Oct. 6, 2016

How Hedge Fund Managers Can Protect Trade Secrets by Providing DTSA-Compliant Notice 

To many hedge fund managers, there is little more important than protecting the fund’s trade secrets – whether they are trading models, track records, client lists or trading positions – from wrongful disclosure. On May 11, 2016, hedge fund managers were given a powerful new tool to protect this proprietary information when President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). See “DTSA Provides Hedge Fund Managers With Protection for Proprietary Trading Technology and Other Trade Secrets” (Jun. 23, 2016). In a guest article, David I. Greenberger, partner at Bailey Duquette P.C., describes how hedge funds can take full advantage of the protections and remedies the DTSA affords – including the right to recover punitive damages and reasonable attorney’s fees – by complying with its requirements to provide certain notices to their employees, consultants and contractors. Additionally, Greenberger suggests that hedge fund managers take immediate steps to ensure that any agreements they enter into with such individuals related to trade secret usage are in writing and contain the requisite notices. Finally, he describes how managers should modify operative agreements that existed prior to the enactment of the DTSA to include the necessary immunity notice provisions. For more on protecting trade secrets, see “Procedures for Hedge Fund Managers to Safeguard Trade Secrets From Rogue Employees” (Jul. 21, 2016); and “How Can Hedge Fund Managers Protect Themselves Against Trade Secrets Claims?” (May 16, 2014).

How Studying SEC Examinations Can Enhance Investor Due Diligence

Investors who are performing or planning to undertake due diligence on hedge funds can glean practical guidance from SEC examinations of fund managers. This was the primary theme of a recent webinar presented by the Investment Management Due Diligence Association (IMDDA) featuring Kristina Staples, managing director of ACA Compliance Group. This article summarizes Staples’ primary insights from the webinar. For more on due diligence, see “RCA Asset Manager Panel Offers Insights on Hedge Fund Due Diligence” (Apr. 2, 2015); “Operational Due Diligence From the Hedge Fund Investor Perspective: Deal Breakers, Liquidity, Valuation, Consultants and On-Site Visits” (Apr. 25, 2014); and “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers” (Apr. 18, 2014). For additional commentary from Staples, see “Five Steps That CCOs Can Take to Avoid Supervisory Liability, and Other Hedge Fund Manager CCO Best Practices” (Mar. 27, 2015). For coverage of a previous IMDDA webinar, see “How Managers May Address Increasing Demands of Limited Partners for Standardized Reporting of Fund Fees and Expenses” (Sep. 1, 2016).

Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations

Alternative asset managers must contend with numerous cybersecurity issues, including emerging threats; potential breaches in a pre-acquisition and post-acquisition context; special considerations for breaches of investor or consumer data; the handling of cybersecurity issues in the investment fund context; and the proper response to breaches. These topics were addressed in a recent panel hosted by Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA), and featuring Debevoise & Plimpton partners Luke Dembosky and Jim Pastore, both of whom are former federal prosecutors. This article highlights the key points from the presentation. For more on cybersecurity, see “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016); “SEC Chief of Staff Outlines Asset Management Initiatives on Cybersecurity and Transition Planning and Emphasizes Robust Enforcement Environment” (Jul. 7, 2016); and “SEC Guidance Update Suggests a Three-Step Framework for Investment Manager Cybersecurity Programs” (May 7, 2015). For coverage of a prior program hosted by MLA, see our two-part series on SEC examinations: “What Hedge Fund Managers Need to Know” (Jun. 16, 2016); and “Fees, Conflicts, Investment Allocations and Other Hot Topics” (Jun. 30, 2016).

