Aug. 1, 2019

Best Practices for Hedge Fund Managers to Mitigate the Conflicts Arising From Managed Accounts: Dealing With Trade and Expense Allocations (Part Three of Three)

While most fund managers with more than one client account maintain trade and expense allocation policies and procedures, the overlap in investment strategies of client accounts can often lead to acute conflicts of interest when making allocation decisions. This three-part series examines why the management of both a commingled fund and a managed account with the same – or similar – investment strategy presents conflicts of interest for a fund manager. This third article reviews the trade and expense allocation risks that can arise when investment managers make allocation decisions between a commingled fund and managed account client with the same or overlapping investment strategy and suggests several best practices for managing those conflicts. The first article explored the increased use of separately managed accounts by institutional investors; ways that separately managed accounts differ from single investor funds; and the general conflicts of interest that can arise for an investment manager when managing multiple client accounts. The second article analyzed how the enhanced transparency and liquidity rights typically retained by separately managed account clients, when compared to investors in the commingled fund, give rise to conflicts of interest for an investment manager and suggested several best practices for managing those conflicts of interest. See “Eight Bad Excuses Fund Managers Have Raised Trying to Avoid SEC Sanctions for Fee and Expense Allocation Violations and Undisclosed Conflicts of Interest” (Oct. 13, 2016); and our three-part series on fee and expense allocation practices: “Practices Fund Managers Should Avoid” (Aug. 25, 2016); “Flawed Disclosures to Avoid” (Sep. 8, 2016); and “Preventing and Remedying Improper Allocations” (Sep. 15, 2016).

Seasoned Hedge Fund Lawyer and Industry Executive Discusses the Evolution of Laws Governing Private Fund Managers

The laws affecting the hedge fund industry have seen numerous changes and mileposts over the past few decades. In order to gain insight into how the laws have evolved, the Hedge Fund Law Report interviewed Terrance O’Malley about the more significant legal developments. O’Malley has played a role in and chronicled many of these developments over the course of his 25 years in the business as a regulator, outside counsel, chief compliance officer, general counsel and hedge fund executive. He is known to many readers as the co‑author of the “Investment Adviser’s Legal and Compliance Guide,” the third edition of which will be released this summer – 15 years after its first publication. For additional insight from O’Malley, see “The SEC’s Proposed Custody Rule Changes: An Analysis of the Impact on Hedge Fund Managers” (Jun. 24, 2009).

Disenfranchisement Provisions in Debt Instruments: A Practical Guide for Hedge Funds

Provisions disenfranchising lenders of record who hold net short positions – most commonly through the acquisition of credit default swap protection on the relevant borrower’s debt – have recently started to emerge in several U.S. credit agreements. This development is presumably a defensive response of borrowers to increased net short hedge fund investor activism in light of the widely publicized dispute between Windstream Holdings, Inc. and Aurelius Capital Management, LP. Borrowers do not want investors who hold large net short positions to exercise, or refrain from exercising, any voting rights that they may have as lenders – including in relation to a highly technical default that is unrelated to the creditworthiness of the borrower – with the goal of realizing profits on their net short positions. There is every reason to believe that this trend will continue as this new drafting technology becomes widely disseminated. In a guest article, Jerome Ranawake and Brian Rance, partners at Freshfields Bruckhaus Deringer, analyze disenfranchisement provisions, the impact they can have on lenders with net short provisions and ways these provisions may impact a hedge fund’s trading strategy. The article also contains a sample disenfranchisement provision for review. For additional commentary from another Freshfields partner, see “ECHR Decision Imposes New Criteria for Email Monitoring Practices on Fund Managers With European Operations” (Sep. 28, 2017). For more on credit agreements, see “What the LSTA’s Revised Delayed Compensation Requirements Mean for Loans Trading on Par/Near Par Documents” (Oct. 27, 2016).

Sadis & Goldberg Program Gets Into the Weeds on Cannabis M&A

A recent program presented by Sadis & Goldberg provided a comprehensive overview of the current state of cannabis regulation and legalization in the U.S., along with the resulting business and legal risks associated with investments in cannabis-related companies. Sadis partner Paul Marino moderated the discussion, which featured Eliott Frank and Robert Cromwell, partner and counsel, respectively, at Sadis; and Michael Feinsod and Hunter Garth, CEO and vice president, respectively, of General Cannabis Corp. This article summarizes the key points from the presentation. See our four-part series on investing in cannabis: “Legal Background, Justice Department Guidance and State Legalization” (May 9, 2019); “Structuring Investments, Due Diligence, Offering Documents and the BSA” (May 16, 2019); “Implications of Federal Illegality and Residency Requirements” (May 30, 2019); and “International Investments, Public Perception, Valuation and Service Providers” (Jun. 6, 2019).

How Fund Managers Can Navigate U.S. and Cayman Islands AML Requirements (Part Two of Two)

A recent Hedge Fund Law Report program delved into best practices for anti-money laundering (AML) compliance by private fund managers. This second article in our two-part series explores common AML controls adopted by fund managers, ways the SEC reviews an adviser’s AML program, day-to-day challenges that fund managers face when implementing their AML controls and best practices when delegating AML responsibilities to a fund administrator. The first article reviewed the current U.S. AML requirements and provided an update on the recently amended Cayman Islands AML regime. The program was moderated by Kara Bingham, Senior Editor of the Hedge Fund Law Report, and featured Sarah Curran, director at Promontory Financial Group; Lucy Frew, partner at Walkers; and Seetha Ramachandran, partner at Proskauer. For a look at AML regulations in the U.K., see “Preparing for Brexit a Key FCA Priority for 2018/2019” (May 31, 2018); and “FCA Fines Deutsche Bank £163 Million for Lax AML Controls, Warns Other Firms to Review AML Procedures” (Feb. 9, 2017).

McDermott Will & Emery Adds David Momborquette to New York Office

McDermott Will & Emery announced the arrival of David Momborquette as a partner in the litigation practice group in the firm’s New York office. Focusing his practice on complex commercial litigation and regulatory matters, Momborquette counsels hedge funds, funds of funds and private equity funds on questions relating to insider trading and market manipulation; SEC examinations; and other securities law issues. For additional commentary from Momborquette, see “Can Hedge Fund Managers Use Whistleblower Hotlines to Help Create and Demonstrate a Culture of Compliance?” (Jul. 23, 2010).