The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Interviews

  • From Vol. 10 No.16 (Apr. 20, 2017)

    Mourant Ozannes Partner Touts the Cayman Islands Hedge Fund Industry Amid Local and Foreign Developments

    As the arguable jurisdiction of choice for U.S. fund managers seeking to establish offshore funds, the Cayman Islands is frequently at the forefront of hedge fund industry innovations and developments. See “U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration” (Nov. 17, 2016). In terms of local developments, the Cayman Islands are fast approaching the first anniversary of the introduction of the limited liability company vehicle, as well as confronting dramatic changes to its fund governance practices. At the international level, the potential extension of the Alternative Investment Fund Managers Directive marketing passport to non-E.U. countries and the potential regulatory changes under the Trump administration each has a substantial bearing on the islands’ hedge fund industry. To help our readers better understand these developments and anticipate the future of the Cayman Islands’ hedge fund industry, The Hedge Fund Law Report recently interviewed Hayden Isbister, a partner at Mourant Ozannes and a panel moderator at the 2017 Cayman Alternative Investment Summit. For additional commentary from Isbister, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016). 

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  • From Vol. 10 No.13 (Mar. 30, 2017)

    Fund Managers Must Address Investors’ Fee and Liquidity Concerns to Maintain Strong Performance in 2017, While Also Preparing for Trump Administration Regulations

    By many indices, the hedge fund industry in early 2017 shows strong signs of recovery after a difficult year marked by heavy outflows. Returns are up and optimism abounds in the midst of the pro-business atmosphere fostered by the new administration of President Donald J. Trump. See “Ways the Trump Administration’s Policies May Affect Private Fund Advisers” (Mar. 2, 2017). This positivity is tempered, however, by concerns over whether fund managers can align their interests with investors’ fee and liquidity concerns, as well as whether funds are making use of an appropriate beta hurdle. Further, there is a great deal of uncertainty about the impact of the Trump administration’s emerging policies and priorities on the SEC’s enforcement efforts, the Dodd-Frank Act, carried interest and the Department of Labor’s fiduciary rule. To cast light on these and other critical issues, The Hedge Fund Law Report recently interviewed Steven Nadel, a partner in the investment management practice at Seward & Kissel and lead author of Seward & Kissel’s recently published “2016 New Hedge Fund Study.” See “Lock-Ups and Investor-Level Gates Prevalent in New Hedge Funds” (Mar. 23, 2017). For additional commentary from Nadel, see “HFLR and Seward & Kissel Webinar Explores Common Issues in Negotiating and Monitoring Side Letters” (Nov. 10, 2016); and “Seward & Kissel Partner Steven Nadel Identifies 29 Top-of-Mind Issues for Investors Conducting Due Diligence on Hedge Fund Managers” (Apr. 4, 2014).

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  • From Vol. 10 No.11 (Mar. 16, 2017)

    Considerations When Winding Down Funds: Navigating Illiquid Assets, Unanticipated Windfalls and Fees and Expenses During Liquidation (Part Two of Two)

    Once a manager decides to wind down a fund, it must navigate myriad considerations and decisions during the process. The manager needs to disclose the wind-down to investors at the outset without triggering liabilities to service providers or diminishing asset values, and the fund needs to retain appropriate personnel and working capital to perform a wind-down that could take months or even years to complete. To address these and other issues that arise when winding down a fund, The Hedge Fund Law Report recently interviewed Michael C. Neus, senior fellow in residence with the Program on Corporate Compliance and Enforcement at New York University School of Law and former managing partner and general counsel of Perry Capital, LLC. This second article in our two-part series analyzes how illiquid assets should be treated during a wind-down; what fees can and should responsibly be charged to investors; and how managers should allocate an unanticipated windfall received after the wind-down is completed. The first article in the series described the roles that a fund’s general counsel and chief compliance officer play in the wind-down, as well as best practices for communicating the decision to wind down to service providers and investors. For more on considerations when winding down a fund in the Cayman Islands, see “How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or at the End of Its Life? (Part One of Two)” (Dec. 5, 2013); and our two-part series on navigating the loss of a fund’s substratum requirement: “Analysis of the Conflicting Cayman Islands Standards” (Jan. 5, 2017); and “Steps to Ensure a Fund’s Soft Wind-Down Does Not Result in a Winding-Up Order” (Jan. 12, 2017).

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  • From Vol. 10 No.9 (Mar. 2, 2017)

    Winding Down Funds: How Managers Make the Decision and Communicate It to Investors and Service Providers (Part One of Two)

    A fund manager typically spends most of its time not only contemplating how to maximize returns for investors, but also navigating the array of compliance and regulatory concerns involved in running a private fund. Because the manager is so caught up in thinking about these daily considerations, it may lose sight of the multitude of issues that arise when it comes time to wind down that same fund. If the manager exercises some foresight regarding the fund’s eventual wind-down and puts proper procedures in place, however, the whole process can be both smoother and less fraught with legal and regulatory risks. In a recent interview with The Hedge Fund Law Report, Michael C. Neus, senior fellow in residence with the Program on Corporate Compliance and Enforcement at New York University School of Law and former managing partner and general counsel of Perry Capital, LLC, shared his detailed insights about the various considerations caused by winding down a fund. For additional commentary from Neus, see “Practical Solutions to Some of the Harder Fiduciary Duty and Other Legal Questions Raised by Side Letters” (Feb. 21, 2013). This first article in a two-part series presents Neus’ thoughts on the factors leading to the decision to wind down a fund, which personnel should lead that process and how it should be disclosed to investors and service providers. The second article will explore what types of fees and expenses investors should be charged during the wind-down, as well as how managers can maximize the value of illiquid assets during a liquidation. For more on winding down funds, see “Practical Tips for Fund Managers to Mitigate Litigation Risk From Regulators, Investors and Vendors When Winding Down Funds” (Oct. 27, 2016).

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  • From Vol. 10 No.7 (Feb. 16, 2017)

    Will Industry Deregulation Affect the Value of Legal and Compliance Staff? An Interview With David Claypoole on In-House Compensation at Fund Managers (Part Two of Two)

    Following the enactment of the Dodd-Frank Act, the market for in-house general counsels (GCs), chief compliance officers (CCOs) and junior legal and compliance personnel at fund managers bloomed. As the Trump administration has pledged to roll back Dodd-Frank, many wonder whether the opposite effect will be seen and whether the market for – and compensation of – in-house legal and compliance staff will decrease. In a recent interview with The Hedge Fund Law Report, David Claypoole, founder and president of Parks Legal Placement, shared detailed insight into the overall in-house legal and compliance market, based on more than a decade of compensation data. In this article, the second in a two-part series, Claypoole shares his thoughts on anticipated changes to the legal and compliance landscape under the new Trump administration, including a possible repeal of the Dodd-Frank Act; the movement of in-house staff from hedge funds to other industries or practices; and characteristics of successful in-house personnel. In the first article, Claypoole discussed how recent hedge fund performance may affect GC and CCO compensation; trends he has identified in legal and compliance compensation; the drivers of compensation for top legal and compliance personnel; and the backgrounds of candidates vying for these positions. In April, Claypoole will present on trends in legal and compliance compensation at GAIM Ops Cayman 2017. For more information on the conference, click here. To register, taking advantage of the HFLR’s promotional discount of 10 percent off the conference price (plus an additional $700 savings before February 17, 2017), click the link available in this article. For more on ways the Trump administration may affect the industry, see “How the Trump Administration’s Core Principles for Financial Regulation May Benefit the U.S. Funds Industry (Part One of Two)” (Feb. 16, 2017). For more on compensation, see also “Hedge Fund Manager Compensation Survey Looks at 2014 Compensation Levels, Job Satisfaction and Hiring Trends” (Jan. 22, 2015); and “Report Reveals Trends in Compensation of Investment Professionals at Buy-Side Firms” (Dec. 19, 2013).

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  • From Vol. 10 No.5 (Feb. 2, 2017)

    How Have Industry Developments Affected the Value of Legal and Compliance Staff? An Interview With David Claypoole on In-House Compensation at Fund Managers (Part One of Two)

    In a regulatory landscape where fund managers are subject to greater scrutiny, the market for in-house legal and compliance personnel including general counsels (GCs), chief compliance officers (CCOs) and junior staff has flourished. Questions have arisen, however, as to whether the compensation of legal and compliance personnel will be affected by the increasingly volatile performance of private funds. In a recent interview with The Hedge Fund Law Report, David Claypoole, founder and president of Parks Legal Placement, shared detailed insight into the overall market for and compensation of legal and compliance personnel based on more than a decade of compensation data. In this article, the first in a two-part series, Claypoole discusses how recent hedge fund performance may affect GC and CCO compensation; trends he has identified in legal and compliance compensation; the drivers of compensation for top legal and compliance personnel; and the backgrounds of candidates vying for these positions. In the second installment in this series, Claypoole will share his thoughts on anticipated changes to the legal and compliance landscape under the new Trump administration, including a possible repeal of the Dodd-Frank Act; the movement of in-house staff from hedge funds to other industries or practices; and characteristics of successful in-house personnel. In April, Claypoole will be presenting on trends in legal and compliance compensation at GAIM Ops Cayman 2017. For more information on the conference, click here. To register for the conference, taking advantage of the HFLRs promotional discount of 10% off the conference price (plus an additional $700 savings before February 17, 2017), click the link available in this article. For more from Claypoole, see his prior two-part interview on the market for in-house compensation at hedge fund managers: What Is the Value of Legal and Compliance Staff?” (Mar. 12, 2015); and Trends in Legal and Compliance Hiring and Staffing” (Mar. 19, 2015).

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  • From Vol. 10 No.4 (Jan. 26, 2017)

    What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta 

    Since entering the E.U. on May 1, 2004, Malta has dedicated significant resources to developing its financial services industry. As a member of the E.U., Malta offers investment managers a platform from which they can access the E.U. market – arguably in a more cost-effective manner than Luxembourg and Ireland. While European regulations grow exponentially, the Maltese government and the Malta Financial Services Authority have developed regimes to fit the various business models of investment managers. These range from lighter-regulated fund vehicles to Undertakings for Collective Investment in Transferable Securities structures, as well as the recent introduction of the Notified Alternative Investment Fund  a structure designed to be managed by alternative investment fund managers. To help our subscribers better understand the options Malta offers private investment funds and their investment managers, The Hedge Fund Law Report recently interviewed Kenneth Farrugia, Chairman of FinanceMalta, a public-private initiative that promotes Malta as an international financial center. Farrugia’s guidance is particularly relevant to managers exploring E.U. jurisdictions for future fund launches, as well as managers seeking a platform to distribute into the E.U. For additional insight on the benefits of establishing a fund in Malta, see “European Alternative Funds: The Alternatives” (Jun. 24, 2009). For more on offshore funds, see “Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?” (Feb. 4, 2010).

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  • From Vol. 10 No.2 (Jan. 12, 2017)

    How New Swiss Regulations Affect the Ability of Private Fund Managers to Market to Swiss Investors

    Switzerland is in the process of adopting a new regime to regulate the financial services industry and its various participants. Two key pieces of Swiss legislation that are undergoing the legislative process will affect Swiss-based financial service provider operations and how financial service providers located outside Switzerland provide services to Swiss clients. Non-Swiss private fund managers will be most interested in the revised approach proposed to Switzerland’s distribution rules, which impact how a fund may be marketed to Swiss investors. To help provide clarity surrounding the Swiss regulatory environment and the expected impact of this new legislation on the private funds industry, The Hedge Fund Law Report interviewed Dr. Vaïk Müller, an attorney-at-law based in Geneva. Müller’s views are particularly relevant to private fund managers that previously prepared their funds for distribution into Switzerland – with the appointment of a Swiss representative and a Swiss paying agent – as the legislation may reduce their regulatory burden in the future. The new legislation is also relevant for private fund managers that are not currently set up to distribute their funds to Swiss-based investors, as the regulations may, to a certain extent, facilitate their ability to market into Switzerland. For additional insight from Müller, see “New Swiss Regulations Require Appointment of Local Agents and Increased Disclosure in Hedge Fund Documents” (May 14, 2015). For coverage of additional Swiss regulations, see “What U.S. and Other Non-Swiss Portfolio Managers Need to Know About Managing Assets of Swiss Occupational Benefit Plans” (Sep. 22, 2016).

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  • From Vol. 10 No.1 (Jan. 5, 2017)

    Key Insights for Fund Managers Establishing Listed and Private Funds in Guernsey

    Craig Cordle recently joined Ogier’s investment funds team as a group partner based in Guernsey. Cordle counsels his clients on all aspects of structuring, restructuring and merging investment funds and other collective investment arrangements, as well as assisting with cross-border marketing and operations for these entities. In connection with his move to Ogier, The Hedge Fund Law Report recently interviewed Cordle concerning his views on the current state of the funds market in Guernsey, the complexities and nuances in launching exchange-listed funds and how law firms are meeting the current needs and demands of their fund clientele. Cordle provides valuable insight to any fund manager considering these funds or Guernsey as a jurisdiction, in addition to all fund managers concerned with managing outside counsel amid expense constraints. For additional insight from Ogier attorneys, see “Will Reported Purchases by D.E. Shaw Hedge Funds of Assets in Other Hedge Funds’ Side Pockets Set a Precedent, or Highlight the Fiduciary Duty, Valuation and Other Challenges in Such Transactions?” (Mar. 18, 2010); and “Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?” (Feb. 4, 2010).

