Aug. 21, 2014

“Best Ideas” Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part Two of Two)

This is the second article in a two-part series discussing the chief legal concerns raised by hedge fund manager presentations at “best ideas” conferences – conferences at which investment professionals present investment ideas, share convictions and analyze recommendations.  The benefits of presenting at such events include increased visibility and often a charitable component.  The legal pitfalls of presenting at such conferences, however, are various.  The first article in this series discussed issues under Rule 506 of Regulation D, including whether a presentation at a best ideas conference constitutes an offering or general solicitation, as well as Investment Company Act issues.  This article discusses Investment Advisers Act issues, advertising restrictions, fiduciary duty and related considerations and Commodity Exchange Act issues.  The authors of this article series are S. Brian Farmer, Co-Managing Partner of the Investment Management & Private Funds Practice Group at Hirschler Fleischer, and John C. C. Byrne, II.

Brevan Howard Co-Founder Sues Firm to Invalidate Non-Compete Provisions in Partnership Agreement

In another example of a messy divorce of a hedge fund principal from the firm he helped to found, Christopher Charles Rokos, formerly of U.K. hedge fund giant Brevan Howard, has filed a declaratory judgment action in the Royal Court of Jersey, Samedi Division, seeking to invalidate the non-compete provisions contained in a Brevan Howard partnership agreement to which Rokos was a party.  Rokos desires to start a new fund.  As is common in non-compete disputes, Rokos alleges that the restrictions, which run until 2018, are unreasonably long in duration and overbroad in substance, and constitute an unenforceable restraint of trade.  Brevan Howard has filed an answer seeking to uphold the non-compete provisions and has asserted a counterclaim against Rokos.  For discussion of another dispute that arose after a fund alumnus started a competing fund, see “Delaware Chancery Court, Criticizing Both Sides in Contentious Litigation, Awards $4.662 Million to Camulos Capital Hedge Fund Founder in Payment for His Fund Interest,” Hedge Fund Law Report, Vol. 5, No. 38 (Oct. 4, 2012).  Other disputes among hedge fund principals that have gone to litigation have involved, or have arisen because of, ownership of intellectual property, misuse of proprietary or confidential information, sloppy documentation of payments and sloppy drafting of governing documents.

McKinsey Report Identifies Six Strategies for Competing Successfully in the Alternative Investment Business

According to the Global Wealth & Asset Management Practice of McKinsey & Company, there are now about $10 trillion in global alternative investments, comprised of hedge funds, private equity, real assets, funds of funds and retail alternative funds.  McKinsey recently polled about 300 institutional investors, which manage $2.7 trillion of aggregate assets, and conducted interviews with 50 of those investors.  McKinsey’s survey report presents the survey participants’ views on the alternative investments space, including their investment preferences and allocation plans; describes the convergence between traditional and alternative investment managers; and offers guidance for managers who wish to thrive in the alternatives space.  See also “BNY Panels Discuss the Supply Of, and Demand For, Alternative Mutual Funds,” Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014).

The Role of Background Checks in Hedge Fund Investor Due Diligence and Hedge Fund Manager Hiring

A thoroughgoing understanding of the backgrounds of principals and employees of a hedge fund management company has historically been a matter of prudence; increasingly, it is also a matter of regulatory compliance.  The “bad actor” disqualification provisions of the JOBS Act, Form ADV and the anti-fraud provisions of the Investment Advisers Act all require hedge fund managers to accurately understand the litigation, licensing, disciplinary, employment, educational, financial and other history of their actual and potential principals and employees.  For hedge fund investors, best operational due diligence practices involve examination of at least the foregoing categories of information for management company principals.  In addition, both managers and investors are well-advised to understand the backgrounds of decision-makers at service providers (such as prime brokers, law firms, administrators, accountants, companies that provide fund directors and others).  Importantly, background checks should not be a rote exercise: if they uncover red flags, those red flags should be pursued vigorously, and should, if serious and not subject to remedy, cause a change of plan (e.g., passing on an investment or a candidate, or terminating an employee).  In an effort to assess the market for important components of background checks as commissioned by investors and managers, the Hedge Fund Law Report recently interviewed Richard “Bo” Dietl, a former New York City police officer and decorated detective, and a seasoned veteran of the private fund background check business.  Dietl provided on-the-ground intelligence on specific goals and targets of background checks by investors and managers; coverage in background checks of nonpublic information; the top three “red flags” that investors are looking for in background checks on managers; best practices for managers in responding to identified red flags; background check pricing and resulting work product; state requirements for employee consent and disclosure to manager background checks; the interaction between background checks and the bad actor disqualification rule; frequency with which background checks should be updated; and whether background checks should be performed on fund directors.

OCIE Letter Foreshadows Examination Activity Focused on Municipal Advisors

On August 19, 2014, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published a letter announcing its intention to examine certain municipal advisors (MAs) that must register with the SEC between July 1 and October 31, 2014 and that are not registered with FINRA.  In its letter addressed to MA senior executives and principals, OCIE explained that it will be examining a “significant percentage” of the newly registered MAs through a National Exam Program (NEP).  MAs must register with the SEC under Section 975 of Dodd-Frank, which amended Section 15B of the Securities Exchange Act of 1934, and they owe fiduciary duties to the municipal pension funds that they advise.  Hedge fund managers should understand the SEC’s agenda concerning the upcoming MA examinations because certain pension fund advisers – critical gatekeepers between hedge fund managers and the considerable volume of retirement assets available for investment – may be deemed to be MAs and therefore scrutinized as part of NEP’s initiative.  See “Getting to Know the Gatekeepers: How Hedge Fund Managers Can Interface with Investment Consultants to Access Institutional Capital (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 27 (Jul. 11, 2013).  In turn, hedge fund managers should understand the total range of concerns bearing on the entities to which they market, or on the intermediaries serving those entities; to the extent pension consultants are under increased examination pressure, managers’ marketing efforts, other things being equal, are more likely to be successful if they take those pressures into account.

Dechert Expands Investment Management Capabilities in Singapore, Luxembourg and Los Angeles

Dechert recently announced that Johan Terblanche joined its financial services practice in Luxembourg; former O’Melveny & Myers partner Dean E. Collins opened the firm’s Singapore office; and funds attorney Asma Chandani joined the firm in Los Angeles as counsel.  For insight from Dechert, see “Dechert Partners and Venor Capital General Counsel Describe the Scope of Supervisory Liability for Hedge Fund Manager Personnel,” Hedge Fund Law Report, Vol. 7, No. 26 (Jul. 11, 2014); “Dechert Partners Discuss Impact of Volcker Rule on European Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014); “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).

Regulatory Counsel Lisa Dunsky Joins Sidley Austin in Chicago

Sidley Austin LLP recently announced that Lisa Dunsky will join its investment funds, advisers and derivatives practice and its securities and derivatives enforcement and regulatory practice in Chicago.  For insight from Sidley, see “Key Structuring and Negotiating Points in Secondary Sales of Private Fund Interests,” Hedge Fund Law Report, Vol. 7, No. 11 (Mar. 21, 2014).

SEC Veteran David W. Blass Appointed General Counsel of ICI

David W. Blass, currently Chief Counsel and Associate Director of the SEC’s Division of Trading and Markets, is scheduled to become the General Counsel of the Investment Company Institute next month.  For insight from Blass, see “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013); “SEC’s David Blass Expands on the Analysis in Recent No-Action Letter Bearing on the Activities of Hedge Fund Marketers,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).