Apr. 12, 2012

What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed?  (Part One of Three)

Mobile devices, such as smartphones and tablet computers, have significantly enhanced the ability of hedge fund managers and their personnel to conduct business more effectively and efficiently by, among other things, facilitating performance of job functions outside of the office.  However, such productivity gains come at a cost.  The ability to remotely access firm networks and information via mobile devices magnifies the risk of losing some control over access to firm information and firm systems.  Such loss of control can, in turn, create additional perils, most notably, security concerns for hedge fund managers who closely guard any informational advantage they have over competitors.  Additionally, such loss of control over access may heighten risks that a firm’s network is compromised, which can cause significant damage to a firm’s operations.  As such, it is imperative for hedge fund managers to keep up with the ever-growing risks that arise from the rapidly evolving mobile device technology landscape and to adopt policies and solutions designed to minimize the loss of control over access to firm information and systems.  This is the first article in a three-part series designed to address the concerns raised by mobile devices and to outline policies and procedures as well as technology solutions that can help hedge fund managers mitigate the risks posed by the use of mobile devices.  This first article provides an overview of the use of mobile devices and how hedge fund managers have historically addressed the use of mobile devices.  In particular, this article surveys the various risks for hedge fund managers raised by mobile devices, including security risks, risks related to unauthorized trading and risks related to the downloading of malware and viruses.  This article also addresses concerns relating to retention and archiving of books and records, and advertising and communications.  The second and third installments in this three-part series will discuss principles and detail best practices for establishing mobile device policies and procedures as well as specific mobile device solutions and technologies designed to address the risks catalogued in this article.

Key Legal and Business Considerations for Hedge Fund Managers in Drafting and Negotiating Confidentiality Agreements (Part One of Three)

Hedge fund managers frequently have occasion to enter into confidentiality agreements or nondisclosure agreements (collectively, NDAs).  For example, distressed debt hedge fund managers often enter into NDAs before obtaining borrower financial statements and sales projections; managers that take control positions in companies often enter into NDAs before taking a “deep dive” into target company data; and managers that invest in real estate often enter into NDAs before obtaining tenant, property and related information.  These are just three of the many instances in which NDAs come into play in day-to-day investment analysis by hedge fund managers.  NDAs are ubiquitous, but typically receive surprisingly little attention from investment and even legal staff at managers.  NDAs are viewed as a bothersome chore – a box to be checked – rather than a fundamental aspect of the investment process.  But that view is dangerously mistaken.  NDAs can have powerful legal and practical consequences.  Drafting or monitoring missteps can, among other things, significantly constrain the ways in which information can be used, can put a manager at risk of insider trading violations and can limit investment exit opportunities.  This article seeks to shed light on the NDA process, a critical but underappreciated aspect of the hedge fund business.  It is the first in a three-part series being published in Hedge Fund Law Report by William G. Frenkel and Michael Y. Sukhman, principals at the law firm Frenkel Sukhman LLP.  Specifically, this article starts by identifying six discrete rationales for the importance of NDAs in the hedge fund context, then goes on to discuss: the “market” for duration provisions; events that trigger expiration of confidentiality obligations; four key elements of the definition of confidential information; and four typical carve-outs from the definition of confidential information.  The second article in this series will discuss: the scope of permitted disclosure of confidential information; return and destruction of documents; and required disclosure.  And the third article in this series will discuss remedies, damages and liability, and non-confidentiality restrictions in NDAs.

SEC Provides Limited Relief to Newly Registered Hedge Fund Managers With Respect to the Inclusion of Mandated Provisions in Their Advisory Contracts

On April 5, 2012, the U.S. Securities and Exchange Commission (SEC) granted newly registered investment advisers, including hedge fund managers, limited relief from the requirement in Sections 205(a)(2) and 205(a)(3) of the Investment Advisers Act of 1940 to include certain contractual provisions in their existing advisory contracts with clients.  This article describes the relief granted, the conditions under which such relief is made available and recommendations for hedge fund managers seeking to claim such relief.