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  • From Vol. 9 No.49 (Dec. 15, 2016)

    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). 

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  • From Vol. 9 No.42 (Oct. 27, 2016)

    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).

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  • From Vol. 9 No.40 (Oct. 13, 2016)

    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).

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  • From Vol. 9 No.36 (Sep. 15, 2016)

    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 

    Julie M. Riewe, a partner at Debevoise & Plimpton and the former Co-Chief of the Asset Management Unit of the SEC’s Division of Enforcement, spoke with The Hedge Fund Law Report about the SEC’s recent enforcement efforts. The discussion centered on the SEC’s focus on conflicts of interest, including its targeting of horizontal allocations between funds and use of analytics to identify the improper cherry-picking of trade allocations. Riewe also explained the SEC’s decision to increase its personnel dedicated to uncovering violations of private fund managers. Riewe will be speaking at the Tenth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM, in New York City on September 28-29. Click here for more information and to register for the Summit, using the HFLR’s promotional code available in this article for a discount of $200 off the registration price. For additional insight from Riewe, see “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016); and “SEC Settlement Highlights Circumstances in Which Hedge Fund Managers Must Disclose Conflicts of Interest” (Apr. 23, 2015). For more on conflicts of interest, see “Proper Use of Advisory Committees by Private Fund Managers May Mitigate Conflicts of Interest” (Dec. 17, 2015); and “Appropriately Crafted Disclosure of Conflicts of Interest Can Mitigate the Likelihood of an Enforcement Action Against an Investment Adviser” (Oct. 15, 2015).

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  • From Vol. 9 No.35 (Sep. 8, 2016)

    How Studying SEC Enforcement Trends Can Help Hedge Fund Managers Prepare for SEC Examinations and Investigations

    In a recent interview with The Hedge Fund Law Report, Patricia A. Poglinco and Robert G. Van Grover, partners at Seward & Kissel, discussed the types of activities the SEC is targeting when bringing enforcement actions against hedge and other fund managers. They also explored the evolving nature of SEC investigations and what hedge fund managers can do to prepare for these examinations. These are among the issues that Poglinco and Van Grover will explore in greater depth as they each moderate panels at the upcoming “Private Funds Forum” co-hosted by Seward & Kissel and Bloomberg BNA to be held on September 15, 2016. For additional insight from Poglinco, see “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?” (Jan. 22, 2015). For commentary from Van Grover, see “Are Hedge Fund Managers Required to Disclose the Existence or Outcome of Regulatory Examinations to Current or Potential Investors?” (Sep. 16, 2011); “Implications for Hedge Fund Managers of Recent Insider Trading Enforcement Initiatives (Part One of Three)” (Feb. 25, 2011); and our three-part series entitled “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?”: Part One (Sep. 12, 2013); Part Two (Sep. 19, 2013); and Part Three (Sep. 26, 2013).

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  • From Vol. 9 No.34 (Sep. 1, 2016)

    Former SEC Senior Counsel Offers Insight on SEC Enforcement Focus and Priorities

    Jamie Lynn Walter recently joined Kirkland & Ellis in Washington, D.C., to help build the office’s investment funds group. Walter last served as a Senior Counsel in the Private Funds Branch of the Division of Investment Management at the SEC, where she provided legal advice and guidance on a wide range of matters involving the regulation of investment advisers and investment funds, including private funds, mutual funds and exchange-traded funds. She made significant contributions to several agency rules and was integral in developing the SEC’s December 2015 proposed rule entitled “Use of Derivatives by Registered Investment Companies and Business Development Companies.” In connection with her joining Kirkland & Ellis, The Hedge Fund Law Report recently interviewed Walter about several topics important to hedge fund managers. This article sets forth Walter’s thoughts on the current regulatory landscape, including current areas of SEC focus; the interaction between the Commission and fund advisers; patterns in SEC enforcement; and regulatory priorities. For additional insight from Kirkland & Ellis attorneys, see “Portability and Protection of Hedge Fund Investment Track Records” (Nov. 10, 2011); and our two-part series on remote SEC examinations: “What Hedge Fund Managers Can Expect” (May 12, 2016); and “How Hedge Fund Managers Can Prepare” (May 19, 2016).

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  • From Vol. 9 No.33 (Aug. 25, 2016)

    Perspectives From In-House and Private Practice: Cadwalader Special Counsel Garret Filler Discusses Family Offices, Broker-Dealer Registration Issues and Impact of Capital, Liquidity and Margin Requirements (Part Two of Two)

    The Hedge Fund Law Report recently interviewed Garret Filler in connection with his recent return to Cadwalader, Wickersham & Taft. As special counsel in the firm’s New York office, Filler represents both start-up and established hedge funds and private equity funds, as well as family offices, banks and broker-dealers. This article, the second in a two-part series, sets forth Filler’s thoughts on family offices transitioning to asset managers; broker-dealer registration issues for fund managers; considerations when negotiating counterparty agreements; the implications to hedge funds of increased capital and liquidity requirements for banks and broker-dealers; and the impact of new margin requirements for uncleared derivatives. In the first installment, Filler discussed the cultures of private fund managers; selection of outside counsel, including law firm relationships with regulators and their willingness to enter into alternative fee arrangements; and counterparty risk. For additional insight from Cadwalader partners, see “Practical Guidance for Hedge Fund Managers on Preparing for and Handling NFA Audits” (Oct. 17, 2014).

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  • From Vol. 9 No.32 (Aug. 11, 2016)

    Perspectives From In-House and Private Practice: Cadwalader Special Counsel Garret Filler Discusses Hedge Fund Culture, Law Firm Selection and Counterparty Risk (Part One of Two)

    Garret Filler recently rejoined Cadwalader, Wickersham & Taft as special counsel in the firm’s New York office, where he represents both start-up and established hedge funds and private equity funds, as well as family offices, banks and broker-dealers. The Hedge Fund Law Report recently interviewed Filler in connection with his return to Cadwalader, during which he discussed numerous topics of import to hedge fund managers. This article, the first in a two-part series, sets forth Filler’s thoughts on the cultures of private fund managers; selection of outside counsel, including law firm relationships with regulators and their willingness to enter into alternative fee arrangements; and counterparty risk. In the second installment, Filler will discuss family office transitions into asset managers; broker-dealer registration issues for fund managers; considerations when negotiating counterparty agreements; the implications to hedge funds of increased capital and liquidity requirements for banks and broker-dealers; and the impact of new margin requirements for uncleared derivatives. For additional insight from Cadwalader partners, see “Best Practices for Hedge Fund Managers to Adopt in Anticipation of Enactment of FinCEN AML Rule Proposal” (Aug. 4, 2016).

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  • From Vol. 9 No.30 (Jul. 28, 2016)

    Implications of Lehman Brothers Decision on Hedge Fund Managers Trading CDOs

    On June 28, 2016, Judge Shelley Chapman of the U.S. Bankruptcy Court for the Southern District of New York authored an opinion in the case of Lehman Brothers Special Financing Inc. v. Bank of America National Association. This decision, which holds that certain market-standard provisions in structured finance transactions are enforceable when the swap counterparty’s default is due to the bankruptcy of that counterparty, provides hedge fund managers and others trading collateralized debt obligations (CDOs) and other structured products with greater certainty than prior rulings relating to the collapse of Lehman Brothers. The Hedge Fund Law Report recently interviewed Schulte Roth & Zabel partner Paul Watterson about Judge Chapman’s decision and its ramifications for hedge fund managers. Specifically, Watterson addressed the significance of the decision in light of prior case law, the implications of the decisions for hedge fund managers trading CDOs and the specific provisions managers should include in CDO documentation to take advantage of this holding. For more on the Lehman Brothers collapse, see “Lesson From Lehman Brothers for Hedge Fund Managers: The Effect of a Bankruptcy Filing on the Value of the Debtor’s Derivative Book” (Jul. 12, 2012); and “How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?” (Aug. 5, 2009).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    Operational Challenges for Private Fund Managers Considering Subscription Credit and Other Financing Facilities (Part Three of Three)

    As subscription credit facilities and other financing facilities become more prevalent in the industry, hedge fund and other private fund managers seeking to use them on their funds’ behalf must be mindful of the operational complexities that attend those structures. In addition to finding the right geographical market, managers must negotiate favorable provisions in facility documents and be wary of such a facility’s risks, including consequences of default. In a recent interview with The Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription financing facilities and other debt facilities used by funds. In this final article in a three-part series, the partners outline geographical, structuring and operational considerations managers should bear in mind when establishing financing facilities. The first article examined subscription facilities, including their prevalence in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into a facility. The second article explored other types of financing facilities, such as fund-of-fund facilities, portfolio acquisition facilities and general partner support facilities, and their evolution in the current market. For insight from other Mayer Brown attorneys, see “Private Equity FCPA Enforcement: High Risk or Hype?” (Feb. 19, 2015).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    Financing Facilities Offer Hedge Funds and Managers Greater Flexibility (Part Two of Three)

    Along with subscription credit facilities, other forms of fund financing are becoming more prevalent in the asset management industry. In the hedge fund space, fund-of-funds managers are employing financing structures, and portfolio acquisition facilities and general partner support facilities are growing in use. However, along with increasing popularity, these structures have also experienced a surge in complexity. In a recent interview with The Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription financing facilities and other debt facilities used by funds. In this second article in a three-part series, Barnett and Soutter discuss financing facilities employed by hedge funds and other private funds, their evolution in the current market and the costs of these facilities. The first article examined subscription facilities, including their prevalence in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into such a facility. The third article will outline market, structuring and operational considerations for managers when establishing financing facilities. For more on hedge fund financing, see “Barclays Predicts Increased Financing Costs for Hedge Funds Due to Regulatory Changes Affecting Prime Broker Financing” (Oct. 18, 2012).

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  • From Vol. 9 No.22 (Jun. 2, 2016)

    Subscription Facilities Provide Funds With Needed Liquidity But Require Advance Planning by Managers (Part One of Three)

    In order to quickly act on investments, instead of waiting for investors to fund capital calls, private equity and other private funds are turning to subscription credit facilities for necessary liquidity. Along with other types of fund financing facilities, subscription credit facilities are becoming more prevalent in the asset management industry. However, to facilitate the execution of a subscription facility, a manager must make certain preparations, particularly at the outset of the fund. In a recent interview with The Hedge Fund Law Report, Zac Barnett and Liz Soutter, partners at Mayer Brown, discussed subscription and other financing facilities used by funds. In this first article of a three-part series, Barnett and Soutter examine the prevalence of subscription facilities in the asset management industry, investor response to these structures and primary considerations for managers anticipating entering into such a facility. The second article will review the evolution of other types of financing facilities in the current market, including fund-of-fund facilities, portfolio acquisition facilities and general partner support facilities. The third article will focus on market, structuring and operational considerations for managers when establishing financing facilities. For more on subscription financing, see “How Can Private Fund Managers Use Subscription Credit Facilities to Enhance Fund Liquidity?” (Apr. 4, 2013). 

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  • From Vol. 9 No.18 (May 5, 2016)

    What Hedge Fund Managers Need to Know About AIFMD’s Depositary Requirement (Part Two of Two)

    Among the changes imposed on hedge fund managers by the Alternative Investment Fund Managers Directive (AIFMD) is the European requirement to appoint a fund depositary. Hedge fund managers may be subject to different depositary regimes depending on their and their funds’ domiciles, and appointing a depositary requires attention to numerous practical and operational details. In a recent interview with The Hedge Fund Law Report, Bill Prew, founder and CEO of INDOS Financial Limited, discussed AIFMD’s impact on the hedge fund industry since its introduction in July 2014. This article, the second in a two-part series, sets forth Prew’s thoughts about the practical implications of the new depositary requirements, as well as other industry trends and issues for hedge fund managers. In the first installment, Prew discussed the effect of AIFMD on hedge fund managers and their ability to market funds across Europe. For more on depositary requirements under AIFMD, see our two-part series “Application of the AIFMD to Non-E.U. Alternative Investment Fund Managers”: Part One (May 23, 2013); and Part Two (Jun. 13, 2013); as well as “AIFM Directive: Loosening the Regulatory Noose” (Jun. 17, 2009).

