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    Feb. 5, 2015

Benchmarking and Best Practices for Hedge Fund Manager Cybersecurity

On February 3, 2015, as part of its Cybersecurity Examination Initiative, the SEC’s Office of Compliance Inspections and Examinations, in coordination with the Division of Trading and Markets and Division of Investment Management, issued a Risk Alert summarizing observations it made through cybersecurity examinations of a cross section of broker-dealers and investment advisers.  This article summarizes the key findings of the Risk Alert.  See also “Weil Attorneys Discuss U.S. and E.U. Cybersecurity Risks and Compliance Issues Relevant to Private Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014).

Why Should Hedge Fund Investors Perform On-Site Due Diligence in Addition to Remote Gathering of Information on Managers and Funds? (Part Two of Three)

An on-site visit has become an essential element of a hedge fund operational due diligence program.  As one allocator told the HFLR, “There are a few important questions that can only be asked while looking into the eyes of the COO or CFO.”  But what are those questions and, more generally, what practices, approaches and techniques can investors implement to extract maximum value from an on-site visit?  This article is the second in a three-part series detailing how and why investors should perform on-site due diligence visits.  Based on insight from operational due diligence veterans, this article describes how investors should conduct diligence visits, and how managers can prepare for them effectively.  The first article focused on the rationale for the on-site visit and the mechanics of preparation.  The third article will discuss further on-site procedures, including red flags to identify, and an investor’s options following the on-site visit.  See also “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014).

Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Insider Trading, Proposed Changes to Form 13F and Schedule 13D and Employment-Related Disputes (Part Three of Four)

This is the third article in a four-part series covering the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  This article summarizes the primary points made at the Summit relating to insider trading, proposed changes to Form 13F and Schedule 13D and employment-related disputes with highly-compensated employees.  The first article in the series covered regulatory priorities, handling regulatory examinations and cybersecurity preparedness.  The second article discussed CFTC compliance, conflicting regulatory regimes in compliance programs and the regulatory and operational considerations of hedge fund marketing.  The last installment in the series will cover negotiating terms with institutional investors, structuring seeding arrangements and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them

A number of state and federal laws and rules are implicated when an investment adviser or one of its employees makes a political contribution to a candidate or government official who may have influence over the decision to award government investment advisory business to the adviser.  The most widely-known of those rules is SEC Rule 206(4)-5, commonly known as the “pay to play” rule.  A recent PracticeEdge session presented by the Regulatory Compliance Association (RCA) provided an overview of four areas where pay to play concerns arise.  This article describes those four areas of concern.  See also “How Can Hedge Fund Managers Participate in the Political Process without Violating Pay to Play Regulations at the Federal, State, Municipal or Fund Level?,” Hedge Fund Law Report, Vol. 4, No. 35 (Oct. 6, 2011).  Cf. “How Much Are In-House Hedge Fund Marketers Paid, and How Will Recent Developments in New York City and California Lobbying Laws Impact the Compensation Levels and Structures of In-House Hedge Fund Marketers (Part Three of Three),” Hedge Fund Law Report, Vol. 4, No. 20 (Jun. 17, 2011).  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.

Trust Indenture Act May Give Hedge Funds the Right to Challenge Involuntary Non-Judicial Debt Restructurings

In late 2014, in a decision that may greatly increase the leverage of holdout bondholders in non-judicial debt restructurings, hedge fund managers holding unsecured debt were denied the injunction they sought of a proposed restructuring of a company’s debt.  This article summarizes the factual background of the case and the court’s reasoning.  For a discussion of other options available to aggrieved debt holders, see “Coercive Exchanges: How Hedge Fund Noteholders Can Salvage Value Under Duress,” Hedge Fund Law Report, Vol. 6, No. 23 (Jun. 6, 2013).  For a look at holdout litigation involving sovereign debt, see “Bondholders, Including Hedge Funds, Win Latest Round in Battle with Republic of Argentina over Payments on Defaulted Sovereign Bonds,” Hedge Fund Law Report, Vol. 6, No. 36 (Sep. 19, 2013).  For another interpretation of the Trust Indenture Act relevant to hedge fund managers that invest in structured products, see “Second Circuit Panel Stays Mum on Whether Trust Indenture Act Applies in All Securitization Deals,” Hedge Fund Law Report, Vol. 7, No. 24 (Jun. 19, 2014).

