Oct. 6, 2011

How Can Hedge Fund Managers Participate in the Political Process without Violating Pay to Play Regulations at the Federal, State, Municipal or Fund Level?

As the campaign season heats up, hedge fund managers who wish to engage in the political process are confronted with a conundrum.  On one hand, the Securities and Exchange Commission (SEC) and individual states, municipalities and public pension funds have enacted a variety of pay-to-play regulations designed to limit political involvement by investment advisers who manage money on behalf of public pension funds.  The penalties for even a minor violation of these rules can be severe.  On the other hand, last year’s Supreme Court decision in Citizens United v. Federal Election Commission reaffirmed the right of corporations, unions and individuals to make independent expenditures in connection with federal elections as protected free speech under the First Amendment.  The result is a confusing duality where political “contributions” may be regulated on pay-to-play grounds yet independent “expenditures” are permitted as free speech.  Adding to the complexity is the variety of entities and organizations that now engage in the political process.  These entities may allow donors to participate in the political process more efficiently and effectively.  However, the variety of organizations creates challenges when combined with complex, broadly drafted statutes in overlapping jurisdictions.  Moreover, several entities may contribute money to candidates and parties at multiple levels of government, increasing the risk of an inadvertent violation of pay-to-play statutes.  In a guest article, Scott E. Gluck, Of Counsel at Venable LLP, brings much-needed clarity to the complex issue of pay-to-play compliance by hedge fund managers.  Gluck starts with a review of the SEC’s pay-to-play rule, then continues with a detailed discussion of specific policies, procedures, practices and precautions that hedge fund managers should undertake to avoid pay-to-play or similar violations.

WaMu Bankruptcy Judge Allows Equity Committee’s Action for Equitable Disallowance of Hedge Fund Noteholders’ Claims to Proceed on the Ground that Equity Committee Stated a “Colorable Claim” that those Noteholders Engaged in Insider Trading

In a shot across the bow of investors who trade in the debt of bankrupt companies, a U.S. bankruptcy court has held that the Equity Committee of Washington Mutual, Inc. (WaMu) has stated a “colorable claim” that four hedge funds that held WaMu debt and participated in bankruptcy settlement negotiations engaged in insider trading when they traded WaMu’s debt.  Hedge funds Appaloosa Management, L.P., Aurelius Capital Management LP, Centerbridge Partners, LP, and Owl Creek Asset Management, L.P. (together, Noteholders), acquired enough WaMu debt that they were in a position to block approval of portions of WaMu’s plan of reorganization.  As a result, they were allowed to participate in negotiations among the various stakeholders in the bankruptcy.  WaMu’s Equity Committee alleged that the Noteholders had engaged in insider trading using information they received during settlement negotiations and that, as a result, their claims should be equitably disallowed.  In a wide-ranging decision denying confirmation of WaMu’s sixth amended reorganization plan, the Court ruled that the Equity Committee had alleged a colorable claim of insider trading by the Noteholders that could support equitable disallowance of their claims.  This article provides a feature length synopsis of the facts that gave rise to the insider trading charges, and the Court’s reasoning.

Federal Court Holds That Hedge Fund Marketing and Brokering Hedge Fund Management Company Transactions Are Different Services for Contracting and Compensation Purposes

The Hedge Fund Law Report previously has reported on a case (which is not the only case of its kind) standing for the incontrovertible proposition that it is preferable for ethical actors to enter into written, as opposed to exclusively oral, hedge fund marketing agreements.  See “Pair of District Court Opinions Illustrates the Difficulty of Enforcing a Purported Oral Agreement Between a Third-Party Marketer and a Hedge Fund Manager,” Hedge Fund Law Report, Vol. 3, No. 49 (Dec. 17, 2010).  A recent federal district court decision refines the analysis by emphasizing the importance of identifying the contemplated services in the relevant written agreement with as much specificity as possible.  Specifically, the decision indicates that hedge fund marketing – efforts to get people or entities to invest in hedge funds – and brokering transactions between hedge fund management companies are two different categories of services.  See “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).  The same person or entity may do both, but a person or entity that retains another person to perform one of these categories of services does not necessarily retain that person to perform the other category of service.

How Much Information Can a Hedge Fund Manager Include On a Public Website?

On September 22, 2011, the Massachusetts Supreme Court issued an important decision dealing with how much information hedge fund managers may include on their public websites.  The answer seeks to balance the right on the part of individuals and entities to free speech with the right on the part of government to limit commercial speech.  The decision is important to hedge fund managers because the Internet is becoming a more central channel of hedge fund marketing.  Conveying the right amount of information in the right way can enhance marketing, but saying too much or saying it in the wrong way can lead to liability.  This decision helps establish parameters.  Our article provides an extensive analysis of the decision, the factual background and prior relevant decisions.

