Apr. 26, 2012

Ten Steps to a Successful Form PF

The Form PF (PF is short for “private funds”) is a new Securities and Exchange Commission reporting form for investment advisers to private funds that have at least $150 million in private fund assets under management.  Comprising 42 pages and divided into 4 sections with corresponding subsections, Form PF may appear daunting at first.  The task of completing and filing the Form also entails categorizations, specific and nuanced reporting requirements and Form-specific calculations, not to mention the fact that improperly completed Forms may be delayed or even rejected.  However, with the proper tools and plan of attack, an adviser will be able to fulfill its reporting requirements and improve its data platform for a host of other reporting and filing requirements.  Form PF necessitates working with large amounts of data.  So, early planning, coordination and organization are essential for success.  In a guest article, Jay Gould, a Partner at Pillsbury Winthrop Shaw Pittman LLP and leader of Pillsbury’s Investment Funds & Investment Management practice team, and Kelli Brown, Director of Private Funds at Data Agent, LLC, describe ten steps that a hedge fund manager should take for successful Form PF completion and filing.

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

For hedge fund managers, mobile devices are pervasive, unavoidable, valuable and dangerous.  Substantially everyone that works at a hedge fund management company has some sort of mobile device – personal or company-issued or both – and those devices are becoming more sophisticated every day.  On the positive side, mobile devices can raze the obstacles created by time and place; they enable employees to be productive on the go or at off hours.  But on the negative side, mobile devices introduce a number of competitive and regulatory challenges for hedge fund managers: they increase the odds that confidential data will leak; they facilitate the knowing or negligent misuse of material nonpublic information; they raise questions with regard to recordkeeping obligations; and so on.  This article is the last in a three-part series intended to help hedge fund managers identify and address – via policies, procedures and technology – the thorniest business and legal questions raised by mobile devices.  The first article in this series highlighted the risks to hedge fund managers posed by mobile devices, including susceptibility of critical information to leakage or theft, unauthorized trading, penetration of systems by malware and viruses and other potential harms.  See “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part One of Three),” Hedge Fund Law Report, Vol. 5, No. 15 (Apr. 12, 2012).  The second article offered concrete suggestions on how hedge fund managers can anticipate and address those risks using policies, procedures and technology solutions.  Specifically, that second article identified three suggested steps that managers should take before crafting their mobile device policies and procedures, and made specific recommendations regarding the content of such policies and procedures.  See “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed? (Part Two of Three),” Hedge Fund Law Report. Vol. 5, No. 16 (Apr. 19, 2012).  This article discusses additional specific suggestions on crafting policies and procedures and deploying technology to address the risks posed by mobile devices.  In particular, this article details: how hedge fund managers can prevent access to data on mobile devices by unauthorized persons; how managers may prevent firm personnel from exceeding authorized levels of data access; technology solutions for monitoring mobile devices; archiving data on mobile devices to comply with books and records policies and laws; and policies governing social media access via mobile devices.  See “SEC Risk Alert Discusses When Social Media Interactions May Constitute Prohibited Hedge Fund Client Testimonials,” Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).

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

Confidentiality or nondisclosure agreements (NDAs) can have powerful legal and practical consequences for hedge fund managers.  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 – the second in a three-part series – discusses: the scope of permitted disclosure of information obtained pursuant to NDAs to six categories of common recipients in the hedge fund context; the terms of permitted disclosure to each of those six types of recipients; the scope and terms of required disclosure; and four important considerations with respect to the return and destruction of documents.  The first article in this series outlined the case for the importance of NDAs in the hedge fund industry and discussed: 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.  See “Key Legal and Business Considerations for Hedge Fund Managers in Drafting and Negotiating Confidentiality Agreements (Part One of Three),” Hedge Fund Law Report, Vol. 5, No. 15 (Apr. 12, 2012).  The third article in this series will discuss remedies, damages and liability and non-confidentiality restrictions in NDAs.