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    AIFMD Has Increased Compliance Burden on Hedge Fund Managers (Part One of Two)

    The Alternative Investment Fund Managers Directive (AIFMD) significantly changed the European legal and regulatory landscape for hedge fund managers, affecting their ability to market funds in Europe, increasing their compliance burden and imposing new requirements on funds. In a recent interview with The Hedge Fund Law Report, Bill Prew, founder and CEO of INDOS Financial Limited, discussed AIFMD’s practical impact on the hedge fund industry since its introduction in July 2014. This article, the first in a two-part series, sets forth Prew’s thoughts about the effect of AIFMD on hedge fund managers and the ability of managers to market their funds across Europe. In the second installment, Prew will discuss the practical implications of the depositary requirements imposed by AIFMD on hedge fund managers, as well as other industry trends and issues. For additional insight from Prew, see our series on Advise Technologies’ program for non-E.U. hedge fund managers under E.U. private placement regimes: “Guidance for Registering” (Dec. 3, 2015); and “Roadmap for Reporting” (Dec. 10, 2015). For more on AIFMD, see “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated” (Oct. 22, 2015).

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  • From Vol. 9 No.8 (Feb. 25, 2016)

    Operational Considerations Hedge Fund Managers Must Address When Redomiciling Their Hedge Funds (Part Two of Two)

    When making the decision to redomicile its hedge fund to a more favorable jurisdiction, a manager must consider more than the potential marketing or other advantages the move promises. Redomiciliation involves potential regulatory burdens, conflicts of interest and operational issues, including investor notification and redemption obligations. In a recent interview with The Hedge Fund Law Report, Jonathan Law and Donnacha O’Connor, partners at Dillon Eustace, discussed the prime reasons hedge fund managers consider redomiciliation of their hedge funds. This article, the second in a two-part series, details the potential drawbacks and operational considerations of redomiciliation. The first article addressed the regulatory implications of, and potential conflicts of interest inherent in, the decision to redomicile. For more on redomiciliation, see “Redomiciling Offshore Investment Funds to Ireland, the European Gateway” (Mar. 4, 2011). For additional commentary from Law and O’Connor’s colleague, Derbhil O’Riordan, see “Four Strategies for Hedge Fund Managers for Accessing E.U. Capital Under the AIFMD” (Feb. 13, 2014).

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  • From Vol. 9 No.7 (Feb. 18, 2016)

    Regulatory Considerations Hedge Fund Managers Must Address When Redomiciling Their Hedge Funds (Part One of Two)

    Hedge fund managers in search of marketing or other advantages may consider redomiciling their hedge funds to a more favorable jurisdiction. However, such managers must consider the implications of the move, including potential increased regulatory burdens and conflicts of interest created by the transition. In a recent interview with The Hedge Fund Law Report, Jonathan Law and Donnacha O’Connor, partners at Dillon Eustace, discussed the prime reasons hedge fund managers consider redomiciliation of their hedge funds, along with the legal and operational considerations that attend that decision. This article, the first in a two-part series, addresses the regulatory implications of, and potential conflicts of interest inherent in, the decision to redomicile. The second article will detail the potential drawbacks and operational considerations of redomiciliation. For more on redomiciliation, see “Benefits and Burdens of Redomiciling a Hedge Fund to an E.U. Jurisdiction” (Oct. 27, 2011). For additional insight from Dillon Eustace, see “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014).

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  • From Vol. 8 No.44 (Nov. 12, 2015)

    What the Evolving European Marketing Environment Means for Hedge Fund GCs and CCOs

    Hedge funds looking to market in Europe face an increasingly complex regulatory environment, and hedge fund GCs and CCOs must adapt to these changes to ensure their firms appropriately solicit and engage with investors.  In a recent interview with The Hedge Fund Law Report, Jeffrey Bronheim, GC of Cheyne Capital Management (UK) LLP; Philip Niel, GC and CCO of Egerton Capital (UK) LLP; and Karen Anderberg, a partner at Dechert, discussed implications of the changes in the European regulatory environment on hedge fund GCs and CCOs; challenges for hedge fund managers pursuing private and retail investors in Europe; and the evolving role of hedge fund GCs and CCOs with respect to marketing.  These experts, along with Dechert partner Gus Black, will expand on the topics in this article – as well as other issues affecting hedge fund GCs and CCOs – in a panel co-sponsored by The Hedge Fund Law Report and Dechert.  Entitled “The Evolving Role of GCs and CCOs in Marketing and Investor Management in Europe,” the panel will be held in London on November 17, 2015, at 5:30 p.m. GMT.  For more information, click here.  To register, click here.  For more from Dechert, see “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates,” The Hedge Fund Law Report, Vol. 8, No. 20 (May 21, 2015); and our recent two-part series on the Supreme Court’s Denial of Cert in Newman: Part One, Vol. 8, No. 42 (Oct. 29, 2015); and Part Two, Vol. 8, No. 43 (Nov. 5, 2015). 

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  • From Vol. 8 No.37 (Sep. 24, 2015)

    The SEC’s Broken Windows Approach: Conflicts of Interest and Expense Allocation Concerns for Hedge Fund Managers (Part One of Two)

    Pursuing its “broken windows” approach to enforcement, the SEC continues to scrutinize hedge fund managers.  Accordingly, managers must be ever cognizant of SEC enforcement trends and practical lessons that may be gleaned from them.  In connection therewith, The Hedge Fund Law Report recently interviewed Barry P. Schwartz, founding partner of ACA Compliance Group (ACA); Kent Wegrzyn, managing director of ACA; and Mark Borrelli, a partner at Sidley Austin.  This article, the first in a two-part series, sets forth the participants’ thoughts with respect to the SEC’s broken windows approach, conflicts of interest and allocation of fees and expenses.  In the second installment, the interviewees will discuss compliance resources, chief compliance officer liability and technology.  On Thursday, October 1, 2015, from 11:00 a.m. to 12:00 p.m. EDT, Schwartz, Wegrzyn and Borrelli will expand on the topics in this series – as well as other issues that affect hedge fund managers – in a webcast entitled “What Hedge Fund Managers Need to Know about SEC Enforcement Trends,” which will be moderated by William V. de Cordova, Editor-in-Chief of the HFLR.  To register for the webinar, click here.  For more from ACA, see “ACA Compliance Professionals and SEC Veteran John H. Walsh Share Insights on SEC Priorities for 2015,” The Hedge Fund Law Report, Vol. 8, No 16 (Apr. 23, 2015); and “ACA Compliance Group Clarifies Misconceptions Commonly Held by Fund Managers with Respect to Cybersecurity,” The Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

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  • From Vol. 8 No.23 (Jun. 11, 2015)

    Costs and Structures of Hedge Fund Management Liability Insurance Policies

    Hedge fund managers’ demand for management liability insurance is rising in response to increasing regulatory scrutiny, market volatility and fiduciary responsibilities of hedge fund managers and directors.  The good news is that insurance prices are falling, thanks to heated competition among insurance carriers.  In a recent interview with The Hedge Fund Law Report, Richard A. Maloy, Jr., Chairman and Chief Executive Officer of Maloy Risk Services, shared his expertise on the hedge fund management liability insurance market, including the types of management liability insurance purchased by hedge fund managers, the costs of such coverage, common practices with respect to negotiating insurance policies and the interaction of insurance with fund indemnification policies.  For more on hedge fund management liability insurance, see “Hedge Fund Insurance Benchmarking Survey Reveals Trends and Views Concerning Insurance Purchasing, Pricing, Coverage Limits, Frequency of Claims and Quality of Claims Service,” The Hedge Fund Law Report, Vol. 5, No. 27 (Jul. 12, 2012); and “Hedge Fund D&O Insurance: Purpose, Structure, Pricing, Covered Claims and Allocation of Premiums Among Funds and Management Entities,” The Hedge Fund Law Report, Vol. 4, No. 41 (Nov. 17, 2011).

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  • From Vol. 8 No.14 (Apr. 9, 2015)

    Permanent Capital Structures Offer Managers Funding Stability and Access to Capital While Granting Investors Liquidity and Access to Managers

    Client redemptions and the need to manage their funds’ underlying portfolios of investments to allow for investor liquidity are issues that hedge fund managers routinely face, especially since the market events of 2008 and 2009.  Consequently, managers may find their abilities to pursue their investment strategies constrained by the need to keep portions of their funds’ assets in cash or may have to reduce otherwise attractive positions held by their funds in order to fund client redemptions.  In an effort to counteract such issues, managers are increasingly exploring permanent capital structures – vehicles that would provide a stable source of assets to the manager.  In a recent interview with The Hedge Fund Law Report, Jay Gould and Christopher Zochowski, partners at Winston & Strawn LLP and members of its Permanent Capital Solutions Group, shared detailed insight into types of permanent capital structures used in the hedge fund and private equity industries; the benefits of such structures; the circumstances under which certain permanent capital structures may be employed by managers; potential investor concerns with such structures; and terms and features of certain permanent capital structures.  For more on permanent capital structures, see “Ares Management IPO Raises Permanent Capital and Creates Liquidity for Founders’ Interests,” The Hedge Fund Law Report, Vol. 7, No. 14 (Apr. 11, 2014); and “Prospectus for Suspended Ellington Financial IPO Details Mechanics of a Hedge Fund Permanent Capital Vehicle,” The Hedge Fund Law Report, Vol. 2, No. 50 (Dec. 17, 2009).

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them

    Like Form PF, the consolidated AIFMD reporting template – commonly referred to as “Annex IV” – requires hedge fund managers to make consistent and persuasive sense out of voluminous and disparate data.  Best practices for Annex IV reporting are emerging; managers’ experience with Form PF provides an analogous but incomplete precedent.  In an effort to identify the chief challenges for hedge fund managers presented by Annex IV, and workable strategies for negotiating those challenges, The Hedge Fund Law Report recently interviewed Jeanette Turner, Managing Director and General Counsel at Advise Technologies, LLC.  Our interview covered, among other topics, the top three pain points felt by hedge fund managers in preparing Annex IV; the different experiences of European Economic Area (EEA) and non-EEA managers; how firms are handling the one-month deadline; the extent to which Form PF guidance is applicable to Annex IV; whether information reported in Annex IV will be made public; how regulators will use that information; key upcoming deadlines; differences in Annex IV reporting for hedge and private equity fund managers; the viability of reverse solicitation; and the continuing (but potentially sunsetting) applicability of national private placement regimes.  This interview was conducted in connection with an AIFMD panel discussion to be held on December 2, 2014 at the Harvard Club of New York City, from 8:30 a.m. to 10:30 a.m.  Turner will participate in that discussion, and she will be joined by John Sampson, Executive Director at Ernst & Young; Richard Webley, Head of Business Advisory Services for Americas, Citi Investor Sales and Relationship Management; and Simon Whiteside, Partner in the London office of Simmons and Simmons.  To attend, please contact RSVP@AdviseTechnologies.com or visit rsvp.AdviseTechnologies.com.  For additional insight from: Turner, see “A Practical Comparison of Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014); Sampson, see “Eight Key Elements of an Integrated, Efficient and Accurate Hedge Fund Reporting Solution,” The Hedge Fund Law Report, Vol. 7, No. 43 (Nov. 13, 2014); Webley, see “Lessons Learned by Hedge Fund Managers from the August 2012 Initial Form PF Filing,” The Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012); and Whiteside, see “U.K. FCA Guidance Confirms Simplified Transparency Reporting for Certain Private Placements of Master-Feeder Funds,” below, in this issue of The Hedge Fund Law Report.

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  • From Vol. 7 No.42 (Nov. 6, 2014)

    Valuation and Cybersecurity Best Practices for Hedge Fund Managers: An Interview with Brian Guzman, Partner and General Counsel at Indus Capital Partners, LLC (Part One of Two)

    The HFLR recently conducted a detailed and expansive interview with Brian Guzman, Partner and General Counsel at Indus Capital Partners, LLC.  At a thematic level, the interview covered valuation, cybersecurity, examinations, the AIFMD, and international and tax issues.  At a granular level, the parts of the interview on valuation covered the role and composition of valuation committees; the role of fund boards in the valuation process; best practices with respect to valuation of credit derivatives, distressed debt and other illiquid assets; valuation challenges facing fund of funds managers; use and limits of third-party pricing services; testing of valuation policies and procedures; valuation disclosure; and the relevance of different regional accounting regimes in the hedge fund valuation process.  On cybersecurity, we covered the top challenges and effective strategies for addressing those challenges.  This article includes the parts of our interview on valuation and cybersecurity.  A follow-up article will cover the parts of our interview on examinations, the AIFMD and international and tax issues.  This interview was conducted in connection with (1) the Regulatory Compliance Association’s Compliance, Risk and Enforcement Symposium, which took place on November 4 in New York City – Guzman participated in this Symposium and we will cover it in subsequent issues of the HFLR – and (2) the RCA’s upcoming Regulation, Operations and Compliance (ROC) Symposium, to be held in Bermuda in April 2015.  For more on ROC Bermuda 2015, click here; to register for it, click here.  For additional insight from Guzman, see “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); 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),” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

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  • From Vol. 7 No.41 (Oct. 30, 2014)

    Tax, Structuring, Compliance and Operating Challenges Raised by Hedge Funds Offered Exclusively to Insurance Companies

    Insurance dedicated funds (IDFs) are hedge funds offered exclusively to insurance companies and indirectly capitalized by the insurers’ life insurance or annuity policyholders.  For hedge fund managers, IDFs offer tax advantages, a niche marketing opportunity and a resilient investor base.  In connection with a Hedge Fund Association Symposium on the topic being held today in Fort Lauderdale, The Hedge Fund Law Report recently interviewed Greenberg Traurig shareholder Scott MacLeod on structuring, operational, tax, compliance, marketing and related considerations in connection with IDFs.  Specifically, MacLeod addressed salient tax considerations from the perspectives of investors, insurance companies and managers; hedge fund strategies that lend themselves to IDFs; relevant control and diversification requirements; redemption and liquidity issues; consequences of insurer insolvencies; material terms of governing documents; differences between IDFs and reinsurance vehicles launched by hedge fund managers; IDF platforms; private placement variable annuities; and compliance challenges specific to IDFs.  See also “Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part One of Two),” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011).

