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.

SEC Provides Guidance Regarding Exemptions From Registration for Managers of “Family Offices”

In two recent pronouncements, the SEC provided much-needed guidance on when a family office does not have to register as an investment adviser. In a recently-issued no-action letter, the SEC stated that it would not recommend enforcement action against a 3(c)(7) fund in which a fund managed by a family office invested, based on an investment in the family office fund by the non-family member executive director of the family office. In a roughly contemporaneous order granted to another family office, the SEC held that a family office did not have to register as an investment adviser where that family office provided services exclusively to a single family, was owned by the family and had a board of directors, the majority of which was comprised of family members.

Delaware Chancery Court Grants Hedge Fund Investors’ Motion to Expedite Proceedings in Fraud Action Against Citigroup Alternative Investments

In ongoing litigation relating to the collapse of MAT Five LLC, a hedge fund sponsored by a Citigroup affiliate, the Delaware Chancery Court on June 26, 2008 granted the plaintiffs’ motion to expedite the proceedings and scheduled a hearing on the plaintiffs’ motion for a preliminary injunction. The case demonstrates some of the problems encountered by large institutions that manage internal hedge funds, and also highlights the various pitfalls faced by such institutions when they attempt to “bail out” an internal hedge fund experiencing performance difficulties.

SEC Subpoenas Hedge Fund in Connection With Suspected Rumormongering

In recent weeks, the SEC has subpoenaed more than 50 hedge fund advisers, seeking communications relating to their involvement in circulating false rumors intended to drive down the share prices of certain financial companies. According to some experts interviewed by the Hedge Fund Law Report, the SEC’s rumormongering investigation is unlikely to disrupt business as usual in the $2.5trillion hedge fund industry. Others, however, see the investigation as an effort by the agency to exert new powers over hedge funds. In any case, the SEC’s investigation has rekindled the long-running debate in the hedge fund legal community about how to determine when rumors fall on this or that side of anti-market manipulation laws and rules.

Sidley Austin Further Expands Hedge Fund Practice in London with Hiring of Counsel Barry Breen

Law firm Sidley Austin LLP announced today that Barry Breen has joined the firm's London office as counsel in the Investment Funds, Advisers and Derivatives practice.

Venable Adds Hedge Fund Attorney and Former Bear Stearns Managing Director Rory Cohen to New York Office

On July 22, 2008, law firm Venable LLP announced the addition of hedge fund and asset management attorney Rory Cohen as a partner in its New York office.