Building upon the principles articulated in its April 2015 settlement with KBR, Inc., the SEC recently announced a settlement with BlueLinx Holdings Inc. relating to provisions the company had included in severance agreements. Those provisions restricted former employees’ abilities to disclose the company’s confidential information and to receive rewards as SEC whistleblowers. The BlueLinx and KBR consent orders together underscore the SEC’s view that any provisions that might stifle an employee’s communications with the SEC – either explicitly (as in KBR) or implicitly (as in BlueLinx) – are prohibited, regardless of the employer’s intent, its efforts (or lack thereof) to enforce them or their actual chilling effect. In a guest article, Anne E. Beaumont and Lance J. Gotko, partners at Friedman Kaplan Seiler & Adelman, describe the circumstances underlying the KBR and BlueLinx enforcement actions, including the specific contractual provisions that the SEC concluded violated the whistleblower rules, and offer practical advice to hedge fund managers on how they can avoid running afoul of applicable whistleblower rules. For additional insight from Beaumont, see “Hedge Fund Service Providers Must Exercise Caution When Communicating With Investors or Face Liability” (May 26, 2016); “BDC Finance v. Barclays: Derivatives Collateral Calls in a Chaotic Market” (Mar. 19, 2015); and “Five Steps for Proactively Managing OTC Derivatives Documentation Risk” (Apr. 25, 2014). For more on whistleblowers, see “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016); and “RCA Session Offers Insights on Dodd-Frank Whistleblower Regime, Incentives, Anti-Retaliation Protections and Risks” (Apr. 9, 2015). Read full article …

There were no specific regulations – and minimal SEC guidance – for fund managers to reference prior to 2015 when allocating expenses between themselves and their funds. To fill this void and protect investors, the SEC announced in 2015 and 2016 that private fund fee and expense practices would be a priority of its Office of Compliance Inspections and Examinations. A flurry of enforcement actions followed, targeting practices often viewed as “market” by hedge fund managers at the time. Fund managers must study those actions to date to ensure they do not commit the same violations highlighted by the SEC. To illuminate best practices for fund managers to avoid expense allocation violations, the Hedge Fund Law Report spoke with top practitioners in the industry and examined SEC enforcement actions and statements by SEC staff. This article, the first in a three-part series, outlines trends in the types of expense allocations most aggressively scrutinized by the SEC. The second article will examine the flaws in disclosures to investors and the gaps in policies and procedures of managers that frequently result in expense allocation violations. The third article will describe best practices fund managers should adopt to prevent violations, as well as remedial actions to take upon discovering the improper allocation of an expense. For additional coverage of expense allocations, see “Battle-Tested Best Practices for Private Fund Expense Allocations” (Oct. 10, 2014); and our two-part series entitled “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds?”: Part One (May 2, 2013); and Part Two (May 9, 2013). Read full article …

Hedge Fund Law Report recently interviewed Garret Filler in connection with his recent return to Cadwalader, Wickersham & Taft. As special counsel in the firm’s New York office, Filler represents both start-up and established hedge funds and private equity funds, as well as family offices, banks and broker-dealers. This article, the second in a two-part series, sets forth Filler’s thoughts on family offices transitioning to asset managers; broker-dealer registration issues for fund managers; considerations when negotiating counterparty agreements; the implications to hedge funds of increased capital and liquidity requirements for banks and broker-dealers; and the impact of new margin requirements for uncleared derivatives. In the first installment, Filler discussed the cultures of private fund managers; selection of outside counsel, including law firm relationships with regulators and their willingness to enter into alternative fee arrangements; and counterparty risk. For additional insight from Cadwalader partners, see “Practical Guidance for Hedge Fund Managers on Preparing for and Handling NFA Audits” (Oct. 17, 2014).

