Jul. 24, 2014

How Much Are Hedge Fund Manager General Counsels and Chief Compliance Officers Paid?

In a revealing recent interview with the Hedge Fund Law Report, Jason Wachtel, Managing Partner of JW Michaels, provided detailed insight into the structures and levels of compensation of hedge fund manager general counsels and chief compliance officers.  Specifically, Wachtel discussed the “market” for compensation of GCs and CCOs; the role of manager size and candidate experience in determining compensation; compensation of junior legal and compliance personnel; compensation of dual-hatted employees; how compensation of GCs and CCOs of hedge fund managers compares to the compensation of persons in similar roles at private equity fund managers; the relationship among fund performance, examination experience and compensation; how experience as a regulator or prosecutor affects compensation; investments by GCs and CCOs in the manager’s funds; and GC and CCO reporting lines.  See also “Annual Greenwich Associates and Johnson Associates Report Reveals Trends in Compensation of Investment Professionals at Buy-Side Firms,” Hedge Fund Law Report, Vol. 6, No. 48 (Dec. 19, 2013).

Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD

The European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) established a comprehensive regime to regulate investment funds that are not organized under the Undertakings for Collective Investment in Transferable Securities Directive and that are based in or marketed into the EU.  See “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  July 22, 2014 was a critical compliance deadline under the AIFMD.  As of that date, in order to market funds in the EU, EU fund managers must be fully authorized under the AIFMD.  Non-EU managers that are ineligible for, or that do not wish to seek, full AIFMD authorization must rely on the private placement regimes of each EU state in which the manager will market; alternatively, they might consider relying on “reverse solicitation” or joining an AIFMD-authorized platform.  See “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014).  A recent program sponsored by Covington & Burling LLP and Augentius provided a timely recap of the requirements and challenges facing non-EU fund managers that wish to market into the EU in reliance on the private placement regimes.

U.K. Financial Conduct Authority Clarifies Whether Hedge Fund Managers May Use Dealing Commissions to Pay for Substantive Research or Corporate Access

U.S. investment advisers are required to seek best execution for their clients’ securities trades, a duty that generally includes seeking to pay the lowest available commissions.  However, under Section 28(e) of the Securities and Exchange Act of 1934, advisers are permitted under certain circumstances to pay higher commissions if, in exchange, they receive credits – “soft dollars” – that can be used to pay for certain eligible brokerage or research services.  See “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).  The U.K. has a similar regime, and the U.K. Financial Conduct Authority recently clarified the application of that regime to the use of dealing commissions by hedge fund managers to purchase substantive research or corporate access.  See also “Best Practices for Due Diligence by Hedge Fund Managers on Research Providers,” Hedge Fund Law Report, Vol. 6, No. 11 (Mar. 14, 2013).

How Does the Custody Rule Apply to Special Purpose Vehicles Used by Private Equity Funds to Purchase, and Escrow Accounts Used to Sell, Portfolio Companies?

In June 2014, the SEC’s Division of Investment Management issued a Guidance Update (Guidance) on certain obligations of advisers to pooled investment vehicles, particularly private equity funds, under Rule 206(4)-2 of the Investment Advisers Act (Custody Rule), when they invest in special purpose vehicles (SPVs) to purchase, or use escrow accounts to sell, portfolio companies.  The Guidance provides three scenarios under which advisers would be deemed to have indirect custody of the assets owned by the SPV and therefore should include the assets in the pooled investment vehicles’ financial statement audits.  The Guidance describes a fourth scenario under which advisers should treat the assets of an investment fund as a separate client for purposes of the Custody Rule, complying separately with its audited financial statement distribution requirements with respect to the investment fund.  Finally, the Guidance states that the SEC would allow advisers to maintain client funds in an escrow account with other client and non-client assets if five criteria are met.  See also “How Does the SEC Approach Custody Issues in the Course of Examinations of Hedge Fund Managers?,” Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012).

Five Key Compliance Challenges for Alternative Mutual Funds: Valuation, Liquidity, Leverage, Disclosure and Director Oversight

On June 30, 2014, Norm Champ, Director of the SEC’s Division of Investment Management, delivered a speech providing an overview of the forces behind the growing alternative mutual fund industry and some concrete steps that hedge fund managers can take to avoid compliance pitfalls when entering that industry.  See “Key Investment and Operational Restrictions Imposed on Alternative Mutual Funds by the Investment Company Act of 1940 (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 25 (Jun. 27, 2014).  Specifically, Champ discussed: how alternative mutual fund managers should approach the regulatory issues associated with valuation, liquidity, leverage and disclosure; the role of directors in overseeing compliance programs of alternative mutual funds; ongoing and new initiatives by OCIE targeting alternative mutual funds’ compliance programs; and the utility of IM Guidance Updates in revising compliance programs.  See also “Citi Survey Highlights Opportunities for Hedge Fund Managers as Institutional Investors Seek to Optimize their Portfolios (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014) (in particular, section entitled “The Rise of Alternative Mutual Funds”).

The Hedge Fund Law Report Joins Mergermarket Group

On July 21, 2014, Mergermarket Group announced that it acquired The Law Report Group, the New York-based publisher of the Hedge Fund Law Report and The FCPA Report.  For HFLR subscribers, this transaction will result in content, distribution and product enhancements.

Perkins Coie Strengthens Investment Management Team in D.C. and White Collar Practice in San Diego

On July 21, 2014, Perkins Coie announced that Andrew P. Cross and Todd P. Zerega have joined its growing investment management team in Washington, D.C.  See also “Jesse Kanach Adds Depth to Perkins Coie’s Investment Management Practice in D.C.,” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).  In addition, Sean T. Prosser has joined the firm as a partner in its San Diego white collar and investigations practice.  On investigations, see “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations,” Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013).