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  • From Vol. 7 No.30 (Aug. 7, 2014)

    Can Private Fund Marketing Be Automated?

    The Hedge Fund Law Report recently interviewed Alon Goren, CEO of INVST, an online platform for connecting private funds and investors.  The intent of the interview was to determine whether private fund marketing, or parts of it, can be automated, or at least facilitated, by technology.  In pursuit of an answer to this question, we discussed the following topics with Goren: what INVST does and its revenue model; how INVST confirms the accredited and qualified status of investors on the platform; compliance with the Lamp Technologies no-action letter and the JOBS Act; segments of the investor market on the platform; size and other characteristics of funds and managers on the platform; INVST’s interaction with third-party marketers and its place in the hedge fund marketing ecosystem; and whether INVST handles secondary market transactions in private fund interests.

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  • From Vol. 7 No.29 (Aug. 1, 2014)

    Strategies for U.S. Hedge Fund Managers Looking to Outsource the Risk and Reporting Requirements of the AIFMD While Focusing on Capital Raising in Europe

    U.S. hedge fund managers broadly have four options available for accessing EU investors in a manner consistent with the AIFMD: reverse solicitation; reliance on national private placement regimes (a time-limited solution); in-house compliance with the AIFMD; and outsourced compliance.  See “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014); “Four Strategies for Hedge Fund Managers for Accessing EU Capital Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).  The Hedge Fund Law Report recently interviewed Paul Nunan, Managing Director of Capita Financial Managers (Ireland) Limited, on the mechanics of the fourth option – outsourced compliance.  Outsourcing in this context generally makes sense for a U.S. hedge fund manager that wishes to focus on capital raising and investment management in Europe, while a third party focuses on the risk, reporting and other operational requirements of the AIFMD.  However, outsourcing also involves addressing a series of complex questions, including whether to do so in the first instance, to whom, with respect to what specific tasks, how to measure service levels, how to allocate responsibility and so on.  This interview is intended to help hedge fund managers think through the analysis of outsourcing AIFMD compliance.  In addition, this interview delves deeply into the mechanics of AIFMD compliance generally, covering such topics as: jurisdiction (i.e., who the AIFMD covers); sizing the capital raising opportunity in Europe; application of the AIFMD to branch offices and additional investments by existing investors; how to prove reverse solicitation to regulators; the time-limited viability of reliance on national private placement regimes; and remuneration, transparency, business conduct, leverage and reporting requirements under the AIFMD.  See also “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).

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  • From Vol. 7 No.20 (May 23, 2014)

    FCPA Considerations for the Private Fund Industry: An Interview with Former Federal Prosecutor Justin Shur

    The assets in private funds are growing faster than the number of investment opportunities, especially in discovered markets.  See “OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing,” The Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014) (section on “Consolidation and Compression of Returns”).  As a result, private equity and hedge fund managers are looking with increasing receptivity at emerging markets, and, in some cases, frontier markets.  These are the faraway places where big, risky opportunities still live – where information remains asymmetric, access remains elusive and property rights remain in flux.  More often than not, these are also the places that rank low on Transparency International’s Corruption Perceptions Index.  Consequently, the Foreign Corrupt Practices Act – the U.S. statute prohibiting bribery of foreign officials – looms ever larger as private fund managers scour the globe for interesting ideas.  It comes up in fund raising from sovereign wealth funds; in structuring funds and transactions; in retaining finders, brokers, distributors and other third parties; in monitoring investments; in restructurings; in hiring; and in a wide range of other contexts.  See “Practical Considerations for Compliance by Hedge Fund Managers with the FCPA When Evaluating and Engaging Foreign Advisors in Connection with Foreign Bankruptcy Investments,” The Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).  In an effort to assist private fund managers in spotting FCPA-related issues and mitigating FCPA risk, we recently interviewed Justin V. Shur, a former federal prosecutor and now a partner at Molo Lamken LLP.  Our interview covered, among other topics: the relationship between investment control and FCPA risk; contract provisions to limit the FCPA risk raised by third parties; issues presented by deal finders and sovereign wealth funds; hiring risks and best practices; facilitation payments; how to handle an FCPA issue discovered during due diligence; and successor liability.  Shur will expand on these ideas at an event on June 3 at the CORE: Club in Manhattan.  The event is being sponsored by Molo Lamken, The Hedge Fund Law Report and our affiliated publication, The FCPA Report.  In addition to Shur, the event will feature panelists from Indus Capital, Seward & Kissel, Global Environment Fund and the U.S. Securities and Exchange Commission.

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  • From Vol. 7 No.18 (May 8, 2014)

    Key Accounting and Legal Hurdles in Starting a Hedge Fund Management Business, and How to Surmount Them

    According to Citi Prime Finance, hedge fund managers need at least $300 million in AUM to break even.  See “Citi Prime Finance Survey Reveals Levels and Mix of Expenses Incurred by Hedge Fund Managers of Different Sizes, Firm Profitability and Margins, Use of Chargebacks and Impact of Regulations on Expenses,” The Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).  According to a paper recently published by Rothstein Kass, “There are plenty of successful funds that launch with $50 million, or even $10 to $20 million, for that matter.”  Who is right?  In a recent interview with the authors of that Rothstein Kass paper, we tackled this question, as well as many others on the accounting and legal mechanics of starting and sustaining a hedge fund management business.

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  • From Vol. 7 No.17 (May 2, 2014)

    Multi-Manager Hedge Funds: Structuring, Fees, Manager Compensation, Marketing, Risk Management and Performance Measurement

    Hedge fund managers invest in securities.  Hedge fund of funds managers invest in people.  Somewhere in between are multi-manager hedge funds, in which a senior management team allocates capital to internal portfolio managers, monitors firm-wide risk and centralizes back-office functions.  Multi-manager funds are growing quickly, especially relative to conventionally run hedge fund groups.  The ten largest multi-manager funds had AUM of $100 billion as of mid-2013, reflecting net inflows of $15 billion since the beginning of 2009.  The ten largest conventionally run hedge funds had $140 billion in AUM as of mid-2013, reflecting net outflows of $28 billion since the beginning of 2009.  To give our subscribers greater insight into what multi-manager hedge funds are, how they are structured and how they operate, The Hedge Fund Law Report recently conducted an interview with Tomas Kmetko, a research consultant at Cambridge Associates.  Our interview covered, among other topics: the difference between multi-manager funds and funds of funds; legal entity and fee structuring; design of compensation mechanisms; risk management and mitigation in the multi-manager format; allocation of responsibility for legal, compliance, technology and similar functions; marketing of multi-manager funds; comparing performance of multi-manager funds with traditional hedge funds; and talent management considerations.

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  • From Vol. 7 No.16 (Apr. 25, 2014)

    Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target? An Interview with Marc Weingarten, Co-Head of the Global Shareholder Activism Practice at Schulte Roth & Zabel

    Activist hedge fund managers typically seek to implement their ideas at a target company by nominating new directors and advocating for the election of those nominees.  Such nominees are more likely to be elected – and, once elected, are more likely to be effective in implementing the activist’s ideas – if they are better qualified, or, to use the activist term of art, if they are “rock stars.”  Accordingly, activists have asked how they can find rock star nominees and get the best performance out of those nominees if they are elected as directors.  At least two prominent hedge fund managers have answered this question by offering special compensation to nominees that are elected to the target board.  These managers and their supporters argue that such compensation arrangements align the incentives of activist nominees and shareholders.  Opponents argue that such special compensation arrangements engender short term thinking and result in dysfunctional boards.  To clarify the mechanics of such arrangements and to assess the merits of the arguments on either side of this debate – a debate that has real consequences for the rapidly growing volume of assets in activist hedge funds – The Hedge Fund Law Report recently interviewed Marc Weingarten, co-head (with David E. Rosewater) of the global shareholder activism practice at Schulte Roth & Zabel.  (On April 22, Schulte announced the expansion of that practice into the U.K.)  Our interview covered, among other things: the “market” for director compensation; structuring of special compensation of nominees by activists (including caps, the identity of the obligor and clawbacks); disclosure of such arrangements; the chief arguments for and against such arrangements; case studies involving the two managers referenced above; and the conflicting views of a prominent proxy adviser and law firm on a bylaw recommended by the law firm to prohibit compensation by shareholders of board nominees.  See also “How Can a Hedge Fund Manager Dislodge a Poison Pill at a Public Company?,” The Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).

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  • From Vol. 7 No.14 (Apr. 11, 2014)

    HFLR Interview Assesses the Mechanics, Revenue Model and Purposes of Hedge Connection

    Hedge fund managers generally have been deliberate in availing themselves of the expanded advertising rights under the JOBS Act.  Instead of explicit advertising, managers generally have been more receptive to conversations with the press, to communicating their values (rather than their performance numbers) through various channels and to expanded (but nonetheless cautious) use of the Internet.  See, e.g., “Dan Darchuck of Topturn Capital Discusses the Mechanics and Consequences of Video Advertising by Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No 13 (Apr. 4, 2014).  We have not seen, for example, a rush by hedge fund managers onto Facebook, LinkedIn and Twitter, but managers have become incrementally more detailed in discussions on their own websites, and marginally more receptive to creative web-based marketing solutions.  Hedge Connection is an online fund database and “online community” for hedge fund industry participants.  While not launched in direct response to the JOBS Act (it was started in 2005), the JOBS Act has nonetheless altered Hedge Connection’s role in hedge fund industry networking and marketing.  In an effort to understand the interaction between regulatory trends and online tools for connecting investors, managers and other industry participants, The Hedge Fund Law Report recently interviewed Lisa Vioni, CEO of Hedge Connection.  Our interview covered the mechanics, revenue model and purposes of Hedge Connection; access limitations; and Hedge Connection’s role in the hedge fund marketing ecosystem, in particular, its interaction with third-party marketers and in-house marketing departments.  This interview is relevant for hedge fund industry participants asking themselves in the wake of the JOBS Act: Should the Internet play a more fundamental role in my networking, marketing and related efforts and, if so, what should that role look like?

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  • From Vol. 7 No.13 (Apr. 4, 2014)

    Dan Darchuck of Topturn Capital Discusses the Mechanics and Consequences of Video Advertising by Hedge Fund Managers

    The JOBS Act has so far occasioned a modest quantity of advertisements by hedge funds, rather than the deluge some expected.  Most managers have decided to hold off on advertising altogether, to use the liberalized advertising rights indirectly (e.g., via wider-ranging public comments) or to take a “wait-and-see” approach.  For managers in the last class, the experience of Topturn Capital is instructive.  Last December, Topturn was among the first hedge fund managers to publicly release a video that, while not an “advertisement” in the traditional retail sense, may well have run afoul of the pre-JOBS Act ban on general solicitation.  Released into the post-JOBS Act world, however, the video has garnered significant attention without violating any law or rule.  The video has had unintended positive consequences – notably, utility in recruiting talent – while the downside has thus far been muted.  The Hedge Fund Law Report recently interviewed Dan Darchuck, Co-Founder and CEO of Topturn, in an effort to understand Topturn’s hedge fund advertising experience at a granular level.  Our interview covered, among other things, Topturn’s rationale for creating the video; the video’s content, distribution and intended audience; its impact on AUM and investor relations; the response from regulators; how Topturn approached the legal disclaimer in the video; the relevance of AUM levels in determining whether to advertise by video; and the cost and other mechanics of creating the video.  See also “Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds,” The Hedge Fund Law Report, Vol. 6, No. 29 (Jul. 25, 2013).

