Mar. 28, 2014

Dechert Partners Discuss Impact of Volcker Rule on European Hedge Fund Managers

On December 10, 2013, federal agencies issued final regulations under the Volcker Rule (Rule), which is part of the Dodd-Frank Act.  The Rule’s primary goal is to limit systemic risk by prohibiting proprietary trading by banks.  In short, the Rule prohibits “banking entities” from engaging in proprietary trading and from holding interests in certain “covered funds.”  Given the broad definitions of “banking entity” and “covered fund,” many European funds and other foreign financial institutions are likely to be affected by the Rule.  A recent program presented by the financial services group of law firm Dechert LLP and the European Fund and Asset Management Association (EFAMA) discussed the potential impact of the Rule on European fund managers.  The program featured Jarkko Syyrilä, Deputy Director General of EFAMA, and Dechert LLP partners Karen L. Anderberg, Julien Bourgeois, David J. Harris and David A. Vaughan.  For insight from Vaughan previously published in the HFLR, see “A Practical Guide to AIFMD Reporting for Non-U.S. Fund Managers: Reporting Under AIFMD versus Form PF,” Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013); and “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).

Greenlight Capital Action against Seeking Alpha Illustrates the Benefits and Limitations of Obtaining Confidential Treatment of Quarterly Reports on Form 13F

David Einhorn’s hedge fund management company, Greenlight Capital, Inc. (Greenlight), recently commenced an action in the New York State Supreme Court, New York County (Court), against Seeking Alpha, Inc. (SA), to discover the name of an anonymous blogger who allegedly revealed Greenlight’s position in Micron Technologies (Micron).  In July 2013, Greenlight quietly began to accumulate a position in Micron.  To that end, it requested confidential treatment of that position in the next periodic report on Form 13F that it was obligated to file with the SEC.  However, in November 2013, an anonymous contributor to SA’s website,, allegedly revealed Greenlight’s investment in Micron.  Greenlight claimed that that information was revealed in breach of a duty of confidentiality and sought permission from the Court to (1) force SA to provide it with the contributor’s identity and contact information and (2) serve pre-action discovery demands on SA in order to obtain that information and any of the contributor’s archived postings on that site.  On March 24, Greenlight filed a Notice of Discontinuance of that lawsuit.  On the same day, The New York Times reported that Greenlight had learned the identity of the contributor; a spokesman for SA told The Times that SA did not reveal the contributor’s name to Greenlight.  This article first describes the factual background and legal claims in Greenlight’s now discontinued action against SA.  This article then summarizes authority on obtaining confidential treatment of Form 13F information, including the statutory and regulatory context, guidance from the SEC’s Division of Investment Management, law firm insight and relevant litigation.

How Can a Hedge Fund Manager Dislodge a Poison Pill at a Public Company?

Third Point LLC (Third Point) recently filed a complaint in the Delaware Chancery Court against Sotheby’s and its board, challenging the defendants’ adoption and non-redemption of a poison pill.  The pill limits the amount of Sotheby’s common stock that Third Point can economically accumulate and undermines Third Point’s ability to wage a valid proxy contest and otherwise exercise the shareholder franchise.  This article describes the business context of Third Point’s “constructivist” campaign at Sotheby’s, the adoption of the pill by Sotheby’s and Third Point’s chief arguments in favor of rescinding the pill.

Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors

For at least the last four years, the Cayman Islands legislative, regulatory and judicial authorities have been focused on improving fund governance.  Three noteworthy examples of this focus include the August 2011 Weavering decision, the January 2013 Statement of Guidance on fund governance and the January 2014 issues paper on statutory codification of directors’ duties.  On the last, see “What Are the Duties of Directors of Cayman Islands Hedge Funds, and Should Those Duties Be Codified?,” Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).  The latest action by Cayman authorities on fund governance is a bill (Bill), gazetted on March 21, 2014, with the short title “Directors Registration and Licensing Law, 2014.”  The Bill generally requires directors of “covered entities” to be registered and requires professional directors of covered entities to be licensed.  This article explains the mechanics of the proposed registration and licensing regime, the regime’s application to non-resident directors, the proposed phase-in schedule, disciplinary provisions, insurance requirements and the “register of directors” referenced in the Bill.

