Nov. 14, 2013

Investment Opt-Out Rights for Hedge Fund Investors: Rationales, Mechanics, Regulatory Risks and Operational Challenges (Part Two of Three)

This is the second article in our three-part series on opt-out rights in the hedge fund industry, and legal and operational challenges associated with structuring and implementing such rights.  This article addresses the structure and exercise of opt-out rights, as well as regulatory risks associated with offering such rights.  The first article explored eight reasons why investors may demand and managers may grant opt-out rights.  See “Investment Opt-Out Rights for Hedge Fund Investors: Rationales, Mechanics, Regulatory Risks and Operational Challenges (Part One of Three),” Hedge Fund Law Report, Vol. 6, No. 43 (Nov. 8, 2013).  And the third article will continue the discussion of risks associated with opt-out rights, focusing on regulatory and other risks, and conclude with a discussion of best practices for implementing such rights.  The intent of this series is to highlight the core tenets of a tool that managers can use to raise capital more effectively.  To offer a simple example: Rather than turning away a pension fund investor with an aversion to tobacco stocks, a manager can grant the pension fund the right to opt out of tobacco-related investments, and accept the investment.  But opt-out rights get significantly more complex, implicating concepts of transparency, liquidity, fiduciary duty and other legal and operational challenges.  This series identifies the headline challenges in this area and offers best practices for addressing them.

Sidley Austin Private Funds Conference Addresses Recent Developments Relating to Fund Structuring and Terms; SEC Examinations and Enforcement Initiatives; Seeding Arrangements; Fund Mergers and Acquisitions; CPO Regulation; JOBS Act Implementation and Compliance; and Derivatives Reforms (Part Three of Three)

This is the third installment in the Hedge Fund Law Report’s three-part series covering the recent Sidley Austin LLP conference entitled “Private Funds 2013: Developments and Opportunities.”  This article summarizes the key points made by presenting Sidley partners on relevant regulatory developments, including commodity pool operator registration and regulation, over-the-counter derivatives reforms and implementation and compliance with the JOBS Act.  The first article summarized conference segments on fund structuring, single-investor funds, first loss capital arrangements, side letter terms, hard wiring of feeder funds for ERISA purposes, liquidity terms, fee terms, founder share classes and expense allocations and caps.  And the second article addressed SEC examinations and enforcement, the SEC’s new policy requiring admissions of wrongdoing and best practices for compliance, seeding arrangements and fund mergers and acquisitions.

Barclays Survey Uncovers Family Office Perspectives on Hedge Fund Allocation Percentages, Strategies, Liquidity, Fees, Track Record and Investor Base

Barclays recently asked 81 family offices about their preferences and practices in making hedge fund investments.  Its survey report analyzed what proportions of assets under management family offices are allocating to hedge funds; how those allocations are likely to change in the coming months; and how the practices of single-family offices differ from those of multi-family offices.  See “How Can Hedge Fund Managers Effectively Raise Capital from Single-Family Offices, Multi-Family Offices and High Net Worth Individuals,” Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013).  The report also explored family office preferences with regard to hedge fund investment strategies, liquidity terms, fees, track record and investor base.  This article summarizes the key findings of Barclays’ survey.  For another perspective on family office preferences, see “Why and How Do Family Offices and Foundations Invest in Hedge Funds?,” Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).

Cayman Grand Court Enforces Side Letter between Hedge Fund and Beneficial Owner of Fund Shares, Even Though the Letter Was Not Signed by the Shareholder of Record

The Grand Court of the Cayman Islands, Financial Services Division, recently ruled that a side letter between a Cayman hedge fund and beneficial owner of certain fund shares was enforceable, even though the side letter was not signed by the registered shareholder.  See “Can an Investor Who Invests Through a Nominee Shareholder in a Cayman Islands Hedge Fund Rely on a Side Letter To Which Its Nominee Is Not a Party?,” Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013).  This article summarizes the background of the dispute, the circumstances surrounding the side letter and the reasoning underpinning the Court’s decision.  For more on structuring and negotiating side letters, see “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters,” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

Federal Court Orders Goldman Sachs to Advance Attorneys’ Fees to Ex-Employee Charged with Theft of Trade Secrets

On October 22, 2013, the United States District Court for the District Court of New Jersey ruled that Goldman Sachs Group, Inc., the parent company of Goldman Sachs & Co., must advance the legal fees and related costs that its former employee, Sergey Aleynikov, incurred and will incur in defending against New York State criminal charges that he stole confidential computer code from the company to benefit his new employer.  The Court’s decision regarding advancement turned on whether Aleynikov was deemed to be an “officer” as defined in Goldman’s by-laws, which permit advancement of legal defense expenses for officers.  The Court’s decision underscores the imperative for hedge fund managers to carefully define the scope of firm personnel who will be afforded the benefit of advancement and indemnification of legal expenses incurred in defending civil and criminal cases.  See “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).  This article summarizes the factual background and Court’s legal analysis, as well as lessons for hedge fund managers arising out of the decision.

Bermuda Investment Funds Amendment Act 2013 Facilitates the Organisation and Operation of Hedge Funds in Bermuda

An energetic collaboration of the Government of Bermuda, the Bermuda Monetary Authority (BMA) and the private sector in Bermuda has yielded exciting results – the passage of the Bermuda Investment Funds Amendment Act 2013 (Act).  The Act creates a new asset class known as the “Class A Exempt Fund,” which is exempt from authorisation and supervision.  The exempted product is not new to Bermuda.  However, the fact that it can be launched immediately upon filing of an exemption notification with the BMA, with no additional regulatory approval, makes it a user friendly and cost efficient alternative to competing products in the marketplace.  Once the exemption notification is filed, the exemption automatically takes effect.  In a guest article, Sarah Demerling, a partner at Appleby in Bermuda, describes the new classes of exempt funds created by the Act, the requirements that must be fulfilled to rely on the exemptions and the opportunities for hedge fund managers created by the new exemptions.

SEC Names LeeAnn Gaunt as Chief of Municipal Securities and Public Pensions Unit

On November 8, 2013, the Securities and Exchange Commission announced the appointment of LeeAnn Ghazil Gaunt as chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit.  See “Why and How Do Corporate and Government Pension Plans, Endowments and Foundations Invest in Hedge Funds?,” Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013).