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    Nov. 10, 2016

SRZ, Activist Insight and FTI Survey Explores Viability of Activism as a Hedge Fund Strategy; Tools and Opportunities for Activist Funds; and Effectiveness of Defenses Against Activist Investors

Activist investing remains a vibrant and growing hedge fund strategy; for example, there have already been 20 percent more activist campaigns at large-cap companies for the first three quarters of 2016 than the total number of such campaigns in 2015. See “Key Trends in Fund Structures (Part Two of Two)” (Jul. 30, 2015). Schulte Roth & Zabel, together with Activist Insight and FTI Consulting, recently asked three dozen activist investors about their perspectives on shareholder activism. The survey report discusses the findings on emerging trends in activism and settlements; activist tools; areas of opportunity; effectiveness of defenses; and growth prospects for activist funds. This article summarizes the key takeaways from the report. For more from Schulte partner Marc Weingarten, one of the report’s authors, see “Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target?” (Apr. 25, 2014). 

In Deutsche Bank Case, SEC Emphasizes Protecting Information From More Than Just Cyber Threats

While regulators and companies have focused on cybersecurity efforts to keep data secure, the SEC’s recent administrative proceeding against Deutsche Bank Securities Inc. (DBSI) emphasizes that policies and practices to secure data must also safeguard material nonpublic information (MNPI) – including information generated by research analysts – from being disseminated, including via emails, chats, telephone calls and in-person meetings. See “Selective Dissemination of Research Through Surveys, Trade Ideas Platforms, Huddles and Desk Research: What Are the Implications for Hedge Funds?” (Aug. 2, 2012). The SEC’s order explains that DBSI has agreed to pay a $9.5 million penalty for (1) failing to properly safeguard MNPI generated by its research analysts; (2) publishing an improper research report; and (3) failing to properly preserve and provide electronic chat records sought by the SEC. This article explores the lessons about securing MNPI that hedge fund managers and other financial services companies can glean from the DBSI action. For more on insider trading, see “Hedge Funds in the Crosshairs: The Law of Insider Trading in an Active Enforcement Environment” (Feb. 17, 2010); “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation” (Nov.  9, 2012); as well as our two-part series “How Can Hedge Fund Managers Apply the Law of Insider Trading to Address Hedge Fund Industry-Specific Insider Trading Risks?”: Part One (Aug. 7, 2013); and Part Two (Aug. 15, 2013). For additional coverage of the SEC’s action against DBSI, see “SEC Action Emphasizes Importance of Safeguarding Analyst Reports and Opinions From Improper Disclosure” (Oct. 20, 2016).

Dechert Partners Outline Post-Brexit Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg (Part One of Two)

The likelihood of a “hard” Brexit poses many challenges for fund managers launching, marketing and distributing fund products in Europe. Nonetheless, funds have many options when it comes to cross-border transactions. Redomiciling a fund is far from the sole – or even the most obvious – choice. With a nuanced grasp of several structuring and regulatory options available in Europe, fund managers can make good use of opportunities available in Ireland, Luxembourg, Germany and other jurisdictions. For additional Brexit analysis, see our two-part series: “Effect of Hard vs. Soft Brexit on Hedge Fund Managers” (Jul. 7, 2016); and “Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World” (Jul. 14, 2016). These points were highlighted during a recent seminar presented by Dechert’s financial services group. Moderated by Dechert partner Chris D. Christian, the seminar featured partners Richard L. Heffner, Jr., Karen L. Anderberg, Marc Seimetz, Mark Browne and Angelo Lercara. This article, the first in a two-part series, presents the points raised during the seminar concerning structuring considerations in light of the impending Brexit, as well as the viability of Luxembourg as a domicile for managers to access E.U. markets. The second article will discuss the viability of domiciling a fund in Ireland or Germany to market in the E.U., as well as the rising prominence of Undertakings for Collective Investment in Transferable Securities structures. For additional commentary from Dechert attorneys, see “Recent Hedge Fund Fee and Liquidity Terms, the Growth of Direct Lending and Demands of Institutional Investors” (Jun. 14, 2016); “Dechert Global Alternative Funds Symposium Evaluates Liquid Alternative Funds and Fund Governance Trends” (Jun. 25, 2015); and “Key Deal Points and Tactics in Negotiations Between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements” (Apr. 18, 2013).

