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    May 13, 2011

Impact of the Foreign Private Adviser Exemption and the Private Fund Adviser Exemption on the U.S. Activities of Non-U.S. Hedge Fund Managers

Passage of the Dodd-Frank Act and relevant SEC rulemaking has changed the regulatory landscape for non-U.S. hedge fund managers that have or plan to establish an advisory presence in the U.S. or that have or plan to target U.S. investors.  Generally – and despite references to “international comity” in one of the relevant proposed rule releases – the Dodd-Frank Act has increased the regulatory burden on non-U.S. hedge fund managers wishing to access the U.S. market.  Or, put another way, Dodd-Frank has narrowed considerably the range of conduct in which non-U.S. managers may engage without getting caught in the purview of U.S. investment adviser registration, or many of its substantive burdens.  This article provides detailed synopses of the relevant provisions of the foreign private adviser exemption and the private fund adviser exemption, focusing in particular on: rules relating to counting clients and investors; measuring “regulatory assets under management”; definitions of “place of business,” “in the United States” and other relevant terms; and recordkeeping and reporting obligations and examination exposure of “exempt reporting advisers.”  This article concludes by discussing how the exemptions may impact U.S. activities typically engaged in by non-U.S. hedge fund managers, such as marketing to U.S. tax-exempt entities and sourcing U.S. investment opportunities.

What Is the Legal Effect of a Side Letter That Contains Specific Terms More Favorable Than a Hedge Fund’s General Offering Documentation?

A question that has arisen in the current climate of hedge fund investor caution in the approach to the terms of investment, and managers being more ready to negotiate the offering terms, is: What is the legal effect of side letters entered into between an investor and the fund (usually through the investment manager) following negotiations as to the terms of a specific investment, which provide for terms more favorable than those offered generally by the fund’s offering documentation?  In a guest article, Christopher Russell and Rachael Reynolds, Partner and Managing Associate, respectively, at Ogier in the Cayman Islands, provide a detailed answer to this question, including a discussion of four principles that should be borne in mind when preparing a side letter to ensure that the letter has legal and binding effect.

New York Appellate Division Dismisses Investors’ Complaint Against Corey Ribotsky and Hedge Fund AJW Qualified Partners, Holding that Fund’s Decision to Suspend Redemptions Did Not Constitute a Breach of the Fund’s Operating Agreement or a Breach of Fiduciary Duty

Plaintiffs are Steven Mizel and his limited partnership which invested, in the aggregate, about $1.6 million with hedge fund AJW Qualified Partners, LLC (Fund).  During the market turmoil of late 2008, plaintiffs sought to redeem their investments in the Fund.  In response to a wave of redemption requests, in October 2008, the Fund froze all redemptions and sought to reorganize.  Plaintiffs brought suit, alleging anticipatory breach of contract by the Fund and breaches of fiduciary duty by the Fund’s manager and its principal, Corey Ribotsky.  The trial court denied the defendants’ motion to dismiss.  The Appellate Division reversed and dismissed the plaintiffs’ complaint in its entirety, holding that the suspension of redemptions was permitted by the Fund’s operating agreement.  We summarize the decision.

Amendments to Bankruptcy Rule 2019 Recently Approved by the U.S. Supreme Court Add Disclosure Requirements While Protecting Distressed Debt Funds’ Proprietary Trading Strategies

The success or failure of a distressed debt investment strategy depends, in part, on the ability of a bankruptcy investor to prevent other investors in the same bankruptcy from obtaining information on its purchase and sale activity.  Rule 2019 of the Federal Rules of Bankruptcy Procedure has threatened to undermine the confidentiality of bankruptcy trading information.  At least some courts in the past two years have construed Rule 2019 to require bankruptcy investors to disclose the value of claims, the timing of purchase, amount paid and the fact of sales.  On April 26, 2011, the U.S. Supreme Court adopted amendments to Rule 2019.  This article details: relevant case law leading up to passage of the amendments; prior HFLR coverage of the extensive disagreement among courts regarding the level of disclosure required under the prior version of the rule; the key differences between the current version of Rule 2019 and the proposed amendment (Amended Rule 2019); the key definitions in Amended Rule 2019; what information must be disclosed under Amended Rule 2019; who must disclose it; and a new rule relating to identification of a chapter 15 debtor’s “center of main interests.”  For more on Rule 2019, see “Would the Expanded Disclosures Required by Proposed Amendments to Federal Rule of Bankruptcy Procedure 2019 Deter Hedge Funds from Investing in Distressed Debt? (Part Three of Three),” Vol. 2, No. 39 (Oct. 1, 2009); “How Can Hedge Funds that Invest in Distressed Debt Keep Their Strategies and Positions Confidential in Light of the Disclosures Required by Federal Rule of Bankruptcy Procedure 2019(a)? (Part Two of Three),” Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009); “How Can Hedge Funds that Invest in Distressed Debt Keep their Strategies and Positions Confidential in Light of the Disclosures Required by Federal Rule of Bankruptcy Procedure 2019(a)?,” Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009).

Two Recent Statements from SEC Chairman Mary Schapiro Suggest That Hedge Fund Adviser Registration and Compliance Date Will Be Extended Until the First Quarter of 2012

In a letter dated April 8, 2011 to the President of the North American Securities Administrators Association, Robert Plaze, Associate Director of the SEC’s Division of Investment Management (Division), indicated that the Division expects “that the Commission will consider extending the date by which [covered hedge fund advisers] must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”  See “SEC Anticipates Extension of Compliance Dates for Hedge Fund Adviser Registration and Mid-Sized Adviser Deregistration,” Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011).  While the Plaze letter did not constitute formal SEC action, two recent statements from SEC Chairman Mary Schapiro indicate an increased likelihood of formal action delaying the date by which hedge fund advisers must register and comply with the obligations of registered investment advisers.

Former SEC General Counsel David M. Becker Rejoins Cleary Gottlieb

David M. Becker, the former top lawyer at the U.S. Securities and Exchange Commission, is returning to his prior job as Partner at Cleary Gottlieb Steen & Hamilton, LLP according to an announcement by the firm on May 9, 2011.  See “Mark Cahn Named SEC General Counsel,” Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011); “Certain Madoff Investors May Find Themselves in an Unusual Dual Role – As Potential Lawsuit Plaintiffs or SIPA Claimants, but also as Potential Clawback Defendants,” Hedge Fund Law Report, Vol. 2, No. 9 (Mar. 4, 2009).

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