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  • From Vol. 7 No.6 (Feb. 13, 2014)

    Three Steps in Responding to an SEC Examination Deficiency Letter and Other Practical Guidance for Hedge Fund Managers from SEC Veteran and Sutherland Partner John Walsh

    The vast majority of hedge fund managers with any nexus to the U.S. interact with the SEC – directly via examinations, enforcement actions or filings, or indirectly by operating under the specter of anti-fraud enforcement.  Counsel (in-house or outside) and compliance officers can, accordingly, best effectuate their prophylactic purpose by understanding the expectations, operations and motivations of SEC officials and staff.  Few understand these dynamics – and how they relate to hedge fund managers – better than Sutherland Asbill & Brennan LLP partner and former SEC official John H. Walsh.  During his 23-year tenure at the SEC, Walsh, among other things, played a key role in creating the Office of Compliance Inspections and Examinations (OCIE), designed and implemented the SEC’s securities compliance examination practices and served as OCIE’s acting director in 2009.  The Hedge Fund Law Report recently interviewed Walsh in connection with the publication of Investment Adviser’s Legal and Compliance Guide, Second Edition, a treatise that Walsh co-authored with Terrance J. O’Malley.  Our interview aimed to connect Walsh’s experience with the concerns of hedge fund managers, and covered topics including: retraining of OCIE staff in 2009; building blocks of a credible “tone at the top”; managing voluminous SEC information requests during examinations; the role of technology in a well-designed examination strategy; factors SEC officials consider in making referrals to Enforcement; the advisability of voluntary presentations to SEC examiners; core elements of effective information barriers; responding to SEC deficiency letters; access to previously-issued SEC deficiency letters; information sharing between the SEC and other regulators; admissions of wrongdoing; and attorney-client privilege.

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities

    On February 4, 2014 – this coming Tuesday – the New York office of Ropes & Gray will host GAIM Regulation 2014.  The event will feature an all-star speaking faculty including general counsels and chief compliance officers from leading hedge fund managers, top partners from Ropes and other law firms and officials from the SEC, CFTC, FINRA and other U.S. and global regulators.  The intent of the event is to share best practices in a private setting, and to hear directly from relevant regulators.  For a fuller description of the event, click here.  To register, click here.  The Hedge Fund Law Report recently interviewed three Ropes partners on some of the more noteworthy topics expected to be discussed at GAIM Regulation 2014.  Generally, we discussed SEC and regulatory issues with Laurel FitzPatrick, co-leader of Ropes’ hedge funds practice and co-managing partner of its New York office; CFTC and derivatives issues with Deborah A. Monson, a partner in Ropes’ Chicago office; and enforcement issues with Zachary S. Brez, co-chair of Ropes’ securities and futures enforcement practice.  Specifically, our long form interview with these partners included detailed discussions of the future of hedge fund advertising following the JOBS Act; the impact of the Volcker rule on hedge fund hiring and trading; fund manager responses to the SEC’s focus on broker registration of in-house marketing personnel; best practices for preparing for and navigating SEC examinations; structuring multi-year incentive fees; the impact of swap execution facilities on hedge fund manager obligations and cleared derivatives execution agreements; recent National Futures Association developments relevant to hedge fund managers; design and enforcement of robust information barriers; measures that managers can take to preserve the firm before and after initiation of an enforcement action; government enforcement priorities for hedge fund managers; and specific financial products likely to face government scrutiny in the next two years.

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  • From Vol. 6 No.37 (Sep. 26, 2013)

    Simon Lorne, Chief Legal Officer of Millennium Management LLC, Discusses the Evolving Roles, Challenges and Risks Faced by Hedge Fund Manager General Counsels and Chief Compliance Officers

    The task of serving as general counsel (GC) or chief compliance officer (CCO) of a hedge fund manager – or both – is becoming increasingly complicated and fraught with legal risk.  As regulatory and other obligations mount, GCs and CCOs face challenges in understanding their roles and devoting sufficient time to fulfilling their responsibilities.  At the same time, the SEC has indicated that it is willing to hold GCs and CCOs personally liable in certain circumstances for regulatory failures of the manager or its employees.  See “Recent SEC Settlement Clarifies the Scope of Supervisory Liability for Chief Compliance Officers of Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).  To define the evolving risks to GCs and CCOs and best practices for navigating them, The Hedge Fund Law Report recently interviewed Simon Lorne, Vice Chairman and Chief Legal Officer of Millennium Management LLC.  With decades of hedge fund and securities industry experience to his credit, including service as GC of the SEC, Lorne offers a unique perspective on issues affecting hedge fund manager GCs and CCOs.  Among other things, our interview with Lorne addressed: reporting lines for GCs and CCOs; chief risks facing dual-hatted GCs/CCOs; potential conflicts of interest in simultaneously serving as GC and CCO of a firm; challenges of protecting attorney-client privilege for dual-hatted GCs/CCOs; conflicts of interest in acting simultaneously as GC for the manager and its funds; supervisory liability of GCs and CCOs; outsourcing of the GC and CCO roles; and division of responsibilities between a GC and CCO.  On September 30 and October 1, 2013, Lorne and other industry experts will speak at the Seventh Annual Hedge Fund General Counsel Summit, presented by Corporate Counsel and ALM Events at the University Club in New York City.  For registration and other information regarding the Summit, click here.  A $200 discount on registration for the event is available to HFLR subscribers and trial subscribers.

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  • From Vol. 6 No.29 (Jul. 25, 2013)

    Mechanics of a Counterintuitive Conversion of a Hedge Fund to a Mutual Fund

    The competition for investor capital among traditional managers and private fund managers is increasingly fierce, which has fueled many private fund managers to enter the mutual fund market.  See “Citi Prime Finance Report Describes the Competition among Traditional, Hedge and Private Equity Fund Managers for $1.3 Trillion in Liquid Alternative Assets (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 22 (May 30, 2013).  Hedge fund managers that have elected to pursue this strategy have typically done so by creating new, stand-alone alternative mutual funds.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  However, BTS Asset Management (BTSAM) recently pursued another approach, electing to “convert” the BTS Tactical Fixed Income Fund LLC (Fund) from a hedge fund to a mutual fund.  To understand the rationale for the conversion and the mechanics of effecting it, The Hedge Fund Law Report recently conducted an interview with Isaac Braley and Gary Shilman, CEO and Chief Compliance Officer, respectively, of BTSAM.  Specifically, our interview with Braley and Shilman covered: factors motivating the decision to convert the Fund to a mutual fund; legal and operational mechanics of the conversion; expenses incurred in effecting the conversion; changes in compliance policies, investment strategy and fund governance practices resulting from the conversion; and new challenges relating to the restrictions on transactions with affiliates contained in the Investment Company Act of 1940.  See also “Dechert Partners Aisha Hunt and Richard Horowitz Discuss Strategies and Challenges for Hedge Fund Managers Wishing to Enter the Alternative Mutual Fund Space,” The Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013).

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  • From Vol. 6 No.20 (May 16, 2013)

    Dechert Partners Aisha Hunt and Richard Horowitz Discuss Strategies and Challenges for Hedge Fund Managers Wishing to Enter the Alternative Mutual Fund Space

    For hedge fund managers, entering the alternative mutual fund space can be attractive for various reasons, including expanded distribution, diversification of product lines, permanent or at least more resilient capital and economies of scale in investment analysis (i.e., getting more mileage out of similar investment ideas).  However, hedge fund managers entering the alternative mutual fund space must confront challenges with which they often have little or no experience – challenges relating to regulation, operations, distribution, marketing, fees, personnel, industry structure and related topics.  We recently explored the opportunities and challenges of the alternative mutual fund space in a two-part series.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013); and Part Two of Two, The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  Fortunately for hedge fund managers wishing to access the alternative mutual fund opportunity, there are a number of ports of entry into the space – different structuring tactics, different strategies and different levels of required resource commitment.  To explore the range of the opportunity and the various ways of accessing it, The Hedge Fund Law Report recently spoke with Aisha Hunt and Richard Horowitz, both partners at Dechert LLP focusing on structuring and advising alternative mutual funds.  Among other things, our interview with Hunt and Horowitz covered: the benefits and costs of offering advisory services through a series trust versus a stand-alone alternative mutual fund; the time and resources necessary to launch alternative mutual funds; open-end versus closed-end funds; trends in the use of fulcrum fees; offering commodity strategies through alternative mutual funds; cannibalization considerations; and the role to be played by 401(k) plans in the future of alternative mutual funds.

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  • From Vol. 6 No.16 (Apr. 18, 2013)

    Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds

    Hedge fund and retail investors are increasingly receptive to the liquidity, transparency and fee benefits associated with alternative mutual funds.  Recognizing that receptivity, hedge fund managers are increasingly interested in launching such products.  While there are notable similarities between managing mutual funds and hedge funds, there are also fundamental differences – many of them regulatory and operational.  For example, the manner in which hedge funds and mutual funds are distributed to investors is considerably different.  Therefore, hedge fund managers interested in entering the alternative mutual funds market must contend with a range of issues that they typically are not equipped to handle by experience, staffing or structure.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).  To help hedge fund managers identify the issues that they will have to tackle before entering the alternative mutual funds market – and to provide strategies for handling those issues – The Hedge Fund Law Report recently spoke with George Silfen, a partner at Kramer Levin Naftalis & Frankel LLP.  Silfen has significant experience advising sponsors on the organization, operation and distribution of alternative mutual funds.  Our interview with Silfen covered various topics relevant to alternative mutual funds and their managers, including popular investment strategies; distribution arrangements and fees; fulcrum fees and other compensation for the fund sponsor; the risk of cannibalization of a manager’s hedge funds; affiliated transaction concerns; appeal for institutional investors; side letters; side by side management with traditional hedge funds; and managing conflicts of interest.  See also “SEI Report Describes the Growth Opportunity for Hedge Fund Managers in Regulated Alternative Funds,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2012).

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  • From Vol. 6 No.15 (Apr. 11, 2013)

    O’Melveny & Myers Partners Dean Collins and James Ford Discuss the Rationale, Mechanics and Common Terms for Secondary Market Sales of Private Equity Fund Interests

    Fund documents generally require private equity fund investors to hold investments for a period ranging anywhere from ten to fourteen years.  However, in the course of that time, many developments can alter a fund investor’s desire to hold onto a private equity fund investment, for example, a change in the investor’s financial condition or significant regulatory reforms.  At the same time, prospective buyers, seeing an opportunity to purchase an attractive private equity fund interest, perhaps at a discount, help create the secondary market for transactions in such fund interests.  As the secondary market for private equity fund interests has evolved, it has grown more robust and well-defined.  To help prospective sellers and buyers understand this market and transactions in fund interests, The Hedge Fund Law Report recently interviewed Dean Collins and James Ford, partners in O’Melveny & Myers LLP’s Singapore and Hong Kong offices, respectively, each of which has wide-ranging expertise in private equity fund formation, secondary transactions and investments.  Our interview with Collins and Ford covered, among other topics: reasons for selling private equity fund interests; channels through which buyers and sellers indicate interest in such transactions; due diligence challenges for prospective buyers; trends in pricing of such transactions; the impact of regulations on the secondary market; steps in the sale of private equity fund interests; risks fund sponsors consider when evaluating whether to consent to such transactions; key transaction documents and negotiating points for such transactions; challenges in negotiating transaction documents; and fund sponsor buybacks of fund interests.  On legal considerations in connection with sponsor buybacks and other principal transactions, see “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).

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  • From Vol. 6 No.8 (Feb. 21, 2013)

    Mike Neus, Managing Partner and General Counsel of Perry Capital, Discusses Practical Solutions to Some of the Harder Fiduciary Duty and Other Legal Questions Raised by Side Letters

    At their core, side letters are about defining specific rights and obligations with respect to a specific investment.  Accordingly, the legal and practical issues raised by side letters, and best practices for addressing those issues, are often context-specific.  This theme of specificity – the idea that effective solutions must be narrowly tailored to specific problems where side letters are concerned – was a leitmotif in our recent conversation with Michael Neus, Managing Partner and General Counsel of Perry Capital LLC.  We posed some of the harder questions generally raised by side letters to Neus, and his answers – transcribed in this article – were typically nuanced, insightful and informed by current market practice.  In particular, we covered trends in the use of and rights granted in side letters; the advisability of and approach to selective disclosure; concerns related to modification of fund redemption terms through side letters; the impact of different regulatory regimes on side letter drafting; strategies for drafting effective most favored nation provisions; strategies for gracefully declining side letter requests; the approach to using single-investor funds and managed accounts to address side letter requests; strategies for monitoring obligations in side letters; the proper party for executing side letters; and trends in negotiating capacity rights.  See also “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).  Our interview with Neus was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013.  That Symposium is scheduled to include a panel on side letters entitled “Navigating the Side Letter Negotiation & Due Diligence Process.”  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.7 (Feb. 14, 2013)

    Peter Tsirigotis of Brown Brothers Harriman Discusses the Operational Challenges Posed by Side Letters

    For hedge fund managers, the panoply of legal and fiduciary duty issues raised by side letters is daunting.  For an insightful discussion of some of these issues, see “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).  Compounding the legal hurdles of side letters are the operational challenges they raise – the need to abide by a patchwork of different promises to different institutions, and the consequent pitfalls in the interstices of those promises.  As SEC examiners and examined managers routinely tell The Hedge Fund Law Report, the most common violations by hedge fund managers are not of external law, but of their own promises and disclosures.  In side letters, therefore, hedge fund managers raise the compliance bar on themselves considerably.  Side letters help raise assets, but they also raise regulatory risk.  Side letters have received considerable attention – including in the HFLR – from the ex ante perspective, that is, from the perspective of a manager negotiating such an instrument.  See, e.g., “RCA Session Covers Transparency, Liquidity and Most Favored Nation Provisions in Hedge Fund Side Letters, and Due Diligence Best Practices,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  But side letters have received less attention from the ex post perspective.  There has been, that is, less discussion on how hedge fund managers can live with the deals they strike in side letters.  We recently talked to Peter Tsirigotis, Senior Vice President at Brown Brothers Harriman, to shed some light on this as yet obscure area.  In particular, our conversation with Tsirigotis covered, among other topics: reasons for side letters; categories of side letter rights requested; most favored nation provisions; methods for tracking manager obligations incurred through side letters; technologies used to assist managers in administering side letters; negotiation practices for side letters; and recommendations for protection of confidential information.  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013.  That Symposium is scheduled to include a panel on side letters entitled “Navigating the Side Letter Negotiation & Due Diligence Process.”  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.6 (Feb. 7, 2013)

