Nov. 23, 2017

Six Essential Articles for European Hedge Fund Managers From the HFLR’s 2017 Archive

In light of the Thanksgiving holiday in the U.S., this issue of the Hedge Fund Law Report features six articles from 2017 addressing legal issues relevant to European hedge fund managers. Next week (the week starting November 27, 2017), the HFLR will resume regular publication, that is, publication of new content focused on regulatory and related considerations applicable to hedge fund managers in the U.S., the U.K. and other jurisdictions.

Best Practices for Fund Managers When Entering Into ISDAs

In the world of hedge funds, trading over-the-counter (OTC) derivatives in the form of swaps has become ubiquitous. Funds trade swaps for a variety of reasons, including to hedge certain risks, take speculative positions, access difficult-to-trade assets or employ synthetic leverage. Some funds prefer to use swaps to gain exposure to the underlying asset class, even when it could be accessed directly, as in the context of equity investing. For swaps that are traded on a bilateral basis, as opposed to on an exchange, most dealers require a fund to execute a variety of complex documents prior to entering into swap transactions. This three-part series assists our readers with understanding the various trading agreements required for a fund to engage in the OTC trading of swaps, certain key negotiated provisions in swap agreements, common amendments requested by dealers and what are currently viewed as “market terms” for certain provisions. The first article provides background on the various agreements that govern swaps, explains how the Dodd-Frank Act has introduced additional complications to the documentation process and offers advice on best practices for negotiating with dealers. The second article reviews the most commonly negotiated events of default and termination events in the trading agreements and offers suggestions for negotiating these provisions. The third article analyzes the key considerations for funds with respect to the collateral arrangements – the delivery of margin to mitigate counterparty risk – between the two parties. For additional insights on swaps regulatory reform, see “How Hedge Fund Managers Can Prepare for the Anticipated ‘End’ of LIBOR” (Aug. 24, 2017); and “Steps Hedge Fund Managers Should Take Now to Ensure Their Swap Trading Continues Uninterrupted When New Regulation Takes Effect March 1, 2017” (Feb. 9, 2017).

MiFID II May Have Significant Ramifications on Research Payments Involving U.S. Managers With Cross-Border Operations

Hedge fund managers using market research that could potentially influence trading and investment decisions must be mindful of potentially dramatic rule changes following the January 2018 implementation date of the revised E.U. Markets in Financial Instruments Directive (commonly referred to as “MiFID II”). Key provisions of MiFID II, such as Articles 23 and 24, set forth strict rules concerning conflicts of interest and the receipt of inducements from third parties in connection with trade execution services. European hedge fund managers and U.S. managers with E.U. affiliates must pay particular attention to this directive in light of the significant impact it will have on their businesses. All these points came across in a panel discussion at Morgan Lewis’ tenth annual Advanced Topics in Hedge Fund Practices Conference: Manager and Investor Perspectives. This article presents the key takeaways from the panel, which featured Morgan Lewis partners Amy Natterson Kroll, Steven W. Stone and William Yonge. For more on MiFID II, see “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” (Nov. 2, 2017); and “MiFID II Will Affect Market Structure, Registration and Soft Dollars for Hedge Funds Trading in Europe” (May 19, 2016).

U.K. Legislation Imposes Criminal Liability on Companies and Partnerships Whose Employees and Other Agents Facilitate Tax Evasion

The previous three years have generally heralded a new approach to combating tax evasion, with a significant international focus on cross-border cooperation and extra-territorial application of tax regimes. The U.K. has been at the forefront of this international action, legislating or proposing a series of new rules and regimes in this area. A particular focus of the U.K. authorities has been to implement legislation designed to change the behavior of individual taxpayers, targeting those directly engaging in tax evasion and individuals who indirectly facilitate or enable it. A new set of rules known as the “failure to prevent the facilitation of tax evasion” rules (UKFP rules) went into effect in the U.K. in September 2017. Designed to prevent tax evasion, the UKFP rules introduce criminal liability for certain companies and partnerships in circumstances where an employee, agent or service provider facilitates the evasion of tax by other persons. In this guest series, Sidley Austin partner Will Smith analyzes the UKFP rules. The first article provides an overview of the UKFP rules. The second article furnishes an in-depth discussion of how the UKFP rules may apply to private fund managers. See also our two-part series “Steps That Alternative Investment Fund Managers Need to Take Today to Comply With the Global Trend Toward Tax Transparency”: Part One (Apr. 7, 2016); and Part Two (Apr. 14, 2016).

ECHR Decision Imposes New Criteria for Email Monitoring Practices on Fund Managers With European Operations

The Grand Chamber of the European Court of Human Rights has sided with an employee who claimed his privacy rights were violated, setting out criteria for national courts to consider when evaluating whether companies, including fund managers, have safeguarded employees’ rights to privacy. In light of this decision, fund managers operating in the 47 jurisdictions that are parties to the European Convention on Human Rights should revisit their policies for monitoring their employees’ communications. This article analyzes the implications of the decision, including how it aligns with other national laws, and presents insights from practitioners with expertise in data privacy. See our three-part series on employee privacy issues relevant to hedge fund managers: “Reconciling Effective Monitoring of Electronic Communications With Employees’ Privacy Rights” (Apr. 4, 2014); “Reconciling Conflicting Sources of Privacy Rights of Employees” (Apr. 11, 2014); and “Six Privacy-Related Topics to Be Covered By Compliance Policies and Procedures” (May 23, 2014).

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

The U.K. triggered Article 50 of the Treaty on the European Union in March 2017, setting in motion a two-year negotiation period over the terms of its departure from the E.U. As a result, 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 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 more on re-domiciliation from the U.K. to the E.U., see “How ESMA’s Opinions on the Relocation of U.K. Financial Market Participants to the E.U. May Affect Fund Managers Post-Brexit” (Nov. 16, 2017). 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).

A Fund Manager’s Guide to Calculating and Reporting Short Sales Under European Regulations

E.U. Regulation 236-2012 (Regulation), in effect since November 1, 2012, imposed reporting obligations on short sellers of E.U. securities and regulated certain aspects of the credit default swap market. Compliance, however, is difficult due to a lack of available guidance on those reporting requirements. To help clarify these obligations for fund managers, a program presented by Advise Technologies (Advise) offered a comprehensive overview of the Regulation, emphasizing the reporting requirements for short-sellers and the calculation of reporting thresholds. Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the program featured Anna Lawry, counsel at Ropes & Gray, and Marye Cherry, E.U. regulatory counsel at Advise. This article summarizes the panelists’ key insights. For more on the Regulation from Lawry and Cherry, see “How Fund Managers Can Navigate and Avoid the Pitfalls of European Short Sale Reporting Obligations” (Dec. 1, 2016). For a review of U.S. short-selling rules, see “Impact of Regulation SHO on the Short Sale Activity of Hedge Fund Managers and Broker-Dealers” (Nov. 10, 2011). For additional insight from Advise, see our two-part series on how non-E.U. hedge fund managers can comply with E.U. private placement regimes: “Registration” (Dec. 3, 2015); and “Reporting” (Dec. 10, 2015).