Jun. 25, 2015

What Hedge Fund Claim Traders Need to Know About the Visa/MasterCard Settlement

In a market environment in which hedge fund and other claim traders face a dearth of large-scale opportunities, a looming $6 billion class action settlement has captured the attention of savvy investors.  The settlement, which affects all merchants that accepted Visa and MasterCard since 2004, resolves whether various financial institutions violated antitrust laws by establishing and enforcing practices that charged merchants excessive fees for accepting Visa and MasterCard-branded credit and debit cards while also limiting merchants’ ability to steer customers toward other forms of payment.  Although the decision approving the settlement is currently facing pending appeals, merchants that are covered by the settlement have the ability to sell their claims now, thereby guaranteeing themselves a minimum fixed level of return in the class action litigation, while avoiding the risk of a delayed (and unknown) recovery.  In a guest article, Darius J. Goldman, head of the distressed debt and claims trading practice of Katten Muchin Rosenman, summarizes the key terms of the settlement as well as issues that claim traders should consider when purchasing a claim subject to the settlement.  For more insight from Katten, see “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); “Katten Partner Raymond Mouhadeb Discusses the Purpose, Applicability and Implications of the August 2012 ISDA Dodd-Frank Protocol for Hedge Fund Managers, Focusing on Whether Hedge Funds Should Adhere to the Protocol,” Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013); and “Katten Seminar Provides Hedge Fund Managers with a Roadmap for JOBS Act Compliance,” Hedge Fund Law Report, Vol. 6, No. 43 (Nov. 8, 2013).

Tiered Management Fees May Help Hedge Fund Managers Attract Institutional Investors (Part One of Two)

Hedge fund managers competing for institutional investors are under constant pressure to lower fees.  In addition, to keep the manager incentivized even as assets under management rise, investors increasingly seek to prevent the management fee from becoming a profit center for the manager.  Consequently, in order to attract capital and satisfy investor demand, hedge fund managers may consider implementing a tiered management fee – either individually with certain investors or as part of their funds’ general offerings.  According to a recent Seward & Kissel survey, 19% of funds studied implemented a management fee rate that tiered down to lower rates as assets surpassed certain benchmarks.  See “Seward & Kissel New Hedge Fund Study Identifies Trends in Investment Strategies, Fees, Liquidity Terms, Fund Structures and Strategic Capital Arrangements,” Hedge Fund Law Report, Vol. 8, No. 9 (Mar. 5, 2015).  This article, the first in a two-part series, examines the prevalence of tiered management fee structures in the hedge fund industry, the rationale for offering tiered management fees and the elements of tiered management fee structures.  The second article will address investor response to tiered management fees and practical considerations for hedge fund managers implementing such structures.  For more on management fees, see “Citi Survey Finds Large Drop in Hedge Fund Profitability from 2013 to 2014, Highlighting the Importance of Management Fee Revenue and Its Impact on Product Strategy and Management Company Valuations (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015); and “Eight Refinements of the Traditional ‘2 and 20’ Hedge Fund Fee Structure That Can Powerfully Impact Manager Compensation and Investor Returns,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).

Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II (Part Two of Two)

As the Markets in Financial Instruments Directive is recast under the new directive (MiFID II) and related regulations (MiFIR), it is important for hedge fund managers and other firms to prepare for the changes taking effect in January 2017.  To assist in that effort, a recent program presented by Hedge Fund Law Report and Advise Technologies offered a comprehensive overview of the proposed changes under MiFID II and MiFIR.  Moderated by William V. de Cordova, editor-in-chief of the HFLR, the program featured Jeanette Turner, a managing director at Advise Technologies, and Simon Whiteside, a partner at Simmons & Simmons.  This article, the second in a two-part series, addresses access to E.U. markets by non-E.U. firms; direct electronic access; investment advice; transaction reporting; transparency reporting; commodities; trading venues; and preparation for MiFID II.  The first article conveyed insight from the panel on the impact of MiFID II on private funds; the legislative and regulatory status of MiFID II; inducements, soft dollars and research; conflicts of interest; information and reporting; best execution; recordkeeping; and product governance.  For more on MiFID II, see “Changing Regulations May Restrict Hedge Fund Managers’ Use of Soft Dollars in Europe,” Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).  For a discussion by Turner of the MiFID II implementation process and new transaction reporting requirements, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  For other collaborations between the HFLR and Advise Technologies, see also “Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filing (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).

