Alternative Investment Fund Managers Directive. The second article will consider the impact of certain U.S. securities laws that would apply to the U.K. listing of the shares of a closed-end fund offered by a U.S.-based manager. See also “Regulatory and Practitioner Perspectives on Alternative Mutual Fund Compliance Risk” (Feb. 26, 2015).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe

    The possibility of Britain’s electorate voting in a widely heralded June 23 referendum to leave the European Union – an eventuality popularly known as the “Brexit” – and the creation of the Luxembourg Reserved Alternative Investment Fund pose special challenges and opportunities for U.S. hedge fund managers marketing their products in the U.K. and Europe. One session of the Dechert Global Alternative Funds Symposium, held in New York on April 6, provided practical insight to help hedge fund managers understand, adapt to and take advantage of these changes and opportunities, including with respect to the marketing passport under the Alternative Investment Fund Managers Directive and the growing popularity of loan origination funds in Europe. Moderated by Boston-based Dechert partner Adrienne Baker, the panel featured London-based partners Richard Heffner and Stuart Martin; Luxembourg-based partner Antonios Nezeritis; and Munich-based partner Hans Stamm. For coverage of last year’s Symposium, see “Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2015); and “Liquid Alternative Funds and Fund Governance Trends” (Jun. 25, 2015).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    ESMA Executive Director Analyzes Evolving Role and Regulatory Environment for Hedge Fund Managers in Europe

    The role of asset managers in Europe and the status of funds under E.U. regulations are changing markedly as funds move into a breach left by the retreat of banks from lending in the years since the global financial meltdown. Regulators, along with much of the public, have moved past a perception of lending by non-bank entities as merely a form of “shadow banking” activity. See “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014). Passporting rights have also expanded significantly, although a lack of harmony among different countries’ regulatory regimes remains a persistent problem. These issues were the focus of a talk delivered by Verena Ross, Executive Director of the European Securities and Markets Authority (ESMA), at the recent AIMA Global Policy and Regulatory Forum in London. This article spotlights the portions of Ross’ speech most relevant to hedge fund managers operating in Europe. For insight from Ross’ colleague, ESMA Chair Steven Maijoor, see “ESMA Chair Calls for Increased Transparency and Regulatory Convergence As Interest Rates Rise” (Jan. 28, 2016); and “ESMA Chair Highlights Upcoming Focus on Supervisory Convergence” (Oct. 1, 2015).

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  • From Vol. 9 No.20 (May 19, 2016)

    U.S., U.K. and Offshore Regulators Share Views on Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers (Part Two of Two)

    As hedge fund managers find themselves scrutinized by numerous regulators, it is important for them to understand those regulators’ views and priorities with respect to issues including cybersecurity, anti-money laundering, the Alternative Investment Fund Managers Directive, advertising and liquidity. These topics were addressed during a Global Regulatory Briefing presented by the Hedge Fund Association, featuring Emma Bailey, Director of the Investment Supervision and Policy Division of the Guernsey Financial Services Commission; Jennifer A. Duggins, Co-Head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Garth Ebanks, Deputy Head of the Investments and Securities Division of the Cayman Islands Monetary Authority; Ifor Hughes, Assistant Director of Policy in the Policy, Legal and Enforcement department of the Bermuda Monetary Authority; and Robert Taylor, Head of the Investment Management Department at the U.K. Financial Conduct Authority. This second article in a two-part series highlights the panelists’ key insights on these topics. The first article recapped the speakers’ commentary on fund regulation in their respective jurisdictions, cooperation among regulators and whether hedge fund regulation is sufficient to address fraud. For more on the regulatory approach to these issues, see “FCA 2016-2017 Regulatory and Supervisory Priorities Include Focus on AML, Cybersecurity and Governance” (Apr. 14, 2016); and “Luxembourg Financial Regulator Issues Guidance on AIFMD Marketing and Reverse Solicitation” (Sep. 3, 2015).

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    AIFMD Has Increased Compliance Burden on Hedge Fund Managers (Part One of Two)

    The Alternative Investment Fund Managers Directive (AIFMD) significantly changed the European legal and regulatory landscape for hedge fund managers, affecting their ability to market funds in Europe, increasing their compliance burden and imposing new requirements on funds. In a recent interview with The Hedge Fund Law Report, Bill Prew, founder and CEO of INDOS Financial Limited, discussed AIFMD’s practical impact on the hedge fund industry since its introduction in July 2014. This article, the first in a two-part series, sets forth Prew’s thoughts about the effect of AIFMD on hedge fund managers and the ability of managers to market their funds across Europe. In the second installment, Prew will discuss the practical implications of the depositary requirements imposed by AIFMD on hedge fund managers, as well as other industry trends and issues. For additional insight from Prew, see our series on Advise Technologies’ program for non-E.U. hedge fund managers under E.U. private placement regimes: “Guidance for Registering” (Dec. 3, 2015); and “Roadmap for Reporting” (Dec. 10, 2015). For more on AIFMD, see “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated” (Oct. 22, 2015).

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    FCA Emphasizes Need for Fund Managers to Monitor and Clearly Communicate Financial Benchmarks and Investment Practices

    Investors base high-stakes decisions on hedge fund marketing materials, disclosure documents and investment mandates, so it is imperative for hedge fund managers to ensure that those documents accurately and clearly describe the funds’ operations. In a recent thematic review, the U.K. Financial Conduct Authority (FCA) assessed whether U.K.-authorized investment funds and segregated mandates are operating in line with investor expectations set by marketing and disclosure materials. While managers generally ensure that their behavior lines up with disclosure, the FCA found room for them to improve and exercise vigilance in managing investor expectations. This article enumerates the FCA-recommended practices for asset managers to ensure that product descriptions are clear and correct, fund governance is effective for the life of the product and distribution channels are adequately monitored. For additional insight from the FCA, see “FCA 2016-2017 Regulatory and Supervisory Priorities Include Focus on AML, Cybersecurity and Governance” (Apr. 14, 2016); “FCA Expects Hedge Fund Managers to Focus on Liquidity Risk” (Mar. 3, 2016); and “FCA Report Enjoins Hedge Fund Managers to Improve Due Diligence” (Feb. 25, 2016).

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  • From Vol. 9 No.16 (Apr. 21, 2016)

    New Luxembourg RAIF Structure Facilitates Access to AIFMD Passport and Marketing to E.U. Investors for Non-E.U. Hedge Fund Managers (Part One of Two)

    The Luxembourg funds market is steadily growing and offers numerous options for U.S. managers looking to access European investors. In addition to Undertakings for Collective Investments in Transferable Securities vehicles and specialized investment funds, Luxembourg has recently unveiled a new structure – the Reserved Alternative Investment Fund (RAIF) – that will provide a flexible new avenue for U.S. managers to market their funds into the E.U. At a recent presentation, the Association of the Luxembourg Fund Industry (ALFI) provided a comprehensive overview of the business, tax and regulatory ramifications of the RAIF. This article, the first in a two-part series, summarizes the panel’s discussion of the Luxembourg funds landscape and the key features of RAIFs. The second article will explore opportunities presented by RAIFs for U.S. managers – including hedge fund, real estate and private equity managers – as well as tax considerations of the new fund structure. For additional insights from ALFI, see “Luxembourg Funds Offer Options for Hedge Fund Managers to Access European and Global Investors” (Feb. 11, 2016); and “NICSA/ALFI Program Considers Impact of AIFMD on U.S. Fund Managers” (Sep. 25, 2014).

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  • From Vol. 9 No.9 (Mar. 3, 2016)

    Hedge Fund Managers May Be Liable for Performance Claims of Others

    Performance advertising is a minefield for fund managers. Besides ensuring that their own performance is accurate, a recently settled SEC enforcement action makes clear that hedge fund managers and other investment advisers can be held liable for disseminating another adviser’s inaccurate claims. See also “Hedge Fund Managers Must Refrain From Combining Actual and Hypothetical Performance Results to Avoid Misleading Investors and Avert SEC Enforcement Action” (Feb. 11, 2016). When a registered investment adviser licensed proprietary trading strategies from another firm, it also began using performance information prepared by that firm. However, those performance claims were inaccurate because, rather than being based on actual track records as purported, they were hypothetical and backtested. See “SEC Settles Enforcement Action and Pursues Company Over Use of Backtested Performance Data” (Jan. 8, 2015). This article summarizes the SEC’s allegations against the relying investment adviser, as well as the terms of the settlement order. For more on backtesting, see “Under What Conditions Can a Hedge Fund Manager Present Hypothetical Backtested Performance Results?” (Feb. 1, 2013). For a discussion of performance advertising, see our two-part series on hedge fund managers’ use of target returns: “Common Practices, Benefits and Drawbacks” (Apr. 23, 2015); and “Legal Risks” (Apr. 30, 2015). For other performance advertising issues, see the HFLR’s articles on GIPS compliance claims; testimonials and social media; cherry picking and case studies; the use of gross performance results; and the use of other firms’ track records.

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  • From Vol. 9 No.6 (Feb. 11, 2016)

    Luxembourg Funds Offer Options for Hedge Fund Managers to Access European and Global Investors

    As hedge fund managers look to access investors or investments in Europe, Latin America or Asia, Luxembourg has emerged as a significant domicile for fund formation. With a favorable tax and regulatory regime, along with structures such as UCITS funds, Luxembourg is an increasingly attractive jurisdiction, particularly for non-E.U. hedge fund managers looking to distribute to European investors in the wake of AIFMD. The Association of the Luxembourg Fund Industry (ALFI) recently held a seminar that discussed the country’s growth in the alternative investment funds industry, regulatory updates, global investment opportunities and alternative fund structures available in Luxembourg. This article captures the seminar’s key takeaways on these topics. For more from ALFI, see “NICSA/ALFI Program Considers Impact of AIFMD on U.S. Fund Managers” (Sep. 25, 2014).

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  • From Vol. 9 No.5 (Feb. 4, 2016)

    How Hedge Fund Managers Can Raise Capital and Expand Despite Increasing Regulation and Investor Demands

    In an environment where investors remain risk averse due, in part, to falling asset prices, hedge fund managers must carefully consider how to market their funds and grow their businesses. With increasing regulation in Europe and investor demands in the U.S., managers must find a way to woo investors and explore the various structures and options available for doing so, including joining an established platform, seeking a strategic investment or offering founder shares. In addition to other topics, speakers at the annual Sadis & Goldberg Alternative Investment Seminar discussed these challenges. This article summarizes the salient points made about marketing hedge funds in Europe and the U.S. and expanding a manager’s business, as well as the trend of converting to a family office or otherwise “going private.” For more from Sadis & Goldberg lawyers, see “Understanding the Benefits and Uses of Series LLCs for Hedge Fund Managers” (Nov. 15, 2012); and “Sullivan v. Harnisch and SEC Proposed Whistleblower Rules Bolster Internal Compliance Programs While Creating Catch-22 for Compliance Officers” (Mar. 18, 2011).

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  • From Vol. 9 No.1 (Jan. 7, 2016)

    Capital-Raising Issues Hedge Fund Managers Must Consider

    One of the greatest concerns for hedge fund managers – particularly startup managers – is raising capital and increasing assets under management, especially in difficult fundraising environments. Managers must solicit investors and raise capital in order to successfully grow their businesses, but raising capital goes beyond simply demonstrating good fund performance. Hedge fund managers must successfully market themselves, understand their competition and know what investors are seeking and how their funds can meet those needs. Participants explored these and other matters at the annual Thompson Hine hedge fund seminar. This article highlights the key points discussed by panelists, including issues relating to raising capital, entering into seeding arrangements, offering founder share classes and understanding investor needs. For coverage of prior Thompson Hine hedge fund seminars, see “Seminar Offers Insights on Organizing Alternative Mutual Funds, AIFMD, FATCA and the JOBS Act” (Dec. 5, 2013); and “Seminar Focuses on Implications for Hedge Fund Managers of the JOBS Act, Form PF and Form CPO-PQR” (Nov. 9, 2012).

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  • From Vol. 8 No.49 (Dec. 17, 2015)

    Hedge Fund GCs and CCOs Face an Expanding Role in Changing E.U. Marketing Environment (Part Two of Two)

    As the European regulatory environment grows more complex, hedge funds looking to market in Europe must navigate this increasingly complicated landscape.  To assist their firms with such efforts, hedge fund general counsels (GCs) and chief compliance officers (CCOs) have seen their roles evolve in recent years to encompass responsibility for compliance with the advanced regulatory burdens and demand greater visibility on the investor relations side.  On November 17, 2015, The Hedge Fund Law Report and Dechert LLP co-sponsored a program, “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” which considered issues faced by GCs and CCOs relating to private placements, reverse solicitation, the E.U. marketing “passport,” regulatory changes, UCITS funds and investor relations.  Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the discussion featured Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Dechert partners Karen L. Anderberg and Gus Black.  This second article in our two-part series addresses topics including the extension of the E.U. marketing passport, potential regulatory changes, marketing alternative mutual funds and investor relations.  The first article summarized key takeaways from the panel discussion with respect to marketing funds under the Alternative Investment Fund Managers Directive and reverse solicitation.  For more from Anderberg, see “Dechert Partners Discuss Impact of Volcker Rule on European Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).  For additional insight from Black, see “Dechert Global Alternative Funds Symposium Highlights Trends in European and Global Hedge Fund Marketing,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).

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  • From Vol. 8 No.49 (Dec. 17, 2015)

    Distribution and Operational Due Diligence Considerations for Hedge Fund Managers Launching UCITS Funds (Part Two of Two)

    As a growing number of hedge fund managers look to Undertakings for Collective Investments in Transferable Securities (UCITS) funds as a means of accessing the European market, those managers must establish a framework for distributing UCITS funds.  While UCITS products are more regulated and transparent than private hedge funds, investors must still conduct thorough operational due diligence before investing in those funds.  At the recent Liquid Alternative Strategies Global conference held in London, speakers delved into these topics as part of a broader discussion about the rise of alternative UCITS as a global investment solution.  This article, the second in a two-part series, focuses on distribution of UCITS products and operational due diligence.  The first article addressed the drivers behind the recent growth in alternative UCITS funds and several key factors that managers should consider when assessing their ability to capitalize on demand for UCITS products.  For more on UCITS, see “U.K. Government Proposes to Implement UCITS V Measures Applicable to Fund Managers,” The Hedge Fund Law Report, Vol. 8, No. 43 (Nov. 5, 2015); and “FCA Consults on Implementation of UCITS V Provisions Applicable to Managers,” The Hedge Fund Law Report, Vol. 8, No. 36 (Sep. 17, 2015).  For more on operational due diligence, see “PLI ‘Hot Topics’ Panel Addresses Operational Due Diligence and Registered Alternative Funds,” The Hedge Fund Law Report, Vol. 8, No. 48 (Dec. 10, 2015); and “FRA Liquid Alts 2015 Conference Highlights Due Diligence Concerns with Alternative Mutual Funds (Part Three of Three),” The Hedge Fund Law Report, Vol. 8, No. 19 (May 14, 2015).

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  • From Vol. 8 No.48 (Dec. 10, 2015)

    Hedge Fund GCs and CCOs Face Risks in Changing E.U. Marketing Environment (Part One of Two)

    Hedge funds looking to market in Europe are faced with an increasingly complex regulatory environment – encompassing the Alternative Investment Fund Managers Directive (AIFMD), the Markets in Financial Instruments Directive, as well as a panoply of local regulations.  Hedge fund general counsels (GCs) and chief compliance officers (CCOs) must adapt to these changes and ensure that their firms appropriately solicit and engage with investors.  On November 17, 2015, The Hedge Fund Law Report and Dechert LLP co-sponsored a program, “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” which considered issues faced by GCs and CCOs relating to private placements, reverse solicitation, the E.U. marketing “passport,” regulatory changes, UCITS funds and investor relations.  Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the discussion featured Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Dechert partners Karen L. Anderberg and Gus Black.  This article, the first in a two-part series, summarizes the key takeaways from the panel discussion with respect to marketing funds under the AIFMD and reverse solicitation.  The second article will address topics including the extension of the E.U. marketing passport, potential regulatory changes, marketing alternative mutual funds and investor relations.  For more from the panelists, see “What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs,” The Hedge Fund Law Report, Vol. 8, No. 44 (Nov. 12, 2015).

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  • From Vol. 8 No.48 (Dec. 10, 2015)

    Advise Technologies Program Provides Non-E.U. Hedge Fund Managers with Roadmap for Reporting Under E.U. Private Placement Regimes (Part Two of Two)

    Concerns about disparate registration and reporting requirements imposed by the national private placement regimes (NPPRs) that have arisen since the Alternative Investment Fund Managers Directive (AIFMD) became effective have caused many non-E.U. hedge fund managers to hesitate when considering marketing their funds into the E.U.  However, as marketing under the NPPRs has evolved in the two years since the AIFMD took effect, much has been learned about how each jurisdiction’s regulators intends to treat non-E.U. fund managers.  A recent program presented by Advise Technologies sought to dispel some of the concerns of non-E.U. fund managers with respect to registration and reporting requirements and offered insights into how NPPRs function in practice.  The program, “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think,” was moderated by William V. de Cordova, Editor-in-Chief of The Hedge Fund Law Report, and featured Bill Prew, Founder and CEO of INDOS Financial; Tim Slotover, Founder and Director of flexGC; Jeanette Turner, Managing Director and General Counsel of Advise Technologies; and Arne Zeidler, Founder and Managing Director of Zeidler Legal Services.  This article, the second in a two-part series, summarizes the key takeaways from the program with respect to the regulatory reporting requirements and the evolution of marketing under the NPPRs.  The first article addressed the initial entry requirements, pre-investment disclosures and annual reporting requirements under the NPPRs.  For more from Turner on marketing and reporting under the AIFMD, see “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); and “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).

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  • From Vol. 8 No.47 (Dec. 3, 2015)

    Advise Technologies Program Provides Guidance for Non-E.U. Hedge Fund Managers Registering Under E.U. Private Placement Regimes (Part One of Two)

    Many non-E.U. fund managers have hesitated to market their funds into the E.U. since the Alternative Investment Fund Managers Directive (AIFMD) took effect, because of national private placement regime (NPPR) requirements of each country in which the manager wants to market.  Non-E.U. managers have been concerned about potentially burdensome and disparate registration and reporting requirements.  A recent program presented by Advise Technologies sought to dispel some of those concerns and offered insights into how the NPPRs function in practice.  The program, “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think,” was moderated by William V. de Cordova, Editor-in-Chief of The Hedge Fund Law Report, and featured Bill Prew, Founder and CEO of INDOS Financial; Tim Slotover, Founder and Director of flexGC; Jeanette Turner, Managing Director and General Counsel of Advise Technologies; and Arne Zeidler, Founder and Managing Director of Zeidler Legal Services.  This article, the first in a two-part series, summarizes the key takeaways from the program with respect to initial entry requirements, pre-investment disclosures and annual reporting requirements under the NPPRs.  The second article will address regulatory reporting requirements and the evolution of marketing under the NPPRs.  For more from Slotover, Turner and Zeidler on the AIFMD, see “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated,” The Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015).  For more on marketing funds into the E.U., see “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era,” The Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015); “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-E.U. Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014); and “Four Strategies for Hedge Fund Managers for Accessing E.U. Capital Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).

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  • From Vol. 8 No.44 (Nov. 12, 2015)

    What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs

    Hedge funds looking to market in Europe face an increasingly complex regulatory environment, and hedge fund GCs and CCOs must adapt to these changes to ensure their firms appropriately solicit and engage with investors.  In a recent interview with The Hedge Fund Law Report, Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Karen Anderberg, a partner at Dechert, discussed implications of the changes in the European regulatory environment on hedge fund GCs and CCOs; challenges for hedge fund managers pursuing private and retail investors in Europe; and the evolving role of hedge fund GCs and CCOs with respect to marketing.  These experts, along with Dechert partner Gus Black, will expand on the topics in this article – as well as other issues affecting hedge fund GCs and CCOs – in a panel co-sponsored by The Hedge Fund Law Report and Dechert.  Entitled “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” the panel will be held in London on November 17, 2015, at 5:30 p.m. GMT.  For more information, click here.  To register, click here.  For more from Dechert, see “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates,” The Hedge Fund Law Report, Vol. 8, No. 20 (May 21, 2015); and our recent two-part series on the Supreme Court’s Denial of Cert in Newman: Part One, Vol. 8, No. 42 (Oct. 29, 2015); and Part Two, Vol. 8, No. 43 (Nov. 5, 2015). 

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  • From Vol. 8 No.41 (Oct. 22, 2015)

    AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated

    With the introduction of Europe’s Alternative Investment Fund Managers Directive (AIFMD), non-E.U. alternative investment fund managers (AIFMs) have sought information about what the directive means for them and whether they should avoid Europe altogether.  Generally speaking, the sentiment has been negative, with firms warned about the need to register in – and comply with distinct reporting requirements in – each jurisdiction, as well as the need to disclose sensitive compensation information.  In the end, most U.S. firms have opted to rely on reverse solicitation or simply stay out of Europe for the time being.  In the two years since AIFMD went into effect, much has been learned about how Member State regulators intend to treat non-E.U. AIFMs.  In many ways, AIFMD is easier than expected for non-E.U. AIFMs.  In short, a non-E.U. firm wishing to market in Europe should not let fear of AIFMD get in its way.  In a guest article, Jeanette Turner, managing director and general counsel at Advise Technologies, Tim Slotover, founder of flexGC, and Arne Zeidler, founder and managing director of Zeidler Legal Services, examine the obligations of non-E.U. AIFMs under the National Private Placement Regimes (NPPRs) of individual European countries and explore alternatives to the NPPRs for non-E.U. AIFMs to market their funds in Europe.  On Tuesday, October 27, 2015, from 8:00 a.m. to 10:00 a.m. EDT, Turner, Slotover and Zeidler will expand on the thoughts in this article – as well as other areas of AIFMD that affect non-E.U. hedge fund managers – in a seminar entitled “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think.”  For more information and to register for the panel discussion, click here.  For additional insight from Turner, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015); and “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015).

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  • From Vol. 8 No.40 (Oct. 15, 2015)

    What Hedge Fund Managers Need to Know About Recent SEC Guidance on Substantive, Pre-Existing Relationships and Internet Use

    On August 6, 2015, the staff of the SEC’s Corporation Finance Division issued Compliance and Disclosure Interpretations regarding general solicitations under Rule 506 of Regulation D under the Securities Act of 1933.  That guidance may change, endorse or liberalize certain hedge fund practices.  Separately, the SEC granted no-action relief to a firm using online qualification to establish a substantive, pre-existing relationship with an offeree.  Together, the guidance and no-action letter may alter some of the principles within which hedge funds and other private investment funds operate, potentially signifying a liberalization of how the SEC interprets the rules governing private offerings.  In a guest article, Steven M. Felsenthal, general counsel and chief compliance officer of Millburn Ridgefield Corporation, discusses the potential implications of the guidance and the no-action letter on the private investment fund industry.  Felsenthal will speak about marketing and compliance at the Ninth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  For more information about the Summit, click here.  To register for the Summit, click here, using the HFLR’s promotional code available in this article for a discount of $500 off the registration price.  For additional insight from Felsenthal, see “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend,” The Hedge Fund Law Report, Vol. 7, No. 35 (Sep. 18, 2014); “What Do the CFTC Harmonization Rules Mean for Non-Mutual Fund Commodity Pools, Including Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013); and “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’: Why Should Commodity Pool and Hedge Fund Managers Care?,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 8 No.34 (Sep. 3, 2015)

    Luxembourg Financial Regulator Issues Guidance on AIFMD Marketing and Reverse Solicitation

    The Luxembourg Commission de Surveillance du Secteur Financier (CSSF) recently updated its Frequently Asked Questions document (FAQ) on the application of AIFMD in Luxembourg.  The FAQ includes helpful guidance and clarifications relating to the definition of marketing and reverse solicitation for hedge fund managers operating or marketing funds in Luxembourg.  In addition, the CSSF set out further information regarding credit institutions and investment firms, depositaries and Annex IV reporting.  This article summarizes the new guidance.  See also “What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014).  For more on AIFMD, see “ESMA Opinion Highlights Issues Regarding the Functioning of the AIFMD Passport,” The Hedge Fund Law Report, Vol. 8, No. 32 (Aug. 13, 2015); and “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions,” The Hedge Fund Law Report, Vol. 8, No. 31 (Aug. 6, 2015).

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  • From Vol. 8 No.34 (Sep. 3, 2015)

    Downplaying Liquidity Risk While a Hedge Fund Sells Assets and Seeks Loans to Ensure Liquidity May Trigger an Enforcement Action

    A recent SEC settlement emphasizes the importance for hedge fund managers of adequately disclosing risks to investors.  The SEC alleged that two affiliated registered investment advisers touted the soundness of several hedge funds, even as those funds sold assets and sought loans to provide liquidity.  This article summarizes the SEC’s order against the investment advisers, including the alleged marketing misrepresentations that gave rise to the specific violations charged by the SEC.  For discussion of another recent enforcement action against one of the investment advisers, see “Failure to Regularly Audit Compliance and Surveillance Systems May Carry Significant Consequences,” The Hedge Fund Law Report, Vol. 8, No. 33 (Aug. 27, 2015).  For another recent enforcement action involving misrepresentations to investors, see “Public Pension Plan Investments May Increase the Risk That Hedge Fund Managers May Breach Fiduciary Duties,” The Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).

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  • From Vol. 8 No.32 (Aug. 13, 2015)

    ESMA Opinion Highlights Issues Regarding the Functioning of the AIFMD Passport

    Currently, non-European hedge fund managers wishing to market or manage funds within the E.U. must comply with the national private placement regime (NPPR) of each Member State where market access is sought, as they are unable to take advantage of the European marketing passport under AIFMD.  To aid the European Parliament, Council and Commission in reaching a decision on the future of NPPRs and/or the potential extension of the AIFMD passport to non-E.U. alternative investment fund managers and non-E.U. alternative investment funds, the European Securities and Markets Authority (ESMA) recently issued an opinion on the functioning of the E.U. passport and the NPPRs.  The opinion ties in with ESMA’s concurrently issued advice regarding the extension of the passport.  See “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions,” The Hedge Fund Law Report, Vol. 8, No. 31 (Aug. 6, 2015).  This article summarizes the methodology and data used by ESMA; highlights the issues identified and conclusions reached in the opinion; and examines stakeholder feedback regarding the functioning of the passport and NPPRs.  For more on the passport and NPPRs, see “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era,” The Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015); “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014); and “Four Strategies for Hedge Fund Managers for Accessing EU Capital Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014). 

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  • From Vol. 8 No.31 (Aug. 6, 2015)

    ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions

    While E.U. hedge fund managers are able to market their funds throughout Europe via AIFMD’s passport mechanism, that option is currently unavailable to non-E.U. managers wishing to market in Europe.  Instead, non-E.U. alternative investment fund managers and non-E.U. alternative investment funds (AIFs) are subject to the national private placement regime of each Member State where the AIF is marketed or managed.  ESMA published its “Advice to the European Parliament, the Council and the Commission on the application of the AIFMD passport to non-E.U. AIFMs and AIFs” on July 30, 2015.  This article examines the assessment criteria and methodology adopted by ESMA; highlights the key commentary regarding the six jurisdictions assessed; summarizes stakeholder feedback; and discusses certain implications of the advice.  See “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era,” The Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015); “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014); and 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).  For more on marketing under AIFMD, see “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014); and “What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014). 

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  • From Vol. 8 No.30 (Jul. 30, 2015)

    The Use of Benchmarks to Measure Hedge Fund Performance by Pension Funds and Institutional Investors (Part One of Two)

    While mutual funds are required to identify a benchmark and state performance over certain timeframes and against certain indices, hedge funds are not legally required to do so.  As such, hedge fund managers typically do not benchmark their performance.  However, pension funds and other institutional investors may assess hedge fund returns, either explicitly or implicitly, in light of a benchmark.  This first article in our two-part series discusses the use of benchmarks as a performance measure, exploring if, and how, pension funds and institutional investors evaluate hedge fund performance against a benchmark.  The second article will discuss the practical consequences of subjecting hedge funds to performance benchmarks; consider whether such a practice could shift the performance emphasis of hedge funds away from absolute returns toward a focus on benchmarked results; and analyze the parameters surrounding the use of benchmarks for evaluating hedge funds.  For discussion of another method of performance measurement, see “Common Practices, Benefits and Drawbacks for Hedge Fund Managers of Using Target Returns (Part One of Two),” The Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015).

