May 23, 2014

Six Privacy-Related Topics to Be Covered by a Hedge Fund Manager’s Compliance Policies and Procedures (Part Three of Three)

This is the final article in our three-part series on employee privacy issues relevant to hedge fund managers.  The first article in this series made the case, using examples, for why hedge fund managers should care about employee privacy.  See “How Can Hedge Fund Managers Reconcile Effective Monitoring of Electronic Communications with Employees’ Privacy Rights? (Part One of Three),” Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014).  The second article in this series identified the five primary sources of employee privacy rights.  See “Three Best Practices for Reconciling the Often Conflicting Sources of Privacy Rights of Hedge Fund Manager Employees (Part Two of Three),” Hedge Fund Law Report, Vol. 7, No. 14 (Apr. 11, 2014).  This article discusses six topics that hedge fund managers should cover in their compliance policies and procedures under the general rubric of employee privacy.  The overarching aim of this series is to assist managers in calibrating and communicating their employees’ expectations of privacy – particularly in connection with electronic communications – in a manner consistent with best practices, relevant law and expectations of SEC examiners.

The 1992 ISDA Master Agreement Says Notice Can Be Given Using an “Electronic Messaging System”; If You Think That Means “E-Mail,” Think Again

That was the conclusion in a case decided last month by the High Court of England and Wales.  In a guest article, Anne E. Beaumont, a partner at Friedman Kaplan Seiler & Adelman LLP, discusses the court’s decision, the definition of an “electronic messaging system” under the 1992 ISDA Master Agreement, the significance of the decision for users of New York-law ISDA Master Agreements and how to provide for e-mail notice.  For related analysis by Beaumont, see “Five Steps for Proactively Managing OTC Derivatives Documentation Risk,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

Bankruptcy Court Rules on Whether Funds Held by Bankrupt Futures Commission Merchant for Retail Forex and OTC Metals Trading Are “Customer Property” Entitled to Priority Distribution

Peregrine Financial Group, Inc. (PFG) was a registered futures commission merchant (FCM) and a “Forex Dealer Member” of the National Futures Association (NFA).  In July 2012, after discovering the theft of client funds, PFG filed for bankruptcy protection.  Later that year, PFG’s bankruptcy trustee (Trustee) sought permission to distribute “customer property” to PFG customers who traded “commodity contracts.”  Such customers are entitled to priority in distributions from a commodities broker bankruptcy.  The Trustee did not include in the proposed distribution PFG customers who engaged in retail foreign exchange (retail forex) and over-the-counter spot metals (OTC metals) transactions.  As a result, Secure Leverage Group, Inc. and other customers of PFG that had accounts with PFG for trading in retail forex and OTC metals commenced an adversary proceeding.  They sought a declaration that their retail forex and OTC metals trading constituted “commodity contracts” within the meaning of the U.S. Bankruptcy Code and that, accordingly, they were entitled to share in the proposed priority distribution of “customer property.”  Jockeying over “customer” status is not unique to bankruptcies of FCMs; similar issues arise in SIPA liquidations as well.  See “U.S. District Court Rules on Whether a Party to a Repurchase Agreement with a Broker-Dealer That Enters Liquidation Is a ‘Customer’ of the Broker-Dealer under SIPA,” Hedge Fund Law Report, Vol. 7, No. 18 (May 8, 2014).

FCPA Considerations for the Private Fund Industry: An Interview with Former Federal Prosecutor Justin Shur

The assets in private funds are growing faster than the number of investment opportunities, especially in discovered markets.  See “OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing,” Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014) (section on “Consolidation and Compression of Returns”).  As a result, private equity and hedge fund managers are looking with increasing receptivity at emerging markets, and, in some cases, frontier markets.  These are the faraway places where big, risky opportunities still live – where information remains asymmetric, access remains elusive and property rights remain in flux.  More often than not, these are also the places that rank low on Transparency International’s Corruption Perceptions Index.  Consequently, the Foreign Corrupt Practices Act – the U.S. statute prohibiting bribery of foreign officials – looms ever larger as private fund managers scour the globe for interesting ideas.  It comes up in fund raising from sovereign wealth funds; in structuring funds and transactions; in retaining finders, brokers, distributors and other third parties; in monitoring investments; in restructurings; in hiring; and in a wide range of other contexts.  See “Practical Considerations for Compliance by Hedge Fund Managers with the FCPA When Evaluating and Engaging Foreign Advisors in Connection with Foreign Bankruptcy Investments,” Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).  In an effort to assist private fund managers in spotting FCPA-related issues and mitigating FCPA risk, we recently interviewed Justin V. Shur, a former federal prosecutor and now a partner at Molo Lamken LLP.  Our interview covered, among other topics: the relationship between investment control and FCPA risk; contract provisions to limit the FCPA risk raised by third parties; issues presented by deal finders and sovereign wealth funds; hiring risks and best practices; facilitation payments; how to handle an FCPA issue discovered during due diligence; and successor liability.  Shur will expand on these ideas at an event on June 3 at the CORE: Club in Manhattan.  The event is being sponsored by Molo Lamken, the Hedge Fund Law Report and our affiliated publication, The Anti-Corruption Report.  In addition to Shur, the event will feature panelists from Indus Capital, Seward & Kissel, Global Environment Fund and the U.S. Securities and Exchange Commission.

United Arab Emirates Implements Licensing Regime for Firms Providing Investment Management Services

In 2000, the United Arab Emirates (UAE) established the UAE Securities and Commodities Authority (ESCA) to supervise and monitor its financial markets.  In 2012, ESCA issued regulations governing the offering of investment funds in the UAE.  It recently issued a follow-up regulation governing the offering of investment management services in the UAE.  A recent event provided an overview of the new regulation, and insight into the interpretation and scope of its provisions.  The new regulation and interpretation of it are relevant to hedge fund managers with or targeting investors or investments in the UAE.  See also “Why and How Do Middle Eastern Sovereign Wealth Funds, Pension Funds and High Net Worth Individuals Invest in Private Funds?,” Hedge Fund Law Report, Vol. 6, No. 23 (Jun. 6, 2013).

King & Spalding Recruits Alternative Investments Partner Drew G.L. Chapman

On May 19, 2014, King & Spalding announced that Drew G.L. Chapman will join its New York office as a partner in the financial institutions practice.  Chapman joins King & Spalding from WilmerHale, where he was head of the alternative investment group.  For insight from Chapman, see “Investment Opt-Out Rights for Hedge Fund Investors: Regulatory Risks, Operational Challenges and Seven Best Practices (Part Three of Three),” Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013); “WilmerHale and Deloitte Identify Best Legal and Accounting Practices for Hedge Fund Valuation, Fees and Expenses,” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).

K&L Gates Welcomes Investment Management Partner C. Todd Gibson

On May 20, 2014, K&L Gates LLP announced that it added C. Todd Gibson as an investment management partner in its Boston and Pittsburgh offices.  For insight from K&L Gates, see “K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014).