May 16, 2014

How Can Hedge Fund Managers Protect Themselves Against Trade Secrets Claims?

Hedge fund management firms, courts and commentators have devoted significant attention to the steps that hedge fund managers can take to protect the confidential information and trade secrets that belong to the firm, including how to protect information that is at risk when employees depart.  In that context, the focus is largely upon potential claims that a hedge fund manager might possess against a departing employee – or the potential grounds that governmental authorities might have to pursue the former employee in such a situation.  See “Recent Developments Affecting the Protection of Trade Secrets by Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013); “Protecting Hedge Funds’ Trade Secrets: What a Difference a Year Makes,” Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012); “Protecting Hedge Funds’ Trade Secrets: The Federal Government’s Enforcement of Criminal Laws Protecting Proprietary Trading Strategies,” Hedge Fund Law Report, Vol. 3, No. 48 (Dec. 10, 2010).  In a guest article, Sean R. O’Brien, Sara A. Welch and A.J. Monaco – Managing Partner, Counsel and Associate, respectively, at O’Brien LLP – consider the other edge of that sword, addressing the following questions: What exposure do hedge fund managers have when new employees arrive and bring with them information that they do not own, and what can hedge fund managers do to reduce the likelihood that they will be the subject of a theft of trade secrets or other similar claim when employees join them?  As set forth in this article, a hedge fund manager’s exposure to such claims can be significant, but at the same time there are a number of relatively simple steps hedge fund managers can take during the hiring process and otherwise to markedly reduce the risk of trade secret claims.

SEC Staff Provides Roadmap to Middle-Market Private Fund Adviser Examinations

The Association for Corporate Growth, in cooperation with law firm Venable LLP and accounting and consulting firm McGladrey LLP, recently sponsored a panel discussion on examinations of middle-market investment advisers featuring six experienced SEC staff members and other professionals.  The program provided valuable insights into how the SEC selects advisers for examinations and how it conducts those exams.  See also “Seven Recommendations to Assist Private Fund Managers in Navigating Heightened SEC Examination and Enforcement Activity,” Hedge Fund Law Report, Vol. 6, No. 27 (Jul. 11, 2013).

Anatomy of a Publicly-Offered Private Equity Investment Vehicle

Alternative investment consulting and advisory firm Altegris, in cooperation with private fund and asset manager Kohlberg Kravis Roberts & Co. L.P. (KKR), is planning to offer access to KKR funds to certain retail investors through a new closed-end investment company (Fund).  The Fund recently filed a Registration Statement under both the Securities Act of 1933 and the Investment Company Act of 1940.  Shares in the Fund will be offered only to accredited investors.  The Fund expects to invest most of its assets in funds sponsored by KKR or in co-investment opportunities with KKR.  See “Co-Investments in the Hedge Fund Context: Fiduciary Duty Concerns, Conflicts and Regulatory Risks (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  This article details the mechanics of the offering.  See “Citi Prime Finance Report Describes the Competition among Traditional, Hedge and Private Equity Fund Managers for $1.3 Trillion in Liquid Alternative Assets (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 22 (May 30, 2013).

OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing

On May 6, 2014, Andrew J. Bowden, Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), delivered a speech at Private Equity International’s Private Fund Compliance Forum 2014 in New York City.  The speech provided a candid and detailed recitation of compliance shortcomings identified by OCIE in 150 presence examinations of private equity managers conducted since October 2012.  Specifically, Bowden discussed: statistics on OCIE and the Presence Exam Initiative; limited partnership agreements; post-investment due diligence and monitoring; “zombie” advisers; consolidation and compression of returns; four commonly identified deficiencies relating to expenses; four troubling practices relating to fees; OCIE’s approach to valuation; two compliance issues raised by fund marketing; and the three chief elements of a successful culture of compliance.  Many, perhaps most, of Bowden’s points made with respect to private equity advisers would apply with equal force – or at least by close analogy – to hedge fund managers.  This article summarizes the points from the speech that may cause private fund managers to adjust their compliance policies and procedures.  For a discussion of a speech delivered by then-SEC Asset Management Unit Chief Bruce Karpati at PEI’s 2013 Private Fund Compliance Forum, see “Bruce Karpati Addresses Private Equity Enforcement Trends, Initiatives and Priorities,” Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  (Karpati has since joined KKR as global chief compliance officer.)

Can a Non-U.S. Banking Entity Invest in a Foreign Fund Organized by a Private Equity or Hedge Fund Manager That Offers a Parallel Fund to U.S. Persons?

Can a non-U.S. banking entity invest in a foreign fund organized by a non-bank sponsor (such as a private equity or hedge fund manager) that contemporaneously offers a parallel covered fund to U.S. persons?  The short answer – according to 15 of the top law firms active in the private funds space – is yes.  Here is why.

Vinson & Elkins Expands Tax Capabilities with Addition of Sheri Dillon in D.C.

On May 12, 2014, Vinson & Elkins announced that Sheri A. Dillon has joined as a partner in Washington, D.C.  Dillon represents clients in a wide variety of federal tax controversy matters, with a particular focus on partnership tax issues.  See “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); “Use by Hedge Fund Managers of Profits Interests and Other Equity Stakes for Incentive Compensation,” Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014); “Hedge Fund Tax Experts Discuss Allocations of Gains and Losses, Contributions to and Distributions of Property from a Fund, Expense Pass-Throughs and K-1 Preparation at FRA/HFBOA Seminar (Part One of Four),” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).

Perkins Coie Expands New York Financial Transactions & Restructuring Group

On May 13, 2014, Perkins Coie announced that Chris Gavin has joined the firm’s New York office as a partner in the Financial Transactions & Restructuring group.  Representative matters he has handled encompass, among other things, residential mortgage transactions and term securitizations for newly originated, seasoned and nonperforming loans.  See “Second Circuit Appeal May Alter the Regulatory Landscape for Hedge Funds and Other Investors in Residential Mortgage-Backed Securities,” Hedge Fund Law Report, Vol. 7, No. 11 (Mar. 21, 2014).

MoFo Expands Capital Markets Team in Tokyo with Addition of Akihiro Wani

On May 7, 2014, Ito & Mitomi (registered associated offices of Morrison & Foerster) announced that Akihiro Wani has joined the firm as a bengoshi (advocate) and senior counselor in Tokyo.  Wani has nearly 30 years of experience as a capital markets lawyer, acting for major domestic financial institutions on financial regulations and derivatives transactions.  See “Five Steps for Proactively Managing OTC Derivatives Documentation Risk,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).