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  • From Vol. 8 No.28 (Jul. 16, 2015)

    “Interval Alts” Combine Benefits of Alternative Mutual Funds and Traditional Hedge Funds

    Following a flurry of interest in “liquid alt” funds (also known as alternative mutual funds), Interval Alts are becoming increasingly popular.  In 2015 alone, there have been ten filings for new Interval Alts.  Interval Alts are non-traded closed-end funds registered under the Investment Company Act of 1940, but they function very much like traditional hedge funds.  In addition to employing alternative strategies, they have terms similar to those of hedge funds, such as monthly subscriptions and quarterly or semi-annual liquidity.  Because of the commonality in offering terms, many Interval Alts also charge fees similar to their sister hedge funds managed by the same manager (e.g., fees of 2 and 20, or some variation thereof).  Unlike hedge funds, however, they may be publicly offered and therefore may be offered in a variety of distribution channels.  In a guest article, George M. Silfen and Ronald M. Feiman of Kramer Levin Naftalis & Frankel examine the regulatory basis for Interval Alts; explore the differences between such structures and liquid alternative funds; and address the marketing advantages of Interval Alts versus traditional hedge funds.  The authors also provide an extensive chart comparing Interval Alts to alternative mutual funds and traditional hedge funds.  For additional insight from Silfen, see “Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013); and “How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part Three of Three),” The Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).  For more from Kramer Levin partners, see “OTC Derivatives Clearing: How Does It Work and What Will Change?,” The Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).

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  • From Vol. 8 No.27 (Jul. 9, 2015)

    Practical Considerations for Hedge Fund Managers Implementing Tiered Management Fees (Part Two of Two)

    As hedge fund managers have implemented tiered management fees, largely in response to investor demands, investors have generally responded positively to such terms.  However, managers must bear in mind certain practical considerations when offering a tiered management fee structure – whether as part of the fund’s general terms or on a one-off basis to certain investors.  This article, the second in a two-part series, discusses the benefits of tiered management fees; examines investor response to and demand for tiered management fee structures; and provides practical guidance for hedge fund managers seeking to implement such structures.  The first article discussed the increasing prevalence of tiered management fees, the rationale behind their implementation and approaches to structuring them.  For more on management fees, see “Sidley Partners Discuss Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two),” The Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014); and “Industry Perspectives on Hedge Fund Fee Pressures, Expense Allocations and Liquidity Terms,” The Hedge Fund Law Report, Vol. 6, No. 31 (Aug. 7, 2013).

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  • From Vol. 8 No.27 (Jul. 9, 2015)

    Non-E.U. Hedge Fund Managers May Not Be Required to Comply with AIFMD’s Capital and Insurance Requirements

    The alternative investment fund managers directive (AIFMD) is a complex and, in places, ambiguous and contradictory piece of legislation.  Four full years after being published in the Official Journal of the European Union and two years after coming into effect, aspects of AIFMD continue to be misunderstood by the asset management industry and its service providers.  In a guest article, Akin Gump partner Christopher Leonard examines the extent to which non-E.U. fund managers must comply with the capital and insurance requirements of AIFMD.  For additional insight from Akin Gump, see “Structuring Private Funds to Profit from the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options,” The Hedge Fund Law Report, Vol. 8, No. 11 (Mar. 19, 2015); “Akin Gump Partners Discuss Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013); and “Akin Gump Partners Present Overview of Recent Developments in Fund Taxation, Fund Manager Transactions and Hedge and Private Equity Fund Investment Terms,” The Hedge Fund Law Report, Vol. 6, No. 48 (Dec. 19, 2013).

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  • From Vol. 8 No.23 (Jun. 11, 2015)

    Modified High Water Mark Provisions May Be Difficult for Managers to Market and Implement (Part Two of Two)

    Hedge fund managers unable to subsist entirely on management fees may risk losing key investment personnel without receiving (and therefore being able to offer key people part of) any incentive compensation.  Traditional high water mark provisions – which prevent hedge fund managers from receiving any incentive or performance fees until prior losses are recouped – can result in managers going years without performance compensation, even after they have begun to turn the fund’s performance around.  To alleviate this pressure, some managers may consider using modified high water mark provisions, allowing them to receive lower amounts of incentive compensation during periods when the fund remains below its high water mark.  However, such provisions are not common in the hedge fund industry and may impact the marketability of the manager’s fund, especially as investors continue to place increasing pressure on hedge fund fees.  See “Deutsche Bank Alternative Investment Survey Explores Fees and Liquidity Trends, the Landscape for Investment Intermediaries and Early Stage Investment Terms (Part Two of Two),” The Hedge Fund Law Report, Vol. 8, No. 22 (Jun. 4, 2015).  This second article in a two-part series discusses the industry prevalence of and investor reception to modified high water marks and examines issues that hedge fund managers should consider before implementing a modified high water mark.  The first article analyzed elements of modified high water mark provisions and explored the benefits of such provisions.

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  • From Vol. 8 No.21 (May 28, 2015)

    Dechert Global Alternative Funds Symposium Highlights Trends in European and Global Hedge Fund Marketing

    As the global market for hedge funds increases, managers looking to raise assets in Europe and other non-U.S. jurisdictions must be aware of the rules and regulations of the jurisdictions of their fundraising targets.  AIFMD and increased regulations enacted by countries in Latin America and the Middle East impose additional registration, disclosure and reporting obligations on fund managers.  Prior to marketing in those jurisdictions, managers must be sure to comply with applicable regulatory requirements.  These challenges, and other trends in the hedge fund market and regulatory environment, were significant issues discussed during Dechert’s Global Alternative Funds Symposium recently held in New York City.  This article highlights the salient points discussed on the foregoing topics.  See “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era,” The Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015).  For additional coverage of the Symposium, see “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates,” The Hedge Fund Law Report, Vol. 8, No. 20 (May 21, 2015).

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  • From Vol. 8 No.20 (May 21, 2015)

    Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates

    In the dynamic and ever-changing hedge fund industry, it is vital for hedge fund managers to understand current trends with respect to fund structures and terms in order to best market to and raise capital from investors and anticipate likely changes in the hedge fund marketplace.  Recent trends have managers rethinking the kinds of expenses that should be appropriately allocated to funds; the structures of gates and redemption provisions; and acceptable fee terms for their funds.  Navigating these trends was a key issue discussed during the Dechert Alternative Funds Symposium recently held in New York City.  This article summarizes the salient points raised on the foregoing topics.  See also “Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two),” The Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014).

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  • From Vol. 8 No.19 (May 14, 2015)

    New Swiss Regulations Require Appointment of Local Agents and Increased Disclosure in Hedge Fund Documents

    Switzerland has traditionally been an important jurisdiction for the distribution of alternative funds, especially hedge funds.  With the revision of the Federal Act on Collective Investment Schemes of 23 June 2006 (CISA), and its implementing ordinance of 22 November 2006 – the Collective Investment Schemes Ordinance (CISO) – as well as the self-regulatory standards (the Guidelines) issued by the Swiss Funds and Asset Management Association (SFAMA), the formerly liberal rules regarding distribution of hedge funds in Switzerland have been tightened, in particular regarding the level of transparency applicable to hedge fund distribution.  The CISA and the CISO entered into force on March 1, 2013, and the transitional period relating to their implementation recently ended on March 1, 2015.  For more on Switzerland, see “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview with Proskauer Partner Robert Leonard,” The Hedge Fund Law Report, Vol. 8, No. 9 (Mar. 5, 2015).  In a guest article, Dr. Vaïk Müller and Olivier Stahler of Lenz & Staehelin first distinguish the requirements deriving from the CISA and the CISO, on the one hand, from those deriving from self-regulation, on the other hand.  The authors next review the impact of the new requirements on hedge fund documentation, taking into account the obligations applicable to the intermediaries concerned with the distribution before finally addressing the issue of the timing of the implementation of the SFAMA Guidelines.

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  • From Vol. 8 No.19 (May 14, 2015)

    K&L Gates Panel Offers Advice on Taxation, Regulatory and Business Integration Issues with M&A Transactions in the Asset Management Industry (Part Two of Two)

    As firms in the asset management industry structure merger and acquisition transactions – including joint ventures, acquisitions of minority interests and lift-outs of teams – they need to be aware of the potential issues that arise with such transactions.  Integrating two businesses may result in tax consequences, regulatory issues or other compliance concerns.  A panel of domain experts from K&L Gates recently discussed current trends in the asset management industry and a number of considerations in planning an acquisition or other deal with an asset manager, broker-dealer or adviser, including choice of partner, due diligence, structuring, taxation and various regulatory and compliance considerations.  Moderated by Michael S. Caccese, a practice area leader, the program featured partners Kenneth G. Juster and Michael W. McGrath; and practice area leaders D. Mark McMillan and Robert P. Zinn.  This article, the second in a two-part series, summarizes the key takeaways from that program with respect to taxation, regulatory and business integration concerns.  The first article addressed asset management industry trends, choosing a partner, due diligence and structuring considerations.  See also “PLI Panel Addresses Recent Developments with Respect to Prime Brokerage Arrangements, Alternative Registered Funds and Hedge Fund Manager Mergers and Acquisitions,” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).

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  • From Vol. 8 No.17 (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,” The 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),” The 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,” The Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).

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  • From Vol. 8 No.17 (Apr. 30, 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,” The 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.

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  • From Vol. 8 No.16 (Apr. 23, 2015)

    Common Practices, Benefits and Drawbacks for Hedge Fund Managers of Using Target Returns (Part One of Two)

    The use of target returns or performance targets by hedge fund managers in offering documents and marketing materials can potentially lead to negative consequences.  For example, Meredith Whitney’s Kenbelle Capital LP aimed for a target return of 12-17%; yet, when the fund returned -11%, BlueCrest Capital Management – its largest investor – filed a lawsuit to redeem its investment.  See “Citing Persistent Losses, Seed Investor BlueCrest Capital Sues Meredith Whitney and Her Hedge Fund for Return of Seed Capital,” The Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).  Other notable fund managers have lowered or revised their target returns in recent months, garnering negative press as a result.  Accordingly, hedge fund managers must take care when using target returns and first consider the potential risks and consequences of doing so.  This article, the first in a two-part series, discusses common practices for the use of target returns by hedge funds; analyzes reasons for using target returns; and highlights some potential drawbacks of using target returns.  The second article will analyze the legal risks associated with target returns and weigh the benefits of using target returns against such risks.

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  • From Vol. 8 No.13 (Apr. 2, 2015)

    FRA Compliance Master Class Highlights Operational and Regulatory Issues for Hedge Fund Managers Considering Launching Alternative Mutual Funds

    Seeking to access a vast source of capital that is not readily accessible by traditional hedge funds, hedge fund managers have been launching or contemplating the launch of alternative mutual funds.  Aside from the opportunity to expand the manager’s investor base, launching an alternative mutual fund allows a hedge fund manager to expand and diversify its product offering.  In the U.S., such funds are governed by the Investment Company Act of 1940 and, as such, must meet a broad array of regulatory and compliance requirements.  See “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014).  For a general discussion of ways that hedge fund managers can enter the retail alternatives space, see “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  Speakers at FRA LLC’s Private Investment Funds Compliance Master Class – including Marie Noble, partner, general counsel and CCO at SkyBridge Capital; and Robert Schwartz, general counsel and CCO at Loeb King Capital Management – discussed issues to consider when converting a hedge fund strategy to a mutual fund structure, due diligence of mutual fund service providers, alternative mutual fund compliance and marketing.  This article highlights the key points discussed on each of the foregoing topics.  For additional coverage of this conference, see “Five Steps That CCOs Can Take to Avoid Supervisory Liability, and Other Hedge Fund Manager CCO Best Practices,” The Hedge Fund Law Report, Vol. 8, No. 12 (Mar. 27, 2015).  For a discussion of another kind of conversion, see “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office,” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).

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  • From Vol. 8 No.12 (Mar. 27, 2015)

    Five Steps That CCOs Can Take to Avoid Supervisory Liability, and Other Hedge Fund Manager CCO Best Practices

    Participants at FRA’s Private Investment Funds Compliance Master Class, held on February 17, 2015 in New York City, addressed testimonials and past-specific recommendations in hedge fund marketing; whether performance should be presented net or gross of fees; presenting performance under different fee structures; use, placement and monitoring of third-party news articles; broker registration of in-house marketers and marketing departments; reverse solicitation and remuneration under AIFMD; bad actor rule compliance; three theories of CCO liability; three categories of enforcement actions involving CCOs; and five steps that CCOs can take to avoid liability.  See also “Stroock Seminar Identifies Five Strategies for Mitigating the Risk of Supervisory Liability for Hedge Fund Manager CCOs,” The Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).

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  • From Vol. 8 No.9 (Mar. 5, 2015)

    Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates:  An Interview with Proskauer Partner Robert Leonard

    The Hedge Fund Law Report recently interviewed Robert Leonard, a partner in Proskauer’s Hedge Funds Group, on implications of the recently effective Swiss Collective Investment Scheme for marketing hedge funds in Switzerland; two new forms required by the Bureau of Economic Analysis to be filed by certain hedge funds; and considerations arising out of Form ADV annual amendments.  This interview was conducted in connection with the Hedge Funds Care 17th Annual NY Open Your Heart to the Children Benefit, to be held in New York City tonight, March 5, 2015.  For more on Hedge Funds Care, click here; for registration information on tonight’s Open Your Heart to the Children Benefit, click here.  See also “The Changing Face of Alternative Asset Management in Switzerland,” The Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012).

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  • From Vol. 8 No.4 (Jan. 29, 2015)

    Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss CFTC Compliance, Conflicting Regulatory Regimes and Best Marketing Practices (Part Two of Four)

    The most difficult compliance issues currently facing the hedge fund industry were front and center at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  This article, the second in a four-part series covering the Summit, contains insight on CFTC compliance, conflicting regulatory regimes in compliance programs, and the regulatory and operational considerations of marketing from Amanda Olear, associate director of the Division of Swap Dealer Intermediary Oversight at the CFTC; Patricia Cushing, director of compliance at the National Futures Association; Myles Edwards, general counsel and CCO at Constellation Wealth Advisors; Mark Schein, CCO and managing director at York Capital Management; Jeanette Turner, managing director and general counsel at Advise Technologies; Jennifer Duggins, senior vice president and CCO at Chilton Investment Company; Edward Dartley, of counsel at Pepper Hamilton; Marc Baum, general counsel and chief administrative officer at Serengeti Asset Management; and Simon Raykher, general counsel at Kepos Capital LP.  The first article in the series covered regulatory priorities, handling regulatory examinations and cybersecurity preparedness.  The third and fourth installments in the series will cover: proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

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  • From Vol. 8 No.2 (Jan. 15, 2015)

    HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements

    On December 2, 2014, The Hedge Fund Law Report and Advise Technologies sponsored a panel discussion that provided practical guidance on the Annex IV reporting regime under the AIFMD, discussed how that regime overlaps with the U.S. Form PF reporting regime, and considered how and whether “soft marketing” and “reverse solicitation” may be used in the E.U. by managers who wish to avoid or postpone the reporting requirements imposed on managers who market funds in the E.U. under national private placement regimes.  The program, entitled “An in depth discussion on AIFMD reporting requirements and lessons learned from those who have already filed,” featured Jeanette Turner, Managing Director and General Counsel for Advise Technologies, LLC; Simon Whiteside, a partner at Simmons and Simmons LLP; Richard Webley, Head of Business Advisory Services for Americas, Citi Investor Sales and Relationship Management; and John Sampson, an Executive Director at Ernst & Young LLP.  This article summarizes the key insights from that presentation.  For an overview of Annex IV reporting issues, see “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).  See also “Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD,” The Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).

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  • From Vol. 8 No.1 (Jan. 8, 2015)

    Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD

    The Alternative Investment Fund Managers Directive (AIFMD) continues to dominate discussions on global hedge fund regulation, marketing, remuneration, risk, reporting and related topics.  In this guest article, two of the leading global authorities on the AIFMD – Samuel K. Won, Founder and Managing Director of Global Risk Management Advisors, and Simon Whiteside, a Partner in the London office of Simmons & Simmons LLP – provide comprehensive answers to 14 of the questions most frequently asked by U.S. and other non-E.U. managers on the impact and implementation of the AIFMD.  Specifically, Won and Whiteside discuss the viability of reverse enquiry; the interaction between capital introduction and reverse enquiry; reliance on national private placement regimes; remuneration, side letter and leverage disclosure; AIFMD versus Form PF; content and frequency of AIFMD reporting; Annex IV reporting on master funds; and AIFMD-relevant risk management and reporting considerations.  See also “A Practical Comparison of Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014).

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  • From Vol. 8 No.1 (Jan. 8, 2015)

    K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three)

    This article is the third in a three-part series discussing practical insights from a recent presentation on insider trading and compliance priorities by K&L Gates partners Michael W. McGrath, Carolyn A. Jayne and Nicholas S. Hodge.  This article summarizes six noteworthy compliance insights and four recent enforcement themes relevant to hedge fund managers.  The first article in this series provided background on critical aspects of insider trading doctrine (including entity liability and special considerations for CFA charter holders) and described four enforcement patterns bearing directly on hedge fund trading strategies and operations.  The second article detailed eight prophylactic measures that hedge fund managers can implement to avoid insider trading violations and also included a detailed discussion of what McGrath called “the next great undiscovered country for enforcement actions.”  On insider trading, see also “Second Circuit Overturns Newman and Chiasson Convictions, Raising Government’s Burden of Proof in Tippee Liability Insider Trading Cases,” The Hedge Fund Law Report, Vol. 7, No. 47 (Dec. 18, 2014).

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  • From Vol. 8 No.1 (Jan. 8, 2015)

    SEC Settles Enforcement Action and Pursues Company Founder over Use of Backtested Performance Data

    Performance advertising remains an SEC enforcement priority and can be a minefield for hedge fund managers.  See “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities,” The Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).  The use of hypothetical or backtested performance is particularly problematic.  See “Under What Conditions Can a Hedge Fund Manager Present Hypothetical Backtested Performance Results?,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).  Consistent with these regulatory priorities, the SEC recently settled an enforcement proceeding against an investment adviser whose founder claimed that the adviser’s strategy had been used to manage actual client assets since 2001, even though the strategy was not devised until late 2008.  The claimed performance was, in fact, backtested.  This article discusses the enforcement action.  For a discussion of other performance advertising issues, see the HFLR’s articles on GIPS compliance claims, testimonials and social media, cherry picking and case studies, use of gross performance results and use of other firms’ track records.

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    U.K. FCA Guidance Confirms Simplified Transparency Reporting for Certain Private Placements of Master-Feeder Funds

    Non-E.U. fund managers that wish to market funds in the E.U. through private placements are subject to the registration, notification and reporting regimes of the individual member states.  In that regard, the U.K. Financial Conduct Authority (FCA) recently published guidance and corresponding FAQs on the reporting obligations of non-E.U. fund managers that are marketing funds in the U.K. under its private placement regime.  See “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).  This article summarizes certain key elements of the FCA’s recent guidance that concern reporting in the U.K. by non-E.U. managers.  See also “What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014).

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  • From Vol. 7 No.42 (Nov. 6, 2014)

    What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?

    Since the Alternative Investment Fund Managers Directive (AIFMD) took effect, a non-E.U. fund manager that wishes to market funds into the E.U. is faced with complying with the individual – and disparate – private placement regimes of the E.U. member states.  See “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).  Alternatively, the manager may wait passively for E.U. investors to seek out the manager, an unpredictable and fraught process known as “reverse solicitation.”  A recent program sponsored by CounselWorks provided guidance on when a manager is “marketing” in the E.U. so as to trigger compliance with the AIFMD, the steps that such a manager must take to comply with local private placement requirements, and how reverse solicitation works in various E.U. states.  See also “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); and Part One of Two.

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  • From Vol. 7 No.41 (Oct. 30, 2014)

    K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia

    Pension funds and sovereign wealth funds are important potential sources of capital for hedge fund managers.  Australia and Japan have about $1.7 trillion and $1.2 trillion in pension assets, respectively, while the sovereign wealth funds of Middle East nations hold another $1.8 trillion.  The Chinese market has huge potential as well.  In that regard, a recent presentation by international law firm K&L Gates LLP offered a comprehensive overview of the regulatory regimes and marketing requirements that affect fund managers seeking capital in Australia, the Middle East, Japan, China, Hong Kong and Singapore.  The program was moderated by K&L Gates partner Cary J. Meer.  The other speakers were her partners Natalie R. Boyd, Elizabeth A. Gray, Betsy-Ann Howe, Tsuguhito Omagari and Choo Lye Tan.  For a similar global regulatory roundup, see “KPMG Report Highlights Key Developments in Hedge Fund Regulation in the Americas, the Asia-Pacific Region, Europe, South Africa and the Middle East,” The Hedge Fund Law Report, Vol. 7, No. 33 (Sep. 4, 2014).  For a discussion of regional “passport” initiatives that may facilitate marketing of funds in Asia and Australia, see “How Can U.S. Hedge Fund Managers Use Passport and Mutual Recognition Initiatives to Market to Investors in Asia?,” The Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).

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  • From Vol. 7 No.39 (Oct. 17, 2014)

    Best Practices for Ensuring That Only Accredited Investors Participate in Publicly Advertised Private Offerings by Hedge Funds (Part Two of Three)

    In June 2013, under authority delegated to it by Congress in the JOBS Act, the SEC adopted Rule 506(c) under the Securities Act.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Rule 506(c) generally permits hedge fund managers to advertise a private offering while maintaining the offering’s Securities Act Section 4(a)(2) exemption from registration, so long as they, among other things, take reasonable steps to verify that investors in the offering are “accredited.”  See “SEC Provides Guidance on When the Bad Actor Rule Disqualifies Hedge Fund Managers from Generally Soliciting or Advertising,” The Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  Recently, the CFTC issued guidance harmonizing its general solicitation rules with the SEC’s.  See “The Odyssey of Private Fund Advertising: From Great Expectations to Much Ado about Nothing,” The Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014).  Hedge fund managers have been slow to access the expanded marketing rights under the JOBS Act rules.  See, e.g., “Dan Darchuck of Topturn Capital Discusses the Mechanics and Consequences of Video Advertising by Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No 13 (Apr. 4, 2014).  One of the more frequently cited reasons for the industry-wide reluctance is the challenge of verifying the accredited status of investors.  Specifically, Rule 506(c)(2)(ii) contains four safe harbors pursuant to which a hedge fund issuer will be deemed to have taken reasonable steps to verify accredited investor status.  But those safe harbors entail practical obstacles.  To help the broker-dealer and investment management industries overcome those obstacles, the SEC and SIFMA issued guidance on complying with the safe harbors.  See “SEC and SIFMA Offer Additional Guidance on Rule 506(c) Accredited Investor Status,” The Hedge Fund Law Report, Vol. 7, No. 30 (Aug. 7, 2014).  At PLI’s recent Hedge Fund Management 2014 program, Sidley Austin partner Thomas J. Kim and Davis Polk partner Nora M. Jordan – both principal drafters of the SIFMA guidance – explained the thinking behind the SIFMA guidance, how the guidance interacts with the Rule 506(c) safe harbors (in particular, the account method test and the investment amount test), how the guidance addresses privacy concerns, the rationale for the guidance’s focus on assets rather than liabilities and the utility of disclaimers in connection with 506(c) offerings.  This article summarizes the main points made by Kim and Jordan.  For the first article in our series covering the same PLI event, see “Davis Polk and Sidley Partners and MFA GC Address the Maze of Hedge Fund Marketing Regulation in the U.S. and E.U. (Part One of Three),” The Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).

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  • From Vol. 7 No.38 (Oct. 10, 2014)

    Davis Polk and Sidley Partners and MFA GC Address the Maze of Hedge Fund Marketing Regulation in the U.S. and E.U. (Part One of Three)

    This is the first article in a three-part series focusing on a recent Practising Law Institute program entitled “Hedge Fund Management 2014.”  This article examines the key points from a panel on European hedge fund regulation and Securities Act Rule 506(c) offerings.  In this panel, Stuart J. Kaswell, Executive Vice President, Managing Director and General Counsel of the Managed Funds Association in Washington, D.C., addressed ways in which the Alternative Investment Fund Managers Directive (AIFMD), the Markets in Financial Instruments Directive (MiFID), the Markets in Financial Instruments Regulation (MiFIR) and recent activity by the European Securities and Markets Authority (ESMA) are complicating the process by which U.S.-based hedge fund managers approach and interact with European investors.  Thomas J. Kim, a partner at Sidley Austin, discussed Rule 506(c) offerings and recent harmonization of SEC and CFTC guidance on general solicitation.  See “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend,” The Hedge Fund Law Report, Vol. 7, No. 35 (Sep. 18, 2014).  Davis Polk partner Nora M. Jordan chaired the program and participated in the panel that is the subject of this article.

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  • From Vol. 7 No.37 (Oct. 2, 2014)

    All-Star Panel at RCA PracticeEdge Session Analyzes Five Key Regulatory Challenges Facing Hedge Fund Managers

    A recent PracticeEdge session presented by the Regulatory Compliance Association (RCA) addressed five key regulatory issues facing hedge fund managers: Broker-dealer registration, the JOBS Act, alternative mutual funds, fiduciary duties and cybersecurity.  Matthew S. Eisenberg, a partner at Finn Dixon & Herling, moderated the discussion.  The speakers included Walter Zebrowski, principal of Hedgemony Partners and RCA Chairman; David W. Blass, at the time of the session, Chief Counsel and Associate Director of the SEC Division of Trading and Markets; Brendan Kalb, General Counsel of AQR Capital Management LLC; Scott D. Pomfret, Regulatory Counsel and Chief Compliance Officer of Highfields Capital Management LP; and D. Forest Wolfe, Chief Compliance Officer and General Counsel of Angelo, Gordon & Co.  As is customary, Blass offered his own opinions, not the official views of the SEC.  (Subsequent to the event, Blass was appointed general counsel of the Investment Company Institute.)  See also “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013); Part Two and Part One.

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  • From Vol. 7 No.37 (Oct. 2, 2014)

    Top Ten GIPS Compliance Challenges for Hedge Fund Managers

    The Global Investment Performance Standards (GIPS) are a set of best practices designed to ensure consistency in the presentation of investment performance results.  See “Expert Panel Provides Roadmap for Hedge Fund Managers Looking to Present Performance in Compliance with GIPS,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Though theoretically voluntary, institutional investors often condition investments on, among other things, performance information presented in compliance with GIPS.  Accordingly, GIPS compliance is viewed by many as a de facto requirement for hedge fund managers seeking institutional capital.  See “Is GIPS Compliance and Verification Thereof a De Facto Requirement for Access by Hedge Fund Managers to Institutional Assets?,” The Hedge Fund Law Report, Vol. 7, No. 29 (Aug. 1, 2014).  At the CFA Institute’s 2014 GIPS Standards Annual Conference, Karyn D. Vincent, a Managing Partner of ACA Performance Services, LLC, discussed the top ten GIPS compliance issues that she sees when acting as a GIPS verifier.  Jonathan A. Boersma, CFA, Executive Director of GIPS Standards at the CFA Institute, also participated in the discussion.  See also “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  This article summarizes Vincent’s top ten list, and identifies strategies for incorporating Vincent’s points into the marketing, reporting, disclosure and compliance efforts of hedge fund managers.

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  • From Vol. 7 No.36 (Sep. 25, 2014)

    The Odyssey of Private Fund Advertising: From Great Expectations to Much Ado about Nothing

    On September 9, 2014, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued an exemptive letter (the JOBS Act Exemptive Letter) for private fund managers relying on exemptions from registration as commodity pool operators (CPOs) with the CFTC.  This relief harmonizes the CFTC’s CPO exemptions with the 2013 final rules issued by the SEC relating to offerings exempt from registration under the Securities Act of 1933 as required by the JOBS Act.  In a guest article, David M. Matteson and Andrew C. Raby, partner and senior associate, respectively, in the Chicago office of Drinker Biddle & Reath LLP, discuss the impact of the JOBS Act Exemptive Letter and summarize the current state of private fund advertising.  See also “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend,” The Hedge Fund Law Report, Vol. 7, No. 35 (Sep. 18, 2014).

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  • From Vol. 7 No.36 (Sep. 25, 2014)

    NICSA/ALFI Program Considers Impact of AIFMD on U.S. Fund Managers

    NICSA, the National Investment Company Service Association, in cooperation with ALFI, the Association of the Luxembourg Fund Industry, recently presented an overview of the AIFMD and its impact on U.S. fund managers.  The program was moderated by Theresa Hamacher, President of NICSA.  The speakers were Michael Ferguson, Co-Chair of the ALFI Hedge Funds Sub-Committee and a Partner and Asset Management Leader at Ernst & Young; and Claude Niedner, Chair of the ALFI Alternative Investments Committee and a founding Partner of Luxembourg’s Arendt & Medernach.  See also “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).

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  • From Vol. 7 No.35 (Sep. 18, 2014)

    Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend

    It is widely recognized that the Commodity Futures Trading Commission (CFTC) has made great strides previously in terms of harmonizing its rules with those of other regulators, including the Securities Exchange Commission (SEC).  See “What Do the CFTC Harmonization Rules Mean for Non-Mutual Fund Commodity Pools, Including Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).  In perhaps a sign that new leadership at the CFTC has settled in and intends to continue the trend toward harmonization, the CFTC has recently acted on a variety of items with respect to which the industry was waiting, in some cases for a year or more, for sorely needed guidance.  While not all pressing issues have been resolved by the CFTC, a number of them have been.  In a guest article, Steven M. Felsenthal, General Counsel and Chief Compliance Officer of Millburn Ridgefield Corporation, The Millburn Corporation and Millburn International, LLC, summarizes some of the recent CFTC actions and guidance, notes certain implications thereof that may or may not require further guidance and identifies certain items with respect to which further CFTC action would be welcome.  The focus of this article is on certain issues affecting hedge fund advisers that are also commodity pool operators, who are thus subject to both SEC and CFTC regulatory regimes.

