Feb. 23, 2012

Key Considerations for Hedge Fund Managers in Developing a Succession Plan (Part Two of Two)

The death, disability or departure of a founder or key employee of a hedge fund manager (succession event) creates a business risk that the manager must proactively address to ensure the long-term viability of the enterprise, to respond to investor concerns and to meet the firm’s regulatory obligations.  A firm must anticipate and address not only personnel considerations, but also the impact of a succession event on ownership, compensation and other legal and operational issues.  This is the second article in a two-part series analyzing key considerations for hedge fund managers aiming to adopt and implement an effective succession plan.  The first article in this series discussed: why succession planning is an imperative for hedge fund managers looking to raise institutional capital and create long-term enterprise value; applicable regulatory requirements; the imperative of commencing succession planning today rather than deferring difficult decisions; examples of prominent hedge fund managers that have implemented succession plans; what types of succession events a succession plan should cover; people decisions, including how to identify roles to be filled and how to identify, incentivize and train successors; and the role of management committees in succession planning.  See “Key Considerations for Hedge Fund Managers in Developing a Succession Plan (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  This article discusses: potential changes in a firm’s ownership and compensation structure designed to incentivize prospective successors to stay with the firm and to address the economics of departing founders or key employees; how to document a succession plan; how to test a succession plan; and how to communicate information about a succession plan with investors.

Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two)

In light of recent CFTC rule amendments repealing the exemption from CPO registration most commonly relied upon by managers of private funds (Rule 4.13(a)(4)), now, more than ever before, it is critical for managers who operate or control private funds to understand: (1) if they must become a registered CPO; and (2) what it means for the operation of their firms and their funds if they do.  See “CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators,” Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  In this article – the first of a two-part series – Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, provides an overview of the current regulatory landscape of Commodity Futures Trading Commission (CFTC) regulation of commodity pool operators (CPOs).  Specifically, McShea discusses: the regulatory framework governing commodity pools and CPOs, and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance.  This article also provides a quick-reference compliance checklist for registered CPOs.  Part two of this series will discuss exemptions available to the funds (i.e., commodity pools) operated by registered CPOs that provide relief from some of the disclosure and periodic reporting obligations to which the funds would otherwise be subject.  For additional insight from McShea, see “What Do Hedge Fund Managers Need to Know to Prepare For, Handle and Survive SEC Examinations?  (Part Two of Three),” Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).

Former SEC Commissioner Paul Atkins Discusses the Big Issues Raised by Form PF: Law, Operations, Confidentiality, Risk Management, Disclosure, Enforcement and Policy

Form PF has created legal and business challenges for hedge fund managers.  On the legal side, managers and their counsel have been scrambling to determine whether they have to file the form, for which entities, when, what data they must include, how frequently they must update the form, and so on.  On the business side, the questions have been even more challenging.  The form requires managers to compile and organize data that is disparate, voluminous and dynamic.  Some of the data is internal to the manager, and some is external, at service providers; much of the data is quantitative, but some is qualitative and discretionary; and substantially all of the data is dynamic – it changes over time, even over the relatively compressed time in which managers have to file their first Forms PF.  Operationally, managers have to coordinate the efforts of service providers that otherwise would operate independently.  Technology will have a large role to play in smart Form PF compliance, but will not substitute for competent human oversight and project management.  In short, Form PF is a challenge.  To help hedge fund managers think through the challenge, we at the Hedge Fund Law Report have published and will continue to publish best-of-breed thinking and analysis on the hardest questions raised by Form PF.  See, e.g., “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  In a similar vein, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will identify and address critical issues and pitfalls with respect to Form PF.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  Subscribers to the Hedge Fund Law Report are eligible for discounted registration.  One of the anticipated speaking faculty members for the Form PF session at the upcoming RCA Symposium is Paul S. Atkins, CEO of Patomak Global Partners, LLC, and former Commissioner of the U.S. Securities and Exchange Commission.  We recently had the privilege of interviewing Atkins on some of the hardest questions raised by Form PF for hedge fund managers.  Generally, our interview covered topics including interpretation, operations, technology, confidentiality, risk management, disclosure, enforcement and policy.  Atkins was candid, knowledgeable and insightful, and his points are important reading for any hedge fund manager looking to get it right on Form PF.  The full text of our interview is included in this issue of the Hedge Fund Law Report.

Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades

On January 31, 2012, the SEC hosted its annual, “Compliance Outreach Program National Seminar” (Seminar).  (The program was previously called “CCOutreach,” but it has been “rebranded,” as the SEC explained in a press release, to be more inclusive of all senior personnel at firms.)  The Seminar included five sessions.  Hedge Fund Law Report recently reported on the session entitled “Enforcement-Related Matters” (Enforcement Session).  See “Enforcement Session at SEC’s Compliance Outreach Program National Seminar Highlights Regulatory Focus on Valuation, Conflicts of Interest and Compliance Shortcomings at Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  This article focuses on the “Trading Practices” session and highlights best practices for addressing the identified compliance concerns.

