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    Jun. 13, 2014

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

This is the second article in a two-part series explaining the mechanics of 10b5-1 plans and their application to the private funds industry; examining 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 recommending practices that may enhance the defensibility of a 10b5-1 plan.  The authors of the series are Daniel Laguardia, a partner in Shearman & Sterling’s Litigation Group, and K. Mallory Brennan and Ross Kamhi, both associates in that group.  See also “The Best-Laid Plans: Preventing Rule 10b5-1 Plans from Going Awry (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 22 (Jun. 6, 2014).

Are Compensatory Options on Offshore Hedge Fund Shares Subject to the Anti-Deferral Provisions of Internal Revenue Code Section 457A?

For years, hedge fund managers and investors have discussed the possibility of structuring the performance allocation payable by an offshore fund to its manager as an option on or appreciation right with respect to shares of the offshore fund.  The benefits of structuring the performance allocation as an option or appreciation right include tax deferral, an implicit clawback and a multi-year measurement period.  See “Hedge Fund Managers Considering Fund Appreciation Rights Compensation Structures to Defer Tax on Performance Compensation and to Better Align Manager and Investor Incentives,” Hedge Fund Law Report, Vol. 2, No. 45 (Nov. 11, 2009).  However, implementation of such structures has been held up by tax risk: The IRS had not opined on whether options or appreciation rights in this context are subject to the anti-deferral provisions of Internal Revenue Code (IRC) Section 457A.  That ambiguity was resolved, in large measure, by a recent IRS revenue ruling.  This article identifies the specific issue addressed by the revenue ruling; summarizes relevant IRC provisions and Treasury Regulations; details the IRS’ analysis in the revenue ruling; and restates the revenue ruling’s conclusion.  Subsequent articles in the HFLR will delve into the consequences of the revenue ruling for structuring hedge fund performance compensation.

ACA Compliance Survey Covers Current Hedge Fund Practices on Marketing, Trading, Counterparties and Valuation

ACA Compliance Group (ACA) recently released the results of its 2014 Compliance Survey for Alternative Fund Managers.  Colleen Marencik, an ACA Senior Principal Consultant, and Faye Chin, an ACA Principal Consultant, recently gave a presentation to discuss the survey results.  The survey, which covered over 200 hedge fund and private equity fund managers, included an update on SEC presence exams and discussion of private fund compliance practices with regard to marketing and advertising, counterparties and trading, and valuation of assets.  See also “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013); and Part One of that series.

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

This is the second installment of the HFLR’s two-part coverage of Citi Investor Services’ (Citi) fifth annual hedge fund industry Evolution Report, entitled “Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization” (Report).  The Report, which predicts substantial growth in hedge fund assets under management in the coming years, provides insights into how hedge fund managers can position themselves to benefit from this continuing growth.  Citi discusses three “diversification trends” in the hedge fund space: A change in the way that investors use hedge funds in their portfolios, the “emergence of a multi-tiered investor audience” and the move to create alternative products for retail investors.  The first part of this series covered 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.  This article covers the second two trends, as well as co-investment opportunities, the leveraging by investors of hedge fund managers’ skill sets, and Citi’s outlook for hedge fund industry growth.

FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers

Given today’s investment environment, with an unabated government focus on the private funds industry and significant investment opportunities in emerging markets, private fund managers are hard-pressed to ignore corruption risks in their businesses.  The Hedge Fund Law Report, The Anti-Corruption Report and law firm Molo Lamken recently hosted a panel that addressed hot topics in FCPA enforcement and compliance for the private funds industry.  The panelists, including outside and in-house counsel, discussed, among other things: the current FCPA enforcement climate for hedge fund and private equity fund managers; strategies for mitigating the risk associated with third parties and service providers in high-risk countries; handling facilitation payments; self-reporting violations; and the importance of continuous monitoring of compliance programs.  See “FCPA Considerations for the Private Fund Industry: An Interview with Former Federal Prosecutor Justin Shur,” Hedge Fund Law Report, Vol. 7, No. 20 (May 23, 2014).

Pension Plan Gatekeepers Increasingly Serving as Competitors to Alternative Investment Managers

On May 21, 2014, Rep. George Miller, Senior Democratic Member of the House Committee on Education and the Workforce, sent a letter to Labor Department Secretary Thomas Perez expressing concerns about a “growing trend” in which pension consultants are “recommending” themselves to manage the assets of their pension plan clients.  See also “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).

Terry L. Wetterman, Jr. Joins Alternative Investment-Focused Investment Bank Hycroft

On June 9, 2014, Hycroft, LLC, a specialty investment bank focused exclusively on the alternative investments market, announced that Terry L. Wetterman, Jr. has joined the firm as a Director.

White & Case Strengthens Private Equity Sponsor Capabilities with Addition of New Banking Partner

White & Case LLP recently added further strength to its U.K. banking practice and intensified its focus on private equity sponsors with the arrival of new partner Martin Forbes in the London office.

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