Generally, if a “benefit plan investor” owns 25 percent or more of any class of equity interests issued by a hedge fund, the fund and its manager will become subject to certain provisions of the Employee Retirement Income Security Act of 1974 (ERISA).  See “Hedge Fund Industry Practice for Defining ‘Class of Equity Interests’ for Purposes of the 25 Percent Test under ERISA,” Hedge Fund Law Report, Vol. 3, No. 29 (Jul. 23, 2010).  For hedge fund managers, there are benefits and burdens to accepting an investment that will subject them to ERISA.  The chief benefits are that ERISA investors tend to be sizable, serious, long-term investors.  The chief burden is the complex regulatory regime with which ERISA managers must contend, and the consequent expansion of potential liability and administrative and other costs.  See “Applicability of New Disclosure Obligations under ERISA to Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).  Hedge fund managers soliciting benefit plan investors therefore seek to capture the upside of ERISA investments while mitigating the potential liability and related costs.  One of the more effective ways in which savvy managers do so is by purchasing fiduciary liability insurance.  But fiduciary liability insurance is a complex product, and structuring an appropriate policy requires an involved legal and business analysis.  The intent of this article is to provide hedge fund managers with a checklist of issues to consider when evaluating the purchase of fiduciary liability insurance and when actually purchasing and structuring such insurance.  In particular, this article details: what fiduciary liability insurance is; the rationale for purchasing such insurance; how such insurance is typically structured; what types of claims and costs are typically covered; the distinction between fiduciary liability insurance and errors and omissions (E&O) coverage; typical premium pricing; the allocation of premiums among management entities and funds; notable fiduciary liability insurance carriers; and the interaction between such insurance and indemnification provisions in manager and fund governing documents. Read full article …

When Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010, some investment advisers worried about how changes to registration and reporting would impact them.  Chief among their anxieties was Form PF, a new filing requirement imposing substantial reporting requirements upon many investment advisers previously exempt from regulatory scrutiny.  More specifically, Form PF is a private, confidential filing required to be made by certain SEC-registered investment advisers on a quarterly or annual basis.  Designed to assist the Financial Stability Oversight Council in monitoring systemic risk, it requires the reporting of a broad range of data on private funds, including portfolio, performance and risk information.  In a guest article, Robert Diaz, managing director of SS&C GlobeOp, discusses ten broadly applicable lessons learned about Form PF preparation and filing.  These lessons are based on months of preparing and coordinating practice filings with SS&C GlobeOp clients.  This article also includes a chart offering a visual representation of the complexity and time pressure of many of the relevant data classifications in Form PF (e.g., RAUM, derivative exposure, etc.). Read full article …

On August 8, 2012, the New York State Supreme Court (Court) allowed several hedge funds to proceed against Porsche Automobil Holding SE (Porsche) in a lawsuit claiming that they lost more than $1 billion in a massive short squeeze as a result of Porsche’s allegedly deceptive manipulation of the market for Volkswagen AG (VW) shares in 2008.  In allowing the hedge funds to proceed with discovery, the Court boosted the position of hedge funds and other investors seeking to recover for fraud in two important respects, both of which are discussed in this article.  More generally, this article summarizes the Court’s order, including the factual background of the case and the legal reasoning behind the decision.  For more on the legal principles at issue in the Porsche matter, see “Update, Are There Still Avenues for Recovery in United States for Overseas Hedge Fund Losses After Morrison v. National Bank Ltd.?,” Hedge Fund Law Report, Vol. 3, No. 27 (Jul. 8, 2010). Read full article …

This article summarizes the events that led to a dispute in federal court relating to a collateralized debt obligation (CDO), a recent Second Circuit opinion in the dispute and the implications of the decision for participants in the CDO market.  This article also summarizes two important practice points arising out of the decision, as identified by Cleary Gottlieb Steen & Hamilton LLP. Read full article …

Simplify, LLC has conducted a comprehensive survey of investor preferences and practices in connection with secondary market trading in hedge fund securities and other alternative investments.  The survey covered a wide range of relevant topics, including the size of the market, the number of participants in the market, rationales for trading, timing, trade size, liquidity, sourcing, brokerage issues and transfer restrictions.  This article summarizes the results of the survey. Read full article …

Motors Liquidation Company f/k/a General Motors Corporation (Old GM) filed for bankruptcy protection on June 1, 2009.  In the months leading up to that filing, hedge funds that specialize in distressed debt snapped up the unsecured debt of Old GM and its subsidiaries, including more than $1 billion of unsecured bonds (Notes) of General Motors Nova Scotia Finance Company (NS Finance).  Old GM had guaranteed repayment of the Notes.  As part of Old GM’s Chapter 11 reorganization, Motors Liquidation Company GUC Trust (GUC Trust) was established to handle disputed claims of unsecured creditors, including those of the Noteholders.  In a Southern District of New York adversary proceeding, GUC Trust claims that, in the days just prior to Old GM’s bankruptcy filing, certain of the Noteholders extracted a settlement from NS Finance that was an “egregious economic overreach.”  This article summarizes the transactions that led to the GUC Trust complaint and its specific allegations.  See also “GM Bankruptcy Judge Rejects Distressed Debt Hedge Fund Investors’ Objections to Reorganization Plan,” Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011). Read full article …

On August 17, 2012, QFS Asset Management announced the appointment of David L. Zimmerman, the firm’s General Counsel, as Chief Operating Officer, and Dan Bender as Chief Financial Officer. Read full article …

On August 15, 2012, Dechert LLP announced that Andrew L. Oringer has joined the firm as a partner in the Employee Benefits and Executive Compensation Group and will be resident in New York.  Oringer was previously a partner at Ropes & Gray LLP, where he led the ERISA and executive compensation practice in New York, and is a notable contributor to the HFLR on ERISA considerations for hedge fund managers.  See, e.g., “Is That Your (Interim) Final Answer? New Disclosure Rules Under ERISA To Impact Many Hedge Funds,” Hedge Fund Law Report, Vol. 3, No. 33 (Aug. 20, 2010). Read full article …

Elementum Advisors, an independent alternative investment manager specializing in collateralized natural event reinsurance investments, has announced two upcoming additions to its team in order to strengthen the depth of its legal, compliance and operational infrastructure. Read full article …

Please note that the Hedge Fund Law Report will not publish an issue next week, the week starting August 27, 2012, and will resume its regular publication schedule the following week, the week starting September 3, 2012. Read full article …