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    Oct. 27, 2016

What the LSTA’s Revised Delayed Compensation Requirements Mean for Loans Trading on Par/Near Par Documents

The Loan Syndication and Trading Association (LSTA) published revised Standard Terms and Conditions, effective September 1, 2016, for its Par/Near Par Trade Confirmation (Revised Terms). These substantially change a party’s right to receive compensation for interest and ordinary course fees accrued on traded debt during the delay period (Delayed Comp). Funds trading loans – particularly those engaging in large volumes of transactions – must prepare to handle the greater demands imposed by the Revised Terms, lest the increased settlement pressures negatively impact them. In a guest article, Darius J. Goldman and Jessica P. Chue, partner and associate, respectively, at Katten, discuss the Revised Terms, including the new deadlines regarding the execution of trading documentation and funding of the purchase price that need to be met in order for a buyer to receive Delayed Comp. Goldman and Chue also explain the economic effect on buyers and sellers of loans in the secondary market when the new deadlines are not met. For additional insight from Goldman, see “How Hedge Fund Claim Traders Can Protect Their Interests in the Visa/MasterCard Litigation” (Jun. 14, 2016); and “What Hedge Fund Claim Traders Need to Know About the Visa/MasterCard Settlement” (Jun. 25, 2015). For more on LSTA trading documentation, see “The Impact of Asymmetric Information, Trade Documentation, Form of Transfer and Additional Terms of Trade on Hedge Funds’ Trade Risk in European Secondary Loans (Part Two of Two)” (Oct. 27, 2011); and “Big Boys Don’t Cry: How ‘Big Boy’ Provisions Can Help Hedge Fund Managers Avoid Liability for Insider Trading Violations” (Dec. 3, 2009). 

Attorney-Consultant Privilege? Practical Tips for Preparing an Engagement Letter for, and Implementing, a Compliant Kovel Arrangement (Part Two of Three)

The decision by a fund manager and its legal counsel to extend the attorney-client privilege to a consultant relationship through a so-called “Kovel arrangement” is only the first step in a complicated process. The next and most important step is ensuring that the entire Kovel engagement is performed correctly so the privilege will be recognized by the SEC, other regulators and the court system. If the arrangement is deemed invalid, the fund manager could be exposed to liability when documents detailing its operational deficiencies are made available to regulators or litigants. This article, the second in a three-part series, provides practical guidance regarding the provisions that need to be included in an engagement letter with a consultant and how the parties must maintain the arrangement on a daily basis in order to ensure it remains Kovel-compliant. The first article in this series detailed the legal requirements of the Kovel doctrine, as well as considerations for fund managers when deciding whether to invoke or waive the privilege. The third article will examine circumstances under which it is and is not appropriate for fund managers to employ Kovel arrangements. For more on the attorney-client privilege, see “Federal Court Decision Narrows the Scope of Attorney-Client Privilege Available to Hedge Fund Managers in Internal Investigations” (Jan. 23, 2014); and “Six Recommendations for Hedge Fund Managers Seeking to Protect Themselves From Waiver of Attorney-Client Privilege When Faced With SEC Document Requests” (Jan. 17, 2013).

Recent SEC and DOJ Settlements With Och-Ziff and Two Executives Underscore FCPA Compliance Risks to Private Fund Managers

The SEC and DOJ recently announced a settlement with Och-Ziff Capital Management (Och-Ziff) and two of its employees for more than $400 million. The settlement papers suggest that the firm’s compliance policies and procedures were not sufficiently robust to prevent violations of the Foreign Corrupt Practices Act (FCPA) – both in terms of procuring investors and when making private equity investments. Events leading to the settlements include allegations that employees of the company worked with intermediaries with questionable backgrounds and known ties to government officials. Once investments were made, it does not appear that checks and balances were in place to ensure that investor funds were spent appropriately. According to a team of attorneys from MoloLamken, including partners Justin Shur and Jessica Ortiz as well as associate Eric Nitz, the settlement is a “significant development” in both the FCPA and hedge fund worlds. “For a number of years, the DOJ and the SEC have indicated that their FCPA enforcement efforts are focused on private equity and hedge funds,” they said, “but the Och-Ziff settlement is the first major move in that direction. And it’s a significant one: the case represents one of the largest FCPA settlements in history against one of the world’s largest hedge funds.” A companion article in our next issue will distill further compliance takeaways from the case. See “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers” (Jun. 13, 2014); as well as our two-part series on FCPA risks and concerns for private fund managers: Part One (May 28, 2015); and Part Two (Jun. 11, 2015).

