Oct. 11, 2012

Sixth Annual Hedge Fund General Counsel Summit Highlights SEC Enforcement Priorities, Side Letters, Investment Allocations, Expense Allocations, Trade Errors, Record Retention, Fund Marketing, Secondaries, JOBS Act and STOCK Act (Part One of Two)

On September 18 and 19, 2012, ALM Events hosted its Sixth Annual Hedge Fund General Counsel Summit (GC Hedge Summit) at the University Club in New York City.  Panelists, including regulators, in-house practitioners and law firm professionals, discussed topics of significant relevance for hedge fund general counsels, including: SEC enforcement priorities relating to hedge funds; the nuts and bolts of a successful hedge fund compliance program (including a discussion of side letters, investment allocations, expense allocations, trade errors and record retention); marketing of hedge funds (including a discussion of compensation of marketing professionals and the Jumpstart Our Business Startups (JOBS) Act); secondary market transactions in fund shares; and the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act) and its implications for the gathering of political intelligence.  Our coverage of the GC Hedge Summit is provided in two installments.  This first installment covers the session addressing the nuts and bolts of a successful compliance program and the session addressing marketing of hedge funds and secondary market transactions in hedge fund shares.  The second article will cover the session discussing the SEC’s enforcement priorities and the session discussing the implications of the STOCK Act for the gathering of political intelligence by hedge fund managers.  See also “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls,” Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).

OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for “Presence Examinations”

On October 9, 2012, the Securities and Exchange Commission’s (SEC’s) Office of Compliance Inspections and Examinations (OCIE) sent a letter (Letter) to senior management of newly registered investment advisers (i.e., advisers that registered with the SEC after July 21, 2011), describing the SEC’s National Examination Program, alerting them to upcoming OCIE examinations of newly registered advisers to private funds to be conducted in the next two years (presence examinations) and highlighting the focal areas of such presence examinations.  This article summarizes some key takeaways from the Letter.

Former Federal Prosecutors Share Perspectives on Insider Trading Hot-Button Issues and Enforcement Trends Relevant to Hedge Fund Managers

At an October 1, 2012 event co-sponsored by The National Law Journal; MoloLamken LLP; Wachtell, Lipton, Rosen & Katz; and Wilmer Cutler Pickering Hale & Dorr LLP, an illustrious panel of former federal prosecutors discussed the current state of insider trading enforcement and reviewed numerous hot-button issues of interest to hedge fund managers and other investors.  This article summarizes the key insights from the panel discussion.

Assumptions to Consider in Completing Form PF Effectively: Experiences from First Filers

The summer of 2012 proved to be a challenging one for many private fund professionals involved in the preparation of the first wave of Form PF filings.  In particular, Large Hedge Fund Advisers were required to make their first Form PF filing by August 29, 2012.  What emerged from the frenzied summer and the post-filing chatter is a common theme that can be gleaned by the title of this article.  Your assumptions will play an important role in how you complete Form PF and whether you do so effectively.  There are many assumptions that can be safely made and many that conclusively cannot be made.  In a guest article, Kelli Brown and Peter J. Chess provide guidance for both the experienced and inexperienced future Form PF filers.  Brown is a principal and co-founder of Sol Hedge, LLC, a hedge fund consulting firm, and Chess is an associate in the Corporate and Securities practice group at Pillsbury Winthrop Shaw Pittman LLP.  For more guidance on successful preparation and completion of Form PF, see “Ten Steps to a Successful Form PF,” Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012).

Release Letters: Key Provisions of Concern for Hedge Fund Managers

In the course of performing due diligence on a potential investment, hedge fund managers often require access to expert reports or similar work product prepared by advisors engaged by third parties.  These third parties engage financial and other advisors to produce various memoranda and other due diligence materials in connection with anticipated investments.  For their part, the advisors generally provide their work product solely to the parties who engaged them to produce this work product with whom the advisors have a direct contractual relationship and who have accepted their standard terms and conditions.  Hedge fund managers, seeking to obtain the information contained in such expert reports for purposes of investment analysis in relation to the underlying assets or securities, but not being “clients” of the advisor for the purpose of the engagement, must sign a so-called “release letter” in order to obtain access to this work product.  These release letters are prepared primarily for the benefit of the advisor who produced the work product to be shared with “non-clients” (such as hedge fund managers or other investors or lenders) on a limited basis.  The release letters’ principal purpose is to exclude, or at least minimize, legal liability of the advisor as a result of the work product being used by such “non-client” third parties.  As such, release letters typically contain a number of important provisions, restrictions and negotiating points of which hedge fund managers should be aware.  In a guest article, William Frenkel, a Partner at Frenkel Sukhman LLP, identifies those provisions and provides guidance to hedge fund managers on how to negotiate them.

Four Recommendations for Hedge Fund Managers Designed to Minimize Risk and Damage from Employment Discrimination Lawsuits

Employment discrimination suits can be the source of significant embarrassment and potentially reputational harm for hedge fund managers, even if the allegations are not proven to be true.  Furthermore, such suits can sap the morale of firm personnel (particularly those who may be similarly situated to the complainant) and harm the firm’s employee recruiting efforts.  It is therefore imperative that fund managers take seriously and proactively address any concerns about discrimination before they reach the courts, which occurred recently when a global private equity fund of funds manager and several of its employees were sued by a former principal/senior employee for discrimination, wrongful termination and defamation.  This article discusses the factual background, allegations and requested relief in the complaint.  Additionally, the article provides some best practices for fund managers designed to assist them in proactively minimizing risks and damage from employment discrimination lawsuits.

Appleby Bolsters Funds Capability with Two Partner Appointments

Appleby recently announced that Ian Gobin and Deborah Poole have been appointed partners of Appleby within the Funds and Investment Services team.  For insight from Appleby (Cayman), see “Fund Misrepresentations Inducing Investment: Claims and Remedies Available to Fund Investors and Protections Available to Promoters, Fund Managers and Directors,” Hedge Fund Law Report, Vol. 5, No. 35 (Sep. 13, 2012).