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  • From Vol. 7 No.35 (Sep. 18, 2014)

    CFTC Allows Hedge Fund Managers to Advertise

    Private funds that are subject to regulation by the SEC may also constitute commodity pools within the meaning of the Commodity Exchange Act, which may subject them and their advisers to regulation by the CFTC.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  In accordance with the JOBS Act, the SEC issued new rules that lift the ban on general solicitation and general advertising by private fund sponsors under certain conditions.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  The CFTC did not follow suit, leaving managers of funds that trade in commodities in a bind, because general solicitation and general advertising render commodity pool operators ineligible for certain important exemptions from CFTC rules.  See “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  Specifically, CFTC Regulation 4.7(b) provides registered commodity pool operators with relief from certain disclosure, reporting and recordkeeping requirements; and Regulation 4.13(a)(3) contains an exemption from registration as a commodity pool operator.  However, both regulations contain requirements that are inconsistent with the lifting of the ban on general solicitation and general advertising reflected in new SEC Rules 506(c) and 144A.  On September 9, 2014, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued exemptive relief to bring Regulations 4.7(b) and 4.13(a)(3) into line with those new SEC Rules.  This article summarizes the existing regulatory lay of the land and the key provisions of the relief.

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  • From Vol. 7 No.31 (Aug. 21, 2014)

    “Best Ideas” Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part Two of Two)

    This is the second article in a two-part series discussing the chief legal concerns raised by hedge fund manager presentations at “best ideas” conferences – conferences at which investment professionals present investment ideas, share convictions and analyze recommendations.  The benefits of presenting at such events include increased visibility and often a charitable component.  The legal pitfalls of presenting at such conferences, however, are various.  The first article in this series discussed issues under Rule 506 of Regulation D, including whether a presentation at a best ideas conference constitutes an offering or general solicitation, as well as Investment Company Act issues.  This article discusses Investment Advisers Act issues, advertising restrictions, fiduciary duty and related considerations and Commodity Exchange Act issues.  The authors of this article series are S. Brian Farmer, Co-Managing Partner of the Investment Management & Private Funds Practice Group at Hirschler Fleischer, and John C. C. Byrne, II.

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    “Best Ideas” Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part One of Two)

    “Best ideas” conferences are events at which investment experts – often including hedge fund managers – make individual presentations or participate in panel discussions during which they share investment ideas, analysis and recommendations with fellow contributors and attendees.  Frequently, these conferences are organized for both educational and charitable purposes, and the net proceeds are donated to one or more non-profit organizations.  Managers who participate in these events likely do so for a variety of reasons: benefitting a particular charity, raising awareness of the attributes or shortcomings of a particular investment, sharing in the opportunity to participate in an exchange of insights with other leading professionals and demonstrating their research and/or analytical skills.  Naturally, information shared at a “best ideas” conference is available to anyone who attends.  Tickets are usually offered for sale on an unrestricted basis to the general investing public via an organizer’s website.  Accordingly, there are generally no controls over who will and will not be in attendance when information is presented.  Additionally, comments and statements made by presenters and panel members are often live-tweeted during the presentation or summarized by bloggers shortly after the presentation is concluded.  Finally, many organizers publish materials used by presenters – such as PowerPoint slides and graphs – to their websites during or soon after a conference has ended.  As a result, the information and materials that a manager prepares for the conference audience generally finds its way to a much broader, and potentially less sophisticated, consumer market.  The porous nature of this process raises a range of issues of concern for a hedge fund manager, from potential violations of general solicitation restrictions under Regulation D of the Securities Act of 1933, as amended, to compliance with antifraud and fiduciary duties under the Investment Advisers Act of 1940, as amended.  In a two-part guest article series, S. Brian Farmer, Co-Managing Partner of the Investment Management & Private Funds Practice Group at Hirschler Fleischer, and co-author John C. C. Byrne, II, identify the primary legal concerns raised by presentations at best ideas conferences and discuss how to address those concerns.  This article is the first in the series.

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    SEC and SIFMA Offer Additional Guidance on Rule 506(c) Accredited Investor Status

    Hedge fund managers and other issuers who wish to offer securities in reliance on the exemption from registration set forth in Rule 506(c) of Regulation D under the Securities Act of 1933 (Securities Act), must take “reasonable steps” to verify that each of the investors is an “accredited investor.”  The main attraction of a Rule 506(c) offering is that it is not subject to the traditional ban on general solicitation and advertising in private offerings.  Rule 506(c) contains a number of safe harbors covering verification of accredited investor status.  In that regard, the SEC recently amended its Securities Act Rules Compliance and Disclosure Interpretations to clarify the calculation of income and net worth in determining accredited investor status and the applicability of the safe harbors relating to income and net worth.  In addition, the Securities Industry and Financial Markets Association recently offered guidance to registered broker-dealers and investment advisers on the determination of accredited investor status.  See also “SEC Provides Guidance on When the Bad Actor Rule Disqualifies Hedge Fund Managers from Generally Soliciting or Advertising,” The Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    Alternative Investment General Counsel Summit Covers Dual Registration, Valuation, Compensation Structures, the AIFMD, Presence Exams and Risk Alerts (Part One of Two)

    ALM’s Corporate Counsel recently hosted its inaugural Alternative Investment General Counsel Summit in New York.  Speakers at the event, including law firm partners, in-house counsel and regulators, addressed conflicts of interest raised by dual registration and valuation; the constituent elements of a culture of compliance; the interaction between compensation structures and regulatory developments; AIFMD compliance and timing; presence exam survival strategies; the role of risk alerts in refining a compliance program; effective responses to regulatory audits and examinations; insider trading; political intelligence; and expert networks.  This is the first article in a two-part series summarizing the points made at the Summit that can impact the design or implementation of hedge fund manager compliance programs.  See also “ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Distressed Debt Investing (Part Two of Three),” The Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013).

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    Can Private Fund Marketing Be Automated?

    The Hedge Fund Law Report recently interviewed Alon Goren, CEO of INVST, an online platform for connecting private funds and investors.  The intent of the interview was to determine whether private fund marketing, or parts of it, can be automated, or at least facilitated, by technology.  In pursuit of an answer to this question, we discussed the following topics with Goren: what INVST does and its revenue model; how INVST confirms the accredited and qualified status of investors on the platform; compliance with the Lamp Technologies no-action letter and the JOBS Act; segments of the investor market on the platform; size and other characteristics of funds and managers on the platform; INVST’s interaction with third-party marketers and its place in the hedge fund marketing ecosystem; and whether INVST handles secondary market transactions in private fund interests.

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  • From Vol. 7 No.29 (Aug. 1, 2014)

    Strategies for U.S. Hedge Fund Managers Looking to Outsource the Risk and Reporting Requirements of the AIFMD While Focusing on Capital Raising in Europe

    U.S. hedge fund managers broadly have four options available for accessing EU investors in a manner consistent with the AIFMD: reverse solicitation; reliance on national private placement regimes (a time-limited solution); in-house compliance with the AIFMD; and outsourced compliance.  See “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014); “Four Strategies for Hedge Fund Managers for Accessing EU Capital Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).  The Hedge Fund Law Report recently interviewed Paul Nunan, Managing Director of Capita Financial Managers (Ireland) Limited, on the mechanics of the fourth option – outsourced compliance.  Outsourcing in this context generally makes sense for a U.S. hedge fund manager that wishes to focus on capital raising and investment management in Europe, while a third party focuses on the risk, reporting and other operational requirements of the AIFMD.  However, outsourcing also involves addressing a series of complex questions, including whether to do so in the first instance, to whom, with respect to what specific tasks, how to measure service levels, how to allocate responsibility and so on.  This interview is intended to help hedge fund managers think through the analysis of outsourcing AIFMD compliance.  In addition, this interview delves deeply into the mechanics of AIFMD compliance generally, covering such topics as: jurisdiction (i.e., who the AIFMD covers); sizing the capital raising opportunity in Europe; application of the AIFMD to branch offices and additional investments by existing investors; how to prove reverse solicitation to regulators; the time-limited viability of reliance on national private placement regimes; and remuneration, transparency, business conduct, leverage and reporting requirements under the AIFMD.  See also “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).

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  • From Vol. 7 No.28 (Jul. 24, 2014)

    Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD

    The European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) established a comprehensive regime to regulate investment funds that are not organized under the Undertakings for Collective Investment in Transferable Securities Directive and that are based in or marketed into the EU.  See “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  July 22, 2014 was a critical compliance deadline under the AIFMD.  As of that date, in order to market funds in the EU, EU fund managers must be fully authorized under the AIFMD.  Non-EU managers that are ineligible for, or that do not wish to seek, full AIFMD authorization must rely on the private placement regimes of each EU state in which the manager will market; alternatively, they might consider relying on “reverse solicitation” or joining an AIFMD-authorized platform.  See “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014).  A recent program sponsored by Covington & Burling LLP and Augentius provided a timely recap of the requirements and challenges facing non-EU fund managers that wish to market into the EU in reliance on the private placement regimes.

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  • From Vol. 7 No.27 (Jul. 18, 2014)

    How Can U.S. Hedge Fund Managers Use Passport and Mutual Recognition Initiatives to Market to Investors in Asia?

    The European Union (EU) has facilitated the cross-border marketing of mutual funds through the Undertakings for Collective Investment in Transferable Securities regime.  It is also offering EU-domiciled alternative investment funds a marketing “passport” under the Alternative Investment Fund Managers Directive.  See “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014) (discussing marketing passports under the subheading “Private Placements”).  Countries in the Asia-Pacific region also have begun to facilitate the cross-border marketing of funds.  A recent program provided an overview of three relevant initiatives: The ASEAN (Association of Southeast Asian Nations) and APEC (Asia-Pacific Economic Cooperation) passports and the China-Hong Kong mutual recognition agreement.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Four of Four),” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  This article highlights the primary fund marketing lessons derived from the program.  These lessons are particularly noteworthy for hedge fund managers looking to market, invest or operate in Asia.

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  • From Vol. 7 No.23 (Jun. 13, 2014)

    ACA Compliance Survey Covers Current Hedge Fund Practices on Marketing, Trading, Counterparties and Valuation

    ACA Compliance Group (ACA) recently released the results of its 2014 Compliance Survey for Alternative Fund Managers.  Colleen Marencik, an ACA Senior Principal Consultant, and Faye Chin, an ACA Principal Consultant, recently gave a presentation to discuss the survey results.  The survey, which covered over 200 hedge fund and private equity fund managers, included an update on SEC presence exams and discussion of private fund compliance practices with regard to marketing and advertising, counterparties and trading, and valuation of assets.  See also “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013); and Part One of that series.

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  • From Vol. 7 No.22 (Jun. 6, 2014)

    RCA Enforcement, Compliance and Operations 2014 Symposium Offers Insight from Top SEC Officials on Custody, Conflicts, Broker Registration, Alternative Mutual Funds and the JOBS Act (Part One of Two)

    On May 1, 2014, the Regulatory Compliance Association held its Enforcement, Compliance and Operations (ECO) 2014 Symposium in New York City.  Top SEC officials and other panelists at the ECO 2014 Symposium offered detailed, current and candid insight on regulatory transparency, custody, conflicts raised by serving simultaneously as a broker and investment adviser, what the SEC’s Division of Trading and Markets does, interaction between the SEC’s Office of Compliance Inspections and Examinations and its Enforcement Division, broker registration of in-house marketing departments, alternative mutual funds, the JOBS Act, cybersecurity, Regulation M, examinations, expert networks and political intelligence.  This is the first article in a two-part series summarizing the key takeaways from the ECO 2014 Symposium.  See also “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three),” The Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

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  • From Vol. 7 No.21 (Jun. 2, 2014)

    When and How Can Hedge Fund Managers Close Hedge Funds in a Way that Preserves Opportunity, Reputation and Investor Relationships?  (Part Two of Two)

    This is the second article in our two-part series on best practices for closing hedge funds.  The first article in this series laid out an eight-step framework for executing fund closures, and this article discusses many of the difficult issues that managers encounter when working through that eight-step framework.  In particular, this article analyzes the following themes or issues that regularly come up in connection with closing hedge funds: what happens to the rights and obligations in side letters; holdbacks, reserves and clawbacks; three strategies for handling side pockets and illiquid assets; management and performance fees; litigation, contingent liabilities and indemnification; how to handle an account managed in parallel with a closed fund; whether to include or exclude a closed fund in performance information and advertising; investor relations best practices; and the three most common mistakes hedge fund managers make in closing funds.

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  • From Vol. 7 No.21 (Jun. 2, 2014)

    Four Approaches to Fund Marketing and Distribution Under the AIFMD

    The European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) established a comprehensive regime to regulate EU-based funds and fund managers, including governing when and how alternative investments may be offered to prospective investors in the EU.  See “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  On July 22, 2014, hedge fund managers who wish to market their funds in the EU must have either received authorization under the AIFMD or taken other steps to assure that they may accept investments from the EU.  A panel of industry experts from Walkers, SEI Investments, PricewaterhouseCoopers and DMS Offshore Investment Services, Ltd. recently discussed those steps, providing practical insight for hedge fund managers who wish to obtain or maintain access to EU capital.  This article summarizes the key points from that discussion.

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  • From Vol. 7 No.20 (May 23, 2014)

    United Arab Emirates Implements Licensing Regime for Firms Providing Investment Management Services

    In 2000, the United Arab Emirates (UAE) established the UAE Securities and Commodities Authority (ESCA) to supervise and monitor its financial markets.  In 2012, ESCA issued regulations governing the offering of investment funds in the UAE.  It recently issued a follow-up regulation governing the offering of investment management services in the UAE.  A recent event provided an overview of the new regulation, and insight into the interpretation and scope of its provisions.  The new regulation and interpretation of it are relevant to hedge fund managers with or targeting investors or investments in the UAE.  See also “Why and How Do Middle Eastern Sovereign Wealth Funds, Pension Funds and High Net Worth Individuals Invest in Private Funds?,” The Hedge Fund Law Report, Vol. 6, No. 23 (Jun. 6, 2013).

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  • From Vol. 7 No.19 (May 16, 2014)

    OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing

    On May 6, 2014, Andrew J. Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), delivered a speech at Private Equity International’s Private Fund Compliance Forum 2014 in New York City.  The speech provided a candid and detailed recitation of compliance shortcomings identified by OCIE in 150 presence examinations of private equity managers conducted since October 2012.  Specifically, Bowden discussed: statistics on OCIE and the Presence Exam Initiative; limited partnership agreements; post-investment due diligence and monitoring; “zombie” advisers; consolidation and compression of returns; four commonly identified deficiencies relating to expenses; four troubling practices relating to fees; OCIE’s approach to valuation; two compliance issues raised by fund marketing; and the three chief elements of a successful culture of compliance.  Many, perhaps most, of Bowden’s points made with respect to private equity advisers would apply with equal force – or at least by close analogy – to hedge fund managers.  This article summarizes the points from the speech that may cause private fund managers to adjust their compliance policies and procedures.  For a discussion of a speech delivered by then-SEC Asset Management Unit Chief Bruce Karpati at PEI’s 2013 Private Fund Compliance Forum, see “Bruce Karpati Addresses Private Equity Enforcement Trends, Initiatives and Priorities,” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  (Karpati has since joined KKR as global chief compliance officer.)

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  • From Vol. 7 No.17 (May 2, 2014)

    Multi-Manager Hedge Funds: Structuring, Fees, Manager Compensation, Marketing, Risk Management and Performance Measurement

    Hedge fund managers invest in securities.  Hedge fund of funds managers invest in people.  Somewhere in between are multi-manager hedge funds, in which a senior management team allocates capital to internal portfolio managers, monitors firm-wide risk and centralizes back-office functions.  Multi-manager funds are growing quickly, especially relative to conventionally run hedge fund groups.  The ten largest multi-manager funds had AUM of $100 billion as of mid-2013, reflecting net inflows of $15 billion since the beginning of 2009.  The ten largest conventionally run hedge funds had $140 billion in AUM as of mid-2013, reflecting net outflows of $28 billion since the beginning of 2009.  To give our subscribers greater insight into what multi-manager hedge funds are, how they are structured and how they operate, The Hedge Fund Law Report recently conducted an interview with Tomas Kmetko, a research consultant at Cambridge Associates.  Our interview covered, among other topics: the difference between multi-manager funds and funds of funds; legal entity and fee structuring; design of compensation mechanisms; risk management and mitigation in the multi-manager format; allocation of responsibility for legal, compliance, technology and similar functions; marketing of multi-manager funds; comparing performance of multi-manager funds with traditional hedge funds; and talent management considerations.

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  • From Vol. 7 No.15 (Apr. 18, 2014)

    SEC Issues Guidance for Investment Advisers on the Interplay of the Testimonial Rule and Social Media

    From the SEC’s perspective, testimonials about investment advisers are misleading for the same reason as cherry picking: because testimonials present positive information without the context of offsetting negative information.  See “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).  Rule 206(4)-1 under the Investment Advisers Act of 1940 (Act), accordingly, prohibits the use of testimonials by investment advisers.  However, that rule was drafted to cover a static media landscape consisting of print, television and radio; the rule is an imperfect fit with social media, a dynamic, ubiquitous and increasingly commercial channel.  Not surprisingly, the SEC has received a regular clip of questions over the past several years about how the prohibition on testimonials applies to statements about an investment adviser on social media websites.  Last month, the SEC’s Division of Investment Management addressed some of those questions in a Guidance Update.  This article describes the Guidance Update, focusing in particular on the principles in the Guidance Update most relevant to hedge fund managers.  This article concludes with the HFLR’s thoughts on the limited utility of the Guidance Update for hedge fund manager marketing.  See also “Understanding the Regulatory Regime Governing the Use of Social Media by Hedge Fund Managers and Broker-Dealers,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).

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  • From Vol. 7 No.14 (Apr. 11, 2014)

    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,” The 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?

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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.13 (Apr. 4, 2014)

    Dan Darchuck of Topturn Capital Discusses the Mechanics and Consequences of Video Advertising by Hedge Fund Managers

    The JOBS Act has so far occasioned a modest quantity of advertisements by hedge funds, rather than the deluge some expected.  Most managers have decided to hold off on advertising altogether, to use the liberalized advertising rights indirectly (e.g., via wider-ranging public comments) or to take a “wait-and-see” approach.  For managers in the last class, the experience of Topturn Capital is instructive.  Last December, Topturn was among the first hedge fund managers to publicly release a video that, while not an “advertisement” in the traditional retail sense, may well have run afoul of the pre-JOBS Act ban on general solicitation.  Released into the post-JOBS Act world, however, the video has garnered significant attention without violating any law or rule.  The video has had unintended positive consequences – notably, utility in recruiting talent – while the downside has thus far been muted.  The Hedge Fund Law Report recently interviewed Dan Darchuck, Co-Founder and CEO of Topturn, in an effort to understand Topturn’s hedge fund advertising experience at a granular level.  Our interview covered, among other things, Topturn’s rationale for creating the video; the video’s content, distribution and intended audience; its impact on AUM and investor relations; the response from regulators; how Topturn approached the legal disclaimer in the video; the relevance of AUM levels in determining whether to advertise by video; and the cost and other mechanics of creating the video.  See also “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).

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  • From Vol. 7 No.10 (Mar. 13, 2014)

    SEC’s David Blass Expands on the Analysis in Recent No-Action Letter Bearing on the Activities of Hedge Fund Marketers

    The SEC recently issued a no-action letter (Letter) calling into question the long-held assumption that the receipt of transaction-based compensation necessarily requires broker registration.  See “SEC No-Action Letter Suggests That There May Be Circumstances in which Recipients of Transaction-Based Compensation Do Not Have to Register as Brokers,” The Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).  At a recent webinar, David W. Blass, Chief Counsel and Associate Director in the SEC’s Division of Trading and Markets, and others offered important insights on the applicability and interpretation of the Letter.  See also “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).

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  • From Vol. 7 No.9 (Mar. 7, 2014)

    SEC Provides Guidance on When the Bad Actor Rule Disqualifies Hedge Fund Managers from Generally Soliciting or Advertising

    In July 2013, the SEC adopted final rules under the JOBS Act that permit hedge fund managers to generally solicit and advertise so long as (1) the manager reasonably believes that relevant investors are accredited, and (2) the principals of the management company and certain other persons are not “bad actors” as generally defined in the rules.  See “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  Contrary to expectations in some quarters, the volume of hedge fund advertising following the relaxation of the ban on general solicitation and advertising has been modest.  See, e.g., “Seward & Kissel Study of 2013 Hedge Fund Launches Identifies Trends in Fees, Liquidity, Lockups, Structuring and Seed Investing,” The Hedge Fund Law Report, Vol. 7, No. 8 (Feb. 28, 2014).  The emerging industry consensus appears to be that the JOBS Act will make accomplished managers less reluctant to speak at conferences and otherwise present in public, but will not result in a material amount of retail advertising by managers.  If anything, traditional advertising by a manager may indicate that the manager is on the wrong side of the adverse selection divide, and, in that sense, may backfire.  In any case, even for managers contemplating the “middle road” of less guarded public pronouncements, the bad actor disqualification provisions are complex in application because of the expansiveness with which the SEC structured the provisions.  Recognizing the complexity – and endeavoring to mitigate it – the SEC has issued, starting in December 2013, a series of bad actor disqualification Compliance and Disclosure Interpretations (CDIs).  This article synthesizes the guidance from the CDIs with the most direct application to hedge fund managers.  See also “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).

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  • From Vol. 7 No.7 (Feb. 21, 2014)

    SEC No-Action Letter Suggests That There May Be Circumstances in which Recipients of Transaction-Based Compensation Do Not Have to Register as Brokers

    In combination with other facts and circumstances, the receipt of transaction-based compensation may trigger a requirement on the part of the recipient to register with the SEC as a broker.  For hedge fund managers, this requirement has been considered problematic because in-house marketing professionals may be construed as brokering securities (i.e., fund interests) and receiving compensation that is based in whole or in part on transaction volumes.  For years, this was a quiet concern among managers, but the topic acquired urgency last April when David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, addressed it in a speech.  See “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).  Since then, managers have been working to determine whether they, their in-house marketing departments or certain members of those departments need to register with the SEC as brokers, or how they should change their compensation or other practices to avoid a broker registration requirement.  See “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013).  A recent SEC no-action letter provides further insight into the SEC’s evolving thinking on this topic.  See “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).

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  • From Vol. 7 No.6 (Feb. 13, 2014)

    Four Strategies for Hedge Fund Managers for Accessing EU Capital Under the AIFMD

    The European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) took effect on July 22, 2013.  It established a comprehensive regime that regulates EU-based funds and fund managers and governs when and how alternative investments may be offered to prospective investors in the EU.  The AIFMD affects hedge funds, private equity funds, investment trusts and most other funds other than mutual funds, which in the EU are governed by the Undertakings for Collective Investment in Transferable Securities Directive.  See “A Practical Guide to AIFMD Reporting for Non-U.S. Fund Managers: Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013).  A recent panel of industry experts discussed how hedge fund managers can market their funds in the EU under the AIFMD.  This article summarizes the key insights from the program.  For an overview of the AIFMD and its impact on U.S. managers, see “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).

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities

    On February 4, 2014 – this coming Tuesday – the New York office of Ropes & Gray will host GAIM Regulation 2014.  The event will feature an all-star speaking faculty including general counsels and chief compliance officers from leading hedge fund managers, top partners from Ropes and other law firms and officials from the SEC, CFTC, FINRA and other U.S. and global regulators.  The intent of the event is to share best practices in a private setting, and to hear directly from relevant regulators.  For a fuller description of the event, click here.  To register, click here.  The Hedge Fund Law Report recently interviewed three Ropes partners on some of the more noteworthy topics expected to be discussed at GAIM Regulation 2014.  Generally, we discussed SEC and regulatory issues with Laurel FitzPatrick, co-leader of Ropes’ hedge funds practice and co-managing partner of its New York office; CFTC and derivatives issues with Deborah A. Monson, a partner in Ropes’ Chicago office; and enforcement issues with Zachary S. Brez, co-chair of Ropes’ securities and futures enforcement practice.  Specifically, our long form interview with these partners included detailed discussions of the future of hedge fund advertising following the JOBS Act; the impact of the Volcker rule on hedge fund hiring and trading; fund manager responses to the SEC’s focus on broker registration of in-house marketing personnel; best practices for preparing for and navigating SEC examinations; structuring multi-year incentive fees; the impact of swap execution facilities on hedge fund manager obligations and cleared derivatives execution agreements; recent National Futures Association developments relevant to hedge fund managers; design and enforcement of robust information barriers; measures that managers can take to preserve the firm before and after initiation of an enforcement action; government enforcement priorities for hedge fund managers; and specific financial products likely to face government scrutiny in the next two years.

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  • From Vol. 7 No.2 (Jan. 16, 2014)

    Aksia’s 2014 Hedge Fund Manager Survey Reveals Manager Perspectives on Economic Conditions, Derivatives Trading, Counterparty Risk, Financing Trends, Capital Raising, Performance, Transparency and Fees

    Aksia LLC (Aksia), a specialist hedge fund research and portfolio advisory firm, recently released the results of its 2014 Hedge Fund Manager Survey (Survey).  This third annual survey solicited hedge fund managers’ views on topics in three principal areas: The state of the economy and the broader market; the state of the hedge fund industry (particularly with respect to counterparty risk and central clearing, fund financing and capital raising); and hedge fund investor concerns with regard to performance, transparency and fees.  The Survey also drew insights on trends by comparing this year’s responses to those from Aksia’s first two surveys.  See “Aksia Survey Reveals Hedge Fund Managers’ Perspectives on AUM Composition, Fees, Liquidity, Advertising Practices, Transparency, Reporting and High-Frequency Trading,” The Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013); and “Aksia’s 2012 Hedge Fund Manager Survey Reveals Managers’ 2012 Predictions Regarding Tail Risk Hedges, Portfolio Transparency, Movement of Balances Away from Counterparties and More,” The Hedge Fund Law Report, Vol. 5, No. 2 (Jan. 12, 2012).

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  • From Vol. 6 No.48 (Dec. 19, 2013)

    RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Two of Three)

    Hedge fund industry experts, including regulators from the SEC and National Futures Association (NFA), recently gathered at the RCA’s Compliance, Risk & Enforcement 2013 Symposium (Symposium) to offer varied perspectives and advice on topics relevant to hedge fund managers.  This second installment in a three-part article series covering the Symposium summarizes notable points from two sessions, including: (1) the keynote address by Andrew Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), who outlined OCIE examination priorities for hedge fund managers; and (2) another session addressing regulatory challenges confronting managers engaged in fund distribution, including the JOBS Act, broker registration, NFA oversight of hedge fund marketing practices and the EU’s Alternative Investment Fund Managers Directive.  The first article in this series covering the Symposium summarized two sessions, one on conducting effective risk assessments for hedge fund managers (including discussions of forensic testing and testing for insider trading, order allocations and best execution), and the other incorporating current and former government officials’ perspectives on expert networks, political intelligence, insider trading investigations and prosecutions and valuation-related conflicts of interest.  See “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013).  The third article will summarize key points from two sessions, one identifying regulatory risks and outlining compliance best practices with respect to use of expert networks, valuation of assets, custody and the allocation of expenses, and another providing a detailed look into fund administrator shadowing.

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  • From Vol. 6 No.47 (Dec. 12, 2013)

    How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part Two of Two)

    For a hedge fund manager to stand out in a crowded capital raising environment, its marketing must be lucid, coherent, consistent, credible and compelling.  The core purpose of hedge fund marketing is to convey the manager’s sustainable competitive advantage, and in doing so, managers typically find case studies persuasive.  If properly structured, case studies can demonstrate how a manager achieved reported results rather than merely communicating what those results were.  That is, a good case study can help substantiate a manager’s claim to competitive advantage, while at the same time illustrating the sustainability of the advantage.  However, the use of case studies by hedge fund managers in marketing is constrained by law and regulation, some of it counterintuitive to a logical portfolio manager.  For example, if a marketing presentation describes a successful investment with 100% accuracy, that presentation may nonetheless be materially misleading under the federal securities laws.  In short, case studies have obvious business value, but sometimes non-obvious legal risk.  This article is the second in a series seeking to untangle that risk for hedge fund managers that wish to capture the upside of case studies in marketing.  This article continues the discussion of risks associated with use of case studies (initiated in the first article in this series), and provides five best practices for managers wishing to use case studies in marketing.  The first article in the series described the purposes and typical contents of case studies; identified the types of managers and strategies that use and benefit from case studies; and began the discussion of risks associated with use of case studies in marketing, including an analysis of the cherry picking rule.  See “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013).

