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    Dec. 21, 2011

RCA Asset Management Thought Leadership Symposium Highlights Regulators’ Examination and Enforcement Priorities, the New SEC Examination Paradigm and Liability Concerns for CCOs and General Counsels

On November 10, 2011, the Regulatory Compliance Association held its Annual Fall Asset Management Thought Leadership Symposium (RCA Symposium) in New York City.  Panelists repeatedly emphasized the trend towards increased regulatory scrutiny of hedge fund managers.  The SEC’s Division of Enforcement (Enforcement Division) anecdotally confirmed this sentiment the day before the RCA Symposium when it announced that it had filed a record 735 enforcement actions against a variety of market professionals during fiscal year 2011.  Through these actions, the SEC has demonstrated its willingness to hold not only firms liable for their compliance failures, but also those individuals that provided inadequate oversight of their firms’ compliance programs.  See “Three Recent SEC Orders Demonstrate a Renewed Emphasis on Investment Adviser Compliance Policies and Procedures by the Enforcement Division,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  Speakers at the RCA Symposium addressed numerous topics, including: examination and enforcement priorities for the SEC and the NFA; the different types of SEC and NFA examinations; recent examination experiences and advice on preparing for examinations; the reality of CCO and GC liability for compliance failures; and the need for operational changes in light of new regulations impacting hedge fund managers.  This article summarizes key points discussed during the RCA Symposium on each of the foregoing topics.

How May Hedge Fund Managers Resuscitate Expired Cayman Islands Limited Duration Exempted Limited Partnership Hedge Funds?

Many hedge funds established as Cayman Islands exempted limited partnerships expressly provide, in their partnership agreements, a fixed term for the duration of the exempted limited partnership or a termination date upon the occurrence of a specified event.  The duration of the partnership term or the specific termination events are a matter of agreement between the partners, and such matters may, upon such terms as may be provided by the partnership agreement, be varied by agreement between the partners during the term of the exempted limited partnership.  Hedge fund managers and general partners should carefully monitor a hedge fund’s termination dates or events because once expired, resurrecting the expired exempted limited partnership will be problematic.  What if the fixed term expires by the lapse of time or the occurrence of a termination event and the partners nevertheless wish their hedge funds to continue operating?  This situation may come about by oversight of the hedge fund manager or the partners in failing to heed the impending termination date or termination event or a change of heart by the hedge fund manager and the partners, after the termination date has passed or the termination event has occurred.  Is it then open to the partners effectively to agree to resurrect and continue their expired limited partnership or must they, in any event, complete the winding up and dissolution of their exempted limited partnership and then form a new partnership with all the time, expense, inconvenience and negative tax and other consequences that this may entail?  In a guest article, Christopher Russell and Oliver Payne, partner and associate, respectively, at Ogier, Cayman Islands, first discuss the Cayman Islands regulations that relate to limited duration exempted limited partnerships.  The authors then highlight a potential course of action to extend the life of the exempted limited partnership where the partnership term has expired or a termination event has occurred.

Compensation Survey by Greenwich Associates and Johnson Associates Highlights Trends in Compensation and Best Practices for Hedge Fund Managers and Other Investment Professionals

In November 2011, Greenwich Associates, an international research-based consulting firm in institutional financial services, and Johnson Associates, a boutique compensation consulting firm specializing in financial services, published their U.S. Asset Management 2011 Compensation Report (Report).  The Report projects compensation levels and trends for hedge fund professionals and other investment professionals for 2011.  The projections are based on historical data gleaned from more than 1,000 interviews with financial professionals in fixed-income and equity investor groups at hedge funds, mutual funds, investment management firms, insurance companies, banks, government agencies and pensions and endowments.  The Report dissects and compares historical compensation data for 2009 and 2010 from various perspectives.  (For another discussion of compensation levels and trends in 2009, see “Infovest21’s Annual Hedge Fund Manager Compensation Survey Reveals Top Paid Manager Positions and Top Factors Affecting Performance,” Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009).)  First, the Report highlights differences in compensation levels among fixed-income and equity investment professionals.  It then contrasts compensation levels for hedge fund professionals versus their counterparts at traditional asset management firms.  It then discusses trends in performance-based compensation and deferrals of compensation.  The Report also reveals trends in compensation for sales professionals and outlines best practices for structuring compensation of sales professionals.  For more on compensation of sales professionals, see “Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation,” Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).  This article discusses the data and analysis contained in the Report and outlines the Report’s projections for 2011 compensation levels.

