Oct. 4, 2012

CPO Compliance Series: Marketing and Promotional Materials (Part Two of Three)

Commodity pool operators (CPOs) that must soon register with the U.S. Commodity Futures Trading Commission (CFTC) and become members of the National Futures Association (NFA) because of the rescission of the CFTC Regulation 4.13(a)(4) registration exemption will shortly need to undertake numerous CFTC and NFA compliance obligations.  One of the key compliance obligations arises from CFTC Regulation 4.41 and NFA Compliance Rule 2-29, each of which sets forth various prohibitions and guidelines for marketing activities and promotional materials for both CPOs and commodity trading advisors (CTAs).  This article discusses in detail the CFTC and NFA prohibitions and guidelines for marketing activities and promotional materials for CPOs and CTAs contained in CFTC Regulation 4.41 and NFA Compliance Rule 2-29 and its related interpretive notices and provides practical guidance on how to comply with these prohibitions and guidelines.  This article is the second of a three-part series of articles that focus in detail on various compliance obligations of CPOs under CFTC and NFA regulations and guidance.  The first article addressed NFA Bylaw 1101, which addresses conducting business with non-NFA members.  See “CPO Compliance Series: Conducting Business with Non-NFA Members (NFA Bylaw 1101) (Part One of Three),” Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  The third article will address reporting of principals and registration of associated persons.  For additional coverage of each of these topics and the topics discussed in this article, see “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

Navigating the Patchwork of Global Insider Trading Regulations: An Interview with Adam Wasserman of Dechert

As the investments and operations of hedge fund managers become increasingly global, managers must contend with a growing number and complexity of regulatory regimes.  One of the most complicated and important areas in which regulation varies from jurisdiction to jurisdiction is insider trading.  Insider trading regulation is complex enough domestically.  When you factor in the asymmetry among global regimes; different treatment of the same conduct; the often counterintuitive aspects of insider trading doctrine; and the ease of tripping jurisdictional wires, global insider trading regulation becomes a minefield for the unwary hedge fund manager.  Moreover, non-U.S. regulators – in the United Kingdom, Hong Kong and Japan, among other places – are growing more vigorous in their insider trading enforcement.  To help hedge fund managers identify and address some of the most important issues in global insider trading regulation, the Hedge Fund Law Report recently interviewed Adam Wasserman, a Partner at Dechert LLP.  The interview covered, among other topics: the biggest differences between the insider trading laws of the U.S. and non-U.S. jurisdictions; the unexpected aspects of insider trading doctrine from various jurisdictions; a discussion of the Greenlight Capital U.K. insider trading settlement; the relevance of the scienter element in insider trading claims in non-U.S. jurisdictions; the applicability of U.S. insider trading laws to conduct outside of the United States; the applicability of various jurisdictions’ insider trading laws in complex situations; whether the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) are focusing insider trading efforts domestically or globally; identification of jurisdictions becoming more forceful in insider trading enforcement; the views of hedge fund managers with respect to domestic versus global insider trading issues; and policies and procedures hedge fund managers should implement to understand insider trading regulations where they do business and to prevent violations.  This article provides the complete transcript of our interview with Wasserman.  This interview was conducted in conjunction with the Regulatory Compliance Association’s upcoming Symposium entitled Compliance, Risk & Enforcement 2012.  Wasserman will be one of various asset management industry thought leaders participating at that Symposium, which will take place on October 30, 2012 at the Pierre Hotel in Manhattan.  Subscribers to the Hedge Fund Law Report are eligible for discounted registration.

Delaware Chancery Court, Criticizing Both Sides in Contentious Litigation, Awards $4.662 Million to Camulos Capital Hedge Fund Founder in Payment for His Fund Interest

