Mar. 31, 2008

Hedge Funds Beware: Proposed “Super” Regulator Could Alter Industry

Treasury Secretary Henry Paulson calls for greater transparency and higher scrutiny of securities firms participating in discounted lending program.
House Democrats to introduce bill designating unified agency to administer new primary dealer loan program and provide added oversight.
House Republicans seek support for massive overhaul of the financial industry regulatory regime, potentially including a single oversight agency.
Bill in Canadian Parliament (S-211) would replace local securities regulators with a federal securities regulator and a new federal securities law.

Do undisclosed side letter arrangements constitute fraud or raise potential conflicts?
Preferential redemption rights, key man provisions, redemption gate waivers and portfolio transparency rights among potentially material terms often contained in side letters that may be appropriate for disclosure in the PPM.
Non-preferred investors may claim that side letters violate fund managers’ fiduciary duty of fair treatment.
U.K. regulators lead the way in guidance for disclosure of side letters, requiring that firms disclose the existence of side letters containing material terms.
Some hedge fund attorneys advise clients to disclose in the PPM the existence of side letters arrangements or the fact that the fund may enter into such arrangements. However, disclosure has not been tested in court or an administrative proceeding, so it is not certain that hedge fund advisers can disclose their way out of breach of fiduciary duty claims based on preferential rights granted in side letters.

IASB discussion paper identifies varying methods and rules as main cause of complexity in financial reporting.
Paper proposes revised reporting standards and seeks to replace IAS 39.
Paper suggests intermediate and long term approaches to problems related to financial instrument measurement.
Suggested interim approaches include simplifying measurement requirements; replacing existing requirements with fair value measurement principles; and simplifying or eliminating hedge accounting requirements.
Single, uniform fair value measurement method - appropriate for all types of financial instruments - urged as the most promising long term solution.
Cost-based measurement method rejected for failing to provide information about future cash-flow prospects.

Unpublished opinion holds that in the case of joint attorney representation of co-venturers, attorney-client privilege may not be raised to prevent disclosure of communications relevant to the common interest of former joint clients in subsequent litigation.
Case suggests that hedge funds entering into joint venture arrangements should consider retaining separate counsel or carefully define the scope of the representation in the engagement letter.
Privilege takes effect only after the co-venturers’ interests clearly diverge.