Sep. 4, 2014

Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse (Part One of Five)

The Employee Retirement Income Security Act of 1974, as amended (ERISA) is a reactive and remedial statute which has been described as setting forth a “comprehensive and reticulated” scheme to regulate the provision of employee benefits.  It can be extremely complex at times, sometimes even seeming to operate counterintuitively in an attempt to achieve its protective goals.  There may have been a time when hedge fund managers commonly disdained taking investments from pension plans subject to ERISA.  The notion of having to comply with ERISA, of all things, in the case of someone who is not charged with addressing human resources concerns or other benefits-related matters, can be an extremely foreign concept.  Only as investment capital has become increasingly concentrated in pension plans have hedge fund managers more broadly realized that dealing with ERISA might be necessary, or even preferable.  In short, complying with ERISA can dramatically enlarge the pool of money potentially available to a hedge fund manager.  But it can also dramatically enlarge the size and complexity of a manager’s legal and compliance efforts.  In an effort to bring some much needed clarity to one of the most opaque legal areas affecting the investment management business, Hedge Fund Law Report is serializing a treatise chapter by Andrew L. Oringer, a partner at Dechert LLP and a dean of the ERISA bar.  The chapter describes – in considerable detail and with extensive references to relevant authority – the application of ERISA to hedge and other investment funds.  For hedge fund managers seeking to raise capital from pension plans subject to ERISA, the chapter is essential reading.  This article is the first in our five-part serialization.  See also “RCA PracticeEdge Session Highlights the Key Points of Intersection between ERISA and Hedge Fund Investments and Operations,” Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).

Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands

There has been much talk recently about the formation of reinsurance companies by hedge fund managers.  Indeed, in the Cayman Islands (Cayman), there has been significant increase of interest in the establishment of reinsurance vehicles.  The first open market reinsurance vehicle with a physical presence was established in Cayman in 2004, and now, several years later, conditions are such that others are following suit.  Anecdotal evidence shows that many service providers across the financial services community in Cayman have been advising or otherwise speaking with fund manager clients about setting up reinsurers in Cayman.  This article highlights some key reasons driving interest in Cayman as a domicile for the establishment of reinsurance vehicles.  The authors of this article are Tim Frawley, a partner in the Cayman Islands office of Maples and Calder, and Karey B. Dearden, an Executive Director in Ernst & Young LLP’s Financial Services Office, International Tax Services practice in New York City.  For background on the opportunities and risks associated with hedge fund managers establishing reinsurance vehicles, see “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013).

KPMG Report Highlights Key Developments in Hedge Fund Regulation in the Americas, the Asia-Pacific Region, Europe, South Africa and the Middle East

KPMG recently issued a report providing a comprehensive overview of completed and contemplated regulatory changes that may impact hedge fund managers around the globe.  This article summarizes the report’s key points on regulatory developments in the Americas, the Asia-Pacific region, Europe, South Africa and the Middle East.

SEC Sanctions Dual-Registered Investment Adviser/Broker Dealer for Disclosure Failures and Breaches of Rules Regarding Best Execution, Compliance Policies and Principal Transactions

The SEC recently settled an administrative action against a dual-registered adviser and broker, and one of its registered adviser representatives.  The firm allegedly failed to have policies and procedures in place to assure best execution for its clients, failed to disclose a conflict of interest regarding rebates from a clearing broker, made material misstatements concerning commissions and principal transactions and failed to obtain client consent when it engaged in principal transactions.  See “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  The registered adviser representative allegedly caused certain of those violations.  Due to the conflicts of interest that arise when an entity provides both advisory and brokerage services, potential violations by dual-registrants have been among the SEC’s recent priorities in enforcement activity focused on private funds.  See “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  This article describes the factual allegations, alleged violations and sanctions outlined in the SEC’s Order in the matter.  This article concludes with insight from Goodwin Procter on the interaction between the Order and the “bad actor” provisions of Rule 506(d) under Regulation D that were adopted by the SEC pursuant to the JOBS Act.  See “How Can Hedge Fund Managers Negotiate the Structuring, Operational and Due Diligence Challenges Posed by the Bad Actor Disqualification Provisions of Rule 506(d)?,” Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013).

U.K. Superior Court Upholds FCA Industry Ban and Steep Penalty Imposed on Principal of Hedge Fund Manager Dynamic Decisions Capital

The Upper Tribunal, Tax and Chancery Chamber (Court), a U.K. Superior Court of Record, recently affirmed, with minor modification, a decision notice by the Financial Conduct Authority (FCA) to withdraw approval from, and to impose an industry ban and a record financial penalty on, a hedge fund manager who used bonds of questionable provenance to conceal his fund’s substantial trading losses.  On bond trading, see “Puffery or Securities Fraud?  Litvak Conviction Sheds Light on Permissible Bounds of Bond Sales Talk and the Evidentiary Power of Bloomberg Chats,” Hedge Fund Law Report, Vol. 7, No. 11 (Mar. 21, 2014).  The Court’s decision, involving Alberto Micalizzi and DD Growth Premium Master Fund, provides insight on the legal standards involved in U.K. investment adviser fraud cases and the penalties that the FCA may impose.  See also “FSA Bans Hedge Fund Firm Dynamic Decisions and Imposes Highest-Ever Fine on an Individual in a Non-Market Abuse Case Against CEO Alberto Micalizzi,” Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).

Leading Broker-Dealer Attorney David M. Katz Joins Fried Frank’s Asset Management Practice

On September 4, 2014, Fried, Frank, Harris, Shriver & Jacobson announced that David M. Katz has joined the firm as a partner in the Asset Management Practice, resident in the New York office.  For insight from Katz, see “SEC Provides Guidance on When the Bad Actor Rule Disqualifies Hedge Fund Managers from Generally Soliciting or Advertising,” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014) (discussion under subheading “Twenty Percent Beneficial Owners”).

Pelican Point Capital Partners Appoints Marvin Miller as General Counsel and Managing Director

On September 3, 2014, Pelican Point Capital Partners, LLC announced the appointment of Marvin Miller as General Counsel and Managing Director.  Most recently, Miller was a corporate partner in the New York office of Winston & Strawn LLP.

SAC Prosecutor Antonia Apps to Join Milbank in New York

On September 3, 2014, Milbank, Tweed, Hadley & McCloy announced that Antonia M. Apps is joining the firm as a partner in its Global Litigation Department.  She starts on September 22.  Apps joins Milbank from the U.S. Attorney’s Office for the Southern District of New York, Criminal Division, where she was a member of the Securities and Commodities Fraud Task Force.  During her tenure, she was a lead prosecutor on the Justice Department’s prosecution of hedge fund manager S.A.C. Capital Advisors, L.P.  See “SEC Charges Steven A. Cohen with Failing to Supervise Employees Who Allegedly Engaged in Insider Trading,” Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013); “SAC Capital Entities Indicted for Securities Fraud and Wire Fraud in Connection With Employees’ Alleged Insider Trading,” Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013); “Five Takeaways for Other Hedge Fund Managers from the SEC’s Record $602 Million Insider Trading Settlement with CR Intrinsic,” Hedge Fund Law Report, Vol. 6, No. 12 (Mar. 21, 2013); and “Fund Manager CR Intrinsic and Former SAC Portfolio Manager Are Civilly and Criminally Charged in Alleged ‘Record’ $276 Million Insider Trading Scheme,” Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).