Nov. 19, 2015

Hedge Fund Managers Must Exercise Restraint in Deploying Indemnification Provisions

Indemnification provisions are the forbidden fruit in every hedge fund partnership agreement.  On the one hand, they are typically drafted in such a broad fashion as to protect the general partner and its affiliates from seemingly any issue arising out of the partnership, provided that their actions do not constitute gross negligence, willful misconduct, fraud or bad faith.  On the other hand, utilizing an indemnification provision almost always places the general partner and investment adviser’s fiduciary duties at risk.  In a guest article, David T. Martin, a partner at Cummings & Lockwood, explains how courts have analyzed indemnification provisions under Delaware law and offers some fundamental principles that every fund counsel should consider before deploying an indemnification provision.  For more on indemnification, see “Stanley Druckenmiller’s Counsel Provides a Tutorial for Negotiating Exculpation, Indemnification, Redemption, Withdrawal and Amendment Provisions in Hedge Fund Governing Documents,” Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  For a Cayman Islands perspective, see our two-part series on “Exculpation and Indemnity Clauses in the Hedge Fund Context”: Part One, Vol. 3, No. 50 (Dec. 29, 2010); and Part Two, Vol. 4, No. 1 (Jan. 7, 2011).

ALM General Counsel Summit Reveals How Hedge Fund Managers Can Prepare for SEC Examinations

As the SEC continues its unprecedented enforcement streak – with 807 enforcement orders for a record $4.2 billion in monetary remedies in the last fiscal year – hedge fund managers need to prepare for the inevitable SEC examination.  See “SEC Chair Emphasizes Enforcement Focus on Strong Remedies and Individual Liability,” Hedge Fund Law Report, Vol. 8, No. 44 (Nov. 12, 2015).  Proper preparation for an examination is critical for hedge fund managers to minimize the risk of further enforcement action.  Speakers at Corporate Counsel’s Ninth Annual Hedge Fund General Counsel and Compliance Officer Summit addressed the best strategy for these preparations, including having a robust compliance program with proper policies and procedures in place, as well as conducting periodic mock examinations.  This article summarizes those panel discussions, highlighting recommended tools and techniques hedge fund managers may employ to properly prepare for SEC, as well as internal, investigations.  For more on preparing for SEC exams, see “SEC’s Rozenblit and Law Firm Partners Explain the SEC’s Enforcement Priorities and Offer Tips on How Hedge Fund and Private Equity Managers Can Avoid Enforcement Actions (Part Three of Four),” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

Specific Disclosure Before Charging Legal Expenses to Funds May Help Investment Advisers Avoid SEC Scrutiny

Expense allocations between fund advisers and the funds they manage give rise to significant conflicts of interest.  The SEC remains keenly focused on such conflicts, paying particular attention to private equity advisers.  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).  Blackstone was one of the latest casualties.  See “Blackstone Settles SEC Charges Over Undisclosed Fee Practices,” Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015).  In another recent settlement, the SEC claimed that two affiliated private equity fund advisers improperly allocated the advisers’ own legal, consulting and compliance expenses to the funds they managed without adequate disclosures.  This article summarizes the alleged misconduct that gave rise to the enforcement action, the SEC’s specific charges and the sanctions imposed.  For more on conflicts of interest involving fee and expense allocations, see “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends,” Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015); and “RCA Panel Highlights Conflicts of Interest Affecting Fund Managers,” Hedge Fund Law Report, Vol. 8, No. 26 (Jul. 2, 2015).  Other SEC enforcement actions have involved other types of adviser fees and expenses.  For a recent enforcement action involving monitoring fees and related fee offsets, see “Full Disclosure of Portfolio Company Fee and Payment Arrangements May Reduce Risk of Conflicts and Enforcement Action,” Hedge Fund Law Report, Vol. 8, No. 44 (Nov. 12, 2015).  For a proceeding involving broken deal expenses, see “SEC Enforcement Action Involving ‘Broken Deal’ Expenses Emphasizes the Importance of Proper Allocation and Disclosure,” Hedge Fund Law Report, Vol. 8, No. 27 (Jul. 9, 2015).