Former Law Firm Partner and Current Independent Director Provides Perspective on Hedge Fund Governance Issues, Regulatory Matters and Allocator Concerns

Julian Fletcher recently joined Carne Group Financial Services (Carne) as an independent director in its Cayman Islands office after previously practicing as a partner in Mourant Ozannes’ investment funds group. Fletcher has the vantage point of a former practicing attorney when considering issues, regulations and trends in the hedge fund industry in his new capacity as a fund director. For more on fund directors, see “SEC Chair Outlines Expectations for Fund Directors” (Apr. 7, 2016); “Irish Central Bank Issues Guidance on Fund Director Time Commitments” (Jul. 9, 2015); and “Cayman Court of Appeal Overturns Decision Holding Weavering Fund Directors Personally Liable” (Feb. 26, 2015). In connection with his move to Carne, the Hedge Fund Law Report recently interviewed Fletcher about topics relevant to hedge fund managers, including the future of corporate governance; trends in the structuring of boards of directors of hedge funds; how directors consider different components of a hedge fund’s operations; the future of the Cayman Islands hedge fund industry in light of the introduction of the Cayman LLC vehicle and the decision not to extend the Alternative Investment Fund Managers Directive passport; and critical considerations confronting allocators at this time. For additional analysis from Carne, see “Luxembourg Funds Offer Options for Hedge Fund Managers to Access European and Global Investors” (Feb. 11, 2016); and “Identifying and Addressing the Primary Conflicts of Interest in the Hedge Fund Management Business” (Jan. 17, 2013).

Practical Tips for Fund Managers to Mitigate Litigation Risk From Regulators, Investors and Vendors When Winding Down Funds

As private funds wind down – typically because of poor performance, investor attrition or fallout from regulatory enforcement actions – it is critically important for fund principals to approach the closure thoughtfully and methodically in order to minimize any potential issues. This includes understanding and honoring the requirements in fund documentation and other contracts; carefully managing communications with investors; promptly notifying investors when the fund liquidation commences; assessing liquidity in preparation for pending redemptions; and identifying which employees can and should be incentivized to remain with the fund through its wind-down. These points were made in a recent session at the Tenth Annual Hedge Fund General Counsel and Compliance Summit, hosted by Corporate Counsel and ALM. The panel featured Patricia Arciero-Craig, general counsel and secretary of Gleacher & Company, Inc.; Cynthia A. Marian, head of legal and compliance of Marto Capital LP; Finbarr O’Connor, managing director and private funds advisory practice leader of Berkeley Research Group, LLC; and Michael R. Schwenk, general counsel and chief compliance officer of NWI Management LP. This article presents key takeaways from the panel discussion. For coverage of the opening session of the conference, see “How Hedge Fund Managers Can Accommodate Heightened Investor Demands for Bespoke Negative Consent, Liquidity, MFN and Other Provisions in Side Letters” (Oct. 13, 2016).

The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options

A decrease in bank lending to small- and middle-market companies has created opportunities for private fund managers that wish to engage in direct lending. A recent program presented by Dechert explored the current growth in direct lending, focusing on fund structures and strategies, tax implications and debt financing for direct lending funds. The program featured Dechert partners Matthew K. Kerfoot and Russel G. Perkins. This article summarizes the speakers’ key insights. See our three-part series on hedge fund direct lending: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016). For additional insight from Kerfoot, see “Dechert Panel Discusses Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016); and “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013). 

Upcoming HFLR and Seward & Kissel Webinar to Present Key Side Letter Issues Faced by Fund Managers

On Tuesday, November 1, 2016, at 10:00 a.m. EDT, the Hedge Fund Law Report and Seward & Kissel will be co-producing a complimentary webinar entitled “Side Letter Considerations for Fund Managers.” In this webinar, William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, along with Seward & Kissel partners Steve Nadel and David Mulle, will discuss issues fund managers commonly face with respect to side letters, including terms most frequently requested by investors, operational concerns when negotiating with investors and administrative issues when handling side letters. Seward & Kissel recently completed a study of side letters entered into by its hedge fund manager clients, considering the prevalence and features of common side letter provisions, and attendees will benefit from the insights gleaned by Nadel – lead author of the study – and Mulle, as well as their considerable experience representing clients entering into side letters. To register for the webinar, click here. 

Former SEC Associate Regional Director Joins WilmerHale’s Securities Litigation Practice

Lorraine Echavarria, the former head of enforcement in the SEC’s Los Angeles office, has joined WilmerHale’s securities litigation and enforcement practice as a partner. Echavarria is a 15-year veteran of the agency, where she ultimately served as Associate Regional Director. Her clients at WilmerHale will include public companies, corporate officers, financial institutions, hedge funds and other financial market participants. For additional insight from WilmerHale, see “WilmerHale and Deloitte Identify Best Legal and Accounting Practices for Hedge Fund Valuation, Fees and Expenses” (Jul. 18, 2013).

BDO Gains Regulatory Compliance Specialist

BDO USA has lured Gary Kaminsky to its New York office. Kaminsky joins as managing director of the firm’s financial services advisory practice. For additional commentary from Kaminsky, see “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising” (Feb. 28, 2013); “When and How Can Hedge Fund Managers Permissibly Disguise the Identities of Their Hedge Funds in Form ADV and Form PF?” (Dec. 13, 2012); and “How Should Hedge Fund Managers Allocate Form PF Expenses Between Their Hedge Funds and Their Management Entities?” (Jun. 21, 2012).

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