Jul. 11, 2014

Potential Pitfalls for Hedge Fund Managers in the Ever-Expanding Use of English Schemes of Arrangement

The English scheme of arrangement has surged in popularity in recent years as distressed hedge fund managers tackle Europe.  The appeal of this procedure is easy to identify.  First, the scheme is predictable: its legal requirements and parameters are clearly set forth in a robust body of law, and it is administered by sophisticated and commercially-minded courts in the United Kingdom.  Second, the scheme permits the company to continue operating (and its management to remain in control) throughout the restructuring – a feature that is prevalent in the United States but which is lacking in many other jurisdictions.  From the perspective of fund managers with American roots, the English scheme has the added benefit of familiarity as it resembles in many ways a “pre-packaged” chapter 11 procedure.  Due to a series of recent rulings in which English courts broadly interpret the scope of their own jurisdiction, the English scheme also has become ever-more accessible.  The courts, for example, have permitted companies with no UK presence to bind creditors under a scheme where the sole jurisdictional nexus to the UK was that the governing law clause of the debtor’s financing documents provided for the choice of English law.  Within the past few months, one English court went a step further and held that even when the foreign debtor’s financing documents originally were governed by foreign law, English jurisdiction could nevertheless be established through the amendment of the governing law clause to provide for English law.  As the English scheme becomes the preferred method of restructuring European companies, it is important to consider whether a scheme that has been “sanctioned” (or confirmed) by an English court will be given effect in other jurisdictions where the debtor has assets or where the debtor’s creditors might reside.  Indeed, before an English court will sanction a scheme, it must be satisfied that the terms of the sanctioned scheme will be respected in all of the relevant jurisdictions.  In a guest article, Solomon J. Noh and Edmund M. Emrich, partner and counsel, respectively, in the Financial Restructuring & Insolvency Group of Shearman & Sterling LLP, identify a potential blind-spot where a foreign company with assets or creditors in the U.S. seeks to restructure its debts through an English scheme of arrangement solely on the basis of the governing law being English law, and discuss potential ways to resolve issues that might arise.

Hedge Fund Industry Experts Discuss Presence Examinations Priorities, SEC Investigations and How an Admission in an SEC Settlement May Affect Insurance Coverage

Since enactment of the Dodd-Frank Act, the SEC has been shining a bright light on newly registered investment advisers, particularly through its presence exam initiative.  See “A Roadmap and Recommendations for Hedge Fund Managers Facing Presence Examinations,” Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).  Private fund managers need to be prepared to respond appropriately and effectively when the SEC comes calling, whether through a routine examination or a formal investigation.  In that regard, a recent program highlighted the areas on which the SEC has focused in its presence exam initiative, the mechanics of an SEC investigation and how admissions of liability may affect the availability of insurance coverage.  The speakers included Mary O’Connor, Global Head of the Financial Institutions Group at Willis Group Holdings; Richard Magrann-Wells, Senior Vice President at Willis; Christopher Lombardy, partner at Kinetic Partners US LLP; Robert J. Herm, Vice President at Axis Insurance; Gary Stein, partner at Schulte Roth & Zabel LLP; and Theodore A. Keyes, special counsel at Schulte.  This article provides a long-form recitation of the material points made during the program.

Dechert Partners and Venor Capital General Counsel Describe the Scope of Supervisory Liability for Hedge Fund Manager Personnel

The Regulatory Compliance Association recently presented a PracticeEdge session that addressed when and how a private fund adviser’s chief compliance officer and/or general counsel could be held personally liable for the misconduct of one of the adviser’s employees.  The session featured Dechert LLP partners Catherine Botticelli, Michael J. Gilbert and Adam J. Wasserman; and John Roth, the General Counsel and Chief Compliance Officer of Venor Capital Management.  The speakers covered the regulatory and statutory background of supervisory liability; three characteristics of effective hedge fund manager CCOs; recent enforcement actions; six tips for minimizing the risks and consequences of personal liability for manager personnel; portfolio manager liability; and codes of ethics.  This article summarizes the session.

SEC Sanctions Fund Adviser for Violation of “Pay to Play” Rule and for Failing to Register

Rule 206(4)-5 (Rule) under the Investment Advisers Act of 1940, commonly known as the “pay to play” rule, prohibits an investment adviser from providing paid investment advisory services to a government entity for two years after the adviser or certain of its employees or executives make a contribution to an official of the government entity.  See “Key Elements of a Pay-to-Play Compliance Program for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010).  In a recent administrative order, the SEC sanctioned a private fund adviser for violating the Rule.  For an example of SEC leniency for an inadvertent violation of the Rule, see “SEC Excuses a Hedge Fund Manager’s Inadvertent Violation of the Pay to Play Rule,” Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

Former SEC Counsel Joins Drinker Biddle & Reath

Drinker Biddle & Reath recently announced that Marc Leaf, former Counsel to SEC Commissioner Luis A. Aguilar, has joined the firm as a partner in the New York office and as a member of the firm’s Corporate Practice Group.  See “SEC Commissioner Aguilar Discusses Insider Trading by Hedge Fund Managers, Valuation and Other Examination and Enforcement Pressure Points,” Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013).