The Hedge Fund Law Report

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

Articles By Topic

By Topic: Swaps and Disclosure

  • From Vol. 9 No.33 (Aug. 25, 2016)

    A “Clear” Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans (Part Four of Four)

    This is the final installment in our four-part serialization of a treatise chapter by Steven W. Rabitz, partner at Stroock & Stroock & Lavan, and Andrew L. Oringer, partner at Dechert. The chapter describes the substantive considerations – as well as potential penalties for missteps – associated with employing swap transactions for employee benefit plans, certain other similar plans and “plan assets” entities subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) or the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986, and includes references to a wide range of relevant authority. This article examines issues relating to cleared swaps, collateral, rehypothecation and swap execution facilities. The third article in the serialization described implications of funds reaching the 25 percent threshold of plan investment; considerations for fund managers when facing governmental plans; and credit-related issues. The second article discussed exemptions that could keep swaps from being considered prohibited transactions and explored the extent to which swap counterparties and others would be considered fiduciaries under ERISA, as well as the potential implications of that consideration. The first article explored fiduciary responsibility and prohibited transactions generally.

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  • From Vol. 9 No.32 (Aug. 11, 2016)

    A “Clear” Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans (Part Three of Four)

    This is the third article in our four-part serialization of a treatise chapter by Steven W. Rabitz, partner at Stroock & Stroock & Lavan, and Andrew L. Oringer, partner at Dechert. The chapter describes the substantive considerations – as well as potential penalties for missteps – associated with employing swap transactions for employee benefit plans, certain other similar plans and “plan assets” entities subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) or the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986, and includes references to a wide range of relevant authority. This third article in the serialization describes implications of funds reaching the 25% threshold of plan investment; considerations for fund managers when facing governmental plans; and credit-related issues. The second article discussed exemptions that could keep swaps from being considered prohibited transactions and explored the extent to which swap counterparties and others would be considered fiduciaries under ERISA, as well as the potential implications of that consideration. The first article explored fiduciary responsibility and prohibited transactions generally.

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  • From Vol. 9 No.31 (Aug. 4, 2016)

    A “Clear” Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans (Part Two of Four)

    This is the second article in our four-part serialization of a treatise chapter by Steven W. Rabitz, partner at Stroock & Stroock & Lavan, and Andrew L. Oringer, partner at Dechert. The chapter describes – in considerable detail and with extensive references to relevant authority – the many substantive considerations associated with employing swap transactions for employee benefit plans, certain other similar plans and “plan assets” entities subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) or the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986 (Code), as well as potential penalties for missteps. This article discusses exemptions that could keep swaps from being considered prohibited transactions and explores the extent to which swap counterparties and others would be considered fiduciaries under ERISA, as well as the potential implications of that consideration. To read the first article in this serialization, click here

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  • From Vol. 9 No.30 (Jul. 28, 2016)

    A “Clear” Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans (Part One of Four)

    Hedge fund managers and other investment professionals contemplating swap transactions for employee benefit plans, certain other similar plans and “plan assets” entities subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) or the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986 (Code) must consider numerous legal issues. To help clarify these complex issues, The Hedge Fund Law Report is serializing a treatise chapter by Steven W. Rabitz, partner at Stroock & Stroock & Lavan, and Andrew L. Oringer, partner at Dechert. The chapter describes – in considerable detail and with extensive references to relevant authority – the many substantive considerations associated with employing swaps on behalf of ERISA plan assets and the potential penalties for missteps. This article, the first in our four-part serialization, discusses fiduciary responsibility and prohibited transactions, including how swaps can constitute prohibited transactions. For more from Rabitz and Oringer, see “Is That Your (Interim) Final Answer? New Disclosure Rules Under ERISA to Impact Many Hedge Funds” (Aug. 20, 2010). For a prior serialization from Oringer, see our five-part series:“Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse”: Part One (Sep. 4, 2014); Part Two (Sep. 11, 2014); Part Three (Sep. 18, 2014); Part Four (Sep. 25, 2014); and Part Five (Oct. 2, 2014).

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  • From Vol. 9 No.8 (Feb. 25, 2016)

    Hedge Funds Face Increased Trading Costs Under Final Swap Rules (Part Two of Two)

    The new joint final rule adopted by the U.S. prudential regulators – establishing minimum initial and variation margin requirements for certain non-cleared swaps – likely means cost increases for hedge funds and other investment funds trading those swaps. Hedge funds face comparable issues under the substantially similar final rule adopted by the CFTC for margin requirements for non-cleared swaps entered into by registered swap dealers or major swap participants that are not regulated by a U.S. prudential regulator. In a guest two-part series, Fabien Carruzzo and Philip Powers, partner and associate, respectively, at Kramer Levin, discuss these final rules and their impact on hedge funds. This second article explores minimum transfer amounts; eligible collateral and haircuts; netting of exposure; documentation and industry initiatives; compliance obligations; and practical implications of the final rules on hedge funds. The first article focused on calculating a fund’s material swaps exposure, as well as the final rules’ requirements for collecting and posting initial and variation margin with respect to non-cleared swaps. For more from Kramer Levin practitioners, see “Risks Faced by Hedge Fund Managers That Access the Alternative Mutual Fund Market Via Turnkey Platforms” (Mar. 13, 2014); and “Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds” (