Oct. 13, 2016

Advisers Investing Client Assets in Affiliated Funds Could Face SEC Scrutiny for Conflicts of Interest

Hedge fund managers and investment advisers periodically allocate client or fund assets to affiliated vehicles. The SEC remains highly attuned to the conflicts of interest inherent in those situations, including when an adviser improperly collects both a management fee from the client and an additional fee on the same client assets invested in the affiliated fund. That was precisely the case in the SEC’s recently settled enforcement proceeding against the principals of an investment adviser that used client funds to purchase shares in an affiliated mutual fund without providing adequate disclosure. See our three-part series on fee and expense allocations: “Practices Fund Managers Should Avoid” (Aug. 25, 2016); “Flawed Disclosures to Avoid” (Sep. 8, 2016); and “Preventing and Remedying Improper Allocations” (Sep. 15, 2016). This article summarizes the alleged improper conduct and the terms of the settlement. For coverage of a recent SEC enforcement action alleging similar issues, see “Undisclosed Increase in Investment Adviser’s Fees Could Result in Significant Penalties” (Jun. 23, 2016). Even an undisclosed “preference” for investing in proprietary funds can be problematic. See “Preference for Investing in Proprietary Hedge Funds Must Be Fully Disclosed by Investment Banks to Avoid Conflicts” (Jan. 7, 2016).

Luxembourg Fund Structures Evolve to Meet the Needs of the Private Fund Industry

On October 5, 2016, a seminar organized by the Association of the Luxembourg Fund Industry (ALFI), Luxembourg for Finance and the Luxembourg Private Equity & Venture Capital Association explored Luxembourg’s evolving role in financial markets and the private fund space. H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, provided opening remarks, and a panel of experts from Luxembourg law firms, asset managers, banks, consultants and other firms contributed insights on a variety of issues, including Brexit, the new Reserved Alternative Investment Fund structure, private credit, Luxembourg limited partnerships, tax reforms and management companies. PwC partner Steven Libby moderated the discussion. This article highlights the principal points raised during the program. For coverage of a prior ALFI event, see “NICSA/ALFI Program Considers Impact of AIFMD on U.S. Fund Managers” (Sep. 25, 2014).

How Hedge Fund Managers Can Accommodate Heightened Investor Demands for Bespoke Negative Consent, Liquidity, MFN and Other Provisions in Side Letters

As investors increasingly demand tailored investment terms, fund managers find themselves forced to accommodate these requests in light of today’s difficult capital raising environment. See “How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds” (Aug. 4, 2016). Some fund managers are incorporating common investor demands into their standard side letters and fund documentation in order to limit negotiations. Many are also adopting side letter policies to accommodate investor demands while avoiding any appearance of preferential treatment and preventing friction among investors. These themes came across in the opening session of the Tenth Annual Hedge Fund General Counsel and Compliance Summit, hosted by Corporate Counsel and ALM on September 28, 2016. Moderated by Mark Proctor, a partner in the private funds group at Vinson & Elkins, the panel featured S. Dov Lando, managing director, general counsel and chief compliance officer at MKP Capital Management; Nicole M. Tortarolo, head of investment structuring at UBS Hedge Fund Solutions; Solomon Kuckelman, head of U.S. legal for Man Investments; and Marc Baum, general counsel and chief administrative officer at Serengeti Asset Management. This article presents the key takeaways from the panel discussion. For additional commentary from Baum, see “Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss CFTC Compliance, Conflicting Regulatory Regimes and Best Marketing Practices (Part Two of Four)” (Jan. 29, 2015). For insight from Tortarolo, see “RCA Asset Manager Panel Offers Insights on Hedge Fund Due Diligence” (Apr. 2, 2015). For additional views from Lando, see “Four Essential Elements of a Workable and Effective Hedge Fund Compliance Program” (Aug. 28, 2014); and “Three Pillars of an Effective Hedge Fund Valuation Process” (Jun. 19, 2014).