Dechert Global Alternative Funds Symposium Evaluates Liquid Alternative Funds and Fund Governance Trends

Since the 2008 market crisis, retail demand for alternative investment strategies has surged.  Consequently, offerings of alternative mutual funds by U.S. hedge fund managers have steadily increased in recent years; however, the alternative mutual fund structure has not proven as popular in Europe or Asia, where retail investors and regulators prefer the UCITS structure.  See “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds,” Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014).  In addition, concerns with fund governance issues, such as key person risk and investment strategy drift, have similarly escalated since the crisis.  This article summarizes the discussion of these topics at the recent Dechert Alternative Funds Symposium in New York City.  For additional coverage of the Symposium, see “Dechert Global Alternative Funds Symposium Highlights Trends in European and Global Hedge Fund Marketing,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).

K&L Gates-IAA Panel Addresses Cyber Breach Response Plans for Investment Advisers (Part One of Two)

Not even state-of-the-art cybersecurity measures can prevent all breaches, so it is critical for investment managers to be prepared for such events.  Managers should consider adopting a breach response plan; they should also consider purchasing insurance to mitigate their losses and response costs in the event of a breach.  Both of those approaches to mitigating the fallout from a cyber breach were recently considered in depth at a program sponsored by K&L Gates and the Investment Adviser Association (IAA).  The program – the fourth installment of the sponsors’ Investment Management Cybersecurity Seminar Series – was moderated by Mark C. Amorosi, a partner at K&L Gates, and featured Laura L. Grossman, assistant general counsel at the IAA; Jason Warmbir, a vice president at Willis Group Holdings Ltd.; and K&L Gates partners András P. Teleki and Gregory S. Wright.  This article, the first in a two-part series, explores the development and testing of a breach response plan; implementation of the plan in the event of a breach; breach notification requirements; and other post-breach actions.  The second article will discuss the availability of coverage for cyber breaches under conventional insurance policies; the availability and types of specialized cyber liability coverage; and coverage issues that may arise under such policies.  For discussions of prior installments in the series, in which Amorosi, Grossman and Teleki also participated, see “K&L Gates-IAA Panel Provides Comprehensive Overview of Cybersecurity Risk Mitigation Frameworks and Techniques for Investment Managers (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015); and “K&L Gates-IAA Panel Addresses Regulatory Compliance and Practical Elements of Cybersecurity Testing (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).

SEC Commissioner Speaks Out Against Trend Toward Strict Liability for Compliance Personnel

SEC Commissioner Daniel M. Gallagher recently issued a statement explaining his rationale for casting dissenting votes in two recent SEC enforcement actions.  In his remarks, Gallagher clarified his position, argued against the SEC’s trend toward strict liability for chief compliance officers under Rule 206(4)-7 under the Advisers Act and urged the Commission to consider whether amendments to the Advisers Act or staff- or Commission-level guidance should be issued in order to avoid adverse consequences to the industry.  This article summarizes Gallagher’s statements.  For additional insight from SEC officials, see “Acting OCIE Director Discusses the Office’s Focus on Private Equity Managers and Emphasizes the Importance of Disclosure by Advisers,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 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).

CEO and Founder of Alternative Investments Forum Joins Winston & Strawn

Winston & Strawn recently announced that Brant Maller has joined the firm’s New York office.  Maller’s practice focuses on representing investors of institutional capital in alternative asset classes, including hedge fund, private equity, real estate and real assets.  For insight from Winston & Strawn partners, see “Permanent Capital Structures Offer Managers Funding Stability and Access to Capital While Granting Investors Liquidity and Access to Managers,” Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).  For more on institutional investors, see “DMS Review Highlights Issues with Regulation, Institutionalization and Customization of Hedge Funds,” Hedge Fund Law Report, Vol. 8, No. 20 (May 21, 2015); and “Why and How Do Corporate and Government Pension Plans, Endowments and Foundations Invest in Hedge Funds?,” Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013).