This is the third article in our series – occasioned, in large part, by David Blass’ April 5, 2013 speech before the American Bar Association, Trading and Markets Subcommittee – on broker registration considerations for hedge fund managers.  The first article in the series described the activities that could trigger a broker registration requirement, and the second installment distilled best industry practices for determining when compensation paid to in-house hedge fund marketers constitutes transaction-based compensation.  This article, the culmination of the analysis in the first two parts, is intended for managers that have taken a hard and candid look at their current marketing practices and determined that those practices may require broker registration.  Such managers must answer at least five critical questions: What are the relevant state broker registration requirements and the consequences for failing to comply with them?  What is involved in broker registration by a manager or an affiliate?  How can managers structure third-party broker arrangements?  How, if at all, can managers modify current marketing practices to sidestep a broker registration requirement?  And, finally, can managers obtain comfort on this topic from the SEC’s no-action process?  This article addresses each of these questions. Read full article …

The task of serving as general counsel (GC) or chief compliance officer (CCO) of a hedge fund manager – or both – is becoming increasingly complicated and fraught with legal risk.  As regulatory and other obligations mount, GCs and CCOs face challenges in understanding their roles and devoting sufficient time to fulfilling their responsibilities.  At the same time, the SEC has indicated that it is willing to hold GCs and CCOs personally liable in certain circumstances for regulatory failures of the manager or its employees.  See “Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).  To define the evolving risks to GCs and CCOs and best practices for navigating them, the Hedge Fund Law Report recently interviewed Simon Lorne, Vice Chairman and Chief Legal Officer of Millennium Management LLC.  With decades of hedge fund and securities industry experience to his credit, including service as GC of the SEC, Lorne offers a unique perspective on issues affecting hedge fund manager GCs and CCOs.  Among other things, our interview with Lorne addressed: reporting lines for GCs and CCOs; chief risks facing dual-hatted GCs/CCOs; potential conflicts of interest in simultaneously serving as GC and CCO of a firm; challenges of protecting attorney-client privilege for dual-hatted GCs/CCOs; conflicts of interest in acting simultaneously as GC for the manager and its funds; supervisory liability of GCs and CCOs; outsourcing of the GC and CCO roles; and division of responsibilities between a GC and CCO.  On September 30 and October 1, 2013, Lorne and other industry experts will speak at the Seventh Annual Hedge Fund General Counsel Summit, presented by Corporate Counsel and ALM Events at the University Club in New York City.  For registration and other information regarding the Summit, click here.  A $200 discount on registration for the event is available to HFLR subscribers and trial subscribers. Read full article …

It is important for hedge fund managers and investors alike to understand the duties that managers of private funds organized as limited liability companies (LLCs) and limited partnerships (LPs) owe to such funds.  Yet confusion has abounded in this area.  Recently, however, the Delaware courts and legislature have provided helpful guidance.  This two-part series is designed to inform managers and investors about the current state of Delaware law as it relates to the duties owed by hedge fund managers to their funds and investors.  This second installment discusses successful and unsuccessful claims brought pursuant the three available avenues for potential recovery by aggrieved investors: (1) breach of fiduciary duty; (2) breach of contract; and (3) breach of the implied covenant of good faith and fair dealing.  The first installment summarized the development of fiduciary duty law with respect to private investment funds organized as LPs or LLCs in Delaware, as well as issues concerning waiver of fiduciary duties by contract.  See “What Is the Current State of Delaware Law on the Scope of Fiduciary Duties Owed by Hedge Fund Managers to Their Funds and Investors? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 36 (Sep. 19, 2013).  The authors of this series are Jay W. Eisenhofer and Caitlin M. Moyna, managing director and associate, respectively, at Grant & Eisenhofer P.A. Read full article …