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  • From Vol. 6 No.47 (Dec. 12, 2013)

    ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing, OTC Derivatives Reforms, Insider Trading Best Practices, the JOBS Act, AIFMD and Activist Investing (Part Three of Three)

    This is the third article in our three-part series covering the 7th Annual Hedge Fund General Counsel Summit hosted by ALM Events.  This article addresses salient points from sessions on the JOBS Act, the Alternative Investment Fund Managers Directive and new regulatory developments that will impact activist investing in Canada.  The first installment discussed strategies for handling government investigations and challenges facing chief compliance officers, including dual-hatting and supervisory liability.  The second installment discussed the impact of over-the-counter derivatives reforms on fund managers (including a discussion of new mandatory trade reporting, clearing and execution requirements as well as CFTC cross border rules); opportunities and challenges associated with distressed debt investing (including a discussion of opportunities to participate in Chapter 11 proceedings, considerations in claims trading and risks of distressed debt investing); and best practices to address insider trading risks.  On insider trading, see also “Akin Gump Partners Discuss Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013).

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  • From Vol. 6 No.46 (Dec. 5, 2013)

    How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part One of Two)

    Hedge fund due diligence is a courtship process in which institutional investors and their consultants spend considerable time and resources getting to know a manager’s philosophy, people, processes and performance.  See “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  Headline performance numbers (phrased gross or net of fees), statements of strategy and similar routine and comparable data points are necessary but not sufficient to tell a manager’s story, or to convey what is unique in the manager’s value proposition.  See “Can Hedge Fund Managers Use Gross (Rather Than Net) Results in Performance Advertising? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013).  Investment and operational due diligence focus not only on what performance the manager achieved, but also on how the manager achieved that performance.  And there is no more comprehensive or persuasive way to convey the “how” of a manager’s processes than to walk investors step-by-step through the lifecycle of actual investments – in other words, to present case studies.  However, the instinct of managers (and their marketing and sales people) to put their best feet forward when presenting case studies is constrained by general and specific prohibitions in the federal securities laws and rules.  Generally, the federal securities laws and rules prohibit materially misleading statements or omissions in communications with investors and potential investors.  Applied to case studies, this general prohibition typically means that managers cannot discuss good investments without also discussing bad investments.  Specifically, Rule 206(4)-1(a)(2) under the Investment Advisers Act of 1940 (Advisers Act) – the so-called “cherry picking” rule – prohibits a manager from disseminating, directly or indirectly, advertisements that refer to specific past profitable recommendations unless the advertisement offers to provide a list of all of the manager’s recommendations for at least the past year.  In short, managers often have a compelling business rationale for telling their stories via case studies (and likely will have more opportunities to do so now that the JOBS Act rules have been finalized), but managers’ ability to present case studies is constrained by a patchwork of law and regulation.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  This article is the first in a two-part series designed to untangle that patchwork and enable managers to market via case studies within the scope of applicable authority.  In particular, this article describes the purposes and typical contents of case studies; identifies the types of managers and strategies that use and benefit from case studies; and highlights risks associated with use of case studies in marketing, including a discussion of the cherry picking rule.  The second article in the series will discuss additional risks of using case studies and provide best practices for managers wishing to use case studies in marketing.

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  • From Vol. 6 No.46 (Dec. 5, 2013)

    Annual Thompson Hine Hedge Fund Seminar Offers Insights on Organizing Alternative Mutual Funds, AIFMD, FATCA and the JOBS Act

    Thompson Hine LLP recently hosted its ninth annual hedge fund seminar, entitled “Regulatory & Compliance Issues Confronting Hedge Funds Today.”  During the seminar, Thompson Hine partners and other panelists discussed critical issues confronting hedge fund managers, including considerations for organizing and operating alternative mutual funds, as well as the impact on hedge fund managers of the Alternative Investment Fund Managers Directive, the Foreign Account Tax Compliance Act and the JOBS Act.  This article describes salient points on each topic discussed during the seminar.

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  • From Vol. 6 No.43 (Nov. 8, 2013)

    Katten Seminar Provides Hedge Fund Managers with a Roadmap for JOBS Act Compliance

    Law firm Katten Muchin Rosenman LLP (Katten) recently hosted a seminar entitled “General Solicitation and Advertising Under the JOBS Act: Practical Considerations for Private Funds,” intended to help hedge fund managers navigate the challenges associated with understanding and complying with new rules proposed and adopted by the SEC to implement the JOBS Act.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Given the continuing rulemaking and interpretational challenges raised by the SEC’s JOBS Act implementing rules, hedge fund managers should proceed cautiously when considering general solicitation and advertising; and the Katten seminar provided useful guidance in this regard.  This article summarizes highlights from the seminar, focusing on, among other things, the accredited investor due diligence process; numerous interpretational challenges posed by the new “bad actor” disqualification provision; proposed rules addressing new filing and disclosure requirements; and pitfalls raised by the unresolved interaction between the JOBS Act and other federal securities laws.

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  • From Vol. 6 No.42 (Nov. 1, 2013)

    Can Hedge Fund Managers Use Gross (Rather Than Net) Results in Performance Advertising? (Part Two of Two)

    Hedge fund managers work long and hard for every basis point of return they achieve.  Therefore, it often comes as a surprise to managers to learn that they do not have plenary rights in their performance information.  Such information is not fully portable.  See “Portability and Protection of Hedge Fund Investment Track Records,” The Hedge Fund Law Report, Vol. 4, No. 40 (Nov. 10, 2011).  Investors often require performance information to be presented in a composite, while managers often think about performance per fund or per strategy.  See “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  And, as a default rule, regulators require performance to be presented net of fees, which, among other things, complicates apples-to-apples comparisons among funds with different fee structures.  See “Can Hedge Fund Managers Use Gross (Rather Than Net) Results in Performance Advertising? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).  However, there are exceptions to that default rule – circumstances in which regulators permit managers to present performance information gross of fees.  It is important for hedge fund managers to understand the existence and limits of situations in which they can present performance information gross of fees, for at least two reasons.  First, as managers hardly need to be reminded, performance remains central to marketing and capital raising.  See “Why and How Do Corporate and Government Pension Plans, Endowments and Foundations Invest in Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013); “Why and How Do Family Offices and Foundations Invest in Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013); “Why and How Do Sovereign Wealth Funds Invest in Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013).  Second, regulators are taking a harder look at performance information in private fund marketing materials and activities, as Norm Champ, Director of the SEC’s Division of Investment Management, explicitly stated in a September 12, 2013 speech at the Practising Law Institute.  Accordingly, this article – the second in a two-part series – describes three circumstances in which hedge fund managers may present performance information gross of fees; analyzes four “hard cases” involving presentation of hedge fund performance information that do not fall neatly within the scope of no-action letters or other guidance; and discusses two categories of best practices that all managers should consider when presenting performance information.  The first article in this series provided an overview of relevant law, rules and SEC authority and offered practical guidance on calculating and presenting net performance results.

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  • From Vol. 6 No.42 (Nov. 1, 2013)

    Deutsche Bank Survey Finds That, Based on AIFMD, Nearly Half of U.S. Hedge Fund Managers Will Only Market “Passively” to EU Investors

    Deutsche Bank’s Hedge Fund Consulting group (Deutsche Bank) recently conducted a survey of 44 U.S. and European hedge fund managers with approximately $325 billion in aggregate assets under management.  Deutsche Bank asked the managers questions relating to whether and how their costs and infrastructure changed as a result of new regulatory requirements, as well as questions relating to their plans to market their funds into the European Union (EU) in light of the recent rollout of the EU Alternative Investment Fund Managers Directive (AIFMD).  See “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).  This article summarizes key takeaways from the survey.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    Can Hedge Fund Managers Use Gross (Rather Than Net) Results in Performance Advertising? (Part One of Two)

    The hedge fund industry’s enthusiasm for the JOBS Act has been tempered by the recognition that while the law and related rules expand the opportunities for advertising by managers, they do not alter much of the long-standing authority governing such advertising.  See “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  In particular, the JOBS Act rules did not abridge or relax the regulatory regime governing performance advertising by hedge fund managers.  See “A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Norm Champ, the Director of the SEC’s Division of Investment Management, emphasized this point in a September 12, 2013 speech at the Practising Law Institute, cautioning, “I’ve instructed Division of Investment Management rulemaking and risk and examination staff to pay particular attention to the use of performance claims in the marketing of private fund interests.  In particular, this review will endeavor to identify potentially fraudulent behavior and to assess compliance with the federal securities laws, including appropriate Investment Advisers Act provisions.”  What hedge fund managers can and cannot do in the course of performance advertising is the product of law, SEC rules, no-action precedent and decades of practice; it is largely a function of principles and experience rather than explicit or rules-based guidance.  At the same time, performance remains a dominant factor in the capital allocation decisions of institutional investors.  See “Goldman Prime Brokerage Survey Relays the Views of Institutional Investors on Hedge Fund Fees, Manager Selection, Due Diligence, Return Expectations, Liquidity, Managed Accounts, UCITS and Alternative Mutual Funds,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).  Accordingly, hedge fund managers want (and need) to know how to put their best foot forward in performance advertising without causing that foot to trip a regulatory wire.  And in analyzing this area, managers are particularly concerned with whether they can advertise using gross performance results; if so, how; and, if not, how to calculate and present net performance results in a way that passes legal muster while still reflecting positively on the manager.  This article is the first in a two-part series that aims to help managers think through these and similar questions relating to the calculation and presentation of performance results in marketing, advertising, governing documents and other contexts.  Specifically, this article provides an overview of relevant law and SEC guidance (including relevant no-action letters), and offers practical guidance on calculating and presenting net performance results.  The second installment will identify situations in which managers may, consistent with relevant regulation, present gross performance results; outline the mechanics of calculating and presenting performance results in a number of challenging scenarios that hedge fund managers regularly face; and describe best practices for hedge fund managers in presenting their performance results.

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  • From Vol. 6 No.41 (Oct. 25, 2013)

    National Futures Association Director of Compliance, Patricia L. Cushing, Discusses the Chief Regulatory Obstacles Faced by Hedge Fund Managers When Marketing Commodity Funds

    Following repeal of the CFTC Rule 4.13(a)(4) commodity pool operator (CPO) registration exemption, numerous hedge fund managers with strategies involving commodities or derivatives registered as CPOs with the CFTC and became members of the National Futures Association (NFA).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Such managers face at least two broad challenges in marketing fund interests.  First, CFTC rules governing commodity pool marketing differ in important ways from SEC rules governing hedge fund marketing.  On CFTC marketing rules, see “CPO Compliance Series: Marketing and Promotional Materials (Part Two of Three),” The Hedge Fund Law Report, Vol. 5, No. 38 (Oct. 4, 2012); on hedge fund marketing, see “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three),” The Hedge Fund Law Report, Vol. 6, No. 37 (Sep. 26, 2013).  Second, effectively negotiating CFTC marketing and other rules requires a thorough and continuously updated understanding of the views of relevant compliance and enforcement officials.  As an adjunct to the efforts of hedge fund managers on the latter point, The Hedge Fund Law Report recently interviewed Patricia L. Cushing, Director of Compliance at the NFA, which is charged with regulating and examining CPOs.  Our interview with Cushing addressed, among other topics, whether the NFA will increase its scrutiny of marketing by CPOs now that the JOBS Act rules have become effective; the NFA’s emerging enforcement focus areas; most common deficiencies uncovered during reviews of CPO marketing materials; the NFA’s views on the use of past specific recommendations in performance presentations; the NFA’s approach to marketing issues raised by use of social media; best practices for review and approval of marketing materials; best practices for retention of promotional materials disseminated through website, radio and television; the role of the CCO or other supervisors in the marketing review process; and supervisory liability of CCOs.  See “Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Regulation and Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013.  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.37 (Sep. 26, 2013)

    How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement? (Part Three of Three)

    This is the third article in our series – occasioned, in large part, by David Blass’ April 5, 2013 speech before the American Bar Association, Trading and Markets Subcommittee – on broker registration considerations for hedge fund managers.  The first article in the series described the activities that could trigger a broker registration requirement, and the second installment distilled best industry practices for determining when compensation paid to in-house hedge fund marketers constitutes transaction-based compensation.  This article, the culmination of the analysis in the first two parts, is intended for managers that have taken a hard and candid look at their current marketing practices and determined that those practices may require broker registration.  Such managers must answer at least five critical questions: What are the relevant state broker registration requirements and the consequences for failing to comply with them?  What is involved in broker registration by a manager or an affiliate?  How can managers structure third-party broker arrangements?  How, if at all, can managers modify current marketing practices to sidestep a broker registration requirement?  And, finally, can managers obtain comfort on this topic from the SEC’s no-action process?  This article addresses each of these questions.

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  • From Vol. 6 No.36 (Sep. 19, 2013)

    How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?  (Part Two of Three)

    Effective hedge fund capital raising requires effective marketers, and incentivizing effective marketers requires paying them for performance.  But paying in-house marketers for performance – paying them what the law calls “transaction-based compensation” or a “salesman’s stake” – requires the manager that employs those marketers to register as a broker.  How, then, can hedge fund managers attract, retain and incentivize top-tier marketers while avoiding a broker registration requirement?  This question has been looming over the hedge fund industry for years, but the question has been perceived as more theoretical than practical because of the absence of specific enforcement activity or speeches by SEC officials directly on the topic.  However, this all changed on April 5, 2013, when David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, delivered a speech to the American Bar Association, Trading and Markets Subcommittee, generally addressing this topic.  See “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013) (analyzing the Blass speech).  The Blass speech was notable for highlighting questions and SEC concerns rather than providing conclusive answers or concrete guidance.  Blass noted, for example, that “[t]he SEC and SEC staff have long viewed receipt of transaction-based compensation as a hallmark of being a broker” – which the industry already knew – but he did not describe the types of compensation structures or scenarios that, in the SEC’s view, could constitute transaction-based compensation.  Nor has any other SEC speech, enforcement action or other category of authority particularized the “transaction-based compensation” analysis in a comprehensive manner.  In the absence of relevant and reliable regulatory guidance, this article – the second in a three-part series – distills best industry practices for determining when compensation paid to in-house hedge fund marketers constitutes transaction-based compensation.  Or, put another way, this article outlines strategies for structuring the compensation of in-house marketers to avoid the transaction-based compensation designation, and thereby avoid a broker registration requirement.  This article also discusses the Rule 3a4-1 issuer safe harbor and describes how managers can operate in-house marketing activities within the “spirit” of the safe harbor to minimize the risk of triggering a broker registration requirement.  The first installment in this series explored the activities that could trigger a broker registration requirement, as well as other factors that bear on the registration analysis, including the time devoted to marketing by an employee, the employee’s job title and the employee’s other responsibilities.  See “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?  (Part One of Three),” The Hedge Fund Law Report, Vol. 6, No. 35 (Sep. 12, 2013).  The third installment will examine alternative solutions for managers looking to structure in-house marketing activities in a manner that accomplishes the fundamental business goals (most notably, capital raising) without triggering a broker registration requirement.

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  • From Vol. 6 No.35 (Sep. 12, 2013)

    How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?  (Part One of Three)

    In-house marketers play a central role in raising and retaining assets for hedge fund managers.  While the role means different things at different firms and even within a firm, the job of an in-house marketer often involves some combination of: directly sourcing investments; indirectly sourcing investments via investment consultants, third-party marketers and others; persuading investors to remain invested, especially during turbulent periods; persuading investors to make follow-on investments; crisis management of various kinds; management of side letter obligations; preparation of investor-facing materials (PPMs, pitchbooks, etc.); coordination of public communications, to the extent permitted by the JOBS Act and otherwise; and more.  Hedge fund managers have asked (usually in hushed tones) whether the activities of in-house marketers require the manager or its marketing department to register as a broker, or require members of the department to register as associated persons of a broker.  For years, there was essentially no regulatory activity on this topic – no enforcement actions or speeches by SEC officials – and many in the industry construed the absence of such activity as tacit approval of typical structures.  See “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  However, an April 5, 2013 speech by David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, indicated that regulators are aware of this issue and provided some insight into how the SEC thinks about it.  The Blass speech refocused attention on this issue and highlighted some important questions to ask, but the speech did not provide conclusive answers to the hard practical questions being asked by hedge fund managers.  See “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” The Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013) (analyzing the Blass speech).  In an effort to move the discussion further along and address important practice points, The Hedge Fund Law Report is publishing a three-part series outlining steps that managers can take to mitigate the risk of triggering a broker registration obligation based on in-house marketing activities.  This article, the first in the series, explores the activities that could trigger a broker registration requirement, as well as other factors that bear on the registration analysis, including the time devoted to marketing by an employee, the employee’s job title and the employee’s other responsibilities.  The second installment will evaluate whether specific types of compensation constitute “transaction-based compensation”; discuss the applicability of the Rule 3a4-1 issuer safe harbor; and advise on how managers can operate in-house marketing activities within the “spirit” of the safe harbor to minimize the risk of triggering a broker registration requirement.  The third installment will examine alternative solutions for managers looking to structure in-house marketing activities in a manner that accomplishes the fundamental business goals (most notably, capital raising) without triggering a broker registration requirement.

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  • From Vol. 6 No.33 (Aug. 22, 2013)

    How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?

    The current capital-raising and regulatory environments are challenging for all hedge fund managers, but particularly for emerging managers.  Institutional investors expect institutional quality infrastructure at the managers to which they allocate capital – and those expectations are not materially adjusted or abridged for manager size.  Start-up and emerging managers therefore face considerable obstacles to entry: they have to build institutional operations before having institutional cash flows.  Accordingly, third-party capital is increasingly perceived as necessary to starting a management company, though not sufficient.  Sufficiency requires more these days – a brand, an identifiable competitive advantage, a coherent strategy and other attributes.  An event recently hosted by the law firm Herrick, Feinstein LLP – which included participants from third-party capital providers, administrators and other service providers, in addition to Herrick partners – focused on the challenges facing emerging managers and identified solutions to many of those challenges.  In particular, the event highlighted strategies for marketing by emerging managers to institutional investors; manager selection criteria employed by institutional investors; methods whereby emerging managers may enhance their operating and compliance systems; and regulatory hurdles that emerging managers must surmount.  This article highlights the pertinent points raised at the event.  See also “SEI Study Offers a Reality Check to Hedge Fund Managers on What Actually Works When Marketing to Institutional Investors,” The Hedge Fund Law Report, Vol. 6, No.15 (Apr. 11, 2013).

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  • From Vol. 6 No.30 (Aug. 1, 2013)

    A Compilation of Important Insights from Leading Law Firm Memoranda on the Implications of the JOBS Act Rulemaking for Hedge Fund Managers

    On July 10, 2013, as required under the JOBS Act, the SEC adopted final rules to relax long-standing restrictions on general solicitation and general advertising applicable to securities offered pursuant to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933.  The rule changes are expected to become effective on September 23, 2013.  The SEC also adopted rule changes that disqualify felons and other bad actors from being able to rely on the Rule 506 safe harbor.  In addition, the SEC proposed amendments to Regulation D, Form D and Rule 156 that would significantly expand filing and other requirements with respect to Rule 506 offerings.  See “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising,” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  Since the SEC published its final and proposed JOBS Act rules, many of the leading law firms with hedge fund practices have issued memoranda describing the rules and their anticipated impact on hedge fund managers.  In an effort to assist our subscribers in understanding the range and diversity of informed opinion on this topic, The Hedge Fund Law Report has compiled and analyzed many such memoranda.  This article embodies our analysis.  In particular, this article provides a detailed summary of the final and proposed JOBS Act rules, then provides a compilation of noteworthy insights and practice points from the memoranda.  In the process, this article conveys the consensus view (and identifies differences of opinion) on questions including: Will more hedge fund issuers engage in general solicitation and advertising following adoption of the JOBS Act rules?  What are the primary hurdles in using Rule 506(c)?  What “speedbumps” are created by proposed Advance Form D?  Should private funds take advantage of the new advertising relief?  And what is the expected impact of the bad actor disqualification rule?  See also “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).

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  • From Vol. 6 No.29 (Jul. 25, 2013)

    Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds

    On July 10, 2013, the SEC adopted and proposed various rules to implement the JOBS Act enacted last year.  The adopted rules will (1) permit general solicitation and advertising for offerings made in reliance on Rule 506 under Regulation D and Rule 144A under the Securities Act of 1933, and (2) disqualify certain “bad actors” from being able to offer securities in reliance on Rule 506.  The SEC also proposed certain rule changes impacting Rule 506 offerings that would enhance Form D reporting; require legends on general solicitation and advertising materials; apply new anti-fraud rules to Rule 506 advertising materials; and require pre-filing of general solicitation and advertising materials with the SEC for a two-year period.  See “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising,” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  During a recent Practising Law Institute briefing, expert panelists Paul N. Roth, a founding partner of Schulte Roth & Zabel LLP; Alan L. Beller and Nicolas Grabar, both partners at Cleary Gottlieb Steen & Hamilton LLP; and David M. Lynn, a partner at Morrison & Foerster LLP, explained the SEC rulemaking; dissected the differences between the adopted rules and the 2012 rule proposals; and considered the implications of the rule changes for hedge funds offering securities in reliance on Rule 506.  This article summarizes the salient points raised by the expert panel during the briefing.

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  • From Vol. 6 No.28 (Jul. 18, 2013)

    SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising

    When the JOBS Act (formally the Jumpstart Our Business Startups Act) was signed by President Obama last year, it directed that one of its most transformational provisions – the relaxation of decades-long limits on public offerings of unregistered securities – not go into effect until the Securities and Exchange Commission (SEC) set rules to implement the changes.  After more than a year of delay, the agency’s implementing rules are now here.  But the SEC at the same time proposed a raft of controversial additions to the new rules, ensuring that the politically charged debate around the JOBS Act – in which consumer advocates and certain lobbies (such as that for the mutual fund industry) vigorously oppose the law and its opportunities for private funds while many business groups push for it – will continue.  The awkward compromise offered by that two-step has nods to both sides of the debate.  On the one hand, the SEC rules reflect only one of many changes called for by JOBS Act opponents, that being some increase in procedures to confirm investor qualifications (this addition was expected, although the final guidance is more strongly worded than in the SEC’s original proposal from a year ago).  See “JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  On the other hand, the SEC proposal now asks whether the agency should add a number of new requirements that will cheer the opposition.  Lest there be any mistake that the SEC is flashing a yellow light, the release also says that the agency’s examination staff will be charged with monitoring new offering activity in the private funds industry and that firms that expand their marketing profile should carefully consider their compliance infrastructure before doing so.  On the same day that the SEC adopted the JOBS Act rules, it also adopted new rules that foreclose reliance on Regulation D in the case of securities offerings involving felons and other “bad actors.”  In a guest article, Nathan J. Greene, a partner and Co-Practice Group Leader in the Investment Funds Group at Shearman & Sterling LLP, describes the above-referenced JOBS Act rulemaking in more detail and highlights important implications for hedge fund managers.

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  • From Vol. 6 No.28 (Jul. 18, 2013)

    Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part Two of Two)

    Investment consultants play an important and growing role in the investment decision-making processes of institutional investors.  See “Goldman Prime Brokerage Survey Relays the Views of Institutional Investors on Hedge Fund Fees, Manager Selection, Due Diligence, Return Expectations, Liquidity, Managed Accounts, UCITS and Alternative Mutual Funds,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).  Therefore, hedge fund managers that seek institutional investors for their hedge funds must understand who investment consultants are, how they operate and how they think, as well as the legal risks and benefits of working with consultants.  This article, the second in a two-part series, analyzes those legal risks and benefits, focusing in particular on pay to play, lobbying, general solicitation, advertising, fiduciary duty, conflicts of interest and related concerns.  The first article in this series provided an overview of the services and service models employed by consultants, discussed how consultants are compensated and explored how consultants think about manager selection.  See “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 27 (Jul. 11, 2013).

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  • From Vol. 6 No.27 (Jul. 11, 2013)

    Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part One of Two)

    If you as a hedge fund manager want to raise and retain institutional investor capital, you have to make (or remain) friends with investment consultants.  Such consultants are playing an increasingly central role in the allocation decisions of institutional investors with respect to hedge funds, for at least five reasons.  First, funding gaps, demographic shifts and other factors have increased the need among many institutions to generate consistent alpha; the same dynamics have accentuated the stakes of making an allocation mistake.  Second, consultants are usurping much of the advisory terrain previously occupied by funds of funds because of concerns regarding the latters’ fees and performance shortcomings.  See “SEI Report Highlights Challenges Faced by Fund of Hedge Funds Industry and Recommends Improvements,” The Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).  Third, the due diligence process and allocation decisions have become more multifaceted, focusing as much (or more) on operational issues than on performance alone.  See “What Should Hedge Fund Managers Expect When ERISA Plans Conduct Due Diligence on and Negotiate for Investments in Their Funds?,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).  Fourth, the pace of regulatory change and new fund launches make it difficult for institutions to keep up with due diligence best practices or investment options.  See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  Fifth, the growing use of investment consultants by institutions has made any particular institution less inclined to go it alone.  In short, investment consultants are fast becoming the standard of care for institutional investors allocating capital to private funds.  As such, they effectively serve as “gatekeepers” – in the commonly heard phrase – to the deepest pool of capital available to hedge fund managers.  In light of the centrality of investment consultants to the world of private fund allocations, this article offers a tutorial to hedge fund managers on what matters to consultants.  To do so, this article – the first in a two-part series – memorializes our interviews with a range of leading consultants on the topics they consider most important.  In particular, this article provides an overview of services and service models employed by investment consultants; discusses how consultants staff engagements and how they are compensated; explores how consultants think about manager selection; and details how managers can disclose information required by consultants while protecting such information.  The second article in this series will focus on the legal and regulatory risks faced by hedge fund managers in working with consultants, and will offer suggestions on mitigating those risks.

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  • From Vol. 6 No.26 (Jun. 27, 2013)

    PLI Panel Addresses Marketing and Brokerage Issues Impacting Hedge Fund Managers, Including Marketing to State Pension Plans, Capital Introduction and Broker Implications of In-House Marketing Activities

    At the Practising Law Institute’s Hedge Fund Compliance and Regulation 2013 program, an expert panel comprised of SEC attorneys and industry practitioners shared insights on topics involving marketing and brokerage issues that impact hedge fund managers.  Among other things, the wide-ranging discussion covered the regulatory perils that accompany marketing to government pension funds, including local, state and federal pay-to-play and lobbying laws; capital introduction programs; the European Union’s Alternative Investment Fund Managers Directive; broker regulations implicated by in-house fund marketing activities; and investment-related regulations impacting broker-dealers and their hedge fund clients, including the Market Access Rule, circuit breakers, the use of dark pools, short selling, securities lending and large trader reporting.  This article summarizes the highlights from the panel discussion that are most pertinent to hedge fund managers.  See also “PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013); “PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance,” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

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  • From Vol. 6 No.23 (Jun. 6, 2013)

    Why and How Do Hedge Fund Managers Set Minimum Subscription Amounts? (Part One of Two)

    If hedge fund investor capital is so hard to raise these days, shouldn’t managers take any capital they can get?  The short answer is, not if one dollar of investor capital costs two dollars in administrative fees, three dollars in litigation costs or four dollars in reputational impairment.  While ubiquitous in PPMs and thus largely ignored, hedge fund investment minimums nonetheless play an important role in hedge fund operations, marketing and portfolio management.  Such minimums communicate information about the manager, its investor base and its goals; both facilitate and constrain performance; impact the pace and quantity of capital raising; and influence the manager’s ability to manage liquidity.  Investment minimums are more important than generally understood, yet they have received a minimum of attention.  This two-part article series remedies that omission by focusing squarely and deeply on hedge fund investment minimums.  This article – the first in the series – outlines key legal, business, and investment rationales for setting hedge fund investment minimums.  Part two of this series will discuss market terms and trends for investment minimums as well as mechanics of implementing, enforcing, waiving and modifying minimum subscription amounts.

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  • From Vol. 6 No.21 (May 23, 2013)

    RCA Symposium Panels Discuss New CFTC and NFA Regulations Governing Obligations of Hedge Fund Managers Required to Register as CPOs or CTAs

    On April 18, 2013, the Regulatory Compliance Association held its Regulation, Operations & Compliance 2013 Symposium (RCA Symposium) in New York City.  Panels during the RCA Symposium covered various topics, including new regulations of the U.S. Commodity Futures Trading Commission and the National Futures Association (NFA) that apply or will apply to numerous hedge fund managers.  The two panels that tackled these issues addressed, among other things, registration obligations of commodity pool operators (CPO) and their principals and associated persons; reporting and other obligations applicable to new CPO and CTA registrants; Bylaw 1101; required ethics training programs; regulations governing marketing and promotional materials; and NFA audits.  This article addresses salient points from both sessions.  See also “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).

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  • From Vol. 6 No.20 (May 16, 2013)

    How Can Hedge Fund Managers Effectively Raise Capital from Single-Family Offices, Multi-Family Offices and High Net Worth Individuals?

    A law firm and an accounting firm hosted a seminar earlier this year on strategies and risks of hedge fund marketing focused on family offices and high net worth individuals.  The primary purpose of the seminar was to highlight workable, battle-tested strategies for raising capital from both sets of investors.  The secondary purpose of the seminar was to offer practical advice on navigating regulatory risks posed by hedge fund marketing generally.  This article discusses the salient points discussed during the seminar.  For related insight, see “Why and How Do Family Offices and Foundations Invest in Hedge Funds?,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).