Four Imminent Changes to E.U. Data Protection Laws of which Private Fund Managers Should Be Aware

Private fund managers with any nexus to the E.U. should care about European data protection laws for two broad categories of reasons: because such laws may impact compliance policies and procedures and other operations at the management company itself, and because such laws may impact companies in which managers’ funds invest.  The latter point typically applies differently to hedge and private equity fund managers.  For hedge fund managers, data privacy laws can create buying or selling opportunities (in the presence of dramatic violations, analogous to the Target data breach in the U.S.), can offer a proxy for the general corporate governance climate at an investee company and are engendering the creation of a new (albeit limited) industry focused on compliance.  For private equity fund managers, data protection laws will typically raise costs at European portfolio companies, and – the other side of the cost coin – offer opportunities to reduce per unit costs via economies of scale spread over multiple portfolio companies.  This article offers a short but pointed summary of some of the key elements of E.U. data protection law currently in force, and highlights four forthcoming changes that will alter the contours of that law and the way private fund managers interact with it.  For discussions of separate sets of considerations for U.S. managers with E.U. operations, see “What Should Hedge Fund Managers Understand About Transfer Pricing and How to Manage the Related Risks?,” Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013) (transfer pricing considerations for U.S. managers with London or E.U. affiliates); “Potential Impact on US Hedge Fund Managers of the Reform of the UK Tax Regime Relating to Partnerships and Limited Liability Partnerships,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014) (U.K. tax considerations for U.S. managers); “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013) (AIFMD considerations for U.S. managers).

IRS Clarifies that Bitcoin and Other Virtual Currencies Are Treated as Property for U.S. Federal Tax Purposes

Bitcoin is a virtual currency whose “supply” is determined by a preset computer algorithm and whose value is determined based on trading on dedicated exchanges.  (One notable Bitcoin exchange – Tokyo-based Mt. Gox – filed for bankruptcy protection in February of this year, claiming that 850,000 Bitcoins, worth about $500 million, were “stolen” by computer hackers.)  Hedge fund managers, manager principals and other types of investment managers (notably, venture capital fund managers) are interacting with the Bitcoin ecosystem in various ways.  For such managers and persons, a recently-issued IRS notice helps clarify the application of general tax principles to transactions using virtual currency.  For a related discussion of the role of different currencies in hedge fund structuring and marketing, see “Local Currency Hedge Funds Expand Marketing and Investment Opportunities, but Involve Currency Hedging and Other Challenges,” Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).

KPMG’s Global Hedge Fund Leader Rob Mirsky Relocates to New York

On March 24, 2014, KPMG announced that Robert Mirsky, global head of its hedge fund practice, has relocated to New York from London.  For insight from KPMG, see “Four Strategies for Hedge Fund Managers for Accessing EU Capital Under the AIFMD,” Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014); “KPMG/AIMA/MFA Survey Quantifies the Impact of the AIFMD, FATCA, Form PF and Adviser/CPO Registration on Hedge Fund Manager Compliance Budgets,” Hedge Fund Law Report, Vol. 6, No. 43 (Nov. 8, 2013); “Survey by AIMA and KPMG Identifies the Key Drivers of the Bifurcation of the Hedge Fund Industry Between Larger and Smaller Managers,” Hedge Fund Law Report, Vol. 5, No. 21 (May 24, 2012).

Yoram Keinan Joins Carter Ledyard & Milburn LLP as a Tax Partner

Carter Ledyard & Milburn LLP recently announced that Yoram Keinan has joined the firm as a partner in its Tax Department.  For insight from Keinan, see “The End of Deferral As We Know It: The New Rules Prohibiting the Deferral of Compensation Paid to U.S. Managers By Off-Shore Hedge Funds,” Hedge Fund Law Report, Vol. 1, No. 23 (Oct. 28, 2008); and other articles for which he provided expertise: “Providing Certainty on Death and Taxes: The IRS Issues Initial Guidance for Sellers and Purchasers of Life Insurance Policies,” Hedge Fund Law Report, Vol. 2, No. 19 (May 13, 2009); and “The Future Will Be Better Tomorrow: The Obama Tax Agenda Is Released,” Hedge Fund Law Report, Vol. 2, No. 21 (May 27, 2009).