Almost one year ago, Hurricane Sandy caused widespread disruption and damage to businesses, including the two-day closure of equities and options markets.  For weeks, Lower Manhattan – where the New York Stock Exchange and numerous financial firms are based – was without power and had limited public transportation.  Largely in response to those disruptions, the SEC’s Office of Compliance Inspections and Examinations (OCIE) recently reviewed the disaster recovery/business continuity plans (together, BCPs) of 40 registered investment advisers.  Its recent Risk Alert (Alert) provides valuable insight into what the SEC considers best practices for BCPs.  The Alert is a targeted follow-up to the August 2013 Joint Report issued by OCIE, the Commodity Futures Trading Commission’s Division of Swap Dealers and Intermediary Oversight and the Financial Industry Regulatory Authority with regard to the business continuity and disaster recovery planning of financial firms.  This article summarizes OCIE’s findings and recommended best practices, and includes relevant insights from the Joint Report.  For a comprehensive look at BCPs and disaster preparedness, see “What Are the Key Elements of a Comprehensive Hedge Fund Adviser Disaster Recovery Plan, and Why Are Such Plans a Business Imperative?,” Hedge Fund Law Report, Vol. 3, No. 8 (Feb. 25, 2010); and “Key Elements of a Hedge Fund Adviser Business Continuity Plan,” Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17, 2010). Read full article …

On September 3, 2013, the U.S. District Court for the Southern District of New York (Court) dismissed a case brought by Banc of America Securities LLC and Bank of America (BOA) against Bear Stearns Asset Management (BSAM) and others.  The plaintiffs claimed that they suffered billions of dollars in losses caused by a fraud perpetrated by BSAM and three of its former directors.  The fraud related to a “CDO squared” investment, a collateralized debt obligation (CDO) comprised of CDOs constructed out of mortgage-backed securities taken from two of BSAM’s funds.  See “U.S. District Court Approves SEC’s Settlement with Bear Stearns Fund Managers Cioffi and Tannin,” Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).  The Court’s analysis sheds light on an important issue that investors may face: How can a plaintiff similarly situated to BOA – for instance, a hedge fund that invested in CDOs, CLOs or other structured products – prove loss causation in a civil suit following investment losses?  What is the legal standard applied to expert testimony in such a context?  This article addresses these questions by summarizing the factual background of the case and the Court’s legal analysis. Read full article …

On September 17, 2013, the SEC announced charges against 23 investment management firms, including some notable hedge fund managers, in connection with violations of Rule 105 under Regulation M under the Securities Exchange Act of 1934.  Rule 105 generally prohibits a person from purchasing equity securities in a public offering if that person has previously sold short the same security during the Rule 105 restricted period (generally five days before the public offering).  While neither admitting nor denying wrongdoing, 22 of the 23 firms settled with the SEC, resulting in a total of more than $14.4 million in disgorgement and penalties.  In addition to announcing the enforcement actions, the SEC’s National Examination Program concurrently released a risk alert highlighting, among other things, best practices for Rule 105 compliance.  This article provides a brief overview of Rule 105, summarizes the risk alert and describes the facts, charges and sanctions outlined in illustrative settlements with two hedge fund management firms.  See also “Touradji Capital Settlement Suggests That Having Employee Training on Rule 105 under Regulation M Without Policies to Prevent Violations Will Not Insulate a Firm From SEC Enforcement,” Hedge Fund Law Report, Vol. 4, No. 46 (Dec. 21, 2011); “Brookside Settlement Suggests That in Calculating Disgorgement Based on a Rule 105 Violation, the SEC Will Look to the Number of Shares Purchased in a Secondary Offering Rather Than the Number of Shares Sold Short Prior to the Offering,” Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011). Read full article …

During September 2013, Merri Jo Gillette, who served as Director of the SEC’s Chicago Regional Office from 2004 to 2013, joined Morgan, Lewis & Bockius LLP in Chicago as a partner in its Litigation Practice, and Kevin O’Mara, a lawyer specializing in the representation of private equity and hedge funds, joined the firm as a partner in its New York Business and Finance Practice. Read full article …

On September 13, 2013, Murphy & McGonigle, P.C. announced that Lindi Beaudreault has joined the firm as a partner in its New York office. Read full article …

On September 23, 2013, Orrick, Herrington & Sutcliffe LLP announced that Elaine C. Greenberg, the inaugural Chief of the SEC’s Municipal Securities and Public Pensions Enforcement Unit and former Associate Director of the Division of Enforcement at the SEC, has joined the firm as a partner, resident in Washington, D.C. Read full article …