Dec. 15, 2016

Recent NY Appeals Court Rulings Clarify How Fund Managers May Pursue Former Employees for Breach of Fiduciary Duty and Improper Use of Performance Record

In the latest chapter of litigation that began in 2008, the New York State Appellate Court issued two rulings that provide meaningful guidance to industry participants on certain employment-related matters. Specifically, the Appellate Court ruled that a hedge fund manager may pursue two former employees for breach of fiduciary duty, including to recoup certain penalties assessed by the SEC against the firm for violating Rule 105 of Regulation M; misuse of the manager’s performance track record; theft of trade secrets; tortious interference with contract; and defamation. In a guest article, Sean O’Brien, managing partner of O’Brien LLP, along with associates A.J. Monaco and Michael Ahern, provide the litigation history of the case and discuss the claims against the employees and the factual details surrounding such allegations. For additional insights from O’Brien, see “DTSA Provides Hedge Fund Managers With Protection for Proprietary Trading Technology and Other Trade Secrets” (Jun. 23, 2016); and “Can Hedge Fund Managers Contract Out of Default Fiduciary Duties When Drafting Delaware Hedge Fund and Management Company Documents?” (Apr. 4, 2013). For coverage of other employment disputes involving hedge fund managers, see “Quant Fund Manager Moves Aggressively Against Former Employee Who Allegedly Stole Trade Secrets and Other Proprietary Information” (Mar. 21, 2014); and “Highland Capital Management Sues Former Private Equity Chief for Breach of Employment and Buy-Sell Agreements” (May 17, 2012).

How Fund Managers Can Mitigate Prime Broker Risk: Legal Considerations When Negotiating Prime Brokerage Agreements (Part Three of Three)

Prior to the 2008 financial crisis, fund managers generally were less focused on incorporating safeguards into their prime brokerage arrangements, instead relying on the perceived strength of the prime brokers themselves to protect their assets. As prime brokers such as Lehman Brothers collapsed, however, fund managers quickly realized the error of their ways. The lessons from those mistakes continue to resonate as managers now work with their legal counsel to understand the fine print in their prime brokerage agreements and to aggressively negotiate the inclusion of asset, third-party and default scenario protections. See “Federal Reserve Credit Officer Survey Identifies Trends in Prime Broker Credit Terms, Hedge Fund Leverage and Counterparty Risk” (Apr. 26, 2012). This final article in a three-part series outlines various protections managers can incorporate into their prime brokerage agreements to monitor and preserve control of their assets, as well as limit their exposure to sub-custodian risk in foreign jurisdictions. The first article detailed ways managers can evaluate the creditworthiness of brokers and to weigh the relative costs and benefits of the various prime brokerage arrangements available in the industry. The second article described how managers can mitigate risk by utilizing multiple prime brokers or engaging a third-party custodian to hold their excess cash and securities. For more on prime brokerage risks, see “Barclays Predicts Increased Financing Costs for Hedge Funds Due to Regulatory Changes Affecting Prime Broker Financing” (Oct. 18, 2012); and “Migrating Toward Multi-Prime: Did Your Manager Decrease or Increase Operational Risk?” (Jun. 10, 2009). 

Challenges Fund Managers Face Meeting the Growing Demands of Employees, Investors and Regulators: An Interview With EY Principal Samer Ojjeh

In a recent interview with the Hedge Fund Law Report, Samer Ojjeh, principal at Ernst & Young LLP (EY), analyzed the current state of the private funds industry. Specifically, Ojjeh discussed the high expectations of investors, the strategies currently attracting capital, barriers to entry for emerging asset managers and ways managers can retain top talent. Ojjeh’s remarks provide valuable perspective to hedge fund managers on the numerous demands they face from diverse parties, including investors, regulators and the managers’ own employees. For further commentary from Ojjeh, see “RCA Symposium Offers Perspectives From Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three)” (Jan. 9, 2014); and “Certain Hedge Fund Managers Are Moving From Full to Partial Shadowing of Administrator Functions” (Sep. 12, 2013). For additional insights from EY professionals, see “Daniel New, Executive Director of EY’s Asset Management Advisory Practice, Discusses Best Practices on ‘Hot Button’ Hedge Fund Compliance Issues: Disclosure, Expense Allocations, Insider Trading, Political Intelligence, CCO Liability, Valuation and More” (Oct. 17, 2013); as well as our two-part series “Steps That Alternative Investment Fund Managers Need to Consider to Comply With the Global Trend Toward Tax Transparency”: Part One (Apr. 7, 2016); and Part Two (Apr. 14, 2016). 