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  • From Vol. 6 No.19 (May 9, 2013)

    Rothstein Kass 2013 Hedge Fund Outlook Highlights Managers’ Perspectives on Performance and Economic Trends, Leverage, Capital Raising Strategies, Due Diligence, Staffing, Operational Changes and Regulatory Concerns

    International services firm Rothstein Kass recently released a report detailing findings from its survey of 358 professionals at hedge fund managers regarding performance and economic outlook, use of leverage, capital raising concerns and strategies (including seed deals, use of separately managed accounts and fee breaks), investor due diligence, staffing issues and regulatory priorities.  This article summarizes the key takeaways from the survey.  For an article summarizing the 2012 version of this annual Rothstein Kass report, see “Rothstein Kass Report Discusses Marketing, Structuring, Tax, Leverage, Due Diligence, Hiring and Other Dominant Concerns for Hedge Fund Managers in a Competitive Capital Raising Environment,” The Hedge Fund Law Report, Vol. 5, No. 22 (May 31, 2012).

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  • From Vol. 6 No.18 (May 2, 2013)

    Three Recommendations to Help Hedge Fund Managers Avoid False GIPS Compliance Claims in Marketing Materials

    Hedge fund managers engaged in raising capital are increasingly looking to present their performance results in compliance with the Global Investment Performance Standards (GIPS).  GIPS provide prospective investors with additional assurances about the integrity of such performance results.  At the same time, with the passage of the Jumpstart Our Business Startups Act, the SEC has become increasingly concerned about public advertising by private fund managers and has made it a priority to review performance advertising presentations during presence examinations of hedge fund managers.  See “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers at the RCA’s Compliance, Risk & Enforcement 2012 Symposium,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013); and “How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated with the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?,” The Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013).  In a development that may foreshadow heightened scrutiny in this area, the SEC has initiated administrative proceedings against an investment adviser and its principal for allegedly falsely claiming that the investment adviser’s performance results complied with advertising guidelines set forth in GIPS.  Although compliance with the GIPS standards are voluntary, the SEC has made clear that managers who advertise GIPS compliance, but whose advertisements and marketing materials do not actually provide all of the information required by GIPS, are subject to sanction under the anti-fraud provisions and advertising rules contained in the Investment Advisers Act of 1940.  This article summarizes the SEC’s factual and legal allegations in this case and provides three recommendations for hedge fund managers interested in reducing the risk of false GIPS compliance claims.  For an article that identifies some of the hedge fund specific issues related to GIPS-compliant performance presentations, see “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).

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  • From Vol. 6 No.16 (Apr. 18, 2013)

    Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?

    In an April 5, 2013 speech delivered before the American Bar Association, Trading and Markets Subcommittee, David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, cautioned private fund managers that certain in-house marketing and investment banking activities may require the manager or its personnel to register as a broker with the SEC.  The speech was in response to certain practices identified by the SEC staff during presence examinations of newly registered advisers.  See “SEC’s OCIE Director, Carlo di Florio, Discusses Examination Strategies and Expectations for Impending Examinations of Private Equity Advisers,” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  Blass highlighted two groups of practices that raise regulatory concerns: (1) the marketing of fund securities by a manager’s in-house personnel; and (2) “purported investment banking or other broker activities” related to a fund’s portfolio companies.  For more on the broker registration consequences of the former practice, see “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).  This article provides an overview of broker registration issues pertinent to hedge fund managers; summarizes key takeaways from Blass’ speech; and helps hedge fund managers understand and analyze their activities within the broker registration framework.

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  • From Vol. 6 No.15 (Apr. 11, 2013)

    SEI Study Offers a Reality Check to Hedge Fund Managers on What Actually Works When Marketing to Institutional Investors

    Financial and asset management services provider SEI has released its sixth annual survey of institutional hedge fund investors.  While hedge fund investors are “generally maintaining, and even somewhat increasing,” their hedge fund allocations, SEI cites “rising investor dissatisfaction” with hedge fund performance, which, going forward, could be further hindered by the “institutionalization” of the hedge fund space in response to more intensive investor due diligence and greater demands for transparency.  Moreover, as the line between hedge funds and other products offering hedge fund strategies continues to blur, it becomes more difficult for managers to distinguish their funds and convince investors that they offer good value.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  This article summarizes key points from the survey.  For more on the expectations of fund managers and investors, see “Ernst & Young’s Sixth Annual Global Hedge Fund Survey Highlights Continued Divergence of Expectations between Managers and Investors,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).  For a general look at institutional investors’ priorities and perspectives on alternative investments, see “Natixis Global Asset Management Survey Reveals Institutional Investors’ Attitudes Towards Market Volatility, Risk Management, Portfolio Construction, Investment Concerns, Alternative Investments and Investment Priorities,” The Hedge Fund Law Report, Vol. 5, No. 42 (Nov. 9, 2012).

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  • From Vol. 6 No.14 (Apr. 4, 2013)

    Four Recommendations to Help Private Equity Fund Managers Reduce the Risk of Conveying Misleading Valuation Information to Prospective and Existing Investors

    The SEC has recently followed through on warnings that it would specifically target improper valuation practices employed by private equity fund managers.  See “SEC Asset Management Unit Chief Bruce Karpati Addresses Private Equity Enforcement Trends, Initiatives and Priorities,” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  The SEC recently entered into a settlement with two affiliated managers of a fund of private equity funds after charging both managers with misleading prospective and existing investors concerning the valuation of a private equity fund of funds that they managed and concerning the practices used to value the fund’s assets.  In light of this enforcement action and the SEC’s stepped-up efforts to target private fund managers for enforcement activity, managers should proactively review their compliance policies and practices as a whole, and specifically those relating to valuation of fund assets.  See “SEC’s OCIE Director, Carlo di Florio, Discusses Examination Strategies and Expectations for Impending Examinations of Private Equity Advisers,” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  This article summarizes the SEC’s factual and legal allegations as well as the terms of the settlement with the managers.  This article also makes four important recommendations to assist private equity managers in avoiding the improper valuation practices that were the subject of this enforcement action.

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  • From Vol. 6 No.13 (Mar. 28, 2013)

    Four Recommendations for Private Fund Managers Wishing to Mitigate the Risks of Using Unregistered Brokers to Introduce Prospective Investors to Their Funds

    Two recently-issued SEC orders settling administrative and cease-and-desist proceedings (Orders) demonstrate the regulatory risks private fund managers face in using unregistered brokers to introduce prospective investors to their funds.  One of those Orders was against a private equity fund manager and its former senior managing partner, and the other was against a third party consultant retained by the private equity fund manager to introduce potential investors to its funds.  The private equity fund manager paid the consultant a percentage of the capital commitments of investors he introduced, resulting in millions of dollars in compensation for him.  See generally “What Is the ‘Market’ for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010).  Importantly, this case demonstrates that the SEC is willing to pursue not just unregistered brokers who engage in impermissible marketing activities on behalf of investment funds, but also the fund managers themselves if they are found to assist an unregistered broker or ignore warning signs that the unregistered broker is engaging in misconduct.  This article summarizes the alleged misconduct, causes of action and the remedies agreed upon in the settlement.  In addition, this article provides four recommendations for fund managers wishing to mitigate the risks of using unregistered brokers in introducing prospective investors to their funds.

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  • From Vol. 6 No.10 (Mar. 7, 2013)

    How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated with the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?

    The Jumpstart Our Business Startups Act (JOBS Act) provisions allowing general solicitation and general advertising in private offerings (JOBS Act Marketing Provisions), upon becoming effective, will profoundly change how hedge fund managers can market their funds.  Before taking advantage of the JOBS Act Marketing Provisions, however, hedge fund managers should be aware of a number of potential pitfalls.  First, hedge fund managers may be prohibited from engaging in general solicitation and general advertising if they rely on exemptions from registration under certain Commodity Futures Trading Commission rules, or under certain state and federal investment adviser laws.  Second, hedge fund managers that are able to take advantage of the provisions need to be aware of several potential compliance issues under the Investment Advisers Act of 1940, including issues that arise when using social media, publicly available websites and publicly advertised performance history.  In a guest article, Adam Gale, a Member in the New York office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., identifies potential regulatory pitfalls associated with reliance on the JOBS Act Marketing Provisions and provides some recommendations to address compliance issues in connection with reliance on the JOBS Act Marketing Provisions.

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  • From Vol. 6 No.10 (Mar. 7, 2013)

    Former OCIE Chief Lori Richards and other PwC Partners and Managers Discuss the Mechanics of the AIFMD and Its Impact on Marketing by U.S. Hedge Fund Managers

    The first phase of the European Union’s (EU’s) Alternative Investment Fund Managers Directive (AIFMD) must be implemented by July 23, 2013.  It will have a significant impact on how non-EU alternative investment fund managers market their funds in the EU.  The AIFMD will affect hedge fund managers that are based in the EU; that have EU operations; or that market their services in the EU.  However, uncertainty remains as to the precise regulations that individual EU member states will adopt and how those regulations will affect non-EU managers who wish to market their funds in the EU.  On February 11, 2013, PricewaterhouseCoopers LLP (PwC) presented a webcast on the AIFMD entitled “AIFMD: How does this impact U.S. investment advisers?”  The webcast was geared to U.S. alternative investment fund managers and provided insight into the implementation of the AIFMD.  In addition to giving a short overview of the AIFMD, the panelists discussed the impact of the AIFMD on U.S. managers who wish to market their funds in the EU; the consequences of being subject to the full AIFMD regime; and the timeline for AIFMD implementation.  This article summarizes the key points from the webcast.

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  • From Vol. 6 No.9 (Feb. 28, 2013)

    RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part Two of Two)

    On December 18, 2012, the Regulatory Compliance Association held its Compliance, Risk & Enforcement Symposium at the Pierre Hotel in New York City.  Participants at the event included leading hedge fund industry professionals, and panels focused on topics including insider trading, compliance programs and reviews, SEC examination priorities, hedge fund governance, Form PF and marketing and advertising issues.  This article – the second installment in a two-part series covering the Symposium – discusses SEC examination priorities (and practical guidance for addressing areas of concern); recent trends in hedge fund governance; lessons learned from initial Form PF filings and strategies for completing Form PF; and marketing and advertising issues, including a discussion of the JOBS Act and related topics.  The first installment covered, among other things: insider trading (including a discussion of manager cooperation, the elements of insider trading, the continuing viability of the mosaic theory, insider trading investigative techniques and the use of expert networks and paid consultants); and compliance programs and reviews (including a discussion of the approach to and framework for hedge fund compliance programs and reviews, and specific policies and procedures designed to address trading risks).  See “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).

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  • From Vol. 6 No.9 (Feb. 28, 2013)

    SEC’s National Examination Program Publishes Official List of Priorities for 2013 Examinations of Hedge Fund Managers and Other Regulated Entities

    On February 21, 2013, the SEC’s National Examination Program (NEP) published its list of priorities for examinations of investment advisers (including hedge fund managers) and other regulated entities for 2013.  The NEP list not only addresses presence examinations of newly registered investment advisers, but also discusses focus areas for examinations of previously-registered advisers.  Also, unlike prior speeches addressing adviser examination priorities for 2013, this announcement reflects an official SEC statement on the matter.  This article offers a deep dive into the SEC’s thinking on each of the specified examination priorities.

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  • From Vol. 6 No.5 (Feb. 1, 2013)

    How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part One of Two)

    The continuing quest for new sources of capital as well as the heightened regulation of hedge fund managers and their funds has prompted managers to explore launching alternative mutual funds.  Simultaneously, the desire for innovative investment strategies and uncorrelated returns has heightened retail investor demand for such products, according to a June 2012 report from McKinsey & Company.  See “McKinsey Analyzes Trends in the Mainstreaming of Alternative Investments and Outlines Strategic Imperatives for Traditional Asset Managers,” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).  However, the organization and operation of alternative mutual funds present numerous challenges and risks for hedge fund managers – in particular, challenges and risks different from those typically encountered in the hedge fund world.  Retail is not necessarily simple, especially if you are starting with a non-retail orientation.  This two-part article series is designed to enable hedge fund managers to weigh the more salient pros and cons of launching alternative mutual funds.  This first installment discusses the structure of alternative mutual funds; the investment strategies typically employed by alternative mutual funds; why hedge fund managers consider launching alternative mutual funds; some drawbacks of launching alternative mutual funds; and the various ways in which hedge fund managers can participate in the alternative mutual fund business.  The second article will detail specific steps necessary to launch an alternative mutual fund; costs and fees associated with launching and operating an alternative mutual fund; how such funds are typically distributed; investment restrictions applicable to alternative mutual funds; and some common conflicts of interest hedge fund managers face when operating alternative mutual funds and traditional hedge funds side by side.  For analysis of an analogous side-by-side management scenario that raises its own conflicts of interest, see “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013) (in particular, the discussion under the heading “Compliance Policies and Procedures to Address Conflicts Raised by Side-By-Side Management”).

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  • From Vol. 6 No.5 (Feb. 1, 2013)

    Under What Conditions Can a Hedge Fund Manager Present Hypothetical Backtested Performance Results?

    Hedge fund managers (particularly early-stage managers) that lack a robust track record to demonstrate their investment prowess may use hypothetical backtested performance results to show how their investment strategies would have performed on an historical basis.  However, the SEC and investors strictly scrutinize the use of hypothetical backtested performance results by hedge fund managers because such results do not represent actual performance data.  The concern is that hypothetical results may reflect rosy assumptions as opposed to real results, and potential investors may not be sufficiently apprised of the difference.  In an expression of such concern, the SEC recently entered into a consent order with an investment adviser and its principal to settle an enforcement action in connection with the misleading use of hypothetical backtested performance results.  The results at issue purported to show how the performance of the manager’s investment portfolios would have compared to designated benchmarks.  This article summarizes the factual background, legal violations and settlement terms in this case.  The article also describes prior SEC enforcement actions that were based on other impermissible practices in connection with the use of hypothetical backtested performance results.  For another example of an SEC action premised on the use of misleading performance advertising, see “SEC Charges Hedge Fund Manager and Its Founder with Securities and Investment Adviser Fraud Based on ‘Cherry Picking’ of Trades,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).

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  • From Vol. 6 No.2 (Jan. 10, 2013)

    SEC Continues Its Crackdown on Misleading Representations of “Skin in the Game” by Hedge Fund Managers

    In many situations, the interests of hedge fund managers and investors diverge.  See generally “Ernst & Young’s Sixth Annual Global Hedge Fund Survey Highlights Continued Divergence of Expectations between Managers and Investors,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).  Recognizing this – and recognizing the insufficiency of the law to effectively mitigate the divergence – managers and investors have developed tools to align interests.  One such tool is the pay-for-performance concept embodied in the performance fee or allocation common to hedge fund structures.  See “SEC Adopts Final Rules Governing the Payment of Performance Fees to Registered Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).  Another tool is manager co-investment or “skin in the game.”  The idea here is for the manager to put his money where his mouth is by making the same investments as investors.  Indeed, many hedge fund PPMs contain language to the effect that the principals of the management company have invested a “substantial portion of their net worth” in the funds.  See “Investments by Hedge Fund Managers in Their Own Funds: Rationale, Amounts, Terms, Disclosure, Duty to Update and Verification,” The Hedge Fund Law Report, Vol. 3, No. 21 (May 28, 2010).  However, from time to time, a manager’s claims with respect to skin in the game are at odds with the facts.  The SEC is attuned to the potential dissonance between representations and reality, particularly in hedge fund marketing materials.  In June of last year, the SEC settled administrative proceedings against a hedge fund manager alleging, among other things, misleading statements regarding skin in the game.  See “SEC Sanctions Quantek Asset Management and its Portfolio Manager for Misleading Investors About ‘Skin in the Game’ and Related-Party Transactions,” The Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012).  The SEC recently settled another administrative action based on similar allegations, this time in connection with investments in collateralized debt obligations (CDOs).  This article describes relevant factual and legal points from the more recent settlement.  For a discussion of another matter involving overlapping facts, see “Implications of the Second Circuit’s Decision to Reinstate Breach of Contract and Gross Negligence Claims Brought against a CDO Manager,” The Hedge Fund Law Report, Vol. 5, No. 33 (Aug. 23, 2012).

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  • From Vol. 5 No.47 (Dec. 13, 2012)

    Understanding the Regulatory Regime Governing the Use of Social Media by Hedge Fund Managers and Broker-Dealers

    Social media has been increasingly adopted, if not embraced, by businesses, including investment advisers (such as hedge fund managers) and broker-dealers (which may be affiliates of certain hedge fund managers).  The question that arises is how does social media fit into the regulatory regime governing investment advisers and broker-dealers?  The question is increasingly important in light of both the forthcoming rule-making by the Securities and Exchange Commission (SEC) pursuant to the Jumpstart Our Business Startup Act (JOBS Act) as well as the SEC’s recent release of a National Examination Risk Alert entitled “Investment Adviser Use of Social Media” (Alert).  The Financial Industry Regulatory Authority, Inc. (FINRA) has also issued regulatory notices within the last two years providing guidance on the use of social media by broker-dealers.  In a guest article, Ricardo W. Davidovich, a partner at Tannenbaum Helpern Syracuse & Hirschtritt LLP, and Karina Bjelland, a managing consultant in the Financial Institutions Practice at Berkeley Research Group, LLC, summarize the relevant regulatory guidance from the federal securities laws, the JOBS Act, the Alert and the FINRA rules and notices to members.  Bjelland also recently participated in a webinar covered in the HFLR.  See “How Can Fund Managers Address the Regulatory, Compliance, Privacy and Ethics Issues Raised by Social Media?,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).

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  • From Vol. 5 No.44 (Nov. 21, 2012)

    How Can Fund Managers Address the Regulatory, Compliance, Privacy and Ethics Issues Raised by Social Media?

    On November 28, 2012 – a week from today – Richards Kibbe & Orbe LLP (RKO), Berkeley Research Group (BRG) and The Hedge Fund Law Report will host a complimentary, CLE-eligible webinar entitled “How can fund managers address the regulatory, compliance, privacy and ethics issues raised by social media?”  Topics to be covered in the webinar include: tapping into the benefits of social media for hedge fund advisory businesses while maintaining necessary control and oversight; navigating the complexities of user privacy, regulatory compliance and ethics; components of a model social media policy for fund managers; and implications of the Jumpstart Our Business Startups (JOBS) Act and rules for social media use.  The participants in the webinar will be: Eva Marie Carney, a partner in the Washington, D.C. office of RKO; James Walker, a partner in the New York office of RKO; Charles Lundelius, a director at BRG; and Karina Bjelland, a managing consultant in BRG’s Financial Institutions Practice.  Michael Pereira, publisher of The Hedge Fund Law Report, will moderate the discussion.  To register for the event, please click here.  As a preview of the material to be discussed during the webinar, The Hedge Fund Law Report conducted a comprehensive interview with the four participants.  Our interview covered, among other topics: the definition of social media; ways in which hedge fund managers are using social media; authority governing the use by fund managers of social media; the chief ways in which the JOBS Act will impact the use by private fund managers of social media; whether the prohibition on public offerings in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act will curtail the expanded solicitation and advertising rights granted by the JOBS Act; the tension between the CFTC’s “de minimis” exception from commodity pool operator registration requirements and the JOBS Act; steps to be taken by a private fund manager to ascertain the “accredited” status of investors sourced via social media; rules governing a fund manager’s recordkeeping obligations with respect to social media; best practices with respect to mobile devices; the interaction between federal and state privacy laws and monitoring and archiving of employee social media communications; insider trading concerns raised by social media; and social media activity that may fall within the ambit of the SEC’s rules on testimonials.  The full text of our interview with Carney, Walker, Lundelius and Bjelland is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 5 No.42 (Nov. 9, 2012)

    Annual Thompson Hine Hedge Fund Seminar Focuses on Implications for Hedge Fund Managers of the JOBS Act, Form PF and Form CPO-PQR

    On October 4, 2012, Thompson Hine LLP hosted its annual Hedge Fund Seminar, which this year was entitled, “The JOBS Act and Dodd-Frank – Two Years Later.”  Speakers at the event addressed the impact of Form PF and Form CPO-PQR as well as the anticipated impact of the Jumpstart Our Business Startups (JOBS) Act on hedge fund managers.  In addition, the speakers discussed the building blocks of a culture of compliance at hedge fund management companies.  This article summarizes the most salient points raised at the seminar.

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  • From Vol. 5 No.39 (Oct. 11, 2012)

    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 One of Two)

    On September 18 and 19, 2012, ALM Events hosted its Sixth Annual Hedge Fund General Counsel Summit (GC Hedge Summit) at the University Club in New York City.  Panelists, including regulators, in-house practitioners and law firm professionals, discussed topics of significant relevance for hedge fund general counsels, including: SEC enforcement priorities relating to hedge funds; the nuts and bolts of a successful hedge fund compliance program (including a discussion of side letters, investment allocations, expense allocations, trade errors and record retention); marketing of hedge funds (including a discussion of compensation of marketing professionals and the Jumpstart Our Business Startups (JOBS) Act); secondary market transactions in fund shares; and the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act) and its implications for the gathering of political intelligence.  Our coverage of the GC Hedge Summit is provided in two installments.  This first installment covers the session addressing the nuts and bolts of a successful compliance program and the session addressing marketing of hedge funds and secondary market transactions in hedge fund shares.  The second article will cover the session discussing the SEC’s enforcement priorities and the session discussing the implications of the STOCK Act for the gathering of political intelligence by hedge fund managers.  See also “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).

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  • From Vol. 5 No.38 (Oct. 4, 2012)

    CPO Compliance Series: Marketing and Promotional Materials (Part Two of Three)

    Commodity pool operators (CPOs) that must soon register with the U.S. Commodity Futures Trading Commission (CFTC) and become members of the National Futures Association (NFA) because of the rescission of the CFTC Regulation 4.13(a)(4) registration exemption will shortly need to undertake numerous CFTC and NFA compliance obligations.  One of the key compliance obligations arises from CFTC Regulation 4.41 and NFA Compliance Rule 2-29, each of which sets forth various prohibitions and guidelines for marketing activities and promotional materials for both CPOs and commodity trading advisors (CTAs).  This article discusses in detail the CFTC and NFA prohibitions and guidelines for marketing activities and promotional materials for CPOs and CTAs contained in CFTC Regulation 4.41 and NFA Compliance Rule 2-29 and its related interpretive notices and provides practical guidance on how to comply with these prohibitions and guidelines.  This article is the second of a three-part series of articles that focus in detail on various compliance obligations of CPOs under CFTC and NFA regulations and guidance.  The first article addressed NFA Bylaw 1101, which addresses conducting business with non-NFA members.  See “CPO Compliance Series: Conducting Business with Non-NFA Members (NFA Bylaw 1101) (Part One of Three),” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  The third article will address reporting of principals and registration of associated persons.  For additional coverage of each of these topics and the topics discussed in this article, see “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

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  • From Vol. 5 No.36 (Sep. 20, 2012)

    Preqin Study Reveals Institutional Investors’ Latest Views and Expectations on Hedge Fund Terms

    Effective hedge fund marketing requires a thorough understanding of the target audience, which increasingly consists of institutional investors.  To deepen the appreciation of hedge fund managers for the concerns, goals and expectations of institutional investors, alternative investment data firm Preqin Ltd. recently published a study on institutional investors’ views on hedge fund fee terms, transparency, liquidity and other aspects of the manager-investor relationship.  This article highlights the key findings of the study.

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  • From Vol. 5 No.30 (Aug. 2, 2012)

    China Launches Landmark Reforms Impacting Hedge Fund Capital Raising, Investments and Operations

    The Chinese government and securities regulators recently undertook a series of historic reforms aimed at dismantling regulations that separate China from international markets.  The first and boldest initiative, the Qualified Domestic Limited Partner Program, has vast potential to enable foreign hedge fund managers and other institutional investors to raise Renminbi (RMB)-denominated funds in mainland China.  See “Local Currency Hedge Funds Expand Marketing and Investment Opportunities, but Involve Currency Hedging and Other Challenges,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  The second initiative, a trial scheme in the prosperous coastal city of Wenzhou, allows residents to invest funds abroad and facilitates the conversion of underground private lenders into loan companies servicing small and medium-sized enterprises.  The third set of reforms expands the Qualified Foreign Institutional Investor program, enabling foreign hedge funds managers and other institutional investors to invest more easily in Chinese markets.  The fourth initiative, the Renminbi Qualified Foreign Institutional Investor scheme, allows Hong Kong-based arms of major Chinese asset managers and securities companies to raise capital from foreign investors that can then be directly invested into mainland China’s markets.  On the flip side, The National People’s Congress is also proposing to implement significant regulations for private funds and their managers by amending the 2004 Securities Investment Funds Law.  This article summarizes key highlights of each of these initiatives.  See also “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 5 No.27 (Jul. 12, 2012)

    How Can Hedge Fund Managers Use Luxembourg Funds to Access Investors and Investments in Europe, Asia and Latin America?

    Luxembourg is a little country (or duchy) with a big presence in the hedge fund world.  Hedge fund managers looking to access investors or investments in Europe, Latin America or Asia have regularly turned to Luxembourg as a domicile for fund formation.  The tax and regulatory climate there is receptive to hedge funds and managers, the service provider industry is well developed and the jurisdiction is geographically close to key developing and developed markets.  Moreover, the growing popularity of funds organized as Undertakings for Collective Investment in Transferrable Securities (UCITS funds) and the impending effectiveness of the Alternative Investment Fund Managers (AIFM) Directive have increased both the attractiveness and complexity of Europe as an alternative investment jurisdiction – and, consequently, the relevance of Luxembourg.  In light of the importance of Luxembourg to many hedge fund managers, The Hedge Fund Law Report recently interviewed Marc Saluzzi and Michael Ferguson, President and Director, respectively, of the Association of the Luxembourg Fund Industry (ALFI).  The general purpose of our interview was twofold.  For HFLR subscribers that are not familiar with Luxembourg, the purpose was to highlight the benefits and downsides of Luxembourg as a hedge fund domicile.  For HFLR subscribers that are familiar with Luxembourg, the purpose was to illustrate the diverse ways in which hedge fund managers can access the various services available in Luxembourg, and the circumstances in which they should avoid Luxembourg – to illustrate, that is, the scope and limits of market practice in Luxembourg.  To effectuate these purposes, our interview with Saluzzi and Ferguson covered the following topics: the specialized investment fund (SIF) regime for hedge funds, including a discussion of the governance, service provider, reporting and regulatory audit requirements applicable to SIFs; a comparison of SIFs versus funds organized in Caribbean or other European jurisdictions; recent legal developments impacting Luxembourg-domiciled funds and managers; the establishment of a new limited partnership regime in Luxembourg; the cost of establishing a hedge fund in Luxembourg; necessary improvements to make Luxembourg a more attractive hedge fund destination; common mistakes hedge fund managers make when establishing funds in Luxembourg; advice for hedge fund managers establishing funds in Luxembourg; advantages and disadvantages of establishing funds and a manager presence in Luxembourg to address the AIFM Directive; the concept of “ManCos”; and the advantages and disadvantages of establishing UCITS funds in Luxembourg.

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  • From Vol. 5 No.24 (Jun. 14, 2012)

    How Can Hedge Fund Managers Both Advertise and Accept Investments from Non-Accredited Employees, Friends and Family Members?

    The Jumpstart Our Business Startups (JOBS) Act has been received by the hedge fund industry with cautious optimism.  Most notably, the JOBS Act eliminates the long-standing and hard-to-justify gag order prohibiting hedge fund managers from “generally soliciting,” or, in plain English, advertising.  The business benefits of advertising are obvious: communicating a value proposition; solidifying a brand; correcting misperceptions; etc.  However, the JOBS Act does not give something for nothing.  In exchange for the ability to advertise, hedge fund managers may only accept accredited investors into their funds.  See “Implications for Hedge Fund Managers of the Rule Amendments Recently Adopted by the SEC to Raise Accredited Investor Standards,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  In the majority of circumstances, this is not an issue because the majority of investors are accredited.  But in an important minority of cases, this regime appears to require hedge fund managers to elect between advertising, on the one hand, and accepting non-accredited investors into their funds, on the other hand.  (Under Rule 506 of Regulation D, hedge fund managers may offer fund interests in a “private offering” – faster, cheaper and otherwise preferable to a “public offering” – to up to 35 non-accredited investors; and the JOBS Act does not change this part of the Rule.)  In turn, this matters because hedge fund managers sometimes have occasion to accept investments in their funds from non-accredited investors – persons such as family members, friends and lower-level employees.  While such “tickets” are typically small relative to institutional investments, they can be strategically important and even connected to institutional investments.  For example, many institutional investors like manager employees to have “skin in the game”; and this preference applies across the pecking order, to investments by star portfolio managers, operations and accounting professionals, compliance personnel, etc.  See “Investments by Hedge Fund Managers in Their Own Funds: Rationale, Amounts, Terms, Disclosure, Duty to Update and Verification,” The Hedge Fund Law Report, Vol. 3, No. 21 (May 28, 2010).  From the perspective of institutional investors focused on operational due diligence, there are no unimportant employees at a hedge fund manager.  Everyone should be invested, figuratively and, ideally, literally.  See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  So, the good news is that hedge fund managers can advertise.  The bad news appears to be that if managers advertise, they cannot accept investments from non-accredited friends, family members, employees and others, which can constitute a strategic impairment.  But hedge fund managers are not lawyers.  When confronted with two alternative options, lawyers – at least good ones – will do a thorough analysis and choose the better option.  Hedge fund managers will choose both.  Accordingly, to enable our hedge fund manager subscribers to get the best of both worlds, and to arm our attorney subscribers for conversations with managers, we have worked with sources to identify eight strategies for simultaneously advertising and accepting non-accredited investments.  Those strategies are detailed toward the end of this article.  To provide context for those strategies, this article also describes: Rule 506 and the mechanics of the JOBS Act; the impact of the JOBS Act on hedge funds and managers; the current accredited investor requirement; integration of securities offerings; and the status of SEC rulemaking under the JOBS Act.