Partings of hedge fund manager principals typically follow one of two paths – the amicable, or the not amicable.  Amicable partings often result in seeding relationships and long-term value creation.  See “Ten Issues That Hedge Fund Seed Investors Should Consider When Drafting Seed Investment Agreements,” Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011).  Not amicable partings often result in protracted litigation, high costs and hurt feelings.  See “Loose Corporate Formalities of Former Hedge Fund Management Partners Result in a Messy Business Divorce,” Hedge Fund Law Report, Vol. 4, No. 26 (Aug. 4, 2011).  This article describes an unfortunate – but instructive – example of the latter scenario.  In mid-2005, Soros Fund Management alumni Richard Brennan and plaintiff William Seibold formed Camulos Capital LP (Camulos Capital) and hedge fund Camulos Partners LP (Fund).  The Fund’s general partner was Camulos Partners GP LLC (Camulos GP and, together with the Fund and Camulos Capital, Camulos).  Unhappy at Camulos, Seibold left in 2007 and started his own fund, Noroton Event Driven Opportunity Fund LP (together with its general partner and investment manager, Noroton).  Seibold asked to redeem his entire interest in the Fund.  Camulos refused to pay, claiming that it was entitled to withhold the money to offset damage it sustained by reason of Seibold’s breach of Camulos’ confidentiality agreement, breach of fiduciary duties and other misconduct.  Almost three years of litigation ensued, followed by a trial before Chancellor Strine of the Delaware Court of Chancery (Court).  In a comprehensive, and at times caustic, decision, Chancellor Strine ruled on both Seibold’s and Camulos’ claims.  See also “Cayman Islands Court of Appeal Refuses to Allow an Investor in Hedge Fund Camulos Partners to Commence a Winding-Up Proceeding to Pursue its Unpaid Redemption Demand Because the Investor has Alternative Available Remedies,” Hedge Fund Law Report, Vol. 3, No. 14 (Apr. 9, 2010).

Operational, Investor and Regulatory Risk in Connection with Form PF: An Interview with Samuel K. Won of Global Risk Management Advisors

The Hedge Fund Law Report recently had the privilege of discussing Form PF with Samuel K. Won, the Founder & Managing Director of Global Risk Management Advisors, Inc. (GRMA), a preeminent adviser to alternative investment managers and investors on risk management.  GRMA has advised major hedge fund managers, institutional investors and regulators on preparation, filing and use of Form PF.  In particular, the firm helped shepherd various “first filer” managers – generally, those with more than $5 billion in regulatory assets under management – though the Form PF process, and in doing so observed what first filers did right, and what they did wrong.  That firsthand experience has direct bearing on how second and third filers should approach the Form PF process, and how first filers should revise their approaches for the second and subsequent filings.  In this interview, Won shared with Hedge Fund Law Report some of the lessons learned (and not learned) from the August 2012 initial filing.  In particular, Won addressed: the three major operational risks that first filer managers struggled with; the chief categories of risk associated with Form PF; how first filers can improve their infrastructure, processes and controls; what second and third filers should be doing to prepare for their initial Form PF filings; how regulators are likely to use the data obtained from Form PF; how institutional investors plan to use Form PF; allocation of expenses of Form PF preparation; who at a hedge fund manager should be the “point person” for the Form PF process; and more.  We conducted this interview with Won in connection with two upcoming events at which Won will participate, along with other panelists from Citi Prime Finance, Sidley Austin LLP and Imagine Software.  Those events are entitled “Form PF: Lessons Learned and Not Learned from the August 2012 Initial Filing,” and will expand on the topics discussed in this interview.  The first of these two events will take place on Thursday, October 11 at the Princeton Club in Manhattan from 4:00 p.m. to 7:30 p.m.  The second of the two events (covering substantially similar substance) will take place on Thursday, October 18 at l’escale Restaurant at the Delamar Greenwich Harbor Hotel in Greenwich, Connecticut from 4:00 p.m. to 7:30 p.m.  Registration for both events is free.  To register for the New York event, click here.  To register for the Greenwich event, click here.

Finadium White Paper Highlights Potential for Growth in Prime Custody Services for Hedge Funds

Finadium LLC (Finadium), in conjunction with BNY Mellon, has released a white paper highlighting the potential for growth in the use of prime custody services by hedge funds (White Paper).  Since the 2008 financial crisis, hedge funds have used less leverage, which has led to increased demand for custodial services for holding unencumbered assets.  On recent trends in the use of leverage by hedge funds, see “Federal Reserve Credit Officer Survey Identifies Trends in Prime Broker Credit Terms, Hedge Fund Leverage and Counterparty Risk,” Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012).  Finadium estimates that $684 billion in fund assets may be available for prime custody services.  Prime custody arrangements offer funds potential cost savings and protection from the risk of the bankruptcy of a prime broker or other counterparty.  This article summarizes the key findings from the White Paper.  See also “Hedge Funds Turning to Prime Brokerage Trust Affiliates For Added Protection Against Prime Broker Insolvencies,” Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009).

Who Are the Top Ten Hedge Fund Administrators by Assets Under Administration?

eVestment/HFN recently released the results of its eleventh survey of hedge fund administrators, covering the first half of 2012, and discussing relevant dynamics in the alternative investment fund administrator industry.  This article summarizes the findings of the survey.

Aisha Hunt Joins Dechert as Financial Services Partner in San Francisco

On October 3, 2012, international law firm Dechert LLP announced that Aisha Hunt has joined the firm’s San Francisco office as a partner in the Financial Services practice.