This is the fourth article in our four-part series on information barriers in the hedge fund context.  The series aims to help hedge fund managers determine whether they should use information barriers and, if so, how they can establish and enforce such barriers.  In particular, this fourth article discusses the role of employee training and compliance surveillance in the maintenance of robust information barriers, and describes four significant challenges faced by hedge fund managers in structuring, implementing and enforcing information barriers.  The first article provided an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; described four principal benefits available from the use of information barriers; highlighted the types of firms that can benefit most from the implementation of information barriers; and described the types of firms that will find the implementation of information barriers most challenging.  The second article discussed the legal and regulatory basis for information barriers and described the building blocks of effective barriers (including the key players, physical components and technological processes).  The third article described how a firm can limit access to material nonpublic information within the information barrier control environment and outlined policies and procedures designed to bolster the effectiveness of information barriers. Read full article …

As a general matter, investors prefer long-term capital gains over ordinary income and, when faced with losses, short-term losses over long-term capital losses.  Investors and tax professionals are constantly seeking to optimize their tax results, in part by seeking to assure the most favorable tax treatment available when trading.  In some circumstances, such as those involving total return swaps, the IRS has simplified matters by predetermining a fixed percentage of gains and losses that are entitled to short-term or long-term treatment.  The IRS has also adopted several rules in response to trades that generated tax benefits but that did not result in a change of economic position for the investor.  In that regard, two presentations given as part of the 15th Annual Effective Hedge Fund Tax Practices seminar, co-hosted by Financial Research Associates and the Hedge Fund Business Operations Association, covered the fundamentals of the taxation of swaps and the tax treatment of wash sales, constructive sales, short sales and straddles.  This article, the last in our four-part series covering the seminar, summarizes the key takeaways from those presentations.  The first article in this series covered three sessions addressing contribution and distribution of property to fund investors, allocation of investment gains and losses to fund investors and preparation of Forms K-1.  See “Hedge Fund Tax Experts Discuss Allocations of Gains and Losses, Contributions to and Distributions of Property from a Fund, Expense Pass-Throughs and K-1 Preparation at FRA/HFBOA Seminar (Part One of Four),” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).  The second article discussed issues impacting foreign investors in foreign funds, including basics of withholding with respect to fixed or determinable annual or periodic gains, profits, or income (FDAPI); the portfolio interest exemption from FDAPI withholding; the pitfalls of effectively connected income (ECI) for offshore hedge funds; and the sources of ECI.  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).  The third article addressed taxation of foreign investments, including withholding at the source, rules regarding controlled foreign corporations and issues concerning taxation of distressed debt investments.  See “Tax Practitioners Discuss Taxation of Foreign Investments and Distressed Debt Investments at FRA/HFBOA Seminar (Part Three of Four),” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014). Read full article …

Gerald Kerner, general counsel of Duquesne Family Office LLC, and former general counsel of famed investor Stanley Druckenmiller’s Duquesne Capital Management, L.L.C., recently drafted a white paper, the general thesis of which is that hedge fund investors pay insufficient attention to certain “boilerplate” terms in fund documents – terms that, in practice, can have important consequences for the economics of an investment.  In the first instance, the white paper recommends that hedge fund investors negotiate such boilerplate provisions – and walk if the manager refuses to engage in productive dialogue.  The white paper then offers specific recommendations for hedge fund investors when negotiating exculpation, indemnification, redemption, withdrawal, amendment and other provisions.  The white paper incorporates the wisdom accumulated by Kerner over years negotiating the deployment of capital by one of the hedge fund industry’s leading lights.  Its insights can tangibly impact the way investors approach negotiating with managers, and vice versa; the white paper, therefore, is illuminating reading for both constituencies.  This article summarizes the recommendations in the white paper. Read full article …

This is the second of two articles covering the 2013 version of the annual K&L Gates investment management seminar.  This article covers two sessions, one discussing the SEC’s approach to examinations and enforcement actions involving fund managers, and another tackling implications of the JOBS Act for fund managers.  The first article relayed key points from a session on regulatory developments impacting registered commodity pool operators and commodity trading advisors, as well as U.S. and European regulations governing swaps and other over-the-counter derivatives.  See “K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014). Read full article …

This is the second article in a three-part series addressing the evolution of U.S. pension plan management and governance.  This article describes the current governance structures of today’s public pension, focusing on the board of trustees and pension staff; briefly reviews current governance research about public pension trustees, and the importance of both adequate staff infrastructure and effective delegation as features of good governance; and explains the new delegation rule and why it should be a key element of long-term organizational change within the U.S. pension system.  The first article highlighted how growth of public pension plans and fundamental legal or regulatory change, when combined with increasing pension portfolio complexity and the current underfunded status of most U.S. public pension plans, will be the forces defining pension evolution in the twenty-first century.  The first article also included an explanation of why the growth of public pension plans and fundamental legal or regulatory change impacted pension plan evolution through the twentieth century.  See “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers (Part One of Three),” Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).  The third article will focus on what the next phase of pension evolution may look like and also highlight how, at least in one area, governance research can be developed to be a true value-added tool for public pension plans and their trustees, potentially guiding the design of their governance structures and investment infrastructures.  The author of this series is Von M. Hughes, a Managing Director at Pacific Alternative Asset Management Company, LLC. Read full article …

On December 19, 2013, the United States District Court for the Southern District of New York allowed Morgan Stanley to recoup more than $31 million paid in compensation to a former portfolio manager who admitted to insider trading.  Morgan Stanley originally sued former FrontPoint Partners, LLC portfolio manager Joseph F. “Chip” Skowron III (Skowron) in October 2012 to recoup compensation paid to him.  Morgan Stanley based its allegation of the right to claw back such compensation upon Skowron’s 2011 guilty plea to insider trading and obstruction of justice charges.  See “Morgan Stanley Sues Former FrontPoint Partners Portfolio Manager Joseph F. ‘Chip’ Skowron III for Losses Allegedly Caused by Skowron’s Insider Trading and Subsequent Cover-Up,” Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).  After prevailing on some of its claims and losing on others, Morgan Stanley moved for partial summary judgment, based on New York’s “faithless servant” doctrine.  This article summarizes the faithless servant doctrine and the Court’s analysis. Read full article …

On February 3, 2014, Schulte Roth & Zabel LLP announced the addition of Steven Whittaker as a partner in the investment management group, resident in the firm’s London office.  For recent insight from SRZ, see “Schulte Partner Stephanie Breslow Discusses Tools for Managing Hedge Fund Crises Caused by Liquidity Problems, Poor Performance or Regulatory Issues,” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014). Read full article …

On February 3, 2014, Akerman LLP announced that it has opened a Chicago office to be led by hedge fund litigator Scott Meyers. Read full article …