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  • From Vol. 5 No.18 (May 3, 2012)

    The Transformation of Third Party Hedge Fund Marketer Contracts and Compensation

    Asset raising and marketing are fundamental, life or death activities for hedge fund managers.  If you as a hedge fund manager (or your agents) cannot market effectively, you cannot survive, regardless of your investing prowess.  According to Rothstein Kass’ sixth annual hedge fund industry outlook survey, released in April 2012, “asset raising and marketing are far and away the top issues for funds in 2012, with 53.1 percent of respondents stating those are their biggest concerns.”  Hence the robust pay packages of the top in-house and third party marketers.  See “How Much Are In-House Hedge Fund Marketers Paid?,” The Hedge Fund Law Report, Vol. 4, No. 20 (Jun. 17, 2011).  Marketing in the hedge fund industry is tough for business and legal reasons.  Hedge fund marketing is tough from a business perspective because, among other things: the sales cycle is long; investors have many choices; investors – especially big ones – have considerable bargaining clout; hedge funds are typically relatively liquid (and where they are not, big investors typically negotiate for liquidity); investors rarely provide feedback when they decide to forgo a hedge fund investment, so it is difficult to learn from your mistakes; it is often challenging to clearly articulate a complicated value proposition; etc.  Hedge fund marketing is tough from a legal perspective because the activity is subject to a dense and often opaque patchwork of law, regulation, policy and practice including – but by no means limited to – lobbying laws and rules and related compensation restrictions; performance reporting considerations; due diligence best practices; the JOBS Act and the evolving rules regarding general solicitation and advertising; the AIFMD in Europe; heightened and focused SEC enforcement activity; general contracting and structuring considerations; registration issues; etc.  In an effort to provide guidance to industry participants trying to navigate the business and legal challenges involved in hedge fund marketing, on April 4, 2012, the Third Party Marketers Association hosted a webinar entitled “The Transformation of Third Party Marketer Contracts and Compensation.”  The participants in the webinar were Matthew Eisenberg, a Partner at Finn Dixon & Herling LLP; Laurier W. Beaupre, a Partner at Proskauer Rose LLP; and L. Charles Bartz, a Partner with placement agent BerchWood Partners LLP.  The webinar was moderated by Mike Pereira, Publisher of The Hedge Fund Law Report.  The webinar covered many of the most important issues involved in structuring relationships between hedge fund managers and third party marketers.  This is our first of two articles covering the webinar.  This article summarizes the specific insights and concrete recommendations of the panelists on topics including: the JOBS Act; separate accounts; due diligence; who bears the risk of public plan-level restrictions on compensation; disclosure; looking through funds of funds; and other topics.

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  • From Vol. 5 No.18 (May 3, 2012)

    How Do New Commodities Regulations Impact Hedge Fund Managers with Respect to Registration, Marketing, Trading, Audits and Drafting of Governing Documents?

    On February 9, 2012, the U.S. Commodity Futures Trading Commission (CFTC) rescinded an exemption from commodity pool operator (CPO) registration found in CFTC Rule 4.13(a)(4) that was previously heavily relied upon by many hedge fund managers.  The rescission of that exemption also narrowed the availability of an exemption from commodity trading adviser (CTA) registration found in CFTC Rule 4.14(a)(8) which was also relied upon heavily by many hedge fund managers.  As such, many hedge fund managers will need to register as CPOs or CTAs with the CFTC, become members of the National Futures Association (NFA) and become subject to CFTC and NFA regulations.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Bearing this in mind, law firm Kleinberg, Kaplan, Wolff & Cohen, P.C. (KKWC) and hedge fund administrator CACEIS jointly hosted a webinar (Webinar) on April 19, 2012 to outline changes in the regulatory regime for CPOs and CTAs.  During the Webinar, Martin D. Sklar, a Member of KKWC, and Darren J. Edelstein, an Associate at KKWC, shared their expertise on numerous topics, including a discussion of the remaining exemptions from CPO and CTA registration for hedge fund managers; the steps taken to register a CPO or a CTA and its respective principals and associated persons; the various CFTC and NFA regulations impacting CPOs and CTAs; and the reporting requirements applicable to registered CPOs and CTAs, including completion and filing of Form CPO-PQR and CTA-PR.  The Hedge Fund Law Report interviewed Sklar and Edelstein following the Webinar to conduct a deeper dive into some of the topics discussed during the Webinar, including a discussion of: the Rule 4.13(a)(3) de minimis exemption; which hedge fund management entities should register as CPOs and CTAs; what marketing, trading and other regulations affect registered CPOs and CTAs; whether and to what extent registered CPOs and CTAs are subject to CFTC and NFA audit; whether hedge fund managers must add additional disclosures or change their subscription documents to allow them to comply with CFTC and NFA regulations; and the biggest challenges hedge fund managers face with respect to registering as a CPO or CTA and becoming subject to CFTC and NFA regulations.

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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.15 (Apr. 12, 2012)

    Brockton Retirement Board Files Class Action Lawsuit Against Oppenheimer Fund of Private Equity Funds and Executive Officers for Allegedly False Claims Relating to Fund Performance and Investment Valuations Contained in Fund Marketing Materials

    The Jumpstart Our Business Startups Act may portend good news for hedge funds that seek to raise capital from investors.  However, hedge fund managers should approach their investor solicitation efforts with caution, particularly in light of the increasing scrutiny from both regulators and investors with respect to fund performance and valuation.  A recent example of this scrutiny is a class action lawsuit initiated on March 26, 2012 by a Massachusetts retirement fund, Brockton Retirement Board (Brockton), against a private equity fund of funds manager and related entities.  The Complaint generally alleges that the Defendants made false and misleading statements in marketing materials.  This article summarizes the factual allegations in the Complaint, the causes of action and the remedies sought by Brockton.  For a similar story of alleged failure by a fund of funds manager to perform claimed due diligence, see “Federal Court Decision Holds That a Fund of Funds Investor May Sue a Fund of Funds Manager That Fails to Perform Specific Due Diligence Actions Promised in Writing and Orally,” The Hedge Fund Law Report, Vol. 4, No. 27 (Aug. 12, 2011).

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  • From Vol. 5 No.14 (Apr. 5, 2012)

    Implications of the JOBS Act for Hedge Fund Managers

    The President is expected to sign into law today the Jumpstart Our Business Startups (JOBS) Act, which could represent a positive development for many small businesses, including hedge funds, that generally seek to raise their profile within the capital markets and specifically seek to raise capital.  While it may still be premature to prognosticate the impact that the JOBS Act will have on hedge fund marketing and advertising because the SEC has not provided details regarding its anticipated rulemaking, hedge fund managers and their compliance staff should nonetheless be cognizant of the potential implications of this legislation on their businesses.  This article surveys some of these potential implications.

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  • From Vol. 5 No.8 (Feb. 23, 2012)

    Hedge Fund Manager May Be Personally Liable to Third-Party Marketers Based on Ambiguities in Marketing Agreement

    A recent court decision highlights the pitfalls of sloppily drafted agreements covering third-party marketing arrangements in the hedge fund context.  This article summarizes that opinion, which is relevant to hedge fund managers, third-party marketers and others engaged in hedge fund capital raising.  See “How Much Are In-House Hedge Fund Marketers Paid, and How Will Recent Developments in New York City and California Lobbying Laws Impact the Compensation Levels and Structures of In-House Hedge Fund Marketers (Part Three of Three),” The Hedge Fund Law Report, Vol. 4, No. 20 (Jun. 17, 2011).

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Does Social Media Have a Place in the Hedge Fund Industry?

    While social media has captivated society and propelled it deeper into the communication age, the hedge fund industry has not yet embraced it on a meaningful scale.  See “Legal Considerations for Hedge Fund Managers that Use Social Media,” The Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011).  In fact, a recent survey of hedge fund managers found that the vast majority of hedge fund managers are simply not using social media.  On the one hand, it is surprising that hedge fund managers have been slow to explore social media given the otherwise cutting edge nature of the hedge fund industry.  On the other hand, many compliance professionals are simply stretched too thin by the introduction of new regulatory challenges arising from the Dodd-Frank Act, and thus are unable to devote resources to exploring this new frontier.  In reality, there appears to be very little dialogue regarding whether social media could be used effectively in the hedge fund industry, and if so, how to do so in compliance with applicable laws and regulations.  Therefore, in a guest article, John Herbert Roth, Counsel and Chief Compliance Officer of Venor Capital Management LP, initiates that dialogue by asking whether social media can have a place in the hedge fund industry, and then proposing a comprehensive framework within which hedge fund managers may think about social media and its compliance implications.  See also “SEC Enforcement Action and Bulletins Shine Spotlight on Use of Social Media by Investment Advisers,” The Hedge Fund Law Report, Vol. 5, No. 2 (Jan. 12, 2012).

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  • From Vol. 5 No.5 (Feb. 2, 2012)

    Pressure Mounts for a Repeal of the Ban on General Solicitation and Advertising by Hedge Fund Managers

    Pressure appears to be mounting to repeal or relax the ban on general solicitation and general advertising applicable to hedge funds engaged in domestic private placements.  That ban has significantly constrained the ability of hedge fund managers to communicate with potential investors and others, but its repeal may have unanticipated consequences.  The impetus for the potential repeal comes from at least four quarters.  This article explains the mechanics of the ban; the four sources of pressure for a repeal; and the potential implications of a repeal for hedge fund managers, investors and others.

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  • From Vol. 5 No.5 (Feb. 2, 2012)

    Marketing Hedge Funds to European Union Investors in the Post-AIFMD Era

    On January 26, 2012, K&L Gates LLP (K&L) hosted a webinar entitled, “Marketing Hedge and Private Funds in Europe” (Webinar).  The purpose of the event was to provide information about the European Union (EU) Alternative Investment Fund Managers Directive (AIFMD), a new law that significantly impacts, among other things, the marketing of hedge funds and other private funds in Europe so that fund managers can proactively evaluate their fund structuring and marketing options.  The Webinar principally focused on: (1) structures for accessing European retail, institutional and other investors via public and private offering; (2) the impact that the AIFMD is anticipated to have beginning in 2013; (3) the survival of the current private placement regime after the AIFMD becomes effective; (4) advantages and disadvantages of establishing EU-domiciled funds and EU-authorized subsidiary operations; (5) the process of becoming EU-regulated; (6) consequences of a collapse of the euro or a country’s departure from the euro zone; and (7) points of consideration for managers with euro-denominated share classes or underlying euro swaps and other exposures.  The Webinar was conducted by K&L partners Martin Cornish and Mark Perlow.  This article provided a comprehensive synopsis of the Webinar.

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  • From Vol. 5 No.4 (Jan. 26, 2012)

    Survey by SEI and Greenwich Associates Highlights the Importance to Hedge Fund Investors of a Clearly Articulated, Comprehensible and Credible Value Proposition

    In October 2011, SEI Knowledge Partnership (SEI) and Greenwich Associates conducted their fifth annual survey of institutional hedge fund investors.  On January 25, 2012, they released a report summarizing part one of the results of that survey (Report), including current trends affecting the hedge fund industry, including institutional hedge fund allocations, objectives, performance and preferences in investment strategies and vehicles.  The Report, entitled “The Shifting Hedge Fund Landscape, Part I of II: Institutions Put Fund Managers to the Test,” identifies a deepening commitment to hedge funds on the part of institutional investors, and foreshadows increased institutional allocations.  At the same time, however, the Report finds that institutions keep creating new challenges and requirements for hedge fund managers.  Notably, the Report also details what hedge fund managers must do in order to maintain investor confidence.  Part two of the survey will explore investors’ chief concerns regarding hedge fund investing, as well as the continuing evolution of institutional standards for hedge fund evaluation, selection and monitoring.  This article summarizes the findings of the Report and the key takeaways for hedge fund managers.  See also “SEI Report Describes the Growth Opportunity for Hedge Fund Managers in Regulated Alternative Funds,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).

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  • From Vol. 5 No.3 (Jan. 19, 2012)

    Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Four of Four)

    This article is the fourth in a four-part series by Maria Gabriela Bianchini, founder of Optionality Consulting.  The first article in this series identified factors that hedge fund managers should consider in determining whether to open an office in Asia and compared the relative merits of Hong Kong and Singapore as locations for an office.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four),” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).  The second article in this series discussed technical steps and considerations for the actual process of opening an office in either Hong Kong or Singapore.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Two of Four),” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  The third article in this series described the practical impact of Singapore’s new regulatory regime on hedge fund managers.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Three of Four),” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15 2012).  This article series concludes with a discussion of topical regulatory issues regarding opening an office in Hong Kong.

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  • From Vol. 4 No.44 (Dec. 8, 2011)

    A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers

    The Hedge Fund Law Report and others have reported on the post-crisis ascendance of non-performance factors in hedge fund due diligence and investment decision-making.  In short, before 2008, hedge fund allocations were driven largely by a manager’s past performance.  After 2008, factors such as transparency, liquidity and robust risk management surpassed performance in the hierarchy of concerns of institutional hedge fund investors.  See “Survey by SEI and Greenwich Associates Identifies the Primary Decision Factors and Concerns of Institutional Investors When Investing in Hedge Funds,” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 11, 2011).  However, we do not wish to overstate the case or the duration of the trend.  The long-term lesson of the crisis likely will be that robust risk management, appropriate liquidity and transparency and well-developed infrastructure are necessary to justify a hedge fund investment, but not sufficient.  Hedge fund managers without institutional caliber businesses will often be passed over, but as between two managers with good businesses, the deciding factor will often be past performance.  Thus the immediate and important question for hedge fund managers: how can managers present performance information in a manner that maximizes capital raising efforts while complying with relevant law and standards?  An increasingly common answer to this question in the hedge fund community is: by complying with the Global Investment Performance Standards (GIPS), an evolving set of practice standards designed to ensure consistency and uniformity in the presentation of investment performance results.  Compliance with GIPS is ostensibly voluntary, but in practice, more and more institutional hedge fund investors are asking to see GIPS-compliant performance information.  Accordingly, GIPS compliance is becoming a de facto requirement for hedge fund managers, and hedge fund managers are actively seeking to become GIPS compliant.  The main challenge for hedge fund managers is that GIPS were originally designed for a long-only world.  They have been an imperfect fit for managers with complex investment structures, side pockets, illiquid or hard-to-value assets and other typical elements of the hedge fund business.  Sensitive to this, the GIPS Executive Committee recently promulgated guidance specific to alternative investment managers, and service providers have adapted their businesses to help hedge fund managers comply with GIPS and certify such compliance.  However, despite the guidance and available assistance, GIPS compliance remains a challenge for hedge fund managers.  This article aims to assist hedge fund managers in rising to that challenge and surmounting it.  To do so, this article starts by providing a comprehensive overview of GIPS.  The article then identifies five discrete categories of benefits of GIPS compliance and two categories of burdens of compliance.  Next, and most importantly, this article provides a step-by-step process by which hedge fund managers can become GIPS compliant.  In the course of this discussion, this article details the material points from two recent webinars and one recent white paper promulgated by leading GIPS service providers.  Reading this article will enable a hedge fund manager to, among other things: revise its marketing materials to comply with GIPS; organize its front, middle and back offices to collect the data necessary to support a GIPS-compliant presentation; manage service providers with a view to GIPS compliance; ask the right questions of outside counsel; determine whether to engage a specific GIPS compliance service provider; define the scope of any such engagement; and respond effectively to due diligence inquiries on GIPS.

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  • From Vol. 4 No.43 (Dec. 1, 2011)

    Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four)

    Over the past 24 months, many articles have been written about global hedge fund managers expanding into Asia.  Indeed, with global markets continuing to experience volatility and Western governments facing significant challenges, many are looking East.  In the current environment, there are many reasons why a U.S.- or European-based manager may choose to open an office or offices in Asia, including, among other things, access to an abundance of Asian investment opportunities and favorable regulatory treatment in certain Asian jurisdictions.  See “AsiaHedge Study Finds That a Growing Proportion of Hedge Funds with Asia-Focused Strategies are Managed from Asia,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  Establishing an office in Asia can also facilitate tax-efficient deployment of certain Asia-focused investment strategies.  For these and other reasons, many international hedge fund managers have established satellite offices in Asia.  Before embarking on this venture, however, a manager should carefully evaluate the host of considerations critical to determining whether and how to accomplish this task.  Hong Kong and Singapore remain the two most common destinations for offices in Asia; Mumbai, Beijing and Sydney are also home to fund managers, but generally host country-specific strategies.  In this guest article, Maria Gabriela Bianchini, founder of Optionality Consulting, a Singapore-based consulting firm specializing in assisting hedge funds with regulatory and operational issues, provides a roadmap for opening up a subsidiary office in Hong Kong or Singapore.  In particular, Bianchini discusses the impact of the following factors, among others, in determining whether to open an office in Hong Kong or Singapore: composition of the manager’s portfolio; tax treaty status in light of the manager’s investment strategies; whether the purpose of the office is investment or marketing; licensing and regulatory issues; number of people in the office; whether the manager focuses on fixed income, equities, illiquid assets or other strategies; access to deal and information flow; access to talent; and personal decisions (such as housing, schools for children and related considerations).  This article is the first in a four-part series by Bianchini to be published in The Hedge Fund Law Report.  Part two will discuss practical considerations and guidance with respect to opening an office in Singapore and Hong Kong, Part three will discuss the changing regulatory landscape affecting managers in Singapore and Part four will conclude with a discussion of Hong Kong.

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  • From Vol. 4 No.43 (Dec. 1, 2011)

    Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation

    Changing investor expectations and heightened regulation of hedge fund marketing has ushered in a new era for hedge fund managers seeking to raise capital.  Hedge fund managers must continuously keep abreast of the issues that will impact their ability to effectively raise capital, particularly from institutional investors.  Additionally, recent regulatory developments have created new challenges for fund managers that use third party marketers to assist in raising capital.  This “New Normal” was the backdrop of the 2011 annual conference of the Third Party Marketers Association (3PM) in Boston on October 26 and 27, 2011.  This article focuses on the most important points for hedge fund managers that were discussed during the conference.  The article begins with a discussion of how fund managers can enhance their marketing efforts to raise more capital by understanding various aspects of the capital raising cycle, including the changing request for proposal (RFP) process, product positioning, the investor due diligence process and the manager selection process.  The article then moves to a discussion of the regulatory challenges facing hedge fund managers using third party marketers, including a discussion of third party marketer due diligence of fund managers and appropriate compensation arrangements for third party marketers in light of lobbying law changes and pay to play regulations.  The final section discusses impending and existing rules that will have a significant impact on hedge fund marketing.

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  • From Vol. 4 No.42 (Nov. 23, 2011)

    Recent Enforcement Action Highlights SEC’s Concern with Preferential Redemption Rights Granted to Favored Hedge Fund Investors

    Hedge fund investors are demanding greater liquidity where liquidity is practicable.  See “What Do Hedge Fund Investors Want in Terms of Liquidity and Transparency?,” The Hedge Fund Law Report, Vol. 4, No. 39 (Nov. 3, 2011).  Some managers are addressing such demands by launching more liquid funds.  See our recent interview with Dechert Partner George Mazin (question on bifurcation in post-crisis hedge fund launches along liquidity lines).  Other managers are addressing such demands by launching moderately liquid hedge funds but granting certain investors preferential redemption rights, often via side letters.  See “Are Side Letters Granting Preferential Transparency and Liquidity Terms to One Investor Ipso Facto Illegal?,” The Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).  The former approach passes regulatory muster.  To an increasing degree, the latter approach does not.  Regulators are concerned that any asymmetry in the redemption rights granted to hedge fund investors that otherwise are getting the same material terms may conflict with the manager’s uniform fiduciary duty to all fund investors.  See “Delaware Chancery Court Opinion Clarifies the Scope of a Hedge Fund Manager’s Fiduciary Duty to a Seed Investor,” The Hedge Fund Law Report, Vol. 4, No. 29 (Aug. 25, 2011).  Top SEC officials have expressed this concern with increasing volume of late, most recently at this week’s Practising Law Institute program on hedge funds.  A recent enforcement action illustrates a factual scenario in which the SEC’s legal concern may give rise to causes of action against a hedge fund manager.  Practically, this action will help hedge fund managers define the scope of accommodation that permissibly may be granted to a significant investor that demands greater liquidity than other investors.  See “How Can Liquid Hedge Funds Be Structured to Accommodate Investments in Illiquid Assets?,” The Hedge Fund Law Report, Vol. 4, No. 4 (Feb. 3, 2011).  Theoretically, this action is part of a growing body of regulatory statements and authority suggesting that uniform liquidity for similarly situated hedge fund investors is in the nature of an inalienable investor right.  This article details the factual and legal allegations in the order and discusses the implications of the order for hedge fund liquidity, brokerage activity by hedge fund managers and principal transactions.

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  • From Vol. 4 No.40 (Nov. 10, 2011)

    Portability and Protection of Hedge Fund Investment Track Records

    A hedge fund’s performance history, or track record, can be one of its most valuable assets.  A fund that has developed a successful track record will want to promote that track record as evidence of its own capabilities and protect that track record from being claimed or distorted by others.  On the other hand, a portfolio manager or other employee who has developed a successful track record will want to take that track record with him when he leaves the fund and use it to attract his own investors.  A fund or portfolio manager with a poor track record may want to avoid or limit the disclosure of past performance.  In a guest article, Sean R. O’Brien and Sara A. Welch, Managing Partner and Counsel, respectively, at O’Brien LLP, along with Joel A. Blanchet, a Partner at Kirkland & Ellis LLP, explore the manner in which the law affects investment funds, investment adviser firms and individuals when it comes to the portability of track records, and identify steps that funds and portfolio managers can take to protect their respective rights with respect to those track records.  At the outset, this article discusses who owns an investment track record and therefore, who can use such a track record.  The following sections detail regulatory guidance provided by the Securities and Exchange Commission (SEC), industry guidance provided by the CFA Institute and court decisions on the ownership and portability of track records.  The article concludes with a discussion of contractual provisions hedge fund managers can use to protect their investment track records from misappropriation and misuse.  For more on O’Brien LLP, see “Sean R. O’Brien Launches Boutique Law Firm Focused on Hedge Fund Litigation,” below, in this issue of The Hedge Fund Law Report.  For more by O’Brien LLP attorneys, see “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” The Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010).

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  • From Vol. 4 No.35 (Oct. 6, 2011)

    Federal Court Holds That Hedge Fund Marketing and Brokering Hedge Fund Management Company Transactions Are Different Services for Contracting and Compensation Purposes

    The Hedge Fund Law Report previously has reported on a case (which is not the only case of its kind) standing for the incontrovertible proposition that it is preferable for ethical actors to enter into written, as opposed to exclusively oral, hedge fund marketing agreements.  See “Pair of District Court Opinions Illustrates the Difficulty of Enforcing a Purported Oral Agreement Between a Third-Party Marketer and a Hedge Fund Manager,” The Hedge Fund Law Report, Vol. 3, No. 49 (Dec. 17, 2010).  A recent federal district court decision refines the analysis by emphasizing the importance of identifying the contemplated services in the relevant written agreement with as much specificity as possible.  Specifically, the decision indicates that hedge fund marketing – efforts to get people or entities to invest in hedge funds – and brokering transactions between hedge fund management companies are two different categories of services.  See “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” The Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).  The same person or entity may do both, but a person or entity that retains another person to perform one of these categories of services does not necessarily retain that person to perform the other category of service.

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  • From Vol. 4 No.35 (Oct. 6, 2011)

    How Much Information Can a Hedge Fund Manager Include On a Public Website?

    On September 22, 2011, the Massachusetts Supreme Court issued an important decision dealing with how much information hedge fund managers may include on their public websites.  The answer seeks to balance the right on the part of individuals and entities to free speech with the right on the part of government to limit commercial speech.  The decision is important to hedge fund managers because the Internet is becoming a more central channel of hedge fund marketing.  Conveying the right amount of information in the right way can enhance marketing, but saying too much or saying it in the wrong way can lead to liability.  This decision helps establish parameters.  Our article provides an extensive analysis of the decision, the factual background and prior relevant decisions.

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  • From Vol. 4 No.35 (Oct. 6, 2011)

    FINforums’ Annual Hedge Fund Summit Focuses on Operations, Marketing and Hedge Fund Strategies in Non-Hedge Fund Structures

    On September 14, 2011, FINforums held its Annual Hedge Fund Summit.  Participants at the summit discussed hedge fund service providers; outsourcing; business continuity and disaster recovery plans; five important points with respect to hedge fund marketing; five specific steps to be taken by hedge fund managers seeking seed capital; and the evolution of hedge fund strategies in non-hedge fund structures, including managed accounts, investable hedge fund indices, hedge fund-like mutual funds and UCITS.  This article summarizes the key points made by presenters at the Summit.

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  • From Vol. 4 No.20 (Jun. 17, 2011)

    New Rothstein Kass Study Explains the “Consultative” Approach to Marketing to Single-Family Offices and the Importance of That Approach for Smaller Hedge Fund Managers

    A recently published study by Rothstein Kass, Forbes Private Capital Group and Forbes Insights defined a single-family office; outlined the three attributes of single-family offices that make them attractive sources of capital for hedge funds, especially smaller hedge funds; emphasized the importance of the Executive Director; distinguished between two broad categories of single-family offices; highlighted the marketing mistakes frequently made by hedge fund managers in marketing to single-family offices; and outlined a viable and realistic strategy that hedge fund managers can use to market to single-family offices.  In general, with large investors increasingly allocating to large hedge fund managers, single-family offices are filling a capital void that is particularly important for start-up and smaller hedge fund managers.  See generally “Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part Two of Two),” The Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011).  This article summarizes the key findings of the study.

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  • From Vol. 4 No.18 (Jun. 1, 2011)

    Is a Hedge Fund Manager Required to Disclose the Existence or Substance of SEC Examination Deficiency Letters to Investors or Potential Investors?

    Following an examination of a registered hedge fund manager by the SEC staff, the staff typically issues a deficiency letter to the manager listing compliance shortcomings identified by the staff during the examination.  See “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Three of Three),” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011).  Quickly, comprehensively and conclusively remedying compliance shortcomings identified in a deficiency letter should be a first order of business for any hedge fund manager – that is the easy part, a point that few would dispute.  However, considerably more ambiguity surrounds the question of whether and to what extent hedge fund managers must disclose to investors and potential investors various aspects of SEC examinations – including their existence, scope, focus and outcome.  More particularly, hedge fund managers that receive deficiency letters routinely ask: must we disclose the fact of receipt of this deficiency letter or its contents to investors or potential investors?  And does the answer depend on whether potential investors have requested information about or contained in a deficiency letter in due diligence or in a request for proposal (RFP)?  The answers to these questions generally have been governed by a “materiality” standard – the same standard that, at a certain level of generality, governs all disclosure questions.  The consensus guidance has been: disclose whatever is material.  But this is more of a reframing of the question than an answer.  The practical question in this context is how to assess materiality in the interest of disclosing adequately, avoiding anti-fraud or breach of fiduciary duty claims and ensuring best investor relations practices.  A recently issued SEC order (Order) settling administrative proceedings against a registered investment adviser provides limited guidance on the foregoing questions.  This article describes the facts recited in the Order, the SEC’s legal analysis and how that analysis can inform decision-making of hedge fund managers considering whether and to what extent to disclose the existence or substance of deficiency letters to investors or potential investors.  This analysis has particular relevance for hedge fund managers seeking to grow institutional assets under management by responding to RFPs.