    Don Muller and Joshua Satten of Northern Trust Hedge Fund Services Discuss the Impact of OTC Derivatives Reforms on Hedge Fund Managers

    In an attempt to reduce systemic risk from over-the-counter (OTC) derivatives trading, the Dodd-Frank Act fundamentally changed the mechanics of the execution, clearing, settlement and recording of OTC derivatives trades.  Among other things, the Dodd-Frank Act mandates central clearing and exchange trading for many OTC derivatives.  These reforms will have financial, legal, compliance and operational implications for hedge fund managers.  Among other things, hedge fund managers will need to determine whether they wish to adhere to the August 2012 International Swaps and Derivatives Association, Inc. (ISDA) Dodd-Frank Protocol, which is a supplement that will amend their ISDA agreements with swap dealers and major swap participants.  See “Katten Partner Raymond Mouhadeb Discusses the Purpose, Applicability and Implications of the August 2012 ISDA Dodd-Frank Protocol for Hedge Fund Managers, Focusing on Whether Hedge Funds Should Adhere to the Protocol,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  To explain some of the impact of these reforms on hedge fund managers, The Hedge Fund Law Report recently interviewed Don Muller, the Global Head of Middle Office Services at Northern Trust Hedge Fund Services, and Joshua Q. Satten, the Global Head of OTC Structured Products at Northern Trust Hedge Fund Services.  Specifically, our interview covered topics including: historical OTC derivatives trading practices; the impact of central clearing and exchange trading of OTC derivatives transactions; the Dodd-Frank Act OTC derivatives reporting requirements; posting of margin on OTC derivatives trades; changes in collateral practices for OTC derivatives trades; the financial impact of such reforms on hedge fund managers; solutions available to facilitate OTC derivatives trading post-reforms; and the impact of OTC derivatives reforms on hedge fund service providers.

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  • From Vol. 6 No.5 (Feb. 1, 2013)

    Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters

    Hedge fund managers intent on attracting institutional capital often feel compelled to entertain requests for preferential treatment via side letters from institutional investors.  But the “cost of capital,” as it were, may increase materially where a side letter is involved.  Such instruments raise regulatory concerns, present business challenges and create operational issues.  See “RCA Session Covers Transparency, Liquidity and Most Favored Nation Provisions in Hedge Fund Side Letters, and Due Diligence,” The Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  In an effort to identify some of the chief regulatory concerns raised by side letters – and to offer suggestions on how to address those concerns in a way that makes business sense – The Hedge Fund Law Report recently interviewed Christopher Wells, a partner and head of the hedge fund practice at international law firm Proskauer Rose LLP.  Our interview with Wells covered selective disclosure, the role of advisory committees, most favored nation provisions, allocation of costs of administering side letters, ERISA considerations, the role of state “sunshine” laws, considerations specific to sovereign wealth funds and much else.  For additional insight from Wells, see “Managing Risk in a Changing Environment: An Interview with Proskauer Partner Christopher Wells on Hedge Fund Governance, Liquidity Management, Transparency, Tax and Risk Management,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012).  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013.  That Symposium is scheduled to include a panel on side letters entitled “Navigating the Side Letter Negotiation & Due Diligence Process.”  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.

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  • From Vol. 5 No.48 (Dec. 20, 2012)

    Former SEC Asset Management Unit Co-Chief Robert Kaplan and Former NYS Insurance Superintendent Eric Dinallo, Both Current Debevoise Partners, Discuss the Purpose, Process and Consequences of Presence Examinations of Hedge Fund Managers

    On October 9, 2012, the SEC’s Office of Compliance Inspections and Examinations (OCIE) sent a letter to senior management of newly registered private fund advisers noting that such managers imminently may be subjected to so-called “presence examinations.”  See “OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  The letter provided some information on how presence examinations would work and what examiners would be looking for, but the letter also left many important questions unanswered.  To fill in the gaps left by the letter and round out the industry’s understanding of what presence examinations will mean for registered hedge fund managers, The Hedge Fund Law Report recently conducted an interview with Robert Kaplan and Eric Dinallo.  Kaplan is the former Co-Chief of the SEC’s Asset Management Unit within the Division of Enforcement and Dinallo is the former New York State Superintendent of Insurance; both are currently partners at Debevoise & Plimpton LLP.  Our interview covered, among other things: what presence examinations are; how OCIE evaluates the risk of hedge fund managers when allocating examination resources; the impact of a whistleblower on a manager’s risk profile; whether and how managers should approach mock examinations; whether self-reporting of violations found during mock examinations is advisable; how managers should approach senior management interviews with OCIE staff; how managers can ensure consistency across various fund documents and examination interview responses; key conflicts of interest OCIE will focus on during presence examinations; other key focal areas for presence examinations; whether managers must disclose the initiation of routine OCIE examinations to investors; whether managers must disclose unremediated material deficiencies to prospective fund investors; how OCIE approaches referrals of matters to the Division of Enforcement; and steps a manager can take to speed up an OCIE examination.

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  • From Vol. 5 No.45 (Nov. 29, 2012)

    Rajaratnam Prosecutor and Dechert Partner Jonathan Streeter Discusses How the Government Builds and Prosecutes an Insider Trading Case against a Hedge Fund Manager

    Allegations of insider trading in the hedge fund industry are once again front-page news, what with the criminal and civil charges filed against former CR Intrinsic portfolio manager Mathew Martoma on November 20, 2012 and the receipt by SAC Capital Advisors of a Wells notice on the same day.  See “Fund Manager CR Intrinsic and Former SAC Portfolio Manager Are Civilly and Criminally Charged in Alleged ‘Record’ $276 Million Insider Trading Scheme,” The Hedge Fund Law Report, Vol. 5, No. 44 (Nov. 21, 2012).  But insider trading considerations were never far from the minds of hedge fund managers, lawyers or compliance professionals.  This is because vigorously pursuing important corporate information is central to most hedge fund strategies, yet doing so inherently involves the risk of obtaining material nonpublic information and trading on it.  At the same time, allegations of insider trading usually damage a hedge fund business fundamentally, and often shut it down altogether.  See “Navigating the Patchwork of Global Insider Trading Regulations: An Interview with Adam Wasserman of Dechert,” The Hedge Fund Law Report, Vol. 5, No. 38 (Oct. 4, 2012).  Hedge fund managers need to understand how the government thinks about this critical area, and it would be hard to find someone with better visibility into relevant government decision-making than former Deputy Chief of the DOJ’s Criminal Division and current Dechert partner Jonathan Streeter.  Streeter served as lead trial counsel for the government in the criminal trial of Raj Rajaratnam, founder and principal of the Galleon Group.  See “Galleon Management, LLC Founder Raj Rajaratnam Sentenced to 11 Years in Prison for Insider Trading,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  Prior to the recent activity involving SAC, the Rajaratnam trial and conviction occasioned the last great crescendo of interest in hedge fund insider trading.  Among other things, the trial highlighted the new centrality of wiretap evidence and caused lawyers to revisit the meaning of the “mosaic theory.”  See “Is the ‘Mosaic Theory’ a Viable Defense to Insider Trading Charges Against Hedge Fund Managers Post-Galleon?,” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  Our interview with Streeter covered, among other things: how the government identifies targets for wiretaps; the communication channels covered by wiretaps (e.g., phones, e-mails); coordination between the DOJ and the FBI in sharing wiretap evidence; the extent to which the SEC can use wiretap evidence in its investigations and enforcement actions; the effectiveness of techniques used to challenge wiretaps; advice to personnel confronted with their wrongdoing and how to respond to government requests for cooperation; the value of cooperating with the government; the utility of a fund manager’s self-reporting of insider trading by an employee; how to handle government requests for information about insider trading by other hedge fund managers; the government’s view of the mosaic theory; how the government determines whether to make an insider trading investigation public; steps fund managers can take to avoid insider trading liability when talking with corporate executives or using expert networks; and the sources used by the government to identify potential insider trading targets.  The following is a complete transcript of our interview with Streeter.  This interview was conducted in connection with the Regulatory Compliance Association’s Compliance, Risk & Enforcement 2012 Symposium, which will take place on December 18, 2012 at the Pierre Hotel in New York.  For more information on the Symposium, click here.  To register for the Symposium, click here.  Hedge Fund Law Report subscribers are eligible for a registration discount.

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  • From Vol. 5 No.38 (Oct. 4, 2012)

    Operational, Investor and Regulatory Risk in Connection with Form PF: An Interview with Samuel K. Won of Global Risk Management Advisors

    The Hedge Fund Law Report recently had the privilege of discussing Form PF with Samuel K. Won, the Founder & Managing Director of Global Risk Management Advisors, Inc. (GRMA), a preeminent adviser to alternative investment managers and investors on risk management.  GRMA has advised major hedge fund managers, institutional investors and regulators on preparation, filing and use of Form PF.  In particular, the firm helped shepherd various “first filer” managers – generally, those with more than $5 billion in regulatory assets under management – though the Form PF process, and in doing so observed what first filers did right, and what they did wrong.  That firsthand experience has direct bearing on how second and third filers should approach the Form PF process, and how first filers should revise their approaches for the second and subsequent filings.  In this interview, Won shared with The Hedge Fund Law Report some of the lessons learned (and not learned) from the August 2012 initial filing.  In particular, Won addressed: the three major operational risks that first filer managers struggled with; the chief categories of risk associated with Form PF; how first filers can improve their infrastructure, processes and controls; what second and third filers should be doing to prepare for their initial Form PF filings; how regulators are likely to use the data obtained from Form PF; how institutional investors plan to use Form PF; allocation of expenses of Form PF preparation; who at a hedge fund manager should be the “point person” for the Form PF process; and more.  We conducted this interview with Won in connection with two upcoming events at which Won will participate, along with other panelists from Citi Prime Finance, Sidley Austin LLP and Imagine Software.  Those events are entitled “Form PF: Lessons Learned and Not Learned from the August 2012 Initial Filing,” and will expand on the topics discussed in this interview.  The first of these two events will take place on Thursday, October 11 at the Princeton Club in Manhattan from 4:00 p.m. to 7:30 p.m.  The second of the two events (covering substantially similar substance) will take place on Thursday, October 18 at l’escale Restaurant at the Delamar Greenwich Harbor Hotel in Greenwich, Connecticut from 4:00 p.m. to 7:30 p.m.  Registration for both events is free.  To register for the New York event, click here.  To register for the Greenwich event, click here.

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  • From Vol. 5 No.31 (Aug. 9, 2012)

    Considerations for Launching Qualified Investor Funds in Ireland: An Interview with Pat Lardner, Chief Executive of the Irish Funds Industry Association

    The popularity of Undertakings for Collective Investment in Transferrable Securities (UCITS) funds as well as the impending effectiveness of the Alternative Investment Fund Managers (AIFM) Directive has heightened the popularity of Ireland as a domicile for organizing hedge funds and alternative retail funds.  In 2011, Ireland experienced net inflows of approximately €62 billion in assets in UCITS funds, approximately €50 billion more than the second-place domicile, representing 8 percent growth over 2010.  Additionally, according to figures from the European Fund and Asset Management Association and the Central Bank of Ireland (Central Bank), Ireland-domiciled non-UCITS funds have experienced considerable growth in recent years, up 35 percent in 2010; 15 percent in 2011; and 4.3 percent in the first quarter of 2012.  Assets in Ireland-domiciled non-UCITS funds are up from €200 billion in 2010 to €250 billion as of June 2012.  Additionally, as of June 2012, the number of qualified investor funds (QIFs) climbed to an all-time high of 1,420, and assets have grown to €182 billion.  In light of this growth and the consequent importance of Ireland as a hedge fund jurisdiction, The Hedge Fund Law Report recently interviewed Pat Lardner, Chief Executive of the Irish Funds Industry Association.  The general purpose of the interview was to enable Lardner to elaborate on considerations for hedge fund managers in establishing funds and managing investments and operations in Ireland.  In particular, our interview covered, among other things: the process for organizing a UCITS fund; the service provider and reporting requirements applicable to Irish UCITS funds; the comparative advantages and disadvantages of establishing UCITS funds in Ireland; measures taken to make Irish UCITS funds more attractive to Asian and Latin American investors; recent developments impacting the appeal of UCITS funds; common mistakes made in organizing UCITS funds; advice for managers establishing Irish UCITS funds; a description of the QIF regime and the organization and fund authorization process; who constitutes a “qualifying investor” eligible to invest in a QIF; governance, service provider, reporting and regulatory examination requirements applicable to QIFs; comparative advantages and disadvantages of the QIF regime; advice for fund managers looking to establish QIFs; the new SICAV corporate structure in Ireland; and various related topics.  This article contains the full transcript of our interview with Lardner.

