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    Jul. 21, 2016

Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers

On July 13, 2016, the highly anticipated Cayman Islands Limited Liability Companies Law, 2016, came into effect, making the limited liability company (LLC) fully available in that jurisdiction. Widely attributed to the demands of U.S. investors seeking an offshore equivalent to the Delaware LLC, the Cayman LLC has been met with positive reactions from onshore and offshore lawyers, though some have raised concerns about the vehicle’s governance. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In an effort to help our readers understand structural, regulatory and registration issues of the Cayman LLC, the Hedge Fund Law Report has interviewed partners of law firms at the forefront of interactions with both the onshore financial sector and the Cayman Islands authorities regarding the law’s development. We present our findings in this article. For analysis of other recent developments in Cayman law, see “Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters” (May 28, 2015); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors” (Jan. 24, 2013).

Lessons for Hedge Fund Managers From the Government’s Failed Prosecution of Alleged Insider Trading Under Wire and Securities Fraud Laws

The Supreme Court stated clearly in Chiarella v. United States that the mere fact that a person receives material nonpublic information and executes a trade based on that information does not constitute a crime. But judicial intervention has not stopped the government from trying to come up with novel theories by which to prosecute so-called “remote tippees” – recipients of information several steps removed from the corporate insiders at the beginning of the chain – for insider trading. This is exactly what happened in the recent prosecution of Steven E. Slawson, co-founder of the hedge fund Titan Capital Management. In a guest article, Todd R. Harrison, lead trial counsel for Slawson and a partner at McDermott Will & Emery, discusses the government’s unsuccessful prosecution of Slawson and the wire and securities fraud statutes upon which it was based, analyzing the ramifications of the case for hedge fund managers. For additional insight from McDermott partners, see “SEC’s Hedge Fund Focus to Include Review of Funds That Outperform the Market” (Apr. 29, 2011). For recent coverage of insider trading issues, see “SEC Continues to Focus on Insider Trading and Fund Valuation” (Jun. 30, 2016); “Hedge Fund Managers Must Ensure That Insider Trading Compliance Policies and Procedures Cover Third-Party Consultants” (Jun. 9, 2016); and “SEC to Return Insider Trading Settlement Payment to Level Global” (Feb. 4, 2016).

Marketing Strategies for U.S. Hedge Fund Managers Under AIFMD (Part One of Two) 

The Alternative Investment Fund Managers Directive (AIFMD) established a comprehensive regime that governs how and when hedge and other private fund managers may offer their products to investors in the E.U. Consequently, U.S. hedge fund managers looking to raise capital from European investors must choose a regulatory compliance strategy that is appropriate in light of the manager’s size, European presence and anticipated reach. A recent program sponsored by the Futures Industry Association (FIA) provided an overview of the marketing environment under AIFMD, along with other regulatory issues. Michael Sorrell, an associate general counsel at the FIA, moderated the discussion, which featured Fried Frank partners Gregg Beechey, William J. Breslin and David S. Mitchell. This article, the first in a two-part series, summarizes the speakers’ key insights with respect to the current options available to U.S. managers to market their funds in the E.U. The second article will address the intersection of CFTC regulation with AIFMD. For additional insight from Fried Frank partners, see “The SEC’s Proposed Custody Rule Changes: An Analysis of the Impact on Hedge Fund Managers” (Jun. 24, 2009). For more on AIFMD, see our two-part series on compliance by hedge fund managers: “Increased Compliance Burden” (Apr. 28, 2016); and “AIFMD’s Depositary Requirement” (May 5, 2016).

