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    Jun. 6, 2014

The Best-Laid Plans: Preventing Rule 10b5-1 Plans from Going Awry (Part One of Two)

The increased focus of regulators, media and private litigants on insider trading has recently expanded to a new target: Rule 10b5-1 trading plans (10b5-1 plans), which are intended to invoke the affirmative defense against insider trading claims provided by Exchange Act Rule 10b5-1 for trades executed pursuant to a written plan that meets specific requirements.  10b5-1 plans are best known as devices to allow company insiders to buy or sell securities pursuant to a pre-arranged instruction without facing automatic liability for insider trading.  When properly implemented, the rule enables both investors and issuers to execute trades, even when they know material nonpublic information, so long as the trades are made pursuant to a plan established when the investor or issuer did not have inside information.  These protections can extend beyond the diversification needs of individual company executives.  For example, trades made by hedge funds pursuant to stop-loss and trailing-stop orders may be protected from insider trading liability if the orders are designed and implemented in accordance with Rule 10b5-1’s parameters.  And the protections of Rule 10b5-1 are not limited to publicly-traded stocks.  Private equity funds and other distressed debt investors and investment managers can also benefit from Rule 10b5-1, such as by using a 10b5-1 plan to make future acquisitions of company debt without running afoul of insider trading restrictions.  The protection of the affirmative defense is not absolute, however, and those trading under the auspices of even a properly adopted 10b5-1 plan have to be careful not to undermine their protection.  In a two-part series of guest articles, Daniel Laguardia, K. Mallory Brennan and Ross Kamhi explain the mechanics of 10b5-1 plans and their application to the private funds industry; examine the lessons that can be learned from an inquiry into possible insider trading by a major private equity fund manager that purchased debt of a portfolio company pursuant to a 10b5-1 plan (the inquiry ultimately determined that the trading had not violated insider trading restrictions); and recommend practices that may enhance the defensibility of a 10b5-1 plan.  Laguardia is a partner in Shearman & Sterling’s Litigation Group, and Brennan and Kamhi are associates in that group.  This is the first article in the two-part series.

RCA Enforcement, Compliance and Operations 2014 Symposium Offers Insight from Top SEC Officials on Custody, Conflicts, Broker Registration, Alternative Mutual Funds and the JOBS Act (Part One of Two)

On May 1, 2014, the Regulatory Compliance Association held its Enforcement, Compliance and Operations (ECO) 2014 Symposium in New York City.  Top SEC officials and other panelists at the ECO 2014 Symposium offered detailed, current and candid insight on regulatory transparency, custody, conflicts raised by serving simultaneously as a broker and investment adviser, what the SEC’s Division of Trading and Markets does, interaction between the SEC’s Office of Compliance Inspections and Examinations and its Enforcement Division, broker registration of in-house marketing departments, alternative mutual funds, the JOBS Act, cybersecurity, Regulation M, examinations, expert networks and political intelligence.  This is the first article in a two-part series summarizing the key takeaways from the ECO 2014 Symposium.  See also “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

Citi Survey Highlights Opportunities for Hedge Fund Managers as Institutional Investors Seek to Optimize Their Portfolios (Part One of Two)

Citi Investor Services (Citi) recently released its fifth annual hedge fund industry Evolution Report (Report).  Citi reports that hedge fund assets under management (AUM) at the end of 2013 were at an all-time high of over $2.6 trillion, and predicts that hedge fund AUM will exceed $4.8 trillion by 2018.  This growth has surpassed Citi’s prior optimistic predictions.  See “Citi Prime Finance Survey Predicts Hedge Fund Industry Assets Will Nearly Double by 2016 and Highlights Opportunities for Hedge Fund Managers to Grow Assets Under Management,” Hedge Fund Law Report, Vol. 5, No. 25 (Jun. 21, 2012).  The Report provides insights into how hedge fund managers can position themselves to benefit from this continuing growth.  This article, the first of a two-part series, covers the portions of the Report that deal with the evolution of the hedge fund investor base since the 2008 global financial crisis, the evolving role of hedge funds as “shock absorbers” in institutional investor portfolios and the shift of those investors toward risk-aligned portfolios.

Benefits and Burdens for Hedge Fund Managers in Establishing or Converting to a Family Office

In this guest article, Pamela Snetro and Christopher Cavallaro, both financial advisers with Morgan Stanley Wealth Management, define a single family office and a multifamily office; identify potential benefits of a family office for hedge fund manager principals; list five potential concerns for hedge fund manager principals in establishing a family office; and highlight some of the reasons why hedge fund managers may consider converting to a family office format.  See “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office,” Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).

Greenwich Associates Report Argues That Hedge Fund Managers Can Use the Cloud to Obtain Greater Computing Power at Lower Cost with Acceptable Risk

A recent Greenwich Associates (GA) report discussed, in connection with the use of cloud computing by hedge fund managers: what hedge fund managers use cloud computing for, security, compliance and culture.  The report concludes with a four-part argument in favor of the ability of hedge fund managers – especially those that use derivatives or structured products – to obtain more computing power at lower cost via the cloud.  This article summarizes the GA report.  See also “Key Considerations for Hedge Fund Managers in Evaluating the Use of Cloud Computing Solutions (Part Two of Two),” Hedge Fund Law Report, Vol. 5, No. 41 (Oct. 25, 2012).

Ropes & Gray Expands Tax Capability in London

On June 3, 2014, Ropes & Gray announced that Andrew Howard has joined the firm as counsel in its London tax & benefits department.  For insight from the firm, see “Estate Planning Tips for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014); “Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities,” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014); and “Tax and Structuring Considerations for Funds Organized to Invest in Master Limited Partnerships,” Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).

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