SEC Enforcement Director Assures CCOs They Need Not Fear SEC Action Absent Wrongdoing

Are chief compliance officers (CCOs) of hedge fund managers and other SEC-registered entities unfairly targeted by the SEC for enforcement action?  This question has been hotly debated in recent months, and a new voice added to the debate was that of Andrew Ceresney, Director of the SEC’s Division of Enforcement.  In his keynote speech to the National Society of Compliance Professionals 2015 National Conference, Ceresney addressed Enforcement’s perspective on compliance officers, as well as how it approaches enforcement cases that touch compliance personnel, in an effort to illustrate “that these actions punish misconduct that falls outside the bounds of the work that nearly all [CCOs] do on a daily basis; do not involve the exercise of good faith judgments; and are consistent with the partnership we have developed to foster compliance with the laws.”  This article analyzes Ceresney’s remarks.  For additional insight from SEC officials on CCO liability, see “SEC Commissioner Speaks Out Against Trend Toward Strict Liability for Compliance Personnel,” Hedge Fund Law Report, Vol. 8, No. 25 (Jun. 25, 2015); and “SEC Commissioner Issues Statement Supporting Hedge Fund Manager Chief Compliance Officers,” Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015).  See also “Commissioner Gallagher’s Dissent in SEC Enforcement Action Against Hedge Fund Manager Misses the Mark,” Hedge Fund Law Report, Vol. 8, No. 30 (Jul. 30, 2015).

IPO of Global Asset Manager Amundi Raises Liquidity for Société Générale

Amundi, one of the world’s top asset managers, which was owned by Société Générale (SG) and the Crédit Agricole group, recently completed an initial public offering (IPO) of SG’s 20% stake in the company.  This article provides a summary of the offering; an overview of Amundi’s business, as detailed in the IPO registration statement; and a look at the risks and regulatory requirements detailed in the registration statement.  The Amundi IPO is aimed primarily at facilitating SG’s sale of its stake in the company.  Fund managers have also used IPOs to establish permanent capital or private equity vehicles.  See “Ares Management IPO Raises Permanent Capital and Creates Liquidity for Founders’ Interests,” Hedge Fund Law Report, Vol. 7, No. 14 (Apr. 11, 2014); “Anatomy of a Blank Check IPO by a Hedge Fund Manager,” Hedge Fund Law Report, Vol. 7, No. 13 (Apr. 4, 2014); and “Prospectus for Suspended Ellington Financial IPO Details Mechanics of a Hedge Fund Permanent Capital Vehicle,” Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009).  They can also be used for succession planning by private fund managers.  See “Mechanics of a Hedge Fund Manager IPO,” Hedge Fund Law Report, Vol. 5, No. 16 (Apr. 19, 2012).

NFA Notice Provides Cybersecurity Guidance to Hedge Fund Managers Registered as CPOs and CTAs

Cybersecurity in the futures and derivatives market is “perhaps the single most important new risk to market integrity and financial stability,” Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad stated in a keynote address.  The National Futures Association (NFA) recently received CFTC approval of its Interpretive Notice to several existing NFA compliance rules related to supervision, titled “Information Systems Security Programs [ISSPs].”  The new guidance will provide more specific standards for supervisory procedures and will require hedge fund managers and other entities that are NFA members to adopt and enforce written policies and procedures to protect customer data and electronic systems.  “The approach of the Interpretive Notice is to tie cybersecurity best practices to a firm’s supervisory obligations,” Covington & Burling partner Stephen Humenik said.  This article summarizes the guidance.  See also “PLI ‘Hot Topics’ Panel Addresses Cybersecurity and Swaps Regulation,” Hedge Fund Law Report, Vol. 8, No. 43 (Nov. 5, 2015).  For more on CFTC and NFA requirements applicable to hedge fund managers, see our three-part CPO Compliance Series: “Conducting Business with Non-NFA Members (NFA Bylaw 1101),” Vol. 5, No. 34 (Sep. 6, 2012); “Marketing and Promotional Materials,” Vol. 5, No. 38 (Oct. 4, 2012); and “Registration Obligations of Principals and Associated Persons,” Vol. 6, No. 6 (Feb. 7, 2013).

Morrison & Foerster Expands Fund Formation Practice in Hong Kong

Morrison & Foerster recently welcomed fund formation lawyer Jason R. Nelms to its Hong Kong office as a partner in its corporate department.  For insight from the firm, see “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).  Nelms focuses on advising Asia- and U.S.-based sponsors and investors in the structuring, formation and offering of private investment funds, including private equity funds, real estate funds, hedge funds, co-investment vehicles and other alternative investment products.  For more on 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).

James J. Kelly Joins Holland & Hart in Salt Lake City

James J. Kelly has joined Holland & Hart as a partner in Salt Lake City.  Kelly’s alternative investment industry expertise includes hedge, private equity, real estate and venture capital funds, as well as funds of funds, representing them in all aspects of their businesses, including structure and organization, and myriad compliance, investment, operational and regulatory matters.  See “How Can Hedge Fund of Funds Managers Manage a ‘Liquidity Mismatch’ Between Their Funds and Underlying Hedge Funds?,” Hedge Fund Law Report, Vol. 2, No. 40 (Oct. 7, 2009).  He also advises investment managers on formation and operation of sponsor and management entities and arrangements among firm principals.  For more on fund manager formation, see “Establishing a Hedge Fund Manager in Seventeen Steps,” Hedge Fund Law Report, Vol. 8, No. 33 (Aug. 27, 2015).