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    May 7, 2015

Recent Cases Reduce the Impact of Newman on Insider Trading Enforcement

The U.S. Court of Appeals for the Second Circuit, with its high-profile decision in U.S. v. Newman, has not enabled investment fund managers and their ilk to commit insider trading with impunity, free from consequence.  Although some commentators have taken a contrary view, that perspective is mistaken, as evidenced by a recent district court decision, and may lead some market participants to adopt risky behavior if not corrected.  For more on Newman, see “The Newman/Chiasson Decision Continues to Have Implications for Insider Trading Compliance,” Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015).  In April 2015, the Securities and Exchange Commission scored a significant victory in SEC v. Payton, obtaining the approval of the Honorable Jed S. Rakoff to pursue a civil enforcement action in the U.S. District Court for the Southern District of New York against two defendants accused of insider trading, notwithstanding the recent Newman decision.  While some commentators have questioned whether the Payton decision marks the beginning of an “erosion” of the insider trading framework recently overhauled in Newman and hailed in many corners of Wall Street, this belief is based upon multiple incorrect assumptions about Newman and its import, and both decisions’ impact on the hedge fund industry.  In a guest article, Marc R. Rosen, chair of the Litigation and Risk Management Department at Kleinberg, Kaplan, Wolff & Cohen, examines the recent insider trading landscape, discusses the Payton decision and explores its impact on the hedge fund community.  For more insight from Kleinberg, Kaplan, Wolff & Cohen, see “Insurance Dedicated Funds Offer Hedge Fund Exposure Plus Tax, Underwriting and Asset Protection Advantages for Investors,” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013); and “How Do New Commodities Regulations Impact Hedge Fund Managers with Respect to Registration, Marketing, Trading, Audits and Drafting of Governing Documents?,” Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012).

Investment Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part One of Three)

As private fund managers seek to diversify their product offerings and lines of business, management companies are increasingly operating hedge funds and private equity funds simultaneously.  However, such simultaneous management gives rise to potential conflicts of interest, including issues relating to allocation of investment opportunities between the funds, possession of material nonpublic information, valuation and allocation of expenses.  The SEC has identified conflicts of interest as one of the top enforcement priorities for 2015, and the SEC’s Asset Management Unit is expected to continue examining advisers to determine whether they have appropriately discharged their fiduciary obligations to identify conflicts of interest and eliminate them or mitigate and disclose them.  See “ACA Compliance Professionals and SEC Veteran John H. Walsh Share Insights on SEC Priorities for 2015,” Hedge Fund Law Report, Vol. 8, No 16 (Apr. 23, 2015); and “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).  Accordingly, especially in today’s regulatory environment, managers must be aware of and mitigate such conflicts of interest.  This article, the first in a three-part series, explores the structural considerations that give rise to potential conflicts and examines the potential conflicts involving the investments held by each fund, as well as conflicts with the allocation of investment and disposition opportunities between affiliated hedge funds and private equity funds.  The second article will discuss operational conflicts arising out of simultaneous management of hedge funds and private equity funds, including conflicts involving the possession of material nonpublic information, valuation, allocation of expenses, personal trading and investors.  The third article will address offshore concerns and ways to mitigate conflicts of interest.  See also “Investment Allocation Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part One of Three),” Hedge Fund Law Report, Vol. 8, No. 13 (Apr. 2, 2015).

FRA Liquid Alts 2015 Conference Highlights ’40 Act Fund Structures and Regulatory Concerns with Alternative Mutual Funds (Part Two of Three)

As the liquid alternatives (or alternative mutual fund) space has expanded significantly in recent years, offerings of alternative mutual funds by hedge fund managers have similarly increased.  Accordingly, as more hedge fund managers look to launch alternative mutual funds, it is important for them to understand the common structures under the Investment Company Act of 1940 (’40 Act).  Additionally, as regulators are interested in ensuring alternative mutual funds meet regulatory requirements and managers of those funds operate within the confines of applicable regulations, it is imperative that managers launching alternative mutual funds understand those regulatory concerns.  See “Alternative Mutual Fund Managers Have Two Custody Rules to Worry About,” Hedge Fund Law Report, Vol. 8, No. 8 (Feb. 26, 2015).  These topics were among those discussed at the recent Liquid Alts 2015 conference hosted by Financial Research Associates, LLC.  This article, the second in a three-part series, focuses on the panel discussions of ’40 Act fund structures and regulatory concerns with liquid alternative funds.  The first article discussed the keys to successfully launching and operating an alternative mutual fund.  The third article will review issues investors should consider while conducting due diligence on an alternative mutual fund.  For more on alternative mutual funds, see “Regulatory and Practitioner Perspectives on Alternative Mutual Fund Compliance Risk,” Hedge Fund Law Report, Vol. 8, No. 8 (Feb. 26, 2015).

