Jun. 22, 2017

How Hedge Fund Managers Can Structure Deferred Compensation Plans to Retain Top Talent (Part One of Two)

It is often arduous and costly for hedge fund managers to build robust management teams with desirable talent in order to meet legal, regulatory and investor demands. Once found, retaining talented individuals becomes the next critical concern for managers, which they frequently address by using deferred compensation plans to delay an individual’s receipt of a portion of his or her compensation until a later point in time. See “Greenwich Associates and Johnson Associates Issue Report on Asset Management Compensation Trends in 2012” (Dec. 13, 2012). This two-part series provides an overview of the use of deferred compensation plans in the hedge fund industry, including the different forms these plans can take and certain tax matters to consider. This first article explores the intended goals of these programs and tax consequences associated with pre- and post-tax deferral programs. The second article will examine how commonly these plans are adopted in the hedge fund industry; discuss technical aspects of these plans, such as vesting schedules and forfeiture events; and identify categories of employees who are likely to participate in deferred compensation plans. For analysis of trends in compensation at hedge fund managers, see “How Much Are Hedge Fund Manager General Counsels and Chief Compliance Officers Paid?” (Jul. 24, 2014); and our two-part series on the market for in-house compensation at hedge fund managers: “What Is the Value of Legal and Compliance Staff?” (Mar. 12, 2015); and “Trends in Legal and Compliance Hiring and Staffing” (Mar. 19, 2015).

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).

Hedge Funds’ Image Crisis: Fighting Public Perceptions Against the Backdrop of Potential Financial Sector Reforms

Despite the generally business-friendly atmosphere of the Trump administration, hedge funds still face an uphill battle when it comes to negative perceptions by the general public and investors. While new SEC Chair Jay Clayton and other top officials have deep and genuine expertise in financial and regulatory topics, much of the public derives its views and attitudes from media reports emphasizing the downside of hedge fund investing. To address its image problem, it behooves the private funds industry to bridge the general public’s knowledge gap. In the background of this battle over the industry’s reputation, reforms that may benefit private funds – including revisions to the business income tax and a consolidation of certain regulatory functions – are potentially on the horizon. All of these points came across in the keynote speech by former SEC Chair Christopher Cox at the tenth annual Advanced Topics in Hedge Funds Practices Conference: Manager and Investor Perspectives recently produced by Morgan Lewis. This article presents the key takeaways from Cox’s talk. For coverage of last year’s conference, see “How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds” (Aug. 4, 2016). For additional insights from Morgan Lewis attorneys, see “Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)” (Jul. 14, 2016); and “Operational Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part Two of Three)” (May 14, 2015).

When and How Attorney-Client Privilege Applies to Communications With In-House Counsel

When a fund manager calls outside counsel, it is generally understood that the purpose of the call is to seek legal advice and that those communications will be protected from disclosure by attorney-client privilege. In contrast, when an officer or employee calls in-house counsel, the situation is not always cut and dried for many reasons, including that in-house counsel may have both legal and non-legal duties; communications may concern both legal and non-legal matters; and unnecessary persons may be party to the communications. A recent program featuring Dechert partner Christopher S. Ruhland explored the nuances of attorney-client privilege as it relates to communications with in-house counsel and debunked three common myths about the availability of privilege. This article summarizes Ruhland’s insights. For a recent in-depth look at attorney-client privilege, see our three-part series, “Protecting Attorney-Client Privilege and Attorney Work Product While Cooperating With the Government”: Establishing Privilege and Work Product in an Investigation (Mar. 23, 2017); Minimizing Cooperation Risks (Mar. 30, 2017); and Implications for Collateral Litigation (Apr. 6, 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).

ESMA Requires Enhanced Supervisory Role and Tools for Harmonizing E.U. and Third-Country Regulations

Part of the mandate for the European Securities and Markets Authority (ESMA) is to achieve harmony across the myriad regulatory regimes of E.U. member states and ensure that cross-border transactions and services run smoothly. To perform this task, ESMA needs the tools and authority to ensure that data and reporting meet certain standards and that no individual country adopts practices and policies radically out of line with E.U. best practices. In the meantime, yet another E.U. regulatory scheme is set to be implemented in January 2018, and there is turmoil amidst E.U.-wide efforts to onboard all or part of investment funds and managers from the U.K. following Brexit. For additional Brexit coverage, see “Dechert Partners Discuss How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect” (Apr. 6, 2017). All these topics were addressed in a recent speech by ESMA chair Steven Maijoor. This article summarizes the key points from Maijoor’s address. For analysis of other speeches by Maijoor, see “ESMA Chair Calls for Stronger Supervisory Tools to Achieve Capital Markets Union” (Apr. 20, 2017); and “ESMA Chair Outlines Rulemaking Authority and Implementation of MiFID II” (Jul. 14, 2016).

Mayer Brown Hires Nicolette Kost De Sevres in Washington, D.C.

Nicolette Kost De Sevres has joined Mayer Brown as a partner based in Washington, D.C. Kost De Sevres has expertise in a vast range of domestic and international regulatory compliance issues, specializing in securities laws, the Markets in Financial Instruments Directive, Basel III, the Dodd-Frank Act and anti-money laundering statutes. For additional insights from Mayer Brown attorneys, see our three-part series on 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).