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    Mar. 19, 2015

Ten Practical Consequences for Hedge Fund Managers of the FCA’s Thematic Review of Asset Managers and the EU Market Abuse Regulation

Over the next eighteen months, compliance officers at UK hedge fund managers will be facing significant additional regulatory burdens.  In the context of market abuse, there is going to be significant legislative change coming from Europe.  Whilst the core market abuse offences will largely be unchanged, the market abuse regime across the EU will be significantly strengthened and broadened by the EU Market Abuse Regulation (MAR) that will replace the Market Abuse Directive with effect from July 3, 2016.  At the same time, there have been a number of regulatory enforcement actions that have shown a more assertive approach by regulators to the regulation of markets across the EU.  In February, the UK Financial Conduct Authority issued a thematic review into asset management firms and the risk of market abuse in equity markets.  This review made clear that the UK regulator considers that firms need to do further work to clarify and extend their compliance procedures to comply with current rules.  These changes will be required in addition to the new detailed obligations and processes under MAR.  For these reasons, compliance teams will have considerable work to undertake in relation to market abuse compliance policies, procedures and monitoring.  For many asset management firms, this will create a significant additional administrative burden and may have an impact on how managers interact with issuers.  In a guest article, Douglas Armstrong, a partner and Head of Funds and Financial Services for Dickson Minto W.S., offers a detailed discussion of MAR and the FCA thematic review, then identifies ten practical consequences of both for UK and global hedge fund managers.  See also “U.K. Financial Conduct Authority Issues Feedback Statement Supporting Proposed E.U. Limits on Soft Dollars,” Hedge Fund Law Report, Vol. 8, No. 9 (Mar. 5, 2015).

Trends in Legal and Compliance Hiring and Staffing: An Interview with David Claypoole on the Market for In-House Compensation at Hedge Fund Managers (Part Two of Two)

By studying legal and compliance staffing, one can see certain trends emerging – with respect to the makeup of legal and compliance teams at hedge fund managers and other private fund managers, and with respect to compensation.  In a recent interview with the Hedge Fund Law Report, David Claypoole, founder and President of Parks Legal Placement LLC, shared detailed insight into the overall market for and compensation of legal and compliance personnel, including general counsels (GCs), chief compliance officers (CCOs) and junior legal and compliance personnel.  In the first article in this two-part series, Claypoole discussed the factors that affect GC and CCO compensation; the current market for compensation of legal and compliance personnel; how compensation of dual-hatted employees compares to compensation of single-role GCs and CCOs; trends in how GCs and CCOs are viewed by employers; compensation of junior legal and compliance personnel; what makes an “exceptional” legal or compliance candidate; and how compensation of hedge fund GCs and CCOs compares to compensation of similar personnel at private equity and other types of managers.  In this second of two articles in the series, Claypoole shares the results of his research and experience on the relationship between fund performance and compensation; trends in legal and compliance compensation, including with respect to junior compliance personnel; investments by legal and compliance personnel in the funds managed by their management company employers; and reporting lines for GCs and CCOs.  On compensation, see also “Hedge Fund Manager Compensation Survey Looks at 2014 Compensation Levels, Job Satisfaction and Hiring Trends,” Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015); “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).  On reporting, see “To Whom Should the Chief Compliance Officer of a Hedge Fund Manager Report?,” Hedge Fund Law Report, Vol. 4, No. 22 (Jul. 1, 2011).  Claypoole will expand on the insights in this series at GAIMOps Cayman, to be held in the Cayman Islands from April 26-29, 2015.  For more information about GAIMOps Cayman, click here.

BDC Finance v. Barclays: Derivatives Collateral Calls in a Chaotic Market

A series of decisions by all three levels of the New York State court system in BDC Finance L.L.C. v. Barclays Bank PLC, which culminated recently in a Court of Appeals decision remanding the case to the Supreme Court for trial, provides a window into the normally opaque world of collateral calls for over-the-counter derivatives transactions and offers some important lessons for hedge funds and other market participants.  In a guest article, Anne E. Beaumont, a partner at Friedman Kaplan Seiler & Adelman LLP, describes the factual background of the decisions, in particular, the relevant series of collateral calls; applicable law, contract language and market practice; the courts’ legal analyses in the relevant decisions; and three important lessons for hedge funds and other derivatives users.  For related analysis by Beaumont, see “Eighteen Major Banks Agree to Adopt FSB/ISDA Resolution Stay Protocol that Postpones Exercise of Right to Terminate Derivatives on Bank Counterparty Failure,” Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014); “The 1992 ISDA Master Agreement Says Notice Can Be Given Using an ‘Electronic Messaging System’; If You Think That Means ‘E-Mail,’ Think Again,” Hedge Fund Law Report, Vol. 7, No. 20 (May 23, 2014); and “Five Steps for Proactively Managing OTC Derivatives Documentation Risk,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

Structuring Private Funds to Profit from the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options