Investor Gatekeepers Advise Emerging Managers on How to Stand Out When Pitching and Marketing Their Funds

As emerging managers pitch their funds to investment committees, they must be fully aware of how the competitive marketing environment has increased the need for them to distinguish themselves from competitors. See “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016); and “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013). Part of this process includes having a nuanced grasp of the criteria – e.g., their track record, pitchbook length and pedigree – investment committees will consider before ultimately selecting or rejecting them. Further, it is vital for managers to remember that the industry is driven by interpersonal relations and that poor first impressions can doom a fund’s prospects. These were among the points discussed during a panel at the Hedge Fund Association’s (HFA) recent Hedgeopolis New York Conference. Moderated by Holly Singer, president of HS Marketing, LLC, the panel featured Meredith Jones, partner and head of emerging manager research for Aon Hewitt Investment Consulting; Sean Cover, director of treasury and investment operations for the Wildlife Conservation Society; and Thomas Pacilio, senior director of RSM U.S. Wealth Management. This article presents the key points communicated by the panelists. For additional coverage of the HFA conference, see “U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration” (Nov. 17, 2016). For insight from another HFA panel, see “Procedures for Hedge Fund Managers to Safeguard Trade Secrets From Rogue Employees” (Jul. 21, 2016).

What the Record Number of 2016 SEC and FINRA Enforcement Actions Indicates About the Regulators’ Possible Enforcement Focus for 2017

SEC and FINRA enforcement efforts ramped up in 2016, with each regulator achieving a record number of enforcement actions and fines. A recent program presented by compliance solutions provider MyComplianceOffice (MCO) looked at how SEC and FINRA enforcement efforts in 2016 compared with prior years, while also speculating on the level of enforcement fund managers may be able to expect under the Trump administration. The program was hosted by Joseph Boyhan, an MCO marketing executive, and Shane McGonigle, MCO’s chief customer officer, and featured Sutherland Asbill & Brennan partner Brian L. Rubin, who is a former NASD Deputy Chief Counsel of Enforcement and SEC Senior Enforcement Counsel, and associate Adam C. Pollet. This article summarizes the speakers’ principal insights. For additional commentary from Sutherland attorneys, see “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016); and our two-part series on IRS audits of private fund partnerships: “Current Regulations” (Apr. 21, 2016); and “Revised Regulations” (Apr. 28, 2016). For coverage of another recent MCO presentation, see “Practical Guidance From Former SEC Examiners on Preparing for and Surviving SEC Examinations” (Sep. 1, 2016).

Study Examines How Hedge Funds Are Adapting to a Less Liquid Market, the Need for Better Liquidity Reporting and the Future Role of Hedge Funds As Price-Makers

Market liquidity has been a key concern of both regulators and market participants since the 2008 global financial crisis. The Alternative Investment Management Association (AIMA) and State Street Corporation recently released the results of their 2016 liquidity management study. The report examines the current liquidity environment, including the regulatory changes that are affecting liquidity, how managers are adapting to that environment and new sources of market liquidity. This article highlights the primary takeaways from the report. For additional insight from AIMA, see “Key Ways That Managers Align With Investors, Including Alternative Fee Structures, Skin in the Game and Customized Investment Solutions” (Sep. 22, 2016); “Survey of Investors in Japan Reveals Concerns With Hedge Fund Manager Registration Requirements, the Volcker Rule and Success of ‘Abenomics’” (Jun. 23, 2016); and “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015). For more from State Street, see “Evolution in the ‘Endowment Model’ of Hedge Fund Investing” (Dec. 20, 2012).

Mayer Brown Enhances Its Banking and Fund Finance Practices in New York

Bryan Barreras has joined Mayer Brown as a partner in the firm’s global banking and finance and fund finance practices in New York. Barreras has extensive experience with hedge fund, registered fund and derivatives transactions, as well as asset-backed financing and structured notes businesses. For insight from Mayer Brown lawyers, see “Private Equity FCPA Enforcement: High Risk or Hype?” (Feb. 19, 2015); and our three-part series on subscription and other financing facilities: “Provide Funds With Needed Liquidity but Require Advance Planning by Managers” (Jun. 2, 2016); “Offer Hedge Funds and Managers Greater Flexibility” (Jun. 9, 2016); and “Operational Challenges for Private Fund Managers” (Jun. 16, 2016).