Recent CFTC Settlement Highlights Regulatory Focus on Manipulation of Commodity Futures and High Frequency Trading

On April 19, 2012, Chief Judge Loretta Preska of the U.S. District Court for the Southern District of New York approved a consent order detailing a settlement entered into among the U.S. Commodity Futures Trading Commission (CFTC), high frequency global proprietary trading firm Optiver Holding BV, two of its subsidiaries (collectively, Optiver) and three individual principals.  The settling parties were accused of manipulating the market for light sweet crude oil, New York harbor heating oil and New York harbor gasoline futures contracts.  This settlement demonstrates a renewed government emphasis on stamping out market manipulation in these markets.  While Optiver is a proprietary trading firm that utilizes high frequency algorithmic trading, as opposed to a hedge fund manager, the legal points raised by the action apply with equal force to hedge fund managers that trade commodity futures or that employ high frequency strategies.  For a discussion of a CFTC action brought against a hedge fund trader, see “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).  This article describes the complaint initially brought by the CFTC in 2008, the terms of the settlement and the stiff sanctions imposed on the defendants, including disgorgement, civil monetary penalties, trading restrictions imposed on Optiver and statutory bars imposed on each of the individual defendants.

District Court Decision Suggests That Overly Broad Restrictive Covenants Will Not Be Enforced in Employment Agreements in the Wealth Management Industry

Ideally, hedge fund managers and employees should be able to negotiate employment agreements that align the interests of the manager with those of the employee.  However, the interests of managers and employees will almost inevitably conflict in the context of certain typical employment agreement provisions.  Most notably, restrictive covenants, such as non-competition, non-solicitation and confidentiality clauses, highlight the diverging interests of managers and employees.  On one hand, hedge fund managers wish to include restrictive covenants in employment agreements to protect their confidential and proprietary information and to protect investments in employee development.  On the other hand, employees wish to limit the scope of such covenants to provide them with the widest universe of employment opportunities following departure from a manager.  While the laws governing restrictive covenants vary from state to state, generally, such laws have been interpreted by courts to balance these competing interests.  For a comprehensive discussion of relevant law and practice, see “Schulte Roth & Zabel Partners Discuss Non-Competition and Non-Solicitation Provisions and Other Restrictive Covenants in Hedge Fund Manager Employment Agreements,” Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).  Where such covenants have been found to be overly restrictive, courts have typically refused to enforce them.  A recent District Court decision addresses the permissible scope of a restrictive covenant in an employment agreement between a wealth management firm and an employee of the firm where the employee was terminated involuntarily without cause.

Federal Reserve Credit Officer Survey Identifies Trends in Prime Broker Credit Terms, Hedge Fund Leverage and Counterparty Risk

One of the fundamental premises of the Dodd-Frank Act is that leverage in the financial system – if inadequately monitored, insufficiently understood and too voluminous – can create systemic risk.  Accordingly, many of the provisions in the Dodd-Frank Act are intended to reduce leverage or increase monitoring of leverage.  In the same vein, regulators have been collecting information about leverage via interaction with market participants.  In the U.K., for example, the FSA conducts a periodic study of potential systemic risk engendered by hedge funds.  See “U.K.’s FSA Issues Latest Biannual Report Assessing Possible Sources of Systemic Risk from Hedge Funds,” Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).  In the U.S., since 2010, the Federal Reserve has been conducting a quarterly Senior Credit Officer Opinion Survey on Dealer Financing Terms.  The survey generally asks dealers about the availability and terms of credit, securities financing and over-the counter (OTC) derivatives markets.  On March 29, 2012, the Federal Reserve published the results of its most recent survey (Survey).  The Survey polled the senior credit officers of the twenty largest dealers in dollar-denominated securities financing and the most active intermediaries in OTC derivatives markets.  The purposes of the Survey were to: (1) obtain a consolidated perspective on changes in the management of credit risk between December 2011 and February 2012; and (2) identify trends in financing terms between dealers (including prime brokers and other counterparties with whom hedge fund managers effect trades) and their customers (including hedge funds).  This article summarizes the Survey’s findings with respect to trends in: credit terms offered by dealer-respondents, including prime brokers; demands by hedge funds for better credit terms from prime brokers; overall use of leverage by hedge funds; credit terms with respect to OTC derivatives; and demand for and credit terms relating to securities financing.

Simmons & Simmons Strengthens Asset Management & Investment Funds Sector with Partner Appointment

On April 23, 2012, international law firm Simmons & Simmons announced the appointment of David Williams as a partner in its London Financial Services team.