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In September 2015, the Financial Stability Board (FSB), an international organization with a mandate to promote global financial stability, identified five areas in the asset management industry that pose risks to financial stability: mutual fund liquidity mismatches; fund leverage; operational risks; securities lending; and potential vulnerabilities of sovereign wealth funds and pensions. The FSB’s concerns are similar to those raised earlier this year by the Financial Stability Oversight Council. See “FSOC Report Focuses on Liquidity, Leverage and Other Risks Facing Hedge Fund and Asset Managers” (Apr. 28, 2016). The FSB stated that these risks should be addressed statutorily and recently issued a consultative document (Consultative Document) focusing on the first four of those potential risks, offering policy recommendations and soliciting comments on them. After considering responses to the Consultative Document, the FSB plans to issue final policy recommendations by the end of 2016, some of which could be implemented by FSB working groups and various regulatory authorities. This article summarizes the key takeaways from the Consultative Document.  Read full article …

This is the final installment in our four-part serialization of a treatise chapter by Steven W. Rabitz, partner at Stroock & Stroock & Lavan, and Andrew L. Oringer, partner at Dechert. The chapter describes the substantive considerations – as well as potential penalties for missteps – associated with employing swap transactions for employee benefit plans, certain other similar plans and “plan assets” entities subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) or the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986, and includes references to a wide range of relevant authority. This article examines issues relating to cleared swaps, collateral, rehypothecation and swap execution facilities. The third article in the serialization described implications of funds reaching the 25 percent threshold of plan investment; considerations for fund managers when facing governmental plans; and credit-related issues. The second article discussed exemptions that could keep swaps from being considered prohibited transactions and explored the extent to which swap counterparties and others would be considered fiduciaries under ERISA, as well as the potential implications of that consideration. The first article explored fiduciary responsibility and prohibited transactions generally. Read full article …

Barclays Capital Solutions Group recently took the pulse of the hedge fund industry, compiling survey responses from 340 hedge fund investors and other relevant data. Its report includes three main components: an overview of hedge fund industry performance, with a focus on the possible causes of recent underperformance; an exploration of investor sentiment; and an outlook on the industry for 2016. This article outlines the insights from the report most applicable to hedge fund managers, including with respect to hedge fund performance and the reasons for industry underperformance; strategy preferences of investors; prevalence of fee discounts; and investor criteria for selecting managers. For coverage of other surveys from Barclays, see “Options for Hedge Fund Managers in Alternative Mutual Fund Space” (Apr. 11, 2014); “Family Office Perspectives on Hedge Fund Allocation Percentages, Strategies, Liquidity, Fees, Track Record and Investor Base” (Nov. 14, 2013); and “Increased Financing Costs for Hedge Funds Due to Regulatory Changes Affecting Prime Broker Financing” (Oct. 18, 2012). Read full article …

Ropes & Gray has bolstered its private investment funds practice in New York with the hiring of Amanda Persaud. For insight from Persaud, see “Structuring Hedge Funds to Avoid ERISA While Accommodating Benefit Plan Investors (Part Two of Two)” (Feb. 12, 2015). Persaud advises clients on the formation and operation of hedge funds, private equity funds and credit funds, and provides guidance on regulatory compliance matters. For commentary from Ropes & Gray attorneys, see “Implications for U.S. Hedge Fund Managers of the European Market Infrastructure Regulation” (Jul. 18, 2014); “The Impact on Private Fund Managers of Final Regulations Under the Volcker Rule” (Mar. 13, 2014); and our two-part series on SEC examinations: “What Hedge Fund Managers Need to Know About Getting Through an SEC Examination” (Jun. 16, 2016); and “Fees, Conflicts, Investment Allocations and Other Hot Topics Hedge Fund Managers Should Expect During an SEC Examination” (Jun. 30, 2016). Read full article …

Lydia Gavalis has joined Hamilton Lane as deputy general counsel. Gavalis comes from SEI, where she spent 10 years as general counsel. Gavalis is joining in preparation for the retirement of the general counsel, Robert Cleveland, and will be responsible for all global legal affairs of the firm upon succeeding Cleveland as general counsel.  Read full article …