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  • From Vol. 5 No.27 (Jul. 12, 2012)

    How Can Hedge Fund Managers Use Luxembourg Funds to Access Investors and Investments in Europe, Asia and Latin America?

    Luxembourg is a little country (or duchy) with a big presence in the hedge fund world.  Hedge fund managers looking to access investors or investments in Europe, Latin America or Asia have regularly turned to Luxembourg as a domicile for fund formation.  The tax and regulatory climate there is receptive to hedge funds and managers, the service provider industry is well developed and the jurisdiction is geographically close to key developing and developed markets.  Moreover, the growing popularity of funds organized as Undertakings for Collective Investment in Transferrable Securities (UCITS funds) and the impending effectiveness of the Alternative Investment Fund Managers (AIFM) Directive have increased both the attractiveness and complexity of Europe as an alternative investment jurisdiction – and, consequently, the relevance of Luxembourg.  In light of the importance of Luxembourg to many hedge fund managers, The Hedge Fund Law Report recently interviewed Marc Saluzzi and Michael Ferguson, President and Director, respectively, of the Association of the Luxembourg Fund Industry (ALFI).  The general purpose of our interview was twofold.  For HFLR subscribers that are not familiar with Luxembourg, the purpose was to highlight the benefits and downsides of Luxembourg as a hedge fund domicile.  For HFLR subscribers that are familiar with Luxembourg, the purpose was to illustrate the diverse ways in which hedge fund managers can access the various services available in Luxembourg, and the circumstances in which they should avoid Luxembourg – to illustrate, that is, the scope and limits of market practice in Luxembourg.  To effectuate these purposes, our interview with Saluzzi and Ferguson covered the following topics: the specialized investment fund (SIF) regime for hedge funds, including a discussion of the governance, service provider, reporting and regulatory audit requirements applicable to SIFs; a comparison of SIFs versus funds organized in Caribbean or other European jurisdictions; recent legal developments impacting Luxembourg-domiciled funds and managers; the establishment of a new limited partnership regime in Luxembourg; the cost of establishing a hedge fund in Luxembourg; necessary improvements to make Luxembourg a more attractive hedge fund destination; common mistakes hedge fund managers make when establishing funds in Luxembourg; advice for hedge fund managers establishing funds in Luxembourg; advantages and disadvantages of establishing funds and a manager presence in Luxembourg to address the AIFM Directive; the concept of “ManCos”; and the advantages and disadvantages of establishing UCITS funds in Luxembourg.

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  • From Vol. 5 No.11 (Mar. 16, 2012)

    Ernst & Young’s Arthur Tully Talks in Depth with The Hedge Fund Law Report About Hedge Fund Governance, Succession Planning, Valuation, Form PF and Administrator Shadowing

    Ernst & Young’s (E&Y) recently published “Coming of Age: Global Hedge Fund Survey 2011” (Survey) highlighted a host of operational issues that hedge fund managers have recently grappled with, including issues related to corporate governance, succession planning and shadowing of fund administrators.  See “Ernst & Young Survey Juxtaposes the Views of Hedge Fund Managers and Investors on Hedge Fund Succession Planning, Governance, Administration, Expense Pass-Throughs and Due Diligence,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  We recently interviewed Arthur Tully, the Co-Leader of E&Y’s Global Hedge Fund practice, on various topics covered by the Survey, including: issues related to valuation of investments; independent reconciliation of investment positions; reconciliation and documentation of differences in NAV calculations; independent administration considerations for UCITS funds; and how to gather the data necessary to complete Form PF.  See “Hedge Fund Valuation Pitfalls and Best Practices: An Interview with Arthur Tully, Co-Leader of Ernst & Young’s Global Hedge Fund Practice,” The Hedge Fund Law Report, Vol. 5, No. 2 (Jan. 12, 2012).  In this follow-up interview, Tully shares his insight and experience on additional topics of pressing importance to hedge fund managers, including best practices for hedge fund corporate governance; compensation structures for effective succession planning; valuation issues (including a discussion of the biggest mistakes made in valuing assets); project management in the Form PF context; and administrator shadowing (including common functions shadowed by hedge fund managers).  This article contains the full text of our second interview with Tully.  Tully is expected to expand on these and related topics during a session focusing on hedge fund governance at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)

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  • From Vol. 4 No.28 (Aug. 19, 2011)

    How Can Hedge Fund Managers Update Their Insider Trading Compliance Programs to Reflect the SEC’s Focus on Systemic Violators, Gatekeepers, Trading Patterns, Profitable Trades and Expert Networks?

    Insider trading enforcement remains a top priority for regulators and prosecutors.  For example, just this month to date: (1) Joseph F. “Chip” Skowron III, a former healthcare portfolio manager at FrontPoint Partners LLC, pleaded guilty to conspiracy to engage in insider trading and obstruction of justice; (2) the DOJ brought conspiracy to commit securities fraud and wire fraud charges against Stanley Ng, the former SEC Reporting Manager at Marvell Technology Group, Ltd., for allegedly providing material nonpublic information to Winifred Jiau; (3) the SEC charged a former professional baseball player and three others with insider trading ahead of the early 2009 buyout by Abbott Laboratories Inc. of Advanced Medical Optics Inc.; and (4) the SEC charged a California man with purchasing Marvel Entertainment call options while in possession of material nonpublic information obtained from his girlfriend (who worked at the Walt Disney Company) regarding Disney’s acquisition of Marvel.  In this still-heightened insider trading enforcement climate, hedge fund managers remain a prime target for civil and criminal insider trading charges.  This is so for at least five reasons.  First, regulators and prosecutors have been emboldened by the May 11, 2011 conviction of Galleon Group founder Raj Rajaratnam on 14 counts of conspiracy and securities fraud.  See “Implications of the Rajaratnam Verdict for the ‘Mosaic Theory,’ the ‘Knowing Possession’ Standard of Insider Trading and Criminal Wire Fraud Liability in the Absence of a Trade,” The Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).  Second, wiretapping has become a viable tool for investigating insider trading by hedge fund manager personnel, and a source of persuasive evidence.  See “Will a Criminal Court Admit into Evidence a Recorded Telephone Conversation Between a Hedge Fund Manager Charged with Insider Trading and an Alleged Co-Conspirator?,” The Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).  Third, in the course of examinations of hedge fund managers, SEC examination personnel are looking for (among other things) evidence of insider trading that can serve as the basis of referrals to the SEC’s Enforcement Division.  See “Is a Hedge Fund Manager Required to Disclose the Existence or Substance of SEC Examination Deficiency Letters to Investors or Potential Investors?,” The Hedge Fund Law Report, Vol. 4, No. 18 (Jun. 1, 2011).  Fourth, the staff of the SEC’s Enforcement Division can now use tools developed in the criminal context in bringing, negotiating and settling insider trading charges against hedge fund managers.  See “Entry by SEC into a Non-Prosecution Agreement with Clothing Marketer Illustrates How Hedge Fund Managers May Survive Discovery of Certain Insider Trading Violations,” The Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010).  And fifth, budgetary constraints have led the SEC to place a higher priority on deterrence, and insider trading actions against hedge fund managers are thought to have a powerful deterrent effect.  See “Key Insights for Registered Hedge Fund Managers from the SEC’s Recently Released Study on Investment Adviser Examinations,” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  In light of the vigor with which civil and criminal authorities are pursuing insider trading actions – and the ongoing susceptibility of hedge fund managers to insider trading charges – the Regulatory Compliance Association’s Fall 2011 Asset Management Thought Leadership Symposium will feature a session entitled “Insider Trading – The New Enforcement Paradigm.”  That RCA Symposium will take place on November 10, 2011 at the Pierre Hotel in New York.  (For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.)  Scott Pomfret – Regulatory Counsel for a Boston-based institutional money manager and a former branch chief in the SEC’s Division of Enforcement – participated in the insider trading session during the RCA’s Spring 2011 Symposium and is expected to participate in the RCA’s Fall 2011 Symposium.  As a former regulator and current in-house counsel, Pomfret has a unique, and uniquely relevant, perspective on insider trading enforcement trends as they relate to hedge fund managers.  By way of revisiting some of the topics that Pomfret discussed during the last RCA Symposium, and by way of preview of some of the topics that he may discuss at the next RCA Symposium, The Hedge Fund Law Report recently conducted an interview with Pomfret.  Our interview covered: Pomfret’s background; a shift in the focus of the SEC’s insider trading enforcement efforts; the rationale for and implications of the SEC’s focus on “gatekeepers”; how the SEC collects and uses hedge fund trading data; the role of trade profitability in allocating SEC enforcement resources; how hedge fund managers can answer investor questions about SEC inquiries; specific steps hedge fund managers can take to mitigate insider trading risk when using expert networks; three specific ways in which hedge fund managers are revising their insider trading compliance policies and procedures; and insider trading concerns for hedge fund managers that typically invest in “private” securities and assets.  The full text of our interview with Pomfret is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 3 No.8 (Feb. 25, 2010)

    Interview with Timothy Spangler: Key Legal and Business Considerations when Launching Hedge Funds or Hedge Fund Managers in China

    In February 2010, People’s Republic of China (PRC)-based investment management firm Munsun Asset Management Limited and its founder, Li Xianghong, announced the launch of the firm's first China-focused hedge fund, Munsun China Opportunity Investment Fund (Munsun fund).  The investment objective of the Munsun fund is to invest in a portfolio consisting primarily of securities of companies established or operating in the Greater China Region, and of companies listed on stock exchanges in Hong Kong, New York, London and Singapore that do business in or are connected to China.  Timothy Spangler, who advised on the launch, recently spoke with The Hedge Fund Law Report about the launch and structuring of the Munsun fund, and what lessons the launch offers for hedge fund managers and investors that are contemplating launching or investing in hedge funds in or focused on China.  In particular, we spoke to Spangler about: the structure of the Munsun fund and advisory entity; the chief business advantages of organizing a hedge fund adviser or a hedge fund in China; the key legal or regulatory hurdles faced in structuring and marketing the Munsun fund; marketing benefits to organizing a fund or adviser in China; licenses required to manage a hedge fund organized in China; laws governing liquidity of Chinese funds; currency issues; the make-up of the Munsun fund investor base; and tax considerations.  The full transcript of that interview is included in this issue of The Hedge Fund Law Report.  See also “Do Collective Investment Management Schemes Offer a Means for Hedge Fund Managers to Access the Potentially Vast China Market?,” The Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009).

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  • From Vol. 3 No.7 (Feb. 17, 2010)

    SEC Enhances its Investigative Capabilities with Powerful New Document Review Software

    In January 2010, the Securities and Exchange Commission (SEC) announced that Nuix Pty Ltd had won a five-year contract to provide the agency with corporate investigations software to assist in the detection of fraud and white-collar crime.  In non-technical language, the purpose of the Nuix software is to enable to SEC to review very large quantities of documents and data in a short time.  In other words, the software is intended to speed up the investigation process, or to dramatically expand the number of investigations the SEC can pursue in the same amount of time, without additional personnel.  In the conviction that hedge fund managers can benefit from a richer understanding of the SEC investigative process and technology, The Hedge Fund Law Report recently spoke with Nuix CEO Eddie Sheehy about how the Nuix software works and how the SEC will use the software in its fraud and insider trading investigations.  The transcript of that interview is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 2 No.52 (Dec. 30, 2009)

    Why Are Most Hedge Fund Investors Reluctant to Sue Hedge Fund Managers, and What Are the Goals of Investors that Do Sue Managers? An Interview with Jason Papastavrou, Founder and Chief Investment Officer of Aris Capital Management, and Apostolos Peristeris, COO, CCO and GC of Aris

    An article in last week’s issue of The Hedge Fund Law Report detailed a ruling by the New York State Supreme Court permitting a lawsuit by funds managed by Aris Capital Management (Aris) to proceed against hedge funds in which the Aris funds had invested and the managers of those investee funds.  See “New York Supreme Court Rules that Aris Multi-Strategy Funds’ Suit against Hedge Funds for Fraud May Proceed, but Negligence Claims are Preempted under Martin Act,” The Hedge Fund Law Report, Vol. 2, No. 51 (Dec. 23, 2009).  That lawsuit is one of various suits brought by Aris and its managed funds against hedge funds or managers in which the Aris funds have invested.  The Aris suits allege a variety of claims in a variety of circumstances, but collectively are noteworthy for their mere existence.  In the hedge fund world, there has been a conspicuous absence during the past two years of legal actions by hedge fund investors against hedge fund managers, despite the coming-to-fruition of circumstances that industry participants thought, pre-credit crisis, would augur an uptick in litigation: the imposition of gates, suspensions of redemptions, mispricing of securities, large losses, etc.  Jason Papastavrou, Founder and Chief Investment Officer of Aris, appears to have broken ranks with what seems like an unspoken agreement in the hedge fund world to avoid the courthouse steps, and he has done so with a considerable degree of thoughtfulness, for specific reasons and with particularized goals.  In an interview with The Hedge Fund Law Report, Papastavrou and Apostolos Peristeris, COO, CCO and GC of Aris, discuss certain of their lawsuits, why they brought them, what they seek to gain from them and what the relevant managers might have done differently to have avoided the suits.  They also discuss: seven explanations for the reluctance on the part of most hedge fund investors to sue managers; the fund of funds redemption process; how their lawsuits have affected their due diligence process; in-house administration; background checks; the importance of face-to-face meetings; side letters; how Aris investors have reacted to the lawsuits; and Aris’ transition to a managed accounts model from a fund of funds model.