The Past, Present and Future of ESG Investing in the Hedge Fund Industry (Part One of Two)

The integration of environmental, social and governance (ESG) factors into the investment process has become a primary objective of certain investors. According to the 2014 Trend Report on Sustainable and Responsible Investing Trends issued by the Forum for Sustainable and Responsible Investment (SIF), mutual funds, variable annuity funds, exchange-traded funds and closed-end funds that incorporate ESG factors into the investment management process more than tripled in terms of assets under management from 2012 to 2014, accounting for $1.94 trillion in ESG assets in 2014. For a summary of an earlier trend report issued by SIF, see “More Hedge Funds Are Employing Environmental, Social and Governance Investment Criteria” (Nov. 3, 2011). Despite the significant amount of assets being directed into investment strategies that incorporate ESG factors, the general industry consensus is that the adoption of formal ESG policies by hedge fund managers remains fairly uncommon and that private equity managers continue to be comparatively better positioned to do so. This article, the first in a two-part series, explores the development of ESG investing and its prevalence in the hedge fund space. The second article will review advice from industry experts on considerations for managers wishing to develop an ESG investment policy, as well as the due diligence demands from investors seeking investment managers that incorporate ESG factors into the investment process. 

Impact on Private Fund Advisers of Obama Administration’s and State Lawmakers’ Actions to Restrict Use of Non-Compete Agreements 

A growing drumbeat of government hostility toward non-compete agreements may portend state-level legislation that would restrict employers’ use of such agreements. While the impetus behind this movement primarily appears to be a concern for low-wage employees, some of the proposals sweep wide and would affect the abilities of private fund advisers to impose and enforce non-competes against their professional employees. In a guest article, Anne E. Beaumont and Lance J. Gotko, partners at Friedman Kaplan Seiler & Adelman, review the call to action by the Obama Administration for state legislators to significantly curtail, through legislation, an employer’s ability to use and enforce non-compete provisions; the responses from various state policymakers to this request; and the likely impact on private fund advisers if legislation that is substantially similar to the proposals were adopted. For additional commentary from Beaumont and Gotko, see “How Hedge Fund Managers Can Balance Protecting Confidential Information Against Complying With Whistleblower Laws” (Aug. 25, 2016). For further insight from Beaumont, see our three-part series on Kovel arrangements: Part One (Oct. 20, 2016); Part Two (Oct. 27, 2016); and Part Three (Nov. 3, 2016). For more on non-competes and other restrictive covenants, see “What the NLRB Complaint Against Bridgewater Means for Hedge Fund Manager Employment Agreements” (Sep. 8, 2016); “District Court Decision Suggests That Overly Broad Restrictive Covenants Will Not Be Enforced in Employment Agreements in the Wealth Management Industry” (Apr. 26, 2012); and “Non-Competition and Non-Solicitation Provisions and Other Restrictive Covenants in Hedge Fund Manager Employment Agreements” (Nov. 23, 2011).

HFLR and Seward & Kissel Webinar Explores Common Issues in Negotiating and Monitoring Side Letters

In a challenging fundraising environment, investors have substantial leverage for demanding preferential terms from hedge fund managers. Those terms are often embodied in side letters, which present numerous operational and administrative challenges to managers. 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); and “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). A recent program presented by the Hedge Fund Law Report and Seward & Kissel explored 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. The program, “Side Letter Considerations for Fund Managers,” was moderated by William V. de Cordova, Editor-in-Chief of the Hedge Fund Law Report, and featured Seward & Kissel partners Steven B. Nadel and David R. Mulle. This article highlights the key takeaways from the presentation. For additional insight from Nadel, see “29 Top-of-Mind Issues for Investors Conducting Due Diligence on Hedge Fund Managers” (Apr. 4, 2014). For further commentary from Mulle, see “Seward & Kissel Private Funds Forum Offers Practical Steps for Fund Managers to Address HSR Act Enforcement, Tax Reforms, Brexit Uncertainty, MiFID II, Cybersecurity and Side Letters” (Oct. 20, 2016).

Mourant Ozannes Hires Corporate and Funds Attorney in Guernsey

Frances Watson has joined the corporate and funds practices of Mourant Ozannes as a partner in Guernsey. She advises companies and funds on a range of transactions, including stock exchange listings, mergers and acquisitions, portfolio company transactions, competition law matters and restructurings. See “Hedge Fund Restructurings Becoming a Viable, and Variable, Alternative to Liquidation” (Feb. 12, 2009). For insight from Mourant Ozannes partners, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016); “Redeemed Investors Have Priority With Respect to Payment From Liquidating Cayman Islands Hedge Fund” (Sep. 10, 2015); and “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators” (Sep. 20, 2012).  

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