Procedures for Hedge Fund Managers to Safeguard Trade Secrets From Rogue Employees  

In an era when high-profile data theft cases have shaken some people’s faith in the security of personal information entrusted to fund managers, it is critically important for firms to take steps to detect, prevent and address such thefts by rogue employees. This is of particular urgency for hedge fund managers now that the SEC has stepped up its focus on cybersecurity. See “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016). Data security and the measures that can help safeguard trade secrets and sensitive information were the focus of a recent Hedge Fund Association (HFA) panel discussion. The participants were Mark Sidoti, director of the business and commercial litigation department and chair of the e-discovery task force at Gibbons; Paul Neale, chief executive officer of DOAR, Inc.; and Lisa Roitman, general counsel of Litespeed Partners. This article highlights the most salient points for hedge fund managers raised by the panel. For additional insight from the HFA, see “HFA Symposium Offers Perspectives From Cybersecurity Industry Professionals on Preparedness, Vendor Management, Cyber Insurance and Cloud Services” (Jul. 7, 2016); and our two-part series on the recent Global Regulatory Briefing, offering insight from U.S., U.K. and offshore regulators: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Views on Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016).

Settlement Clarifies Limitations on Activist Hedge Fund Access to the “Investment Only” Exemption from Hart-Scott-Rodino Filing Requirements  

In April 2016, the DOJ sued VA Partners I, LLC, ValueAct Capital Master Fund, L.P. and ValueAct Co-Invest International, L.P. (together, ValueAct) for alleged violations of the pre-merger notification provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). At issue in the case was whether ValueAct was entitled to rely on the so-called “investment only” exemption to the HSR Act filing requirements (Investment Only Exemption). See “DOJ Lawsuit May Limit Ability of Activist Hedge Funds to Rely on ‘Investment Only’ Exemption From Hart-Scott-Rodino Filing Requirements” (Apr. 14, 2016). On July 12, 2016, the DOJ announced that ValueAct agreed to settle the charges and pay a record $11 million fine. The settlement includes an injunction against certain specified types of conduct which will presumably limit the ability of activist hedge funds to rely on the Investment Only Exemption. This article summarizes the terms of the settlement and its impact on activist hedge funds. For more on activist investing, see “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015); and our two-part series on “Considerations for Hedge Fund Managers Pursuing Activist Strategies”: “Filing Obligations and Other Operational Considerations” (May 5, 2016); and “Settlement, Prospects, Shareholder Engagement and Proxy Access Considerations” (May 12, 2016).

FCA Director Emphasizes Regulator’s Focus on Firm’s Culture of Compliance 

On July 12, 2016, Jonathan Davidson, Director of Supervision – retail and authorisations of the U.K. Financial Conduct Authority (FCA), spoke at the 2nd Annual Culture and Conduct Forum for the Financial Services Industry in London. In his remarks, Davidson outlined the FCA’s ambitions for firm culture in the financial service industry; the responsibility of leaders to encourage personal responsibility and impress the value of good culture upon all staff; and the view that a strong culture that builds trust in firms and markets is in the economic self-interest of firms and their shareholders. Davidson also discussed the Senior Managers and Certification Regime that will eventually apply to hedge fund managers and the FCA’s expectations thereof. See “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016). This article highlights the elements of Davidson’s remarks most applicable to hedge fund managers with respect to developing an appropriate culture of conduct and compliance. For commentary from Davidson’s colleagues at the FCA on other legal and regulatory issues, see “Focus on Hedge Fund Managers and Market Liquidity May Be Overemphasized, Argues FCA Director” (Mar. 31, 2016); “FCA Acting Chief Calls for Hedge Fund Managers to Take Greater Responsibility for Implementing MiFID II” (Feb. 18, 2016); and “Hedge Fund Managers Must Prepare for Benchmark Regulation” (Feb. 11, 2016).

Bryan McGee Joins Gibson Dunn’s Investment Funds Practice in New York 

Gibson, Dunn & Crutcher has expanded its investment funds practice in New York with the hiring of Bryan McGee as of counsel. McGee advises alternative asset managers in all aspects of their operations, including the establishment of new investment firms, assisting investment funds through the private placement process and providing guidance on regulatory and compliance matters. For additional insight from Gibson Dunn partners, see “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016); and “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016); as well as our two-part series on tiered management fees: Part One (Jun. 25, 2015); and Part Two (Jul. 9, 2015).

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