Experts Offer Advice on Initiating and Structuring M&A Transactions in the Asset Management Industry (Part One of Two)

Mergers, acquisitions, joint ventures, acquisitions of minority interests and lift-outs of teams occur in the asset management industry for many reasons; managers may seek to grow assets under management, plan for succession, add new products or strategies or add new distribution channels.  A panel of experts from K&L Gates recently discussed current trends in the asset management industry and a number of considerations in planning an acquisition or other deal with an asset manager, broker-dealer or adviser, including choice of partner, due diligence, structuring, taxation and various regulatory and compliance considerations.  Moderated by Michael S. Caccese, a practice area leader, the program featured partners Kenneth G. Juster and Michael W. McGrath; and practice area leaders D. Mark McMillan and Robert P. Zinn.  This article, the first in a two-part series, summarizes the key takeaways from that program with respect to asset management industry trends, choosing a partner, due diligence and structuring considerations.  The second article will address taxation, regulatory and business integration concerns.  See also “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). 

New York Court Assesses the Validity of a Former Portfolio Manager’s Claim against a Fund Management Company for Unvested Performance Compensation

After a portfolio manager was terminated following nine months of employment with a fund manager, he refused to sign a separation agreement that released the manager employer from a broad array of possible claims.  However, the separation agreement apparently permitted the portfolio manager to collect unvested performance fees in accordance with the conditions of the relevant vesting plan – one of which was that the portfolio manager sign such a release.  The former portfolio manager sued, claiming an entitlement to unvested performance fees.  This article summarizes the court’s decision and reasoning and provides relevant background information drawn from the complaint and the relevant motion papers.  For coverage of other high-stakes severance disputes, see “U.S. District Court Evaluates FINRA Arbitration Decision in High-Stakes Severance Dispute Between UBS and Former Portfolio Manager,” Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011); and “New York State Supreme Court Upholds Former Portfolio Managers’ Claims Against Hedge Fund Manager Touradji Capital for Breach of Contract and Intentional Infliction of Emotional Distress; Dismisses Remaining Causes of Action,” Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009).

SEC Guidance Update Suggests a Three-Step Framework for Investment Manager Cybersecurity Programs

The SEC's Division of Investment Management issued an Investment Management Guidance Update (Guidance) on cybersecurity on April 28, 2015.  The Guidance discusses actions that investment advisers and managers should consider to make their cybersecurity protections more robust as well as to mitigate technology risks and enhance their cybersecurity programs.  See “K&L Gates-IAA Panel Provides Comprehensive Overview of Cybersecurity Laws and Threats Applicable to Investment Managers (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015); and Part Two of Two, Vol. 8, No. 17 (Apr. 30, 2015).  The SEC Guidance follows on the heels of the SEC Office of Compliance Inspections and Examinations (OCIE) Risk Alert earlier this year based on sweep exams OCIE conducted of cybersecurity practices and policies of investment adviser and broker-dealers, as well as the SEC’s 2014 Cybersecurity Roundtable.  See “Benchmarking and Best Practices for Hedge Fund Manager Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015).  This article summarizes the three-step proactive process for investment manager cybersecurity programs outlined by the SEC in the Guidance.

Rita Rubin Joins Ropes & Gray’s Asset Management Practice in Chicago

On April 28, 2015, Ropes & Gray announced that Rita Rubin has joined the firm’s investment management practice as counsel in Chicago.  She was formerly a partner with K&L Gates and senior counsel at Deutsche Asset Management.  Rubin joins the firm’s asset management practice in Chicago, which includes investment management partners Paul Dykstra and Paulita Pike, who recently joined the firm in April, as well as hedge funds partner Deborah Monson, and private investment funds partner Matthew Posthuma, who joined the firm in January.  For additional insight from the firm, see “Estate Planning Tips for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014); “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); and “Ropes & Gray Partners Share Insights Gleaned from Successfully Navigating Presence Examinations with Hedge Fund Manager Clients,” Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013).

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