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  • From Vol. 2 No.47 (Nov. 25, 2009)

    How Will Registration and Reporting Impact Hedge Fund Managers? An Interview with Todd Groome, Non-Executive Chairman of the Alternative Investment Management Association (Part 2)

    On November 3, 2009, the Alternative Investment Management Association (AIMA) reiterated its support for the registration of hedge fund managers operating in the U.S. and for the reporting of systemically relevant information by larger managers to national authorities in the interest of financial stability.  The following day, the Financial Services Committee of the U.S. House of Representatives, by a vote of 41 to 28, approved a bill that would impose a registration mandate, The Private Fund Investment Advisers Act of 2009, sponsored by Rep. Paul Kanjorski (D-PA).  See “U.S. House of Representatives Holds Hearings on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009); “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  The Hedge Fund Law Report recently interviewed Todd Groome, who since December 2008 has served as Non-Executive Chairman of the AIMA.  (Before assuming his current role, Groome was an Advisor in the Monetary and Capital Markets Department of the International Monetary Fund.)  Our interview focused on topics including: the range of appropriate information for financial reports to national authorities; the capacity of administrators to analyze and act on that information; the disproportionate costs of compliance with reporting requirements for smaller managers; the need to preserve the confidentiality of the information (in its pre-aggregated form) that may be reported by managers; the sources of systemic risk and how to mitigate it; the sharing of information among national authorities; the development of an official multi-national information template; the threat of a tax-driven flight of talent and capital from London; sound practices for hedge fund administrators; the continued viability of an in-house administration option; and the policy or politics behind last year’s bans on short selling in the financial services industry in both the U.S. and the U.K.  The first half of the full transcript of that interview appeared in last week’s issue of The Hedge Fund Law Report.  The remainder of the full transcript is included herein.

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  • From Vol. 2 No.46 (Nov. 19, 2009)

    How Will Registration and Reporting Impact Hedge Fund Managers? An Interview with Todd Groome, Non-Executive Chairman of the Alternative Investment Management Association

    On November 3, 2009, the Alternative Investment Management Association (AIMA) reiterated its support for the registration of hedge fund managers operating in the U.S. and for the reporting of systemically relevant information by larger managers to national authorities in the interest of financial stability.  The following day, the Financial Services Committee of the U.S. House of Representatives, by a vote of 41 to 28, approved a bill that would impose a registration mandate, The Private Fund Investment Advisers Act of 2009, sponsored by Rep. Paul Kanjorski (D-PA).  See “U.S. House of Representatives Holds Hearings on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009); “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  The Hedge Fund Law Report recently interviewed Todd Groome, who since December 2008 has served as Non-Executive Chairman of the AIMA.  (Before assuming his current role, Groome was an Advisor in the Monetary and Capital Markets Department of the International Monetary Fund (IMF).)  Our interview focused on topics including: the range of appropriate information for financial reports to national authorities; the capacity of administrators to analyze and act on that information; the disproportionate costs of compliance with reporting requirements for smaller managers; the need to preserve the confidentiality of the information (in its pre-aggregated form) that may be reported by managers; the sources of systemic risk and how to mitigate it; the sharing of information among national authorities; the development of an official multi-national information template; the threat of a tax-driven flight of talent and capital from London; sound practices for hedge fund administrators; the continued viability of an in-house administration option; and the policy or politics behind last year’s bans on short selling in the financial services industry in both the U.S. and the U.K.  The first half of the full transcript of that interview is included in this issue of The Hedge Fund Law Report.  The remainder of the full transcript will be included in a subsequent issue.

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  • From Vol. 2 No.40 (Oct. 7, 2009)

    What Can Hedge Fund Managers Learn From the SEC’s Failure to Catch Madoff? An Interview with Charles Lundelius, Senior Managing Director at FTI Consulting, Inc.

    FTI Consulting Inc. (FTI), a global business advisory firm, substantially assisted the Securities and Exchange Commission’s (SEC) Office of Inspector General (OIG) in preparation of its report on the agency’s responses – or failures to respond – to a series of “red flags” regarding Bernard Madoff and Bernard Madoff Investment Securities LLC (BMIS).  For more on that report, see “SEC Recommends More Hedge Fund Oversight in Audit on Its Failure to Uncover Madoff Fraud; House Oversight and Government Reform Committee Chairman Questions SEC Competence,” The Hedge Fund Law Report, Vol. 2, No. 38 (Sep. 24, 2009).  Charles Lundelius, a Senior Managing Director in the FTI Forensic and Litigation Consulting Practice, led the FTI engagement team, and thus has a uniquely clear perspective on the OIG’s review, the omissions in the SEC’s approach as determined by the OIG, structural flaws at the SEC as identified by the OIG and the OIG’s suggestions for remedying those flaws.  The Hedge Fund Law Report recently interviewed Lundelius, focusing on his experience assisting the OIG in preparation of its report.  The full transcript of that interview is included in this issue of The Hedge Fund Law Report, and touches on topics including: what FTI is and what they do; the most salient red flags that were missed by the SEC in the Madoff context; structural problems that may exist at the SEC and OCIE; the tendency of investigators to view new evidence in light of old experience; how the SEC – and for that matter, hedge funds and funds of funds – can use news and information services to discover information that may lead to red flags and ultimately to decisions against investments or in favor of redemptions; how the OIG’s report can offer tips to hedge funds of funds on how to conduct effective due diligence and how to detect fraud; and the role of hedge fund manager Renaissance Technologies in the Madoff investigation.

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  • From Vol. 2 No.37 (Sep. 17, 2009)

    The Evolution of Offshore Investment Funds (Part Three of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Cross-Border Regulation; Transparency in Various Offshore Financial Centers; Preferred Offshore Financial Centers for Organizing Hedge Funds; Audits and Examinations of Offshore Financial Centers by Global Regulatory Bodies; and How Hedge Fund Managers Can Access Regulatory Findings

    During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco.  Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar.  In prior issues, we published the first two of three parts of the full transcript.  This week’s issue of The Hedge Fund Law Report includes part three of three of the full transcript, in which MacKay discusses cross-border regulation; the definition of “established operations”; transparency in various offshore financial centers (including the Cayman Islands, BVI, the Channel Islands and Bermuda); which offshore financial centers are more risky for organizing hedge funds; which offshore financial centers hedge funds are likely to migrate to based on their ability to meet international standards of transparency; whether global regulatory bodies such as the Organization for Economic Cooperation and Development and the International Organization of Securities Commissions are merely promulgating standards or whether they are actively examining or auditing the regulatory and tax rules and enforcement of those rules in offshore financial centers; and how hedge funds can access the results of examination and audit work conducted by regulators.

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  • From Vol. 2 No.34 (Aug. 27, 2009)

    Interview with HedgePort Associates’ CEO Andrew Springer on the New Firm’s Operational and Marketing Services for Startup Hedge Fund Managers

    Although the hedge fund industry continues to recover from a year of unprecedented underperformance and record redemptions, and is still reeling from an economic recession, opportunities remain for startup hedge funds.  A new firm, HedgePort Associates, has been established to provide operational, regulatory and marketing services to hedge fund managers as they start and grow their businesses.  Andrew Springer is the founder and CEO of HedgePort Associates; he also founded hedge fund operations consulting firm Resolve Inc.  The Hedge Fund Law Report spoke with Springer about HedgePort and the services the firm provides.  The full transcript of that interview is included in this issue of The Hedge Fund Law Report, and covers topics including: the market for startup hedge funds; whether and how certain operational functions can be outsourced; where liability resides in the event of a compliance violation if compliance functions are outsourced; the difference between track records compiled at hedge funds and on proprietary trading desks; HedgePort’s compensation structure; wind-down services offered by HedgePort; the SEC’s new pay to play rules; structuring matters; and more.

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  • From Vol. 2 No.31 (Aug. 5, 2009)

    The Evolution of Offshore Investment Funds (Part Two of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Indemnification; Evolution of the “Gross Negligence” Standard for Directors; Caselaw on When a Redeeming Shareholder Becomes a Creditor of a Hedge Fund and Efforts by Liquidators to Adjust Net Asset Value; and Clawback Principles and Mechanics

    During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco.  Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar.  Last week, we published the first of three parts of the full transcript.  In that first installment, MacKay discussed, among other things: drafting of offshore fund documents; net asset value (NAV) adjustments; clawbacks; managed accounts; and payment-in-kind provisions.  See “The Evolution of Offshore Investment Funds (Part One of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Drafting of Offshore Fund Documents; NAV Adjustments; Clawbacks; Managed Accounts; and Payment-in-Kind Provisions,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  This week’s issue of The Hedge Fund Law Report includes part two of the full transcript, in which MacKay discusses indemnification of fund directors and the evolution of the “gross negligence” standard; the most relevant caselaw developments in offshore financial centers (including cases addressing when a redeeming shareholder becomes a creditor of a fund and cases dealing with attempts by liquidators to adjust NAV); and clawback principles and mechanics (including an extensive discussion of why a Cayman court may not enforce a clawback action by a U.S. bankruptcy trustee in circumstances such as the Madoff fraud).

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  • From Vol. 2 No.30 (Jul. 29, 2009)

    The Evolution of Offshore Investment Funds (Part One of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Drafting of Offshore Fund Documents; NAV Adjustments; Clawbacks; Managed Accounts; and Payment-in-Kind Provisions

    During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco.  Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar, including: (1) How regulatory developments, recent economic events and caselaw in offshore financial centers is affecting drafting of specific provisions in fund documents (including net asset value adjustments, “clawbacks” of performance fees for subsequent underperformance); (2) Managed accounts, and the amount of assets required to be in a managed account for such an account to be economically viable, in light of the various administrative costs involved in creating and maintaining such an account; (3) Side letters; (4) Liquidity management tools (such as gates, redemption suspensions, payments in kind, etc.), and how the increasing use of such tools is affecting the drafting of payment-in-kind provisions in Cayman and BVI fund documents; (5) Indemnification of fund directors and the evolution of the “gross negligence” standard; (6) Caselaw developments in offshore financial centers (including cases addressing when a redeeming shareholder becomes a creditor of a fund and cases dealing with attempts by liquidators to adjust net asset value); (7) Clawback principles and mechanics; (8) Regulatory developments in offshore financial centers, and in other jurisdictions that may affect funds organized in offshore financial centers (such as the EU’s AIFM Directive); and (9) The relative advantages and disadvantages of various offshore financial centers.  This issue of The Hedge Fund Law Report includes the first of three parts of the full transcript of our interview with MacKay.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    Andrew Baker, CEO of the Alternative Investment Management Association, Discusses the AIFM Directive, UK Tax, Short Selling and Other Topics with The Hedge Fund Law Report

    Andrew Baker, formerly Chief Operating Officer for Schroder Investment Management, became the Deputy Chief Executive of the Alternative Investment Management Association (AIMA) in August 2007, and the Chief Executive Officer in December 2008.  In those capacities, he has played a key role in shaping the AIMA’s response to recent developments in international hedge fund law and regulation.  On July 17, 2009, The Hedge Fund Law Report spoke to him about current and potential regulatory changes in Europe and the U.S., the tax climate in the UK, “grey” tax havens and laws and proposals that have or would mandate transparency with respect to short positions.  A full transcript of that interview is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 2 No.20 (May 20, 2009)

    Interview With Drinker Biddle Partner David Matteson on Citadel’s Entry Into the Investment Banking Business

    Earlier this month, hedge fund manager Citadel Investment Group L.L.C. announced that it is entering the investment banking business, hiring three former Merrill Lynch executives to lead the effort.  Todd Kaplan, who joined Citadel in March, will run the unit, reporting to Citadel Securities CEO Rohit D’Souza.  Reporting to Mr. Kaplan will be Brian Maier, head of industry groups, and Carl Mayer, head of leveraged finance.  In the past, Citadel has entered non-hedge fund businesses, including the successful launch of an options market-making unit, but this marks its first major foray into a non-trading business.  The Hedge Fund Law Report discussed Citadel’s move in an interview with David Matteson, a Partner at Drinker Biddle & Reath LLP.  We provide excerpts from the interview.

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