Energy companies directly or indirectly reliant on reserve based lending and public equity markets are feeling pressure as markets have tightened, as evidenced by recent significant stock declines, IPO delays, dividend and distribution cuts and missed interest payments leading to bankruptcy filings.  If lower prices are sustained, this financial pressure will continue over time as reserves are increasingly valued at lower prices, interest rates move upward and poorly hedged exploration and production companies and counterparties face unfavorable positions.  In such a market, leveraged and shale focused high-yield exploration and production companies, shale-reliant and undiversified oil field services companies and small- to medium-sized financial institutions with significant exposure to such companies and the boom oil patch areas generally will present distressed investors with plenty of opportunities to extract value from current market conditions.  Along with the financial considerations, investment funds looking to take advantage of distressed energy opportunities will have to consider various legal matters including structuring the investments, due diligence and dealing with potentially illiquid positions.  This guest article describes the market context, focusing on opportunities for hedge funds and other players arising out of the oil price plunge; the palette of investment options available to managers looking to invest in or around oil price movements; the balance between speed and comprehensiveness in due diligence; and tax, liquidity and other fund structuring considerations.  The authors of this article are James Deeken and Shubi Arora, both partners at Akin Gump Strauss Hauer & Feld; Jhett Nelson, counsel at Akin; and Stephen Harrington, an Akin associate.

Recent Guidance Clarifies that a Foreign Banking Entity May Rely on the “SOTUS” Exemption to the Volcker Rule when Investing in a Covered Fund that Is Offered to U.S. Residents by an Unaffiliated Third Party

The Volcker Rule, adopted as part of the Dodd-Frank Act, prohibits “banking entities” from engaging in proprietary trading or sponsoring or acquiring interests in so-called “covered funds.”  The Federal Reserve and other federal agencies recently added a new frequently asked question (FAQ) to their Volcker Rule FAQs.  The new FAQ clarifies that certain foreign banking entities may rely on an exemption from the Volcker Rule to invest in a covered fund solely outside of the U.S., even if the fund is offered to U.S. residents, so long as the foreign banking entity does not sponsor or serve in certain management or advisory roles for the fund and does not participate in that offering.  This article summarizes the relevant rules, the ambiguity they presented, the resolution provided by the new FAQ and an important remaining ambiguity.  For a discussion of the impact of the Volcker Rule on foreign managers, see “Dechert Partners Discuss Impact of Volcker Rule on European Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).  For a detailed overview of the Rule, see “Ropes & Gray Attorneys Discuss the Impact on Private Fund Managers of Final Regulations Under the Volcker Rule,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).

What Are “Green Bonds” and Are They Materially Different from Other Investments?

In the past few years, there has been tremendous growth in the issuance of so-called “Green Bonds,” a catchall term for debt issued to finance environmentally-friendly infrastructure and other projects.  A recent program explored the concept of Green Bonds, summarized the “Green Bond Principles” and described the current state of the private and municipal markets for such bonds.  The program featured Stuart K. Fleischmann and Robert N. Freedman, partners at Shearman & Sterling; Gordon G. Raman, a partner at Borden Ladner Gervais; and Tatjana Misulic, of counsel at Ballard Spahr.  Green Bonds may offer opportunities for hedge fund managers looking to market to pension funds and other institutions with investment guidelines that incorporate “environmental, social and governance” considerations.  See “United Nations White Paper Explains How Hedge Fund Investors Can Layer Environmental, Social and Governance Factors into Manager Selection,” Hedge Fund Law Report, Vol. 5, No. 46 (Dec. 6, 2012).

Gibson Dunn Adds Shukie Grossman in New York Office

On March 16, 2015, Gibson, Dunn & Crutcher announced that Y. Shukie Grossman has joined the firm’s New York office as a partner and co-chair of the firm’s Investment Funds Practice Group.  For insight from Gibson Dunn, see “Top SEC Officials, Law Firm Partners and In-House Counsel Discuss Private Fund Enforcement Priorities, Tender Offer Rules Applicable to Activist Investing, Valuation Challenges, Personal Trade Monitoring and Compliance Testing (Part Four of Four),” Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015).  Grossman has significant experience advising on, among other things, the acquisition and sale of minority and majority stakes in fund sponsors and secondary transactions involving fund interests.  On acquisitions of majority stakes in fund sponsors, see “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).  On secondary transactions involving fund interests, see “Key Structuring and Negotiating Points in Secondary Sales of Private Fund Interests,” Hedge Fund Law Report, Vol. 7, No. 11 (Mar. 21, 2014).

Jones Day Expands Fund Formation Capabilities in Asia

Jones Day recently announced that Scott D. Peterman has joined as a partner in the firm’s private equity practice in Hong Kong.  See “How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People’s Republic of China,” Hedge Fund Law Report, Vol. 6, No. 13 (Mar. 28, 2013); and “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four),” Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011); Part Two; Part Three; and Part Four.

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