Structuring Private Funds to Avoid ERISA While Accommodating Benefit Plan Investors (Part One of Two)

Private fund managers need to understand what ERISA is, why ERISA matters and what exceptions are available to managers who do not want to be subject to ERISA as a manager of “plan assets.”  At a recent event, ERISA practitioners from Simpson Thacher & Bartlett LLP; Proskauer Rose LLP; Skadden, Arps, Slate, Meagher & Flom LLP; and Wachtell, Lipton, Rosen & Katz discussed these issues and other ERISA-related developments applicable to organizing and operating private equity and hedge funds.  This article, the first in a two-part series, summarizes insights from panelists on identifying benefit plan investors and exemptions available to fund managers under ERISA.  The second installment will address drafting fund documents, ERISA-related liability and implications of the Sun Capital case.  See also “Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse (Part Five of Five),” Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014); and “What Should Hedge Fund Managers Expect When ERISA Plans Conduct Due Diligence on and Negotiate for Investments in Their Funds?,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).

SRZ Welcomes Securities Attorney Frank Kwok

On February 4, 2015, Schulte Roth & Zabel LLP announced that Frank Kwok has joined the firm as special counsel in the New York office.  Kwok will focus his practice on securities law, with a special emphasis on alternative investment structures, including Private Investment in Public Equity (PIPEs) transactions and related products, such as Rule 144A offerings, registered direct offerings, pre-IPO financings, exchange offers and rights offerings, and regulatory and compliance matters.  For more on PIPEs, see “Former Federal Prosecutors Share Perspectives on Insider Trading Hot-Button Issues and Enforcement Trends Relevant to Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  For HFLR articles authored by SRZ partners, see “Ten Recommendations to Help Hedge Fund Managers Conduct Successful Internal Investigations,” Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013); and “Hedge Fund Names: What a Hedge Fund Manager Should Do Before It Starts Using a Name,” Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).  For additional insight from SRZ partners, see “Schulte Partner Stephanie Breslow Addresses Gates, Side Pockets, Secondaries, Co-Investments, Redemption Suspensions, Funds of One and Fiduciary Duty,” Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014); and “Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target? An Interview with Marc Weingarten, Co-Head of the Global Shareholder Activism Practice at Schulte Roth & Zabel,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

Wendy Beer and George Jamgochian Appointed Directors in Wells Fargo Securities Prime Services

Wells Fargo Securities, the capital markets and investment banking business of Wells Fargo & Company, recently welcomed Wendy Beer and George Jamgochian as directors in Wells Fargo Securities’ Prime Services.  Both are based in New York.  See “Factors to Be Considered by a Hedge Fund Manager When Selecting a Prime Broker,” Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014).

K&L Gates Adds Investment Management Partner in Hong Kong

On February 2, 2015, K&L Gates LLP announced the addition of Michael Wong as a partner in the investment management, hedge funds and alternative investments practice in its Hong Kong office.  For insight from the firm, see: “K&L Gates Partners Identify Four Insider Trading Enforcement Trends with Direct Impact on Hedge Fund Trading Strategies (Part One of Three),” Hedge Fund Law Report, Vol. 7, No. 43 (Nov. 13, 2014); “K&L Gates Partners Identify Eight Actions That Hedge Fund Managers Can Take to Avoid Insider Trading Violations (Part Two of Three),” Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014); and “K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three),” Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).

SEC Names David Grim as Acting Director of the Division of Investment Management

On February 3, 2015, the SEC announced that David Grim has been named as Acting Director of the Division of Investment Management.  For insight from Grim, see “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Two of Three),” Hedge Fund Law Report, Vol. 7, No. 8 (Feb. 28, 2014).  He replaces Norm Champ, the division’s former director, who left the SEC at the end of January.  See “SEC Investment Management Division Director Norm Champ Identifies the Top 10 Regulatory and Enforcement Lessons Learned during 2014,” Hedge Fund Law Report, Vol. 8, No. 4 (Jan. 29, 2015); and “Trading Practices Session at SEC’s Compliance Outreach Program National Seminar Addresses Need for Holistic Compliance Procedures Dealing with Allocations, Best Execution and Cross Trades,” Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).

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