Aug. 1, 2014

Strategies for U.S. Hedge Fund Managers Looking to Outsource the Risk and Reporting Requirements of the AIFMD While Focusing on Capital Raising in Europe

U.S. hedge fund managers broadly have four options available for accessing EU investors in a manner consistent with the AIFMD: reverse solicitation; reliance on national private placement regimes (a time-limited solution); in-house compliance with the AIFMD; and outsourced compliance.  See “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014); “Four Strategies for Hedge Fund Managers for Accessing EU Capital Under the AIFMD,” Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).  The Hedge Fund Law Report recently interviewed Paul Nunan, Managing Director of Capita Financial Managers (Ireland) Limited, on the mechanics of the fourth option – outsourced compliance.  Outsourcing in this context generally makes sense for a U.S. hedge fund manager that wishes to focus on capital raising and investment management in Europe, while a third party focuses on the risk, reporting and other operational requirements of the AIFMD.  However, outsourcing also involves addressing a series of complex questions, including whether to do so in the first instance, to whom, with respect to what specific tasks, how to measure service levels, how to allocate responsibility and so on.  This interview is intended to help hedge fund managers think through the analysis of outsourcing AIFMD compliance.  In addition, this interview delves deeply into the mechanics of AIFMD compliance generally, covering such topics as: jurisdiction (i.e., who the AIFMD covers); sizing the capital raising opportunity in Europe; application of the AIFMD to branch offices and additional investments by existing investors; how to prove reverse solicitation to regulators; the time-limited viability of reliance on national private placement regimes; and remuneration, transparency, business conduct, leverage and reporting requirements under the AIFMD.  See also “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).

Gibson Dunn Trial Attorneys Discuss the Trial Victory of Hedge Fund Manager Nelson Obus, the “Lamest Insider Trader in History”

On May 30, 2014, after an investigation and litigation that spanned 13 years, a jury found Nelson J. Obus, Peter F. Black and Thomas Bradley Strickland not liable for insider trading in the shares of SunSource, Inc. at the time of its acquisition by Allied Capital Corporation in 2001.  Two of Obus’ defense attorneys recently shared the lessons they learned from contending with the SEC investigation, the insider trading litigation and the trial of the case.  The program featured Gibson, Dunn & Crutcher LLP partner Joel M. Cohen and associate Mary Kay Dunning.  See “When Does Talking to Corporate Insiders or Advisors Cross the Line into Tipper or Tippee Liability under the Misappropriation Theory of Insider Trading?,” Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).

Is GIPS Compliance and Verification Thereof a De Facto Requirement for Access by Hedge Fund Managers to Institutional Assets?

First introduced in 1999, the Global Investment Performance Standards (GIPS) were designed and promulgated by the CFA Institute as a way of ensuring that investment managers report their performance in a consistent and transparent way.  A recent survey of investment managers and investment consultants looked at how many firms comply with GIPS and why.  This article summarizes the results of that survey and a related event.  In particular, this article discusses rates of GIPS compliance and verification among investment managers; manager perspectives on electing or eschewing GIPS compliance and verification; consultant and investor perspectives on GIPS compliance and verification; general trends in GIPS compliance; and the impact of those trends on hedge fund managers.  See also “Expert Panel Provides Roadmap for Hedge Fund Managers Looking to Present Performance in Compliance with GIPS,” Hedge Fund Law Report, Vol. 6, No. 30 (Aug. 1, 2013).

Settlement by Harbinger’s Former COO Calls into Question the Utility for Hedge Fund Manager Executives of Indemnification Provisions in Fund Documents and D&O Insurance Policies

On July 28, 2014, the SEC settled charges against Peter A. Jenson, former COO at Harbinger Capital Partners LLC (Harbinger), stemming from a group of enforcement actions initiated in 2012.  In those actions, the SEC alleged that Phillip A. Falcone, Harbinger and related entities and individuals misappropriated client assets, created an illegal short squeeze to manipulate bond prices and had control person liability relating to the short squeeze.  See “SEC Charges Philip A. Falcone, Harbinger Capital Partners and Related Entities and Individuals with Misappropriation of Client Assets, Granting of Preferential Redemptions and Market Manipulation,” Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).  Under the consent and proposed final consent judgment, for at least two years, Jenson cannot work in the securities industry or as an accountant on behalf of any entity regulated by the SEC.  The U.S. District Court for the Southern District of New York must approve the settlement.  This article describes the background of the settlement and the proposed settlement terms, and discusses an underappreciated risk issue highlighted by the settlement.

ALJ Decision Highlights the Critical Difference between “Audited” and “Verified” Returns in GIPS-Compliant Performance Advertising by Hedge Fund Managers

This article discusses the facts and legal analysis in a recent decision by an SEC Administrative Law Judge relating to shortcomings in GIPS compliance by a registered investment adviser.  See “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  This article also identifies seven compliance lessons – arising out of the case and related materials – applicable to performance advertising by hedge fund managers.  On the topic of performance advertising, see also “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013); and “Can Hedge Fund Managers Use Gross (Rather Than Net) Results in Performance Advertising? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 42 (Nov. 1, 2013).

Kirkland & Ellis and WilmerHale Welcome New Tax Partners

On July 16, 2014, Kirkland & Ellis LLP announced that Dean S. Shulman has joined the firm’s New York office as a partner in its tax practice group.  See “Tax Practitioners Discuss Taxation of Swaps, Wash Sales, Constructive Sales, Short Sales and Straddles at FRA/HFBOA Seminar (Part Four of Four),” Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  WilmerHale also recently announced that Matthew Schnall is joining the firm as a partner and a member of the tax practice group in Boston.  See “Tax Experts Discuss Provisions Impacting Foreign Investors in Foreign Hedge Funds During FRA/HFBOA Seminar (Part Two of Four),” Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).  For a discussion of an important recent tax development relevant to hedge fund managers, see “The Impact of Revenue Ruling 2014-18 on Compensation of Hedge Fund Managers and Employees,” Hedge Fund Law Report, Vol. 7, No. 24 (Jun. l9, 2014).

Bingham Expands New York Office with White Collar Partner

David Miller recently joined Bingham McCutchen LLP as a partner in its White Collar Investigations and Enforcement Group in New York.  Miller was an assistant U.S. attorney in the Southern District of New York for five years.  Miller was on the team of prosecutors leading the government’s investigation and prosecution of Operation Perfect Hedge, resulting in the conviction of more than 80 individuals for insider trading offenses since 2009.  See “How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part One of Four),” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).