How Developments With California’s Pension Plan Disclosure Law, the SEC’s Rules and FINRA’s CAB License May Impact Hedge Fund Managers and Third-Party Marketers

Hedge fund managers and many service providers have faced a wave of new regulatory requirements since the 2008 global financial crisis. This is particularly true for third-party marketers engaged by hedge fund managers to solicit clients and fund investors, which may be subject to a barrage of regulations at the federal, state and local level depending on the nature of their business. To explore some of the latest regulatory challenges faced by funds and their marketers, the Hedge Fund Law Report recently interviewed Susan E. Bryant, counsel at Verrill Dana LLP, and Richard M. Morris, partner at Herrick, Feinstein LLP. This article sets forth the participants’ thoughts on a host of issues, including new disclosure requirements for state pension plan investors; recent enforcement trends; and new rules adopted by the SEC, FINRA, Municipal Securities Rulemaking Board (MSRB) and state regulators. On Thursday, October 20, 2016, from 10:30 a.m. to 11:30 a.m. EDT, Morris and Bryant will expand on the topics in this article – as well as other issues that affect hedge fund managers and third-party marketers – during a panel moderated by Kara Bingham, Associate Editor of the HFLR, at the Third Party Marketers Association (3PM) 2016 Annual Conference. For more information on the conference, click here. To take advantage of the HFLR’s $300 discount when registering for the conference, click the link available in the article. For prior coverage of a conference sponsored by 3PM, see “Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation” (Dec. 1, 2011).

Eight Bad Excuses Fund Managers Have Raised Trying to Avoid SEC Sanctions for Fee and Expense Allocation Violations and Undisclosed Conflicts of Interest

Over the last several years, fund managers have tried to explain to the SEC why alleged conflicts of interest or improper fees and expense allocations were not, in fact, violations. These excuses may reflect a temptation for fund managers to explain away these issues, rather than fixing the actual problems. However, by understanding in advance the excuses that the SEC has rejected, managers can avoid this false sense of security if the underlying issues are revealed at any point, up to and including during an SEC examination. For more on SEC examinations, see our two-part series: “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). To help our readers avoid the same faulty logic, this article outlines eight excuses that have failed to persuade the SEC and avert enforcement actions or other sanctions when raised by managers. For more on conflicts of interest, see “Seward & Kissel Private Funds Forum Explains How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading (Part Two of Two)” (Sep. 29, 2016); and “Former SEC Asset Management Unit Co-Chief Describes the Agency’s Focus on Conflicts of Interests and Increased Efforts to Crack Down on Private Fund Managers” (Sep. 15, 2016).

Shareholders, Directors and Distressed Investors: What Hedge Fund Managers Need to Know About Investing in Spanish Restructurings

Distressed Spanish companies have become targets of investors during the last few years, in part because new legislation has introduced tools to enhance out-of-court and in-court restructurings. In addition to considering the financials of the target companies and the business case behind each investment, investors in distressed debt in Spain must carefully assess the investment under Spanish law. In a guest article, Ignacio Buil Aldana, partner at Cuatrecasas, Gonçalves Pereira, highlights the key considerations hedge fund managers should regard when approaching Spanish distressed investments. Specifically, he outlines the rules that address subordination of claims and lender-shareholder relationships, including the rights of existing shareholders under Spanish law. For more on distressed investing, see “Investment Strategies, Considerations and Uncertainties of Distressed Debt Investments by Hedge Funds” (Apr. 9, 2015); and “Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing” (Dec. 5, 2013).

Artivest Appoints Jon Feigelson as General Counsel and CCO

Artivest, a tech-driven alternative investment platform, recently announced that Jon Feigelson has joined as its general counsel and chief compliance officer. He will be responsible for providing strategic, regulatory and transactional legal counsel across the firm’s alternative investment offerings. For more on regulatory priorities applicable to alternative investments, see “Former SEC Senior Counsel Offers Insight on SEC Enforcement Focus and Priorities” (Sep. 1, 2016); and “U.S., U.K. and Offshore Regulators Discuss Best Ways for Hedge Fund Managers to Approach Regulation”: Part One (May 12, 2016); and Part Two (May 19, 2016).

Investment Funds and Corporate Partner Joins DLA Piper in New York

DLA Piper has bolstered its investment funds and corporate practices in New York by hiring Yasho Lahiri as a partner. Lahiri advises fund sponsors on product launches, capital raising and restructuring in the U.S. and abroad. He also counsels institutional investors on bespoke investment structures and represents them in the negotiation of investment-related documentation. For insight from Lahiri, see our two-part series “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule?”: Part One (Dec. 5, 2013); and Part Two (Dec. 12, 2013). For coverage of other recent hires at the firm, see “DLA Piper Hires Private Equity Real Estate Funds Partner in Chicago” (Oct. 6, 2016); and “DLA Piper Expands Investment Management Practice in Philadelphia” (Jun. 16, 2016).