Trends in Irish Fund Launches and the Challenges – and Solutions – for Non-E.U. Fund Managers Using These Vehicles

Fund managers outside the E.U. are increasingly looking to Ireland’s thriving funds market as a way to access potential E.U. investors. Regulatory changes have allowed fund managers to take advantage of innovative approaches and strategies, resulting in record numbers of cross-border fund launches in the jurisdiction. A recent report published by Maples and Calder found, among other things, that there has been a sizable increase in Irish fund launches recently, along with a trend toward the use of tax transparent vehicles. This article analyzes the report, together with insight from partners at law firms at the forefront of fund interactions with Irish and E.U. regulators concerning how non-E.U. fund managers can circumvent obstacles – such as marketing, regulatory and remuneration issues – in order to take advantage of these vehicles. For more on issues pertinent to Irish fund vehicles, see “Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA” (Feb. 12, 2015); and “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014). For additional insight from Maples and Calder, see “Tax, Legal and Operational Advantages of the Irish Collective Asset-Management Vehicle Structure for Hedge Funds” (Aug. 13, 2015); “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands” (Sep. 4, 2014); and “Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments” (Nov. 29, 2012).

Hedge Funds As Direct Lenders: Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms (Part Three of Three)

As lending to U.S. companies has increased in popularity as an investment strategy among hedge and private equity funds, some have voiced concerns about the lack of regulation of these alternative corporate lenders as compared to the capital requirements imposed on traditional lenders. This is in stark contrast to the European alternative lending market, where substantial and varied barriers imposed by some jurisdictions create challenges for alternative lenders originating loans on a cross-border basis. Whether U.S. regulators will adopt a European-style regulatory model of alternative lending to U.S. companies remains to be seen. This final article in a three-part series provides an overview of the current regulatory environment surrounding direct lending by alternative lenders and outlines common fee and liquidity terms of direct lending funds. The first article discussed the prevalence of hedge fund lending to U.S. companies and the primary tax considerations to hedge fund investors associated with this strategy. The second article examined how direct lending can constitute engaging in a “U.S. trade or business” and explored structures and strategies available to minimize this risk to investors in an offshore fund. See also “Permanent Capital Structures Offer Managers Funding Stability and Access to Capital While Granting Investors Liquidity and Access to Managers” (Apr. 9, 2015).

Seward & Kissel Study Finds MFN Clauses and Reduced Fees Most Prevalent Terms in Side Letters 

Seward & Kissel (S&K) recently completed a study of side letters entered into by its hedge fund manager clients. “The Seward & Kissel 2015/2016 Hedge Fund Side Letter Study” considers the prevalence and features of five common side letter provisions: most favored nation clauses, fee discounts, transparency, preferential liquidity and capacity rights. This article summarizes S&K’s findings. For HFLR coverage of S&K’s annual hedge fund studies, see: 2015 Study (Mar. 31, 2016); 2014 Study (Mar. 5, 2015); 2012 Study (Apr. 11, 2013); and 2011 Study (Feb. 23, 2012). For additional analysis of side letter practices, see “RCA Symposium Clarifies Current Market Practice on Side Letters, Conflicts of Interest, Insider Trading Investigations, Whistleblowers, FATCA and Use of Managed Accounts Versus Funds of One (Part One of Two)” (Jun. 13, 2013). Steve Nadel, lead author of the study and a partner in S&K’s investment management practice, will expand on the topics in this article – as well as other issues relating to side letters – in an upcoming webinar co-produced by the Hedge Fund Law Report and S&K. Details of the webinar are forthcoming. 

DLA Piper Hires Private Equity Real Estate Funds Partner in Chicago

DLA Piper has broadened its real estate capital markets team by hiring Nathaniel Marrs as a partner in Chicago. Marrs advises clients on the launch of private equity real estate funds, joint ventures, operating companies and management companies. For a discussion of trends in real estate funds, see “Portfolio Management and Global Trends for Private Equity and Real Estate Funds” (Jul. 2, 2015). For additional commentary from DLA Piper, see “DLA Piper Compliance Survey Offers Perspectives to Hedge Fund Managers on CCO Liability and Compliance Program Benchmarks” (May 26, 2016); and “DLA Piper Hedge Fund Valuation Webinar Covers Fair Value Methodologies, Valuation Services, Valuing Illiquid Positions and Handling Valuation Inquiries During SEC Examinations” (Aug. 7, 2013). For coverage of another recent hire at the firm, see “DLA Piper Expands Investment Management Practice in Philadelphia” (Jun. 16, 2016).