Hedge Fund Manager May Be Personally Liable to Third-Party Marketers Based on Ambiguities in Marketing Agreement

A recent court decision highlights the pitfalls of sloppily drafted agreements covering third-party marketing arrangements in the hedge fund context.  This article summarizes that opinion, which is relevant to hedge fund managers, third-party marketers and others engaged in hedge fund capital raising.  See “How Much Are In-House Hedge Fund Marketers Paid, and How Will Recent Developments in New York City and California Lobbying Laws Impact the Compensation Levels and Structures of In-House Hedge Fund Marketers (Part Three of Three),” Hedge Fund Law Report, Vol. 4, No. 20 (Jun. 17, 2011).

IOSCO Publishes Consultation Report on Valuation of Hedge Fund Portfolio Assets

On February 16, 2012, the key policymaking entity of the International Organization of Securities Commissions (IOSCO), IOSCO’s technical committee, released a Consultation Report entitled “Principles for the Valuation of Collective Investment Schemes.”  The Report sets out 13 key principles on valuation of assets by collective investment schemes, including hedge funds.  Valuation is an important issue for hedge fund managers, investors and regulators.  See “Hedge Fund Valuation Pitfalls and Best Practices: An Interview with Arthur Tully, Co-Leader of Ernst & Young’s Global Hedge Fund Practice,” Hedge Fund Law Report, Vol. 5, No. 2 (Jan. 12, 2012).  This article details the 13 draft principles in the Report.  See also “IOSCO Report Discusses Appropriate Use and Disclosure of Hedge Fund Redemption Suspensions, Gates and Side Pockets,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).

Seward & Kissel Study Highlights Trends in Hedge Fund Investment Strategies, Fee and Liquidity Terms, Fund Structures and Strategic Capital for New Managers

While the hedge fund industry continues to be plagued by a challenging capital raising environment, a number of new hedge fund managers were able to launch advisory firms within the past year.  With that in mind, Seward & Kissel LLP conducted a survey (Seward Study) of their U.S. clients that launched hedge fund firms in 2011 to ascertain information about the hedge funds that they either launched in 2011 or are expected to launch in the first quarter of 2012.  The Seward Study focused on the types of investment strategies employed by such funds; fee and liquidity terms; fund structures; and types of strategic capital investments.  The Seward Study did not include new hedge funds launched by Seward clients that were managers with hedge fund businesses existing prior to 2011.  Nonetheless, the authors of the Seward Study believe that the funds surveyed reflect approximately 60% of the new hedge fund start-ups for 2011.  This article highlights the key findings of the Seward Study and provides additional insight as to what the data points represent in terms of hedge fund manager and investor preferences.

Hedge Fund Attorney and D. E. Shaw Alumnus Bertrand Fry to Co-Head Pryor Cashman’s Investment Management Group

On February 21, 2012, Pryor Cashman LLP announced that Bertrand C. Fry has joined the firm as a Partner in the firm’s Investment Management Group.

Sadis & Goldberg Welcomes Private Funds Tax Lawyer Alexis Gelinas to its New York Office

On February 22, 2012, Sadis & Goldberg LLP announced the addition of Alexis Gelinas to its New York Office as Partner in the Tax Group.  For analysis published in the Hedge Fund Law Report by other Sadis & Goldberg attorneys, see “Sullivan v. Harnisch and SEC Proposed Whistleblower Rules Bolster Internal Compliance Programs While Creating Catch-22 for Compliance Officers,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).

Drinker Biddle Welcomes Brad Campbell, Former Assistant Secretary of Labor, to Financial Services ERISA Team

On February 21, 2012, Drinker Biddle & Reath LLP announced the addition of Bradford P. Campbell, former Assistant Secretary of Labor of the Employee Benefits Security Administration, as Counsel in its Employee Benefits & Executive Compensation Practice Group in Washington, D.C.  For coverage of ERISA issues related to hedge funds, see “How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions?,” Hedge Fund Law Report, Vol. 3, No. 24 (Jun. 18, 2010).

Kathleen Casey and Brian Cartwright Join Patomak Global Partners

On February 22, 2012, Patomak Global Partners announced that former SEC Commissioner Kathleen L. Casey and former SEC general counsel Brian Cartwright have joined the firm as Senior Advisors.  See “Former SEC Commissioner Paul Atkins Discusses the Big Issues Raised by Form PF: Law, Operations, Confidentiality, Risk Management, Disclosure, Enforcement and Policy,” above, in this issue of the Hedge Fund Law Report.