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  • From Vol. 4 No.15 (May 6, 2011)

    PerTrac’s Eighth Annual “Sizing the Hedge Fund Universe” Study Identifies Trends Regarding AUM, Domicile, Currency and Performance Information Reporting for Single Manager Hedge Funds, Funds of Funds and Commodity Trading Advisors

    In its recently released study entitled “Sizing the 2010 Hedge Fund Universe” (Study), software and services provider PerTrac analyzed information from ten leading global hedge fund databases to identify trends with respect to assets under management, domicile, currency and performance information reporting by single manager hedge funds, funds of funds and commodity trading advisors.  The Study generally found that the overall number of entities that existed and reported performance information to databases increased during 2010 over 2009, but that the growth was unevenly distributed among the types of entities under analysis.  Moreover, the Study highlighted the significant number of small managers, and thus, from a regulatory perspective, implicitly emphasized the increased importance of state-level hedge fund adviser registration.  See “Connecticut Welcomes You! Federal Financial Regulatory Reform Restores Connecticut’s Authority over Hedge Fund Advisers,” The Hedge Fund Law Report, Vol. 3, No. 30 (Jul. 30, 2010).  This article summarizes the key findings of the Study.  Also, where relevant, this article includes links to other articles in The Hedge Fund Law Report offering concrete guidance to managers on the legal and regulatory implications of the business trends identified by the Study.  See, e.g., “Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).

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  • From Vol. 4 No.14 (Apr. 29, 2011)

    Legal Considerations for Hedge Fund Managers that Use Social Media

    In late 2010, the SEC sent a “sweep” letter (the “Sweep Letter”) to a number of registered investment advisers requesting information on their involvement with social media and related recordkeeping practices.  The Sweep Letter appears to signal heightened regulatory awareness that social media websites such as Facebook and LinkedIn are increasingly being used by investment advisers to connect with clients.  Use of these sites by hedge fund and other private fund advisers may present regulatory issues, however, under the advertising rules of the Investment Advisers Act of 1940 (the “Advisers Act”) and the exemptions for private placements under the Securities Act of 1933.  With the repeal of the private adviser exemption from Advisers Act registration still on track for July, social media compliance by advisers to hedge funds and private funds can present important compliance issues.  In a guest article, Diana E. McCarthy and Andrew E. Seaberg, Partner and Associate, respectively, at Drinker Biddle & Reath LLP, detail: the specific items requested in the Sweep Letter; existing regulatory guidance on social media use (including guidance with respect to testimonials and supervision); advertising issues raised by social media; how hedge fund managers can develop a robust social media policy; personal use of social media and related compliance policies; and business use of social media and related compliance policies.

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  • From Vol. 4 No.13 (Apr. 21, 2011)

    How Can Hedge Fund Managers Structure the Compensation of Third-Party Marketers in Light of the Ban On “Contingent Compensation” Under New York City and California Lobbying Laws? (Part Two of Three)

    An authoritative recent interpretation of New York City’s lobbying law and recent amendments to California’s lobbyist law likely will require placement agents and other third-party hedge fund marketers, in-house hedge fund marketers and, in some cases, hedge fund managers themselves, to register as lobbyists.  Such registration will impose new obligations and prohibitions on hedge fund marketers and managers.  See “Recent Developments in New York City and California Lobbying Laws May Impact the Activities and Compensation of In-House and Third-Party Hedge Fund Marketers (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 6 (Feb. 18, 2011).  Most dramatically, both California and New York City will prohibit a registered lobbyist from receiving contingent compensation, that is, compensation that is calculated by reference to the success of the lobbyist’s efforts in persuading a public pension fund to invest in a hedge fund.  Success-based compensation is the primary mechanism used to compensate and incentivize hedge fund marketers.  Accordingly, the legal change in California and the interpretive change in New York will fundamentally alter the economics of hedge fund marketing.  Or to set the stage in simpler terms: Hedge fund marketers will be required to register as lobbyists; hedge fund marketers are paid by commission; lobbying laws prohibit the payment of commissions to lobbyists; so how will hedge fund marketers be paid going forward?  This is the second article in a three-part series intended to address that question.  The first article included a comprehensive chart detailing the provisions relevant to hedge fund managers and marketers of the New York City and California lobbying laws.  This article examines how hedge fund managers can structure or restructure their arrangements with third-party hedge fund marketers in light of the ban on contingent compensation.  Specifically, this article discusses: the relevant provisions of the New York City Administrative Code and the California Code; trends in other states and municipalities; typical components, levels and structures of compensation of third-party hedge fund marketers (all of which were analyzed in depth in a prior article in the HFLR); four specific strategies that hedge fund managers can use to structure new arrangements with third-party marketers, and the benefits and burdens of each; three of the more challenging scenarios that hedge fund managers may face in restructuring existing agreements with third-party marketers, and the relevant legal considerations in each scenario; whether the New York City and California lobbying laws contain grandfathering provisions; special lobbying law considerations for funds of funds; and changes to representations, warranties, covenants and due diligence necessitated by the changes to the lobbying law.  The article concludes with a discussion of a “bigger issue” that has the potential to render the foregoing discussion largely moot.  (The third article in this series will examine related issues with respect to in-house hedge fund marketers.)

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  • From Vol. 4 No.12 (Apr. 11, 2011)

    GIPS Committee Provides Eagerly-Anticipated Guidance on Presentation of Hedge Fund Performance Information for Master-Feeder Structures, Side Pockets, Illiquid Assets and Other Assets, Strategies and Structures

    As established by the CFA Institute in 1999, the “Global Investment Performance Standards” (GIPS) for the presentation of investment performance information aims to create ethical, global and industry-wide methods of communicating investment results to prospective clients.  On March 15, 2011, the GIPS Executive Committee released its “Exposure Draft of the Guidance Statement on Alternative Investment Strategies and Structures” (Guidance Statement) in an effort to provide dedicated guidance to firms that manage hedge funds, funds-of-funds, master-feeder funds and other alternative investment strategies so they may better understand and meet the GIPS standards.  The Executive Committee decided to produce these standards due to the perception among many alternative investment firms that the lack of such guidance complicated compliance with GIPS.  Accordingly, the GIPS standards, which focus on the underlying GIPS principles of “fair representation and full disclosure,” provide a framework that substantially all hedge fund and other private fund managers can apply to a variety of assets, structures and strategies.  The exposure draft is open for public comment until June 15, 2011.  This article provides a comprehensive summary of the exposure draft, focusing on the items most relevant to presentation of hedge fund performance information.

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  • From Vol. 4 No.11 (Apr. 1, 2011)

    CalPERS “Special Review” Includes Details of Misconduct and Recommendations That May Fundamentally Alter the Hedge Fund Placement Agent Business

    In 2009, the California Public Employees’ Retirement System (CalPERS) – the largest state pension fund in the country, with about $228 billion in assets held for the benefit of over 1.6 million California public employees, retirees and their families – discovered that exorbitant fees had been paid by certain of its external money managers to placement agents.  CalPERS retained the law firm of Steptoe & Johnson LLP to investigate whether the payment of these fees compromised the interests of its participants and beneficiaries.  The Steptoe investigation focused on placement agents that allegedly used their connections with certain members of CalPERS’ Board of Administration (Board), executive staff and senior officers to obtain excessive fees from money managers and others who wished to obtain access to CalPERS contracts.  As previously reported in The Hedge Fund Law Report, in December 2010, the law firm issued a series of twelve preliminary recommendations to CalPERS’ Board and its executive staff for its immediate consideration in remedying the harm to its beneficiaries and participants caused by the improper use of placement agents.  See “CalPERS Special Review Foreshadows Seismic Shift in Business Arrangements among Public Pension Funds, Hedge Fund Managers and Placement Agents,” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011).  Since that time, CalPERS has effectively adopted each of these recommendations.  Then, on March 14, 2011, Steptoe & Johnson issued the “Report of the CalPERS Special Review.”  This Report detailed, subject to limitations requested by law enforcement agencies and allegations for which the law firm could not obtain sufficient corroboration, the apparent misconduct and ethical breaches committed by former CalPERS Board members and employees.  The Report also offered four additional recommendations to prevent a recurrence.  As a result of its size and experience with hedge funds, CalPERS is a trendsetter for other public pension funds and institutional investors with respect to hedge fund investment terms and governance, placement agent relationships and related matters.  Accordingly, the Report, like the previously issued recommendations, is of broad interest to hedge fund managers, investors and service providers.  See generally “Lessons for Hedge Fund Managers on Liquidity, Allocations, Marketing and More from Yale’s 2009 Endowment Report,” The Hedge Fund Law Report, Vol. 3, No. 14 (Apr. 9, 2010).  Indeed, the Report acknowledges that CalPERS’ experience “was apparently no different . . . than that of a number of other public pension funds.”  This article summarizes: the findings of the Report; the four key recommendations made in the Report; and the terms of letter agreements entered into with respect to fees between CalPERS and some of its more prominent external money managers, including Apollo Global Management.

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  • From Vol. 4 No.11 (Apr. 1, 2011)

    Survey by SEI and Greenwich Associates Identifies the Primary Decision Factors and Concerns of Institutional Investors When Investing in Hedge Funds

    A survey of 97 institutional investors and 14 investment consultants conducted by SEI Knowledge Partnership in collaboration with Greenwich Associates last October, and released earlier this year, identifies the hierarchy of considerations and concerns of institutional investors when investing in hedge funds.  One notable finding of the survey – especially for a publication, like the HFLR, focused on regulation – is the view of most institutional investors with respect to regulation.  That view is discussed in this article.  In addition, this article discusses the survey’s findings on the following topics: statistics with respect to hedge fund returns, assets under management, launches and liquidations during the last three years; plans with respect to hedge fund allocations during 2011; objectives of institutional investors when investing in hedge funds; most significant challenges in hedge fund investing; experience with and perceptions of liquidity; the 16 factors that investors consider most important when selecting among managers; four key takeaways for hedge fund managers from the survey findings; breakdown of hedge fund allocations by institutional investor type; trends with respect to fees; the role of consultants; the success rate of negotiations on liquidity terms; and trends with respect to the resources dedicated by institutional investors and consultants to hedge fund due diligence and monitoring.

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  • From Vol. 4 No.10 (Mar. 18, 2011)

    Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?

    The hedge fund adviser registration provisions of Dodd-Frank have, deservedly, received considerable attention during the last year from hedge fund managers and other industry participants.  However, there is another big registration question in the hedge fund industry – a question that predates Dodd-Frank by years; that has been discussed in hushed tones, for fear that regulators will overhear; and that may have consequences at least as powerful as the new adviser registration rule.  The question is the title of this article: is the in-house marketing department of a hedge fund manager required to register as a broker?  A closely related question is whether the members of such a department must register as associated persons of a broker.  These questions do not lend themselves to conclusive answers, but this article seeks to provide a framework for analyzing the relevant issues.  In particular, this article discusses: the general broker-dealer registration regime; SEC staff and court interpretations of the term “broker”; registration relief available to issuers and “finders”; the non-exclusive registration safe harbor for associated persons of an issuer; consequences of not registering as a broker if a person or entity is required to do so; specific challenges for hedge fund managers in complying with the safe harbor; how to structure in-house marketer employment agreements to fit within the safe harbor; and structuring alternatives for managers who elect to live with the broker registration regime.  According to our research, while the SEC has brought enforcement actions against various types of entities for operating as unregistered brokers, the SEC has not, to date, brought an action against a hedge fund manager solely for operating its in-house marketing department as an unregistered broker.  However, the SEC’s enforcement division is newly invigorated, with an asset management unit focused specifically on regulating hedge funds via enforcement.  Moreover, the consequences for failing to register as a broker when required to do so can be dramatic.  Finally, the “hushed tones” referenced above have not been entirely successful – we at The Hedge Fund Law Report have anecdotal and written evidence that the issue of broker registration of in-house hedge fund marketing departments is on the SEC’s radar screen.  That is, this article is not alerting the SEC to an issue of which the agency is unaware.  Rather, it is letting hedge fund managers know that they should be prepared – and offering guidance on how to prepare.

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  • From Vol. 4 No.6 (Feb. 18, 2011)

    Recent Developments in New York City and California Lobbying Laws May Impact the Activities and Compensation of In-House and Third-Party Hedge Fund Marketers (Part One of Three)

    Public pension funds represent approximately 16 percent of all institutional investor assets in hedge funds, according to alternative investment data provider Preqin.  However, not all assets invested in hedge funds are equally weighted.  To a hedge fund manager, a dollar invested by a public pension fund generally is more valuable than a dollar invested by a high net worth individual, or most funds of funds, for at least two reasons.  First, that pension fund is likely to stay invested longer, and thus to generate more fees over time.  Second, an investment by a public pension fund often increases the likelihood of other investments because subsequent investors assume, rightly or wrongly, that the public pension fund engaged in rigorous investment and operational due diligence before investing.  Accordingly, public pension funds have long been among the most coveted investors in hedge funds, and that 16 percent figure understates the attention such funds have garnered from in-house and third-party marketers.  However, at least three recent developments have complicated the process of marketing to public pension funds.  The first two of those three developments are discussed in this article.  The third such development is this: an authoritative recent interpretation of New York City’s lobbying law, and recent amendments to California’s lobbying law, likely will require placement agents and other third-party marketers, in-house hedge fund marketers and, in some cases, hedge fund managers themselves, to register as lobbyists.  Such registration will impose new obligations and prohibitions on hedge fund marketers.  Most dramatically, both California and New York City prohibit a registered lobbyist from receiving contingent compensation, that is, compensation that is calculated by reference to the success of the lobbyist’s efforts in persuading a public pension fund to invest in a hedge fund.  In other words, the lobbying laws of both jurisdictions appear to prohibit – or at least complicate – precisely the types of compensation structures most typically found in placement agent agreements and many in-house marketer agreements.  See “What Is the ‘Market’ for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010).  Of course, the lobbying laws only prohibit or complicate such compensation structures in connection with solicitation activities directed at public pension funds in California or New York City.  However, those jurisdictions contain public pension funds – notably including CalPERS – whose actions are widely followed by other public pension funds and other institutional investors.  See “CalPERS Special Review Foreshadows Seismic Shift in Business Arrangements among Public Pension Funds, Hedge Fund Managers and Placement Agents,” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011).  This article is the first installment in a three-part series intended to explore the implications of the New York City and California lobbying law developments for various hedge fund industry participants.  Specifically, this article provides the legal basis on which the analyses in parts two and three will be based.  The core of this article is a proprietary, 14-page chart summarizing the key provisions of the New York City and California lobbying laws, and comparing those provisions side-by-side.  For example, column one of the chart lists a provision (e.g., people and entities whose efforts to influence investment decisions may constitute “lobbying” under relevant law), column two describes the provision under New York City law, and column three describes the provision under California law.  The intent of this layout is to enable subscribers to easily compare the way in which the different jurisdictions handle the same concept.  The specific provisions covered by the chart include: primary legal, regulatory and interpretive resources, and links thereto; affected pension funds; definitions of “lobbyist”; definitions of “client” (NY), “external manager” (CA) and “lobbyist employer” (CA); definitions of “lobbying”; people and entities whose efforts to influence investment decisions may constitute “lobbying” under relevant law; exceptions from the definition of “placement agent”; people and entities, contacts with whom may constitute “lobbying” under relevant law; registration requirements for lobbyists; timing and frequency of required filings by lobbyists of statements of registration; filing requirements applicable to clients of lobbyists; periodic filing requirements applicable to lobbyists; prohibitions on contingent compensation; other prohibitions; recordkeeping requirements; the requirement to attend ethics training courses; penalties for violations of lobbying laws; and the public availability of reported data.  Part two of this article series will examine the implications of these lobbying law developments for the activities and compensation of third-party hedge fund marketers, and part three of this series will examine the implications for in-house marketers.

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  • From Vol. 3 No.49 (Dec. 17, 2010)

    Pair of District Court Opinions Illustrates the Difficulty of Enforcing a Purported Oral Agreement Between a Third-Party Marketer and a Hedge Fund Manager

    On October 20, 2009 and November 9, 2010, the U.S. District Court for the Northern District of Illinois issued two opinions benefiting hedge fund manager Whitecap Advisors, LLC, in breach of contract litigation brought by third-party hedge fund marketer Coburn Group, LLC.  In the lawsuit, Coburn Group had accused Whitecap of breaching its oral agreement to continue to pay its commission for so long as the investors it introduced to Whitecap maintained investments with it.  Whitecap, in turn, had challenged Coburn Group’s claim that such an agreement existed, and claimed, alternatively, that they had entered a “pay-as-you-go” arrangement that it terminated following repeated unsuccessful attempts by both parties to reach a memorialized contract.  When Coburn Group moved for summary judgment, the District Court found that material issues of fact existed that necessitated a jury trial.  When Whitecap moved, days later, to preclude Coburn Group from introducing evidence at that trial of damages to Coburn Group that may arise in the future, the District Court agreed that such evidence would be inappropriate given the speculative nature of such damages, and granted Whitecap’s motion.  This action is particularly significant because not many legal opinions address the relationship between hedge fund managers and placement agents or third-party marketers.  This article details the background of the instant action and the court’s pertinent legal analysis.  For more on the relationships between hedge fund managers and placement agents or third-party marketers, see “What Is the ‘Market’ for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010); “Indemnification Provisions in Agreements between Hedge Fund Managers and Placement Agents: Reciprocal, But Not Necessarily Symmetrical,” The Hedge Fund Law Report, Vol. 3, No. 41 (Oct. 22, 2010).

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  • From Vol. 3 No.48 (Dec. 10, 2010)

    Participants at Hedge Fund Compliance Summit Detail Best Practices with Respect to Insider Trading, SEC Examinations, Risk Mitigation, Marketing Materials, Valuation and Avoiding Investor Lawsuits: Part Two of Two

    On November 15 and 16, 2010, Financial Research Associates, LLC and the Hedge Fund Business Operations Association presented a Hedge Fund Compliance Summit at the Princeton Club in New York City.  In our issue of November 24, 2010, we detailed the key insights of Summit participants on topics including insider trading; the use by hedge fund managers of consultants and expert networks; sharing of information among personnel at different hedge fund managers; market rumors; insider trading considerations in connection with bank debt trading; and how to prepare for, handle and follow up on SEC examinations.  See “Participants at Hedge Fund Compliance Summit Detail Best Practices with Respect to Insider Trading, SEC Examinations, Risk Mitigation, Marketing Materials, Valuation and Avoiding Investor Lawsuits: Part One of Two,” The Hedge Fund Law Report, Vol. 3, No. 46 (Nov. 24, 2010).  As we observed in that article, the timing of the Summit was fortuitous because two weeks after it, The Wall Street Journal and other sources disclosed a wide-ranging, inter-agency insider trading investigation focusing on hedge fund managers, expert networks and other alternative research providers, investment banks and others.  See “Lessons for Hedge Fund Managers and Expert Network Firms from the Government’s Criminal Complaint against Don Chu, Formerly of Primary Global Research LLC,” The Hedge Fund Law Report, Vol. 3, No. 47 (Dec. 3, 2010).  This article finalizes our coverage of the Summit.  Specifically, this article summarizes the most relevant points made by Summit participants with respect to: the revised “accredited investor” definition in Dodd-Frank; the consequences of violating Regulation D, and how to mitigate those consequences; how to negotiate the apparent conflict between the prohibition on general solicitation of Regulation D and the expanded disclosures required by revised Form ADV, Part 2; the importance of consistency between marketing materials and fund documents; recordkeeping with respect to hedge fund manager websites; the distinction between specific representations in and collective impressions created by marketing materials; rules with respect to presentation of performance information; four specific items that the SEC looks for in valuation policies and procedures of hedge fund managers; six specific red flags that the SEC looks for with respect to valuation in the course of inspections and examinations of hedge fund managers; big boy letters; what provisions in side letters may, in the view of the SEC, need to be disclosed to hedge fund investors; and why the fraud exclusion in D&O and E&O insurance policies may often be moot.

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  • From Vol. 3 No.41 (Oct. 22, 2010)

    Indemnification Provisions in Agreements between Hedge Fund Managers and Placement Agents: Reciprocal, But Not Necessarily Symmetrical

    In a recent article, we argued that the use of placement agents by hedge fund managers – especially smaller and start-up managers – is likely to continue and grow in the near term, for both macro and micro reasons.  At the macro level, we identified four rationales for this anticipated trend: (1) many new investments are going to larger managers; (2) many institutional investors plan to increase their hedge fund allocations in the next three to five years; (3) a noteworthy percentage of institutional investors plan to increase their allocations to new managers; and (4) manager reputation weighs heavily in the allocation decision-making of institutional investors.  And at the micro level, we suggested that the use of placement agents by hedge fund managers will continue and grow because placement agents provide a range of potentially valuable services to managers, including: marketing and sales expertise; division of labor between portfolio management and marketing; credibility; contacts and access; strategic and other services; geographic and cultural expertise; and the ability to avoid the question of whether the manager’s in-house marketing department must register with the SEC as a broker.  For a fuller discussion of each of these points, see “What Is the ‘Market’ for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010).  Another point we made in that article – and a large part of the reason why we have undertaken this article – is that while the business case for the use by hedge fund managers of placement agents is compelling, the recent regulatory attention focused on placement agent activities and hedge fund marketing more generally is unprecedented.  See, e.g., “Three Significant Legal Pitfalls for Hedge Fund Marketers, and How to Avoid Them,” The Hedge Fund Law Report, Vol. 3, No. 36 (Sep. 17, 2010); “Third-Party Marketers that Solicit Public Pension Fund Investments on Behalf of Hedge Funds May Have to Register with the SEC within Three Weeks,” The Hedge Fund Law Report, Vol. 3, No. 35 (Sep. 10, 2010); “Key Elements of a Pay-to-Play Compliance Program for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010); “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  Accordingly, hedge fund managers are increasingly sensitive to the prospect that retaining placement agents can involve burdens as well as benefits.  At best, placement agents can dramatically increase assets under management, revenues and profits.  But at worst, placement agents can materially expand the range and severity of liabilities to which hedge fund managers are exposed.  At the same time, marketing and selling hedge fund interests can expose placement agents to liability.  In short, the exposure created by the relationship is reciprocal, but not necessarily symmetrical: in most cases, and as explained more fully below, placement agents have more opportunities to harm managers than vice versa.  Sophisticated hedge fund managers and placement agents recognize that their relationships may create these reciprocal, asymmetrical liabilities, and, to the extent possible, seek to allocate the burden of such liabilities ex ante, by contract.  Specifically, the indemnification provisions included in agreements between hedge fund managers and placement agents theoretically aim to allocate a particular category of liability to the party best situated to avoid it.  (Practically, they often allocate more liabilities to the party with less bargaining power.)  By allocating (in theory) liabilities to the “least cost avoider,” indemnification provisions also seek to affect behavior in a manner that mitigates the likelihood of loss.  The idea is that a party is more likely to take precautions against a loss if it is required to internalize the cost of that loss; and the party best situated to take such precautions is the party that can do so at the lowest cost. This article explores a question that frequently arises in the negotiation of agreements between hedge fund managers and placement agents: who should indemnify whom?  Or more particularly – since the answer is not so absolute – for what categories of potential liability should placement agents indemnify managers, and vice versa?  To answer that question, this article discusses: the activities of placement agents that can give rise to claims (by regulators or investors) against or can otherwise adversely affect managers; the activities of managers that can give rise to claims against or can otherwise adversely affect placement agents; how indemnification provisions in placement agent agreements are drafted to incorporate the various categories of potential liability; other mechanics of indemnification provisions (including the relevant legal standard, term, advancement of attorneys fees and clawbacks); the inevitable insufficiency of indemnification; the consequent heightened importance of due diligence and monitoring (including a discussion of ten best compliance practices and procedures for broker-dealers); and the interaction in this context among indemnification, directors and officers (D&O) insurance and errors and omissions (E&O) insurance.

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  • From Vol. 3 No.40 (Oct. 15, 2010)

    Two Recent Matters Suggest That Law Firms Should Stick to Practicing Law Rather Than Trying to Intermediate Hedge Fund Investments

    From time to time, business-minded hedge fund lawyers look at their client bases and networks and say to themselves: “I know a lot of hedge funds managers looking for investors and a lot of institutions looking to invest in hedge funds.  Wouldn’t I be helping everybody – myself included – if I connected those hedge fund managers and investors?”  Two recent matters answer this question with a resounding “no.”  This article describes the two matters, and their application to law firms with hedge fund manager or investor clients.

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  • From Vol. 3 No.39 (Oct. 8, 2010)

    Prime Broker Merlin Securities Develops Spectrum of Hedge Fund Investors; Event Hosted by Accounting Firm Marcum LLP Examines Marketing Implications of the Merlin Spectrum

    In August of this year, prime broker Merlin Securities, LLC released a white paper dividing the universe of hedge fund investors into ten categories, and arranging those categories along a spectrum from least to most “institutional.”  By institutional, Merlin was referring to the demand placed on hedge fund managers by each type of investor with respect to assets, operational practices, risk management, track record, reporting and other factors.  On September 23, 2010, at an event hosted by accounting firm Marcum LLP, Ron Suber, Senior Partner at Merlin and an author of the white paper, expanded on the institutional investor spectrum and its implications for hedge fund marketing.  This article outlines the Merlin investor spectrum and details the key takeaways from the Marcum conference with respect to hedge fund marketing, including a discussion of hedge fund seeding by pension funds.  Like any analytical framework, Merlin’s spectrum is intended to help managers clarify their marketing efforts and develop reasonable expectations, rather than to apply without alteration to every factual context.  As discussed more fully below, according to Merlin, it generally would not be realistic for a startup manager to target only pension funds in its marketing efforts; but by the same token, as discussed at the Marcum event, some pension funds have explored or executed hedge fund seeding deals, so startup managers should not rule out marketing to pension funds altogether.  See “How Should Hedge Fund Managers Adjust Their Marketing to Pension Funds in Light of Potential Downward Revisions to Pension Funds’ Projected Rates of Return?,” The Hedge Fund Law Report, Vol. 3, No. 11 (Mar. 18, 2010); “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).

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  • From Vol. 3 No.36 (Sep. 17, 2010)

    Three Significant Legal Pitfalls for Hedge Fund Marketers, and How to Avoid Them

    Until recently, the generally held perception was that the worst a hedge fund marketer could do is fail to raise money.  But then came the credit crisis, a raft of new regulations, a newly enlarged and invigorated SEC and a tectonic shift in the hedge fund investor base in favor of more public and private pension funds and other retirement plans.  In this fraught new operating environment, hedge fund marketers can do more than fail to benefit the fund: they can affirmatively harm the fund and manager.  In particular, marketers can, in different contexts: jeopardize fees; render ideal investors off-limits; subject a manager to complex regulatory schemes from which the manager would otherwise be exempt; and give investors the right to rescind their investments.  This article details three significant legal pitfalls that can give rise to these and other harms, and suggests ways to avoid them.

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  • From Vol. 3 No.35 (Sep. 10, 2010)

    What Is the “Market” for Fees and Other Key Terms in Agreements between Hedge Fund Managers and Placement Agents?

    Historically, hedge fund managers have retained placement agents and other third-party intermediaries to identify investors, obtain investments and for related purposes.  Hedge fund managers’ use of placement agents is likely to continue and even increase for two simple reasons: because such use is permitted, and because it can add value.  On the first point, the fact that hedge fund managers can use placement agents is only news because between August 2009 and June 2010, the continued viability of that use was in doubt.  In short, in August 2009, the SEC proposed a pay to play rule that would have prohibited hedge fund managers from using placement agents (or “third-party solicitors,” “solicitors,” “finders” or “pension consultants”) to obtain investments from public pension funds.  Given the importance of public pension funds in the hedge fund investor base – according to Preqin, public pension funds comprise approximately 17 percent of all institutional hedge fund investors – many in the hedge fund industry thought that the proposed ban marked the beginning of the end of the use by hedge fund managers of placement agents.  See, e.g., “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  However, the final pay to play rule, adopted by the SEC on June 30, 2010, did not prohibit hedge fund managers from using placement agents to solicit investments from public pension funds, but rather permitted such use so long as the relevant placement agent is a registered investment adviser or registered broker-dealer.  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures and Marketing Practices in Light of the SEC’s New ‘Pay to Play’ Rule?,” The Hedge Fund Law Report, Vol. 3, No. 30 (Jul. 30, 2010).  Along similar lines, on September 2, 2010, the SEC adopted a temporary rule (Rule 15Ba2-6T under the Securities Exchange Act of 1934) requiring municipal advisors to register with the SEC by October 1, 2010 (i.e., within three weeks).  This rule does not prohibit the use by hedge fund managers of “finders,” “solicitors” or other previously unregistered entities to obtain investments from public pension funds, but it may require such entities to register with the SEC.  See “Third-Party Marketers that Solicit Public Pension Fund Investments on Behalf of Hedge Funds May Have to Register with the SEC within Three Weeks,” below, in this issue of The Hedge Fund Law Report.  In short, while the legal and regulatory environment for placement agents has become more complex, their activities are, in general, still legally permitted.  And on the second point – the idea that placement agents can add value – there are two categories of rationales for this idea: micro rationales and macro rationales.  The micro rationales – the specific categories of services that placement agents are well-positioned to provide to hedge fund managers – are detailed below.  As for the macro rationales, four trends suggest that placement agents will play an increasingly important role in the allocation of capital to hedge funds.  First, a disproportionate volume of recent inflows have gone to larger managers.  Second, according to Preqin, 29 percent of institutional investors plan to invest more capital in hedge funds over the next 12 months than they did during the previous 12 months, and 46 percent of investors plan to increase their hedge fund allocations in the next three to five years.  Third, according to Preqin, 37 percent of institutional investors plan to direct any hedge fund allocations in the short to medium term to a mixture of new and existing managers, and 23 percent of institutional investors plan to invest in new managers only (that is, new to the investor, though not necessarily new to the market, i.e., not necessarily startup managers).  Fourth, according to Preqin, “firm reputation” is tied with “track record” as the second most important factor for institutional investors when making hedge fund allocations.  The point: capital is likely to flow into hedge funds over the next five years, but if you are anything other than a large, established manager, the competition for capital is likely to remain fierce.  And importantly in an industry where performance is easily measured, readily comparable and frequently updated, even “large, established managers” can stumble in terms of size and stature, and find themselves pounding the proverbial fundraising pavement once again.  In light of the anticipated importance of placement agents in steering capital into hedge funds over the next (at least) five years, this article seeks to shed light on a relatively obscure topic: the “market” for fees and other terms in agreements between hedge fund managers and placement agents.  Specifically, this article first identifies seven distinct reasons why a manager may hire a placement agent, then details the most important terms of, and issues in connection with, placement agent agreements, including the following: fee structures and levels; declining fees; duration of engagements and sunset provisions; carve-outs for the manager’s pre-existing relationships; exclusivity; licensing, registration and representations with respect to both; indemnification; insurance; and the pay to play overlay.

