Feb. 21, 2013

RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two)

On December 18, 2012, the Regulatory Compliance Association held its Compliance, Risk & Enforcement Symposium at the Pierre Hotel in New York City.  Participants at the event included leading hedge fund industry professionals, and panels focused on topics including insider trading, compliance programs and reviews, SEC examination priorities, hedge fund governance, Form PF and marketing and advertising issues.  We are covering the Symposium in a two article series.  This first installment addresses, among other things: insider trading (including a discussion of manager cooperation, the elements of insider trading, the continuing viability of the mosaic theory, insider trading investigative techniques and the use of expert networks and paid consultants); and compliance programs and reviews (including a discussion of the approach to and framework for hedge fund compliance programs and reviews, and specific policies and procedures designed to address trading risks).  The second installment will discuss SEC examination priorities (and practical guidance for addressing areas of concern); recent trends in hedge fund governance; lessons learned from initial Form PF filings and strategies for completing Form PF; and marketing and advertising issues, including a discussion of the JOBS Act and related issues.

How Can Hedge Fund Managers Understand Recent SEC Developments to Mitigate Enforcement Risk?

Whether it be insider trading, soft dollar issues, misappropriation or misrepresentations, the slew of SEC enforcement actions filed against investment advisers in the last year – along with the recently released results from the SEC’s Division of Enforcement (Enforcement) – speaks volumes.  The SEC is taking action.  The statistics alone show a concerning trend: In 2011, the SEC filed 146 enforcement actions relating to investment advisers or investment companies, a single year record and a 30 percent increase over fiscal year 2010.  These record numbers caused the industry to question whether this was merely an anomaly – possibly a byproduct of the financial crisis – or whether the industry as a whole became a target.  With the release of the SEC’s fiscal year 2012 numbers – 147 enforcement actions against investment advisers and investment companies, one more than the previous year’s record number – the SEC confirmed the industry’s fears.  Investment advisers remain in the SEC’s cross-hairs.  Understanding how this happened can help a firm reduce the risk of becoming the subject of an SEC examination or enforcement investigation.  This requires looking behind the statistics.  Although the driving force behind this trend is likely a multitude of factors, the primary culprits are an aggressive Asset Management Unit within Enforcement, the SEC’s new whistleblower program and an enhanced and invigorated Office of Compliance Inspections and Examinations.  In a guest article, Andrew J. Dunbar, a partner at Sidley Austin LLP and a former SEC enforcement attorney, discusses each of these developments in an effort to help hedge fund managers minimize the risk of becoming the subject of an SEC enforcement action.

Mike Neus, Managing Partner and General Counsel of Perry Capital, Discusses Practical Solutions to Some of the Harder Fiduciary Duty and Other Legal Questions Raised by Side Letters

At their core, side letters are about defining specific rights and obligations with respect to a specific investment.  Accordingly, the legal and practical issues raised by side letters, and best practices for addressing those issues, are often context-specific.  This theme of specificity – the idea that effective solutions must be narrowly tailored to specific problems where side letters are concerned – was a leitmotif in our recent conversation with Michael Neus, Managing Partner and General Counsel of Perry Capital LLC.  We posed some of the harder questions generally raised by side letters to Neus, and his answers – transcribed in this article – were typically nuanced, insightful and informed by current market practice.  In particular, we covered trends in the use of and rights granted in side letters; the advisability of and approach to selective disclosure; concerns related to modification of fund redemption terms through side letters; the impact of different regulatory regimes on side letter drafting; strategies for drafting effective most favored nation provisions; strategies for gracefully declining side letter requests; the approach to using single-investor funds and managed accounts to address side letter requests; strategies for monitoring obligations in side letters; the proper party for executing side letters; and trends in negotiating capacity rights.  See also “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).  Our interview with Neus was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013.  That Symposium is scheduled to include a panel on side letters entitled “Navigating the Side Letter Negotiation & Due Diligence Process.”  Subscribers to the Hedge Fund Law Report are eligible for a registration discount.

