Cybersecurity has been a growing priority for the SEC.  See “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Two of Three),” Hedge Fund Law Report, Vol. 7, No. 8 (Feb. 28, 2014).  On March 26, 2014, the SEC hosted a cybersecurity roundtable that featured representatives of regulatory agencies, leading professional firms, financial institutions and other businesses.  SEC Chair Mary Jo White and Commissioner Luis A. Aguilar gave opening remarks that stressed the SEC’s concerns about cybersecurity threats.  Following that event, the SEC’s Office of Compliance Inspections and Examinations issued a National Exam Program Risk Alert (Alert) that outlined a new initiative to “assess cybersecurity preparedness in the securities industry and . . . obtain information about the industry’s recent experiences with certain types of cyber threats,” including a plan to examine more than 50 registered investment advisers and broker-dealers on cybersecurity matters.  The Alert also included examples of questions relating to cybersecurity that examiners may pose to investment advisers and broker-dealers.  For hedge fund managers, whether or not registered, the Alert and speeches at the roundtable offer valuable guidance for identifying and addressing cybersecurity threats, and preparing for SEC examinations that focus in part on cybersecurity.  See also “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014). Read full article …

Hedge fund managers invest in securities.  Hedge fund of funds managers invest in people.  Somewhere in between are multi-manager hedge funds, in which a senior management team allocates capital to internal portfolio managers, monitors firm-wide risk and centralizes back-office functions.  Multi-manager funds are growing quickly, especially relative to conventionally run hedge fund groups.  The ten largest multi-manager funds had AUM of $100 billion as of mid-2013, reflecting net inflows of $15 billion since the beginning of 2009.  The ten largest conventionally run hedge funds had $140 billion in AUM as of mid-2013, reflecting net outflows of $28 billion since the beginning of 2009.  To give our subscribers greater insight into what multi-manager hedge funds are, how they are structured and how they operate, the Hedge Fund Law Report recently conducted an interview with Tomas Kmetko, a research consultant at Cambridge Associates.  Our interview covered, among other topics: the difference between multi-manager funds and funds of funds; legal entity and fee structuring; design of compensation mechanisms; risk management and mitigation in the multi-manager format; allocation of responsibility for legal, compliance, technology and similar functions; marketing of multi-manager funds; comparing performance of multi-manager funds with traditional hedge funds; and talent management considerations. Read full article …

In 2013, hedge fund NB Distressed Debt Investment Fund Limited (NB Distressed) and affiliates purchased an interest in a defaulted loan to a bankrupt borrower.  Distressed debt investing can present a host of complexities, especially when the borrower is in bankruptcy.  See “ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Distressed Debt Investing (Part Two of Three),” Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013).  Those issues may involve credit bidding, equitable subordination, disallowance risks, insider trading and recharacterization of debt as equity.  In the case of NB Distressed, the loan documents provided that the lender could only transfer the loan to “Eligible Assignees,” a term that included banks, insurance companies and “financial institutions.”  The bankruptcy court ruled that the funds were not financial institutions and therefore not entitled to vote on the borrower’s reorganization plan.  In a recent decision, a U.S. District Court reviewed the bankruptcy court’s decision.  The District Court’s decision and analysis are relevant to hedge funds that purchase distressed debt and other loans containing “Eligible Assignee” provisions. Read full article …

Amid the sound and fury surrounding the hostile bid for Allergan by an entity jointly formed by Pershing Square Capital Management and Valeant Pharmaceuticals, a recurring question is whether the bid or the transactions leading up to it violated securities or antitrust law.  The short answer is no.  This article explains why.  See also “Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target? An Interview with Marc Weingarten, Co-Head of the Global Shareholder Activism Practice at Schulte Roth & Zabel,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014). Read full article …

Veteran federal prosecutor Katherine Goldstein will be stepping into a “top leadership position in the securities-fraud unit for Manhattan U.S. Attorney Preet Bharara’s office,” the Wall Street Journal reported today.  Working closely with the SEC and the FBI, the Securities and Commodities Fraud Task Force investigates and prosecutes crimes relating to the operation of the U.S. securities and commodities markets, including all varieties of securities fraud, insider trading, market manipulation schemes, accounting and regulatory reporting frauds and penny stock “pump and dump” schemes.  See “Current and Former Regulators and Prosecutors Particularize the Enforcement Challenges Facing Hedge Fund Managers in 2014,” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014); and “Former Federal Prosecutors Share Perspectives on Insider Trading Hot-Button Issues and Enforcement Trends Relevant to Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012). Read full article …