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  • From Vol. 3 No.16 (Apr. 23, 2010)

    Impact of Regulatory Reforms on Hedge Funds is Key Focus of PLI’s Hedge Fund Registration and Compliance 2010 Seminar

    As the government and the Securities and Exchange Commission (SEC) push for a number of reforms in the financial markets, the impact on hedge funds is expected to be significant, particularly with the Private Fund Investment Advisers Registration Act of 2009 (House bill) and the Wall Street Reform and Consumer Protection Act of 2009 (Dodd bill) both calling for the mandatory registration of hedge fund managers who meet certain assets under management (AUM) thresholds.  On April 9, 2010, the Practising Law Institute hosted the Hedge Fund Registration and Compliance 2010 seminar in New York City.  Among the key topics discussed during the conference were: fund manager registration; likely changes to the definition of accredited investor; proposed resolution authority; the Volcker Rule; key issues regarding hedge fund marketing; side letters; strategy drift; and soft dollars.  This article offers a comprehensive summary of the key points raised and discussed at the conference.

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  • From Vol. 3 No.11 (Mar. 18, 2010)

    How Should Hedge Fund Managers Adjust Their Marketing to Pension Funds in Light of Potential Downward Revisions to Pension Funds’ Projected Rates of Return?

    Recent market chatter suggested that public pension funds – as a group, one of the largest allocators of capital to hedge funds – were considering reducing their target rates of return.  For example, recent news reports suggested that the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the U.S., was considering reducing its target annual rate of return from 7.75 percent to 6 percent.  One of the headline responses to the rumored reduction in pension fund investment targets was that such reductions would decrease the capital allocated to hedge funds by pension funds.  The assumption behind this idea was that pension funds invest in hedge funds for alpha, or above-market returns, and because the reduced investment targets would be more in line with beta, or market returns, pension funds no longer needed the market-beating services of hedge funds.  However, while alpha may be one reason why pension funds invest in certain hedge funds, it is by no means the only reason.  In fact, in the wake of the credit crisis, alpha has fallen in the ranking of rationales for pension fund investments in hedge funds, and other rationales are ascendant.  As explained more fully below, those other rationales include, but are not limited to: uncorrelated returns; absolute returns; reduced volatility; sophisticated risk management; access to standout managers; and access to unique assets.  In short, even if pension funds reduce their investment targets – and whether or not they will remains uncertain – pension funds are likely to continue allocating capital to hedge funds, likely at a hastening clip.  See “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  But as they do, the specific factors on which pension funds base their hedge fund investment decisions are likely to evolve in subtle but important ways.  In other words, while the potentially reduced investment targets likely will not materially diminish the volume of pension fund allocations to hedge funds, they do reflect a shift in the focus of pension funds’ concerns.  For hedge fund managers seeking to raise and retain institutional capital, it is critical to understand pension fund decision-making and to translate that understanding into informed marketing strategies.  Accordingly, this article examines how hedge fund managers may adjust their marketing to pension funds in light of the potentially reduced investment targets.  Or more precisely, this article examines how hedge fund managers may refocus their investment strategies and operations in light of pension fund concerns – because marketing in the hedge fund context should not be a matter of puffery or salesmanship, but rather should be a matter of clearly, candidly and comprehensively conveying a manager’s strategy and operations.  In particular, this article discusses: the potential reduction in target returns; the rationale for pension fund investments in hedge funds; trends and data with respect to such investments; specific marketing strategies that hedge fund managers can employ when targeting pension funds (including discussions of strategy drift, pension fund consultants, liquidity and other relevant matters); and the evolving role of placement agents in connecting pension funds and hedge funds.

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  • From Vol. 3 No.7 (Feb. 17, 2010)

    Barclays Capital Report Says Mid-Sized Hedge Funds Attract the Most Money from Investors and Hedge Funds Saw $150 Billion Inflows in First Nine Months of 2009

    A December 2009, Barclays Capital’s Prime Services Division report on the hedge fund industry, entitled “Raising the Game,” found that hedge funds attracted $150 billion in new assets in the first nine months of this year.  Despite that inflow, the report stated that assets under management (AUM) remain an average of 32 percent below peak levels two years ago.  Even so, hedge fund managers surveyed for the report representing a combined total of $387 billion of AUM, or approximately one third of the industry, expressed optimism regarding future inflows.  Notably, the survey also found that hedge funds are devoting more resources to differentiate themselves as a result of the financial crisis.  See also “The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance,” The Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  This article details the most salient findings of the report and their implications.

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  • From Vol. 2 No.50 (Dec. 17, 2009)

    How Can Start-Up Hedge Fund Managers Use Past Performance Information to Market New Funds?

    Recent market dislocations have given rise in the hedge fund industry, as in other industries, to an increasing crescendo of entrepreneurship.  According to data from Hedge Fund Research Inc., 224 hedge funds launched worldwide during the third quarter of this year, while 190 closed in the same period – the first time since early 2008 that the number of new launches exceeded the number of closures.  While compensation has come down on average, especially at firms under their high water marks, so has the opportunity cost of casting out on one’s own.  See “How Are Hedge Fund Managers with Funds Under their High Water Marks Renegotiating Performance Fees or Allocations?,” The Hedge Fund Law Report, Vol. 2, No. 33 (Aug. 19, 2009).  In short, for star traders on broker-dealer prop desks, second chairs, co-managers and trusted lieutenants, the climate for hedge fund entrepreneurship is unusually fertile.  See “As Banks Close Prop Desks and Traders Move to Hedge Funds, Hedge Fund Managers Focus on Permissible Scope of Use of Confidential Information,” The Hedge Fund Law Report, Vol. 2, No. 18 (May 7, 2009).  While hedge fund entrepreneurs face all of the usual issues involved in entrepreneurship – employment matters, office leases, professional services fees, etc. – they also face certain issues unique to the hedge fund industry.  See “Stars in Transition: A New Generation of Private Fund Managers,” The Hedge Fund Law Report, Vol. 2, No. 49 (Dec. 10, 2009).  Chief among those unique issues are the legal and regulatory limitations on what a hedge fund entrepreneur can communicate to potential investors in the new funds or management entity with respect to prior performance.  Specifically, despite the ubiquity of the disclaimer stating that past performance does not guarantee future results, there remains no more reliable predictor of future results than past performance.  Accordingly, new investors are keenly interested in past performance, and for any hedge fund entrepreneur that seeks to create a viable business, the question is not whether to communicate past performance, but how.  The short answer is: carefully.  Few topics are as central to marketing discussions when launching a new hedge fund management company and new hedge funds, and few topics are as fraught with legal risk.  In an effort to help hedge fund entrepreneurs navigate the thicket of relevant regulation, this article analyzes in depth the laws, rules, regulatory pronouncements (in particular, no-action letters) and market practices governing the permissible and impermissible uses of past performance data when launching new funds or managers.  While the authority is complex and fact-specific, this article extracts and drills down on five broad principles that new managers would be well-advised to keep in mind during (and even after) new fund or manager launches.  Within those five broad principles, this article describes concrete strategies that managers can follow to stay within the rules governing the use of past performance information in marketing efforts.  This article also details the key points from the seminal Clover Capital no-action letter.

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  • From Vol. 2 No.45 (Nov. 11, 2009)

    The Four P’s of Marketing by Hedge Fund Managers to Pension Fund Managers in the Post-Placement Agent Era: Philosophy, Process, People and Performance

    As a result of the recent “pay to play” scandals in New York, California and other states, the SEC, New York Attorney General Andrew Cuomo and certain state pension fund managers have restricted or prohibited hedge fund managers from using placement agents when marketing to state pension fund managers.  See “What Do the Regulatory and Industry Responses to the New York Pension Fund ‘Pay to Play’ Scandal Mean for the Future of Hedge Fund Marketing?,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  Prior to the pay to play scandals, placement agents often served an important intermediary role between investment managers and the trustees of state retiree money: they understood the investment goals of pension funds and the investment competencies of particular managers, and they added value by connecting goals with appropriate competencies.  However, the regulatory and industry responses to the pay to play scandals – still perceived in various quarters as unduly draconian – have all but eliminated placement agents from hedge fund manager marketing efforts, at least to the extent those efforts are directed at state pension funds, and at least for now.  At the same time, pension funds are expected to contribute a growing proportion of the assets under management by hedge funds in the next few years.  So who or what is going to fill the hedge fund marketing void that has opened up in the post-placement agent era?  In an effort to answer that question, this article revisits the New York State pension kickback case then discusses: the reduction in the use of placement agents by state pension funds in New York and California; the SEC’s recently proposed rule regarding placement agents; the move by pension funds away from allocations to funds of funds in favor of direct investments in hedge funds; specific examples of pension funds that have moved to single manager allocations; what precisely pension funds are looking for in allocating capital to single managers; specific steps that hedge fund managers can take to market to pension fund managers without relying on placement agents; considerations with respect to in-house marketing teams and prime broker capital introduction services; due diligence by pension funds; and background checks.

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  • From Vol. 2 No.42 (Oct. 21, 2009)

    Specific Steps that Hedge Fund Managers Can Take to Increase the Likelihood of an Investment from a Sovereign Wealth Fund

    Sovereign debt has been the historical repository of foreign exchange reserves.  In the old model, state enterprises would export goods (often commodities, such as oil) abroad, and the revenue from such sales would be used to purchase debt issued by other governments or their subdivisions, often the U.S. Treasury.  Alternatively, private firms would export goods produced with a state license, thereby generating tax revenue that the host country invested in sovereign debt.  With the bull run in commodities that began in the late 1990s, the foreign exchange coffers of various nations – especially the oil-rich – swelled, and the financial authorities in those nations took notice.  Rather than reflexively pouring growing foreign exchange reserves exclusively into sovereign debt, resource rich countries and other countries organized sovereign wealth funds (SWFs).  The goals of such funds included more concerted and disciplined management of reserves, and diversification among asset classes, industries and geographies.  For various countries, SWFs represented an effort to surmount the “resource curse” – the paradox in which development is often stunted in a nation rich in a single or a few natural resources.  Historically, SWFs have invested primarily in straightforward, liquid assets such as public equity and bonds, and allocated only a modest proportion of their net assets to hedge funds and other alternatives.  However, the credit crisis complicated the assumptions that undergirded that investment approach.  Among other things, the crisis demonstrated that investments in public equity – for example, in the stock of bank holding companies – could entail greater risk and exposure to more leveraged entities than investments in hedge funds.  Accordingly, SWFs are now looking to invest a greater proportion of their assets in hedge funds.  For example, in August of this year, the China Investment Corporation confirmed its plan to allocate approximately $6 billion to alternative investment strategies by the end of 2009.  For hedge funds managers still facing a difficult money-raising climate, the significant volume of assets in SWFs presents a compelling fund raising opportunity.  However, fund raising from SWFs is different in subtle but important ways from fund raising from the more traditional hedge fund investor base.  With the goal of assisting hedge fund managers in this unique but critical fund raising niche, this article explores: what SWFs are and how they are funded; the history and purpose of investments by SWFs in hedge funds; specific considerations for hedge fund managers when seeking to raise funds from SWFs; and potential concerns arising out of the receipt by hedge fund managers of SWF investments.

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  • From Vol. 2 No.41 (Oct. 15, 2009)

    Massachusetts’ Lawsuit Against Hedge Fund Manager Bulldog Investors and Its Principal, Phillip Goldstein, Survives Free Speech Challenge

    On September 30, 2009, the Massachusetts Superior Court ruled that an administrative action by Massachusetts securities regulators against activist hedge fund manager Bulldog Investors, its principal Phillip Goldstein and its affiliated funds, for selling unregistered securities over an Internet website, did not violate the defendants’ First Amendment rights.  The court found that the regulations challenged by the defendants as an unconstitutional abridgement of their right to freedom of speech fulfilled the criteria for testing such a First Amendment challenge as set forth by the United States Supreme Court in Central Hudson Gas & Electric Corp. v. Public Serv. Comm’n, 447 U.S. 557, 561 (1980).  As required by that decision, the court found that the regulations advanced the state’s interest in protecting the capital markets and did not intrude on speech any more than necessary to achieve that objective.  This article summarizes the background of the action and details the court’s legal analysis.

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  • From Vol. 2 No.34 (Aug. 27, 2009)

    Interview with HedgePort Associates’ CEO Andrew Springer on the New Firm’s Operational and Marketing Services for Startup Hedge Fund Managers

    Although the hedge fund industry continues to recover from a year of unprecedented underperformance and record redemptions, and is still reeling from an economic recession, opportunities remain for startup hedge funds.  A new firm, HedgePort Associates, has been established to provide operational, regulatory and marketing services to hedge fund managers as they start and grow their businesses.  Andrew Springer is the founder and CEO of HedgePort Associates; he also founded hedge fund operations consulting firm Resolve Inc.  The Hedge Fund Law Report spoke with Springer about HedgePort and the services the firm provides.  The full transcript of that interview is included in this issue of The Hedge Fund Law Report, and covers topics including: the market for startup hedge funds; whether and how certain operational functions can be outsourced; where liability resides in the event of a compliance violation if compliance functions are outsourced; the difference between track records compiled at hedge funds and on proprietary trading desks; HedgePort’s compensation structure; wind-down services offered by HedgePort; the SEC’s new pay to play rules; structuring matters; and more.

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  • From Vol. 2 No.30 (Jul. 29, 2009)

    What Do the Regulatory and Industry Responses to the New York Pension Fund “Pay to Play” Scandal Mean for the Future of Hedge Fund Marketing?

    New York’s so-called “pay to play” scandal – in which state officials conditioned investments of state pension money in hedge and private equity funds on payments by the funds’ managers to the officials or their affiliates – has yielded a range of regulatory and industry responses, of varying degrees of severity.  At the most draconian is New York Attorney General Andrew Cuomo’s Code of Conduct (Code), to which three alternative investment managers have thus far agreed in settlement of pay to play charges.  The Code bans the use of placement agents altogether, but is not yet law and has not yet been adopted by any industry group as a best practice.  (However, it has been adopted by the New York State Teachers’ Retirement System.)  Somewhat less severe is a recently proposed SEC rule intended to curtail pay to play practices.  That rule generally provides that an investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser to manage money for state or local governments would be barred for two years from providing advisory services for compensation, either directly or through a fund.  A yet more measured response to the pay to play scandal ­– and in the view of many on the hedge fund side, a more practicable one – has come from CalPERS and other pension funds.  These pension funds have required increased disclosure and transparency with respect to compensation arrangements between investment managers seeking to manage pension assets and any placement agents or third party marketers acting on behalf of such managers.  Finally, lurking in the background has been Investment Advisers Act Rule 206(4)-3, which generally requires disclosure of the compensation arrangement between a registered investment adviser and a placement agent, to any “client” of the adviser that was solicited by the placement agent.  The application of this rule in the pay to play scandal is subtle, as explained more comprehensively in this article.  The regulatory responses have changed the game of hedge fund marketing.  The difficult (though apparently improving) investment climate for hedge funds has made marketing more difficult as a practical matter, and the regulatory responses to the pay to play scandal have made marketing more treacherous as a legal matter.  Therefore, this article provides background on the scandal and the various settlements; offers details of Cuomo’s Code; addresses the likelihood that other states will follow New York’s lead; discusses actions by pension funds in response to the scandal, the SEC’s recently proposed anti-pay to play rule and Rule 206(4)-3; and, importantly, explores the future of hedge fund marketing without placement agents, or with harsh restrictions on their activities.

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  • From Vol. 2 No.25 (Jun. 24, 2009)

    European Alternative Funds: The Alternatives

    The alternative investment funds industry is currently facing significant regulatory and legal challenges and, particularly for fund promoters seeking access to European investors, 2009 may well prove to be a watershed. Traditionally, the European (and U.S.) alternative investment funds industry has embraced the offshore jurisdictions as providers of tax-efficient and regulatory “light-touch” domiciles for fund and management structures. The Cayman Islands, in particular, has become the “path of least resistance.”  However, alternative investment funds have recently become subject to hitherto-unseen levels of scrutiny from regulators, politicians, tax authorities and investors, even though much of the resulting criticism has been unwarranted (other than in terms of underperformance). Few participants in the financial services industry seriously believe that the global financial crisis was caused by hedge funds, and this scepticism has been endorsed by more than one regulator. Nevertheless, certain axes are now being held firmly to the grindstone. In this political climate, the future of the “unregulated” offshore jurisdictions is far from certain, and their role as significant financial centers may be substantially altered by forthcoming legislation and regulation, as well as investor demand.  In a guest article, Simon Thomas and Samuel T. Brooks, Partner and Associate, respectively, at Akin Gump Strauss Hauer & Feld LLP, provide a detailed examination of how hedge fund structures are evolving in response to regulatory change, in particular in the European Union.  In particular, Thomas and Brooks examine: the implications for structuring and operations of the Alternative Investment Fund Managers Directive; considerations in connection with an Undertaking for Collective Investment in Transferable Securities (UCITS) structure; incentives for organizing single-strategy hedge funds in various EU jurisdictions; and listings and permanent capital vehicles.

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  • From Vol. 2 No.25 (Jun. 24, 2009)

    Former Employee Sues Hedge Fund Manager Claiming Entitlement to Bonus “In Perpetuity” Based on Capital Introductions

    Accordingly to publicly available court documents, in February 1995, Kimberly Steel entered into an employment agreement with hedge fund manager Watch Hill Management (Watch Hill).  She was employed as “Managing Director, Investor Relations.”  As such, one of her main duties was to solicit investors for Watch Hill.  Her compensation, according to the documents, was based in large part on the amount of money invested by the investors whom she introduced to Watch Hill Fund L.P. (Fund).  At the end of each quarter, she was to receive a bonus equal to a specified percentage of the capital accounts of the investors whom she had introduced.  The agreement also contemplated that if those investors moved to (or invested additional money with) new funds created by Watch Hill’s principals, those investments would also count towards her bonus.  According to the public documents, Watch Hill Management terminated Steel’s employment as of January 28, 2004, and she sued, claiming that she was to receive a bonus “in perpetuity” based on the capital account balances of the limited partners whom she introduced to the Fund.  More recently, a third-party complaint was filed, containing claims arising out of the same facts and circumstances.  We describe the factual and legal allegations of the complaints, which can have relevance for any hedge fund manager structuring compensation arrangements with partners or employees hired or retained to solicit investors.

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  • From Vol. 2 No.24 (Jun. 17, 2009)

    A Pequot Postmortem: What is Headline Risk and How Can it be Avoided or Mitigated?

    In the hedge fund context, “headline risk” may be defined as the potential for adverse publicity to undermine the business operations and investment strategy of a manager.  Headline risk is often invoked with a mixture of reverence and terror, one of the few trump cards that almost invariably will persuade a manager to make changes to a marketing presentation that otherwise appear ministerial.  The deterrent power of headline risk likely arises out of its vagueness: hedge fund managers generally are accustomed to modeling and quantifying the world, while headline risk remains inherently ambiguous – the stuff of rumor rather than reason – and thus difficult to measure or control once realized.  As demonstrated by the recent demise of Pequot Capital Management, headline risk can bring down an entire hedge fund management enterprise, even one with an admirable track record, and can tarnish otherwise sterling reputations.  However, managers are not without recourse – not defenseless against the fickle whims of the Fourth Estate.  There are specific precautions a manager can take to minimize both the likelihood of events that will result in headline risk, and the magnitude of the risk even if such events occur.  This article defines headline risk with more particularity, identifying its constituent elements and discussing the Pequot case as an example, then details the specific precautions managers can take to mitigate the likelihood and magnitude of headline risk.  It also discusses certain responses to headline risk that managers are encouraged to avoid.

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  • From Vol. 2 No.22 (Jun. 3, 2009)

    Certain Hedge Funds are Using Enhanced Investor Liquidity as a Marketing Tool

    The credit crisis has been caused in large part by financial market participants assigning too great a value to assets.  In the hedge fund context, however, the crisis has also highlighted an asset to which managers and investors historically have assigned too little value: liquidity.  As formerly liquid markets froze in late 2007 and 2008, liquidity assumed a more prominent place in the total mix of value offered by certain hedge funds.  Along with absolute return, diversification, low correlation with traditional asset classes and access to unique strategies, liquidity became something many investors wanted but only a handful of managers could deliver.  In a word, during the crisis, liquidity was in high demand and short supply.  As markets have begun to thaw – or at least the perception of a thaw has become more widely held among market participants – supplying liquidity has become more feasible, yet the demand for liquidity remains every bit as strong (and shows little sign of abating).  Where practicable (an important caveat), hedge fund managers are meeting this demand with new or restructured funds with enhanced liquidity terms.  In particular, managers are enhancing liquidity by: (1) shortening the initial lock-up period, that is, the period during which an investment cannot be redeemed or can only be redeemed subject to a significant penalty; (2) offering redemptions without penalties at more frequent intervals following the initial lock-up period; (3) shortening the notice required in connection with redemption requests; and (4) restricting the range of tools available to the manager to suspend or delay redemptions (such as gates or suspensions).  The primary goal of offering increased liquidity is raising and retaining assets at a time when the balance of power still tips in favor of institutional investors.  We detail specific terms that managers are changing to enhance liquidity, and explore how to manage redemptions in light of enhanced liquidity, what types of funds can offer enhanced liquidity and potential detriments for the manager and non-redeeming investors.  In addition, we highlight two benefits to the manager of enhanced liquidity that have received little attention to date.

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  • From Vol. 2 No.15 (Apr. 16, 2009)

    Hedge Fund Managers Launching Mutual Funds in an Effort to Stay a Step Ahead of Regulatory Convergence

    Although the term “hedge fund” has no statutory or common law definition, historically hedge funds have been defined in large part by what they are not: mutual funds.  Unlike mutual funds, hedge funds have been exempt from the definition of “investment company” under the Investment Company Act of 1940, and unlike mutual fund advisers, hedge fund advisers have not been required to register under the Investment Advisers Act of 1940.  Free from many regulatory restrictions that bind registered funds and advisers, the hedge fund format has been understood as a blank canvas on which a creative manager can realize his or her full investment potential; and the historical returns of some managers have borne out that understanding.  However, in a potent sign of the extent to which the challenging economic climate has changed the hedge fund industry, hedge funds managers are now engaging in a move formerly considered unthinkable – they are launching mutual funds.  While there are various reasons for this trend, two macro variables are largely responsible.  First, the negative feedback loop of poor performance and redemptions that has virtually halved the capital base of the industry.  Without capital there are no hedge funds – or mutual funds – and so hedge fund managers are looking for new sources of capital to fill the holes left by redemptions, even if that new capital generates lower fees.  Second, the increasing likelihood, perhaps inevitability, of regulatory convergence between hedge funds and mutual funds, and their respective managers.  Bills presently before Congress would subject hedge funds and their managers to many of the regulations currently applicable to mutual funds and their managers.  If such bills pass – and the consensus view is that they will, though likely with modifications from their current forms – then the regulatory playing field will be leveled and the legal advantages of running a hedge fund over a mutual fund will largely disappear.  In this sense, launching a mutual fund constitutes a recognition by a hedge fund manager of what may well be a legal fait accompli, and an effort to capitalize (from a marketing perspective) on the “aura” of being a hedge fund manager while that still means something in the retail imagination.  We discuss the convergence trend, the benefits and burdens to hedge fund managers of running a mutual fund, which hedge fund strategies lend themselves to mutual fund structures, allocation and marketing considerations and competition issues.

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  • From Vol. 2 No.4 (Jan. 28, 2009)

    Can the Madoff Trustee Recover Fictitious Investment Gains Distributed to Investors Prior to Inception of the SIPA Proceeding?

    Possession, they say, is nine-tenths of the law.  But sections of the Bankruptcy Code (incorporated, in pertinent part, by reference into the Securities Investor Protection Act of 1970 (SIPA)) providing for avoidance of preferential transfers and fraudulent conveyances demonstrate that possession is not invariably determinative of ownership.  This point has renewed relevance in light of the alleged $50 billion Ponzi scheme orchestrated by Bernard Madoff.  The question for many investors who thought they got out unscathed is now: will the SIPA trustee be able to require them to return money already paid out?  Investors who lost all or substantially all of their investments with Madoff are asking the same question, since it looks increasingly likely that any recovery for Madoff investors will come from claw back of formerly distributed amounts as opposed to discovery of hidden cash.  We explore these questions in detail, outlining the statutory bases of recovery actions, defenses to such actions, relevant precedents, statute of limitations concerns and hedge fund marketing issues.

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  • From Vol. 2 No.2 (Jan. 15, 2009)

    Hedge Fund Managers Use Technology to Expand Marketing Efforts while Complying with Regulation D

    Hedge fund managers are frequently described as a “secretive” bunch.  To the extent that characterization is valid, its roots may reside in the recognition that for hedge fund managers, publicity carries with it substantial potential downside, and little possibility for upside.  One of the more notable potential downsides is that any advertising or marketing by hedge fund managers may be construed as a “general solicitation” of investors.  Since many hedge funds offer their interests to accredited investors in reliance on Regulation D under the Securities Act of 1933, and Reg D prohibits general solicitations, hedge fund managers are effectively prohibited from advertising.  However, hedge fund managers are starting to use digital rights management and enterprise rights management technology to significantly expand the scope of their marketing efforts while remaining within the Reg D safe harbor.  We explain in detail how they are doing this.

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  • From Vol. 1 No.29 (Dec. 24, 2008)

    NFA Letter to CFTC Broadens Marketing Restrictions Applicable to Forex Dealer Members

    The use by or on behalf of a Forex Dealer Member (FDM) of the National Futures Association (NFA) of hypothetical performance results in the context of promotional materials has long been a controversial subject.  A new NFA letter to the CFTC tweaks the rule book in this area, applying to off-exchange hypotheticals the same restrictions that have applied for more than a decade to on-exchange hypotheticals.  We detail the substance of the amendments, and changes they may require in the presentation of performance information and other policies and procedures of FDMs.

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  • From Vol. 1 No.17 (Aug. 1, 2008)

    SEC Issues No-Action Letter Suggesting Hedge Fund Advisers Are Exempt From Cash Solicitation Arrangement Disclosure Requirements

    On Tuesday, July 15, 2008, the SEC Division of Investment Management issued a no-action letter stating that “[w]e believe that Rule 206(4)-3 generally does not apply to a registered investment adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser.” Even though the letter appears to be a positive development for hedge fund managers that contract with third-party solicitors to solicit fund investors, managers should still be cognizant of the actual or potential conflicts of interest that may be inherent in solicitation arrangements. Advisers Act Rule 206(4)-3(b) may still provide useful guidance as to the content and substance of appropriate disclosure of solicitation arrangements.

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  • From Vol. 1 No.10 (May 6, 2008)

    New York Court Allows Suit to Progress Against Hedge Fund Manager for Allegedly Terminating its Contract in Bad Faith to Avoid Paying Finder’s Fees

    • Hedge fund manager entered into a finder’s agreement that provided for payment to the finder of a finder’s fee and, for larger investments, a “structuring payment,” so long as the investor invested within a year of the finder’s last contacts with the investor.
    • A Norwegian bank made a substantial investment in an Ellington fund more than a year after the finder’s last contact with the bank, and the court held that the finder was not entitled to its fee, but might (pending more fact finding) be entitled to its structuring payment.
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  • From Vol. 1 No.9 (Apr. 29, 2008)

    Hedge Funds Consider Forthcoming Solicitation Guidance

    • The SEC’s “cash solicitation rule” requires certain disclosures and acknowledgments from “clients,” so, following Goldstein, application of rule to hedge fund advisers is ambiguous.
    • The SEC has indicated that it will issue guidance on the application of the rule to hedge fund advisers.
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