U.S. Court of Appeals Finds That a Private Fund Manager and One of its Portfolio Companies May Constitute a Single Employer with Regard to Liability for Unfair Labor Practices

During the relevant period, investment manager Oaktree Capital Management, L.P. (Oaktree) indirectly owned TBR Property, L.L.C. (TBR), which operates the Hawaiian resort property known as the Turtle Bay Resort (Resort).  The collective bargaining agreement covering certain of the Resort’s employees expired in November 2003.  While a new contract was being negotiated, TBR and its third party resort manager barred certain union representatives from the Resort and refused to collect union dues from the employees.  As a result, the National Labor Relations Board (NLRB) brought unfair labor practice charges against Oaktree, TBR and the manager.  An administrative law judge found all three defendants liable, holding that Oaktree and TBR constituted a “single employer” and that, as a result, Oaktree was jointly and severally liable for the violations.  A panel of the NLRB upheld the administrative law judge’s decision.  An appeal was taken to the U.S. Court of Appeals for the Fifth Circuit.  We summarize the Court’s decision and reasoning, and highlight the criteria the NLRB used in making its determination.  The decision is relevant to hedge fund managers following control-oriented, private equity style strategies.

Deloitte’s Fourth Annual Fund Administration Survey Identifies the Challenges Facing the Hedge Fund Administration Business

Hedge fund managers are looking to fund administrators to provide a growing variety of administrative, accounting, custodial and asset confirmation services.  See “Application to Hedge Fund Managers of the Internal Control Report Requirement of the Amended Custody Rule,” Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).  The evolving hedge fund industry, changing regulatory landscape and heightened investor demands for greater and more timely information reporting have ratcheted up expectations for fund administrators, and fund administrators are striving to meet these heightened expectations.  See “Hedge Fund Administration Faces a ‘Perfect Storm’: An Interview with Confluence Technologies Senior Market Analyst Scott Powell,” Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009).  Recently, Deloitte LLP (Deloitte) published a report in which 70 third party fund administrators from 11 countries were surveyed on the biggest challenges they face (Deloitte Survey).  As indicated by fund administrator respondents, the biggest challenges fall into several general categories: regulatory changes; cost containment; implementation of streamlined processes and new technology; and pressure on fees.  This article discusses the findings from the Deloitte Survey.  The survey findings can, among other things, help hedge fund managers select administrators, enable administrators to better focus their resources and assist investors in performing due diligence on administrators.  See “Legal, Operational and Risk Considerations for Institutional Investors When Performing Due Diligence on Hedge Fund Service Providers,” Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010).

Touradji Capital Settlement Suggests That Having Employee Training on Rule 105 under Regulation M Without Policies to Prevent Violations Will Not Insulate a Firm From SEC Enforcement

On December 9, 2011, hedge fund manager Touradji Capital Management, L.P. (Touradji) and the SEC entered into a settlement whereby Touradji consented to an SEC order finding that it violated Rule 105 under Regulation M and imposing remedial sanctions, including disgorgement and civil monetary penalties.  Rule 105 under Regulation M generally prohibits a person from purchasing an issuer’s equity securities in a public offering from an underwriter or broker-dealer participating in the offering if the person has sold short the securities that are the subject of the offering during the five-day period preceding the offering.  The Touradji settlement is the latest in a line of settlements involving hedge fund managers that were found by the SEC to have violated Rule 105 under Regulation M.  For a discussion of other such actions, see “Brookside Settlement Suggests That in Calculating Disgorgement Based on a Rule 105 Violation, the SEC Will Look to the Number of Shares Purchased in a Secondary Offering Rather Than the Number of Shares Sold Short Prior to the Offering,” Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011); “Terms of Gartmore Settlement with SEC Suggest that in Calculating Disgorgement for Reg M Violations, SEC Will Use a First-In, First-Out Approach,” Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010).

Linda C. Goldstein Joins Dechert as Partner in New York

On December 19, 2011, Dechert LLP announced that Linda C. Goldstein joined the firm as a partner in its White Collar and Securities Litigation practice.  She will be resident in the firm’s New York office.  Goldstein was most recently a partner at Covington & Burling LLP and a co-chair of its Securities/Derivatives Litigation & Enforcement practice.

Michael Garrity Named Head of Examination Program in SEC’s Boston Regional Office

On December 19, 2011, the Securities and Exchange Commission announced the appointment of Michael E. Garrity to lead the examination program in its Boston Regional Office.  See “Legal and Practical Considerations in Connection with Mock Examinations of Hedge Fund Managers,” Hedge Fund Law Report, Vol. 4, No. 26 (Aug. 4, 2011).

The Hedge Fund Law Report Will Not Publish an Issue Next Week and Will Resume Its Regular Publication Schedule the Following Week

Please note that the Hedge Fund Law Report will not publish an issue next week, the week starting December 26, 2011, and will resume its regular publication schedule the following week, the week starting January 2, 2012.

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