Recent New York Court Decision Suggests That Hedge Funds Have a Due Diligence Obligation When Entering into Credit Default Swaps

Domestic and foreign regulators have historically afforded differing levels of protection to retail investors as opposed to sophisticated investors, such as hedge funds, based on their presumptively differing levels of financial knowledge and abilities to conduct due diligence on prospective investments.  Sophisticated investors have been permitted to invest in more complicated financial products based on their presumed ability to understand and conduct due diligence on such investments.  However, the flip side of enhanced access is diminished investor protection, as evidenced by a recent court decision holding that sophisticated investors have a duty to investigate publicly available information in arms-length transactions.

Brockton Retirement Board Files Class Action Lawsuit Against Oppenheimer Fund of Private Equity Funds and Executive Officers for Allegedly False Claims Relating to Fund Performance and Investment Valuations Contained in Fund Marketing Materials

The Jumpstart Our Business Startups Act may portend good news for hedge funds that seek to raise capital from investors.  However, hedge fund managers should approach their investor solicitation efforts with caution, particularly in light of the increasing scrutiny from both regulators and investors with respect to fund performance and valuation.  A recent example of this scrutiny is a class action lawsuit initiated on March 26, 2012 by a Massachusetts retirement fund, Brockton Retirement Board (Brockton), against a private equity fund of funds manager and related entities.  The Complaint generally alleges that the Defendants made false and misleading statements in marketing materials.  This article summarizes the factual allegations in the Complaint, the causes of action and the remedies sought by Brockton.  For a similar story of alleged failure by a fund of funds manager to perform claimed due diligence, see “Federal Court Decision Holds That a Fund of Funds Investor May Sue a Fund of Funds Manager That Fails to Perform Specific Due Diligence Actions Promised in Writing and Orally,” Hedge Fund Law Report, Vol. 4, No. 27 (Aug. 12, 2011).

IOSCO Announces Intention to Conduct Annual Surveys of Hedge Fund Managers Based on Updated Systemic Risk Data Categories

On March 22, 2012, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published an updated list of categories of data to be used in connection with annual surveys of hedge fund managers by IOSCO’s Task Force on Unregulated Financial Entities.  IOSCO conducted its first hedge fund survey in September 2010, soliciting information in categories publicly identified in February 2010.  See “Does the IOSCO Hedge Fund Disclosure Template Foreshadow the Content of Hedge Fund and Hedge Fund Adviser Disclosures to be Required by the SEC?,” Hedge Fund Law Report, Vol. 3, No. 15 (Apr. 16, 2010).  IOSCO intends to conduct its second hedge fund survey in September 2012, and to conduct such surveys annually thereafter, each September.  The September 2012 hedge fund survey will solicit information from hedge fund managers in at least the updated data categories.  According to a press release, those categories incorporate “lessons learned [since February 2010] and recent legislative developments in the U.S. and Europe.”  The stated purpose of the annual surveys is to “enable the collection of internationally consistent data which can be shared to facilitate international supervisory cooperation.”  This article describes the ten categories of information in which IOSCO will solicit information, discusses the context and limits of the annual surveys and highlights questions raised by IOSCO’s announcement to conduct annual surveys.

Perkins Coie Adds High Profile Hedge Fund SEC Enforcement Partner in New York

On March 12, 2012, Perkins Coie announced that Keith Miller has joined the firm as a Partner in the Investigations & White Collar Defense practice in New York and will serve as Head of the SEC Enforcement practice.  He joins the firm from Paul Hastings and is a former SEC enforcement attorney.  During Miller’s Paul Hastings tenure, the HFLR reported on a seminar at which he presented.  See “Paul Hastings Hosts Program on Securities Litigation and Enforcement in Light of New SEC Initiatives to Enhance Enforcement Efforts and Encourage Witness Cooperation,” Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).

SkyBridge Capital Bolsters Fund of Hedge Fund Product Portfolio with Broader Platform Distribution and Expanded Sales Team

On April 12, 2012, alternative investment firm SkyBridge Capital announced the continued expansion of its global distribution footprint with the addition of five new members to its sales team and new partnerships with major distribution platforms.  For insight from Anthony Scaramucci, Managing Partner at SkyBridge Capital, see “How to Structure Exit Provisions in Hedge Fund Seeding Arrangements,” Hedge Fund Law Report, Vol. 3, No. 40 (Oct. 15, 2010).