Hedge Fund Manager Compensation Survey Addresses Employee Compensation Levels and Composition Across Job Titles and Firm Characteristics, Employee Ownership of Manager Equity and Hiring Trends

HedgeFundCompensationReport.com, a division of Job Search Digest, has published its 2013 Hedge Fund Compensation Report.  Among other things, the Report provided a comprehensive look at compensation levels at hedge fund managers across job titles, by manager characteristics (including size, investment strategy and performance) and other criteria; composition of compensation; and employee compensation satisfaction levels.  The Report also contained data addressing employee ownership of hedge fund managers’ equity; hiring trends; and employee concerns over job security.  The Report generally revealed broad gains in average employee compensation for 2012.  This article highlights selected takeaways from the Report.

In Lawsuit by Hedge Fund Manager against Law Firm, the Viability of a Statute of Limitations Defense Turns Not on the Length of the Limitations Period, But on When the Period Starts Running

A recent decision by the New York State Supreme Court, Appellate Division, First Department, takes its place among the limited but growing body of caselaw involving lawsuits by hedge fund managers and others against law firms.  See, e.g., “Dismissal of Fortress’ Complaint Against Dechert Illustrates the Limits of a Hedge Fund Manager’s Ability to Rely on a Legal Opinion Issued by a Law Firm of Which It Is Not a Client,” Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011); “SEC Receiver for Arthur Nadel’s Scoop Capital Hedge Funds Moves to Settle Malpractice Claim Against Law Firm Holland & Knight,” Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012).  This decision addressed the question: When does the limitations period start running in a suit by a hedge fund manager principal against a law firm for deceit?  For hedge fund managers, the decision provides important insight on when to bring such a claim.  For law firms, the decision illustrates how to effectively deploy a statute of limitations defense.

Recent Lawsuit Addresses the Question of When a Hedge Fund Manager Is a Customer of a Broker-Dealer for FINRA Arbitration Purposes

A bank and its affiliated broker-dealer (plaintiffs) recently initiated suit in federal district court to enjoin a hedge fund and its manager (defendants) from continuing to pursue a Financial Industry Regulatory Authority, Inc. (FINRA) arbitration claim initiated against them.  Among other things, the plaintiffs contend that the defendants were not “customers” of the broker-dealer affiliate, and were not required to submit to FINRA arbitration.  FINRA Rule 12200 requires FINRA members to arbitrate disputes, in the absence of a written agreement, if requested by “customers.”  The court’s ultimate determination as to who constitutes a “customer” will likely impact the availability of this alternative dispute resolution mechanism for hedge funds and their managers looking to assert legal claims against FINRA members.  This article summarizes the factual allegations, arguments and relief sought by the plaintiffs in their complaint.  See also “How Hedge Fund Managers Can Use Arbitration Provisions to Prevent Investor Class Action Lawsuits,” Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).

Macfarlanes Expands Hedge Fund Offering with Fund Formation Partner Simon Thomas

Macfarlanes has announced the appointment of alternative investment fund lawyer Simon Thomas as a partner in its investment funds group.  For insight from Thomas on structures commonly used for alternative investment funds in Europe, see “European Alternative Funds: The Alternatives,” Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009).

Ganesh Ramkumar Joins EisnerAmper Fund Services LLC as Managing Director of New Markets in Bangalore

On February 18, 2013, EisnerAmper Fund Services LLC (EFS) announced that Ganesh Ramkumar has joined the firm as Managing Director-New Markets, a new position, effective immediately.  For insight on hedge fund structuring and related concerns from EisnerAmper LLP, see “Structuring, Valuation, Fee Calculation and Other Legal and Accounting Considerations in Connection with Hedge Fund General Redemption Provisions, Lock-Up Periods, Side Pockets, Gates, Redemption Suspensions and Special Purpose Vehicles,” Hedge Fund Law Report, Vol. 3, No. 43 (Nov. 5, 2010).