FINforums’ Annual Hedge Fund Summit Focuses on Operations, Marketing and Hedge Fund Strategies in Non-Hedge Fund Structures

On September 14, 2011, FINforums held its Annual Hedge Fund Summit.  Participants at the summit discussed hedge fund service providers; outsourcing; business continuity and disaster recovery plans; five important points with respect to hedge fund marketing; five specific steps to be taken by hedge fund managers seeking seed capital; and the evolution of hedge fund strategies in non-hedge fund structures, including managed accounts, investable hedge fund indices, hedge fund-like mutual funds and UCITS.  This article summarizes the key points made by presenters at the Summit.

Eight Corporate Governance Steps That Hedge Fund Managers Should Consider in Response to Concerns Expressed by Institutional Investors

Fund governance provider Carne Global Financial Services (Carne) recently released a research paper entitled “Corporate Governance in Hedge Funds: Investor Survey 2011” (Report).  The Report is a summary of the results of Carne’s survey (Survey) of institutional hedge fund allocators with respect to the issue of hedge fund corporate governance.  Overall, the Report demonstrates a desire among investors for higher corporate governance standards at hedge funds.  The Report attributes this desire to three major factors: (1) anxiety stemming from the financial crisis that began in 2008; (2) the recent decision in Weavering Macro Fixed Income Fund Limited v. Stefan and Hans Ekstrom; and (3) a push by regulators and others to crack down on hedge funds in order to improve their public image.  See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  Hedge fund managers can look to the Survey results as a barometer of investor sentiment and as a tool for benchmarking the sufficiency of the governance of their own funds.  See also “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors,” Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011).  This article summarizes the most important results of the Report including: the level of importance allocators place on corporate governance; allocators’ current satisfaction with corporate governance standards at hedge funds; areas of corporate governance that allocators believe require the most improvement; allocators’ preferences for board composition and oversight; and the degree of allocator concern about directors’ conflicts of interest.  The article concludes with a suggested list of eight corporate governance action points for hedge fund managers.

South Korea Permits Domestic Hedge Funds to Use More Leverage and to Increase Investments in Derivatives

On July 27, 2011, the Financial Services Commission (FSC) of South Korea – South Korea’s SEC – made legislative notice of its proposal to revise the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA).  The intent of the proposal is to enhance the speed and depth of development of South Korea’s domestic hedge fund market.  To do so, the proposal generally relaxes South Korean securities regulation with respect to who may invest in hedge funds, leverage and asset restrictions, who may manage hedge funds and the activities that prime brokers may undertake.  At the same time, the proposal also contemplates enhanced supervision and surveillance of South Korean hedge fund managers by the FSC, and enhanced reporting to the FSC by hedge fund managers.  On September 27, 2011, South Korea’s cabinet approved the proposal.  This article outlines the proposed revisions of the FSCMA based on available documents and correspondence between the South Korea FSC and the Hedge Fund Law Report.

Haynes and Boone Expands its Hedge Fund Practice in New York

On October 3, 2011, Haynes and Boone, LLP announced that it added two partners, George Wang and Nir Yarden, in its New York office, as part of its strategic expansion of its corporate and capital markets practices.  The combined practices of Wang and Yarden are focused on servicing the corporate and financing needs of private equity and hedge funds, prime brokers and other institutional capital market clients.

DLA Piper Appoints Troy Doyle to Lead its Restructuring & Distressed Investment Team in Asia

On October 6, 2011, DLA Piper announced the appointment of Troy Doyle as a partner in its Singapore office to lead the firm’s restructuring and distressed investment team in Asia.  Doyle is experienced in advising investment banks, private equity firms, hedge funds, insolvency practitioners and corporations on distressed situations throughout Australia, Singapore, Thailand, India, Indonesia, Philippines and China.  For an analysis of FCPA considerations in connection with engaging advisors for investments in and around non-U.S. bankruptcies, see “Practical Considerations for Compliance by Hedge Fund Managers with the FCPA When Evaluating and Engaging Foreign Advisors in Connection with Foreign Bankruptcy Investments,” Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).

Dechert Adds Vivian A. Maese as Head of Its Global Outsourcing and Offshoring Practice

On October 4, 2011, Dechert announced the addition of Vivian A. Maese as a partner in the firm’s Intellectual Property Practice, and head of its global Outsourcing and Offshoring Practice.  See “Primary Legal and Practical Considerations for Hedge Fund Managers Looking to Outsource Their Operational Functions,” Hedge Fund Law Report, Vol. 4, No. 33 (Sep. 22, 2011).