Dec. 20, 2012

Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation

On November 8, 2012, international law firm Walkers Global hosted its annual Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various issues of current relevance to hedge fund managers, including: recent developments in fund structuring and terms; fund governance; recent Cayman legal developments (including those relating to side letter disputes); implications of the Foreign Account Tax Compliance Act for hedge fund managers; and regulatory developments, including proposed amendments to the Cayman Islands Exempted Limited Partnership Law and the impact of the EU’s Alternative Investment Fund Managers Directive.  This article summarizes noteworthy points discussed during the seminar on each of the foregoing topics.  For our coverage of last year’s Walkers Fundamental Hedge Fund Seminar, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds,” Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).

Former SEC Asset Management Unit Co-Chief Robert Kaplan and Former NYS Insurance Superintendent Eric Dinallo, Both Current Debevoise Partners, Discuss the Purpose, Process and Consequences of Presence Examinations of Hedge Fund Managers

On October 9, 2012, the SEC’s Office of Compliance Inspections and Examinations (OCIE) sent a letter to senior management of newly registered private fund advisers noting that such managers imminently may be subjected to so-called “presence examinations.”  See “OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  The letter provided some information on how presence examinations would work and what examiners would be looking for, but the letter also left many important questions unanswered.  To fill in the gaps left by the letter and round out the industry’s understanding of what presence examinations will mean for registered hedge fund managers, the Hedge Fund Law Report recently conducted an interview with Robert Kaplan and Eric Dinallo.  Kaplan is the former Co-Chief of the SEC’s Asset Management Unit within the Division of Enforcement and Dinallo is the former New York State Superintendent of Insurance; both are currently partners at Debevoise & Plimpton LLP.  Our interview covered, among other things: what presence examinations are; how OCIE evaluates the risk of hedge fund managers when allocating examination resources; the impact of a whistleblower on a manager’s risk profile; whether and how managers should approach mock examinations; whether self-reporting of violations found during mock examinations is advisable; how managers should approach senior management interviews with OCIE staff; how managers can ensure consistency across various fund documents and examination interview responses; key conflicts of interest OCIE will focus on during presence examinations; other key focal areas for presence examinations; whether managers must disclose the initiation of routine OCIE examinations to investors; whether managers must disclose unremediated material deficiencies to prospective fund investors; how OCIE approaches referrals of matters to the Division of Enforcement; and steps a manager can take to speed up an OCIE examination.

CFTC Grants Additional Relief from CPO Regulation for Operators of Certain Securitization Vehicles

On December 7, 2012, the CFTC’s Division of Swap Intermediary Oversight issued a letter expanding the scope of relief from commodity pool regulation for certain securitization and structured finance vehicles and their operators.  This article summarizes the guidance and relief granted in the letter.  See also “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests,” Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).

SEC Settles Insider Trading Action against Tiger Asia Management

On December 12, 2012, the SEC charged Tiger Asia Management, LLC (Tiger Asia Management), Tiger Asia Partners, LLC (Tiger Partners) and their principal, Sung Kook (Bill) Hwang, with insider trading and market manipulation relating to their trading in the shares of Bank of China, China Construction Bank and other Chinese companies.  The same day, Tiger Asia Management, Tiger Partners and Hwang agreed to pay $44 million in the aggregate to settle the charges.  This article summarizes the underlying misconduct, the settlement terms and the SEC’s charges.  See generally “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part Two of Two),” Hedge Fund Law Report, Vol. 5, No. 32 (Aug. 16, 2012).  Tiger Asia Management faces parallel criminal charges brought by the U.S. Attorney’s Office for the District of New Jersey.  For the details of an action brought by Hong Kong securities regulators against Hwang and Tiger Asia Management arising out of the same alleged insider trading, see “Hong Kong Securities and Futures Commission Wins Appeal of Insider Trading Action Against New York-Based Hedge Fund Manager Tiger Asia Management,” Hedge Fund Law Report, Vol. 5, No. 10 (Mar. 8, 2012).

Allen & Overy Report Suggests that Pressure from New Regulations on Bank Lending May Create Additional Opportunities for Hedge Funds and Other Non-Bank Sources of Capital

International law firm Allen & Overy (A&O) has released a report considering the impact that new regulations are likely to have on the supply of credit in the global economy.  A&O’s general view is that the “deliberate and systematic tightening of regulation around the world is shrinking the size and scope of banking activity.”  A&O sees an opportunity for hedge funds and other investment funds, which remain for now either unregulated or “lightly” regulated, to provide credit to fill the gap.  This article focuses on the portions of the Report that address how those regulations may affect the ability of hedge funds to participate in the credit markets.

State Street Report Describes an Evolution in the “Endowment Model” of Hedge Fund Investing

State Street recently released a report gathering investors’ thoughts concerning their approach to investing in alternatives, and their opinions on different investment models, including the endowment model.  Based on analysis of the data collected, State Street found that asset owners are changing their approach to investing in light of lessons learned from the global financial crisis.  Investors indicated that they are using the endowment model differently than they had before the financial crisis.  Investors are also adopting new asset allocation tools and increasingly focusing on risk management in managing their portfolios.  The report also included a list of best practices suggested by State Street that could be useful for successful hedge fund investing.  This article summarizes the key takeaways from the report.

Davis Polk Partner Danforth Townley Named Attorney Fellow in SEC’s Division of Investment Management

On December 13, 2012, the SEC announced that Danforth Townley has been appointed an Attorney Fellow in its Division of Investment Management.  Townley will provide counsel on rulemaking issues and other policy initiatives beginning in January 2013.

The Hedge Fund Law Report Will Not Publish an Issue Next Week and Will Resume Its Regular Publication Schedule the Following Week

Please note that the Hedge Fund Law Report will not publish an issue next week, the week starting December 24, 2012, and will resume its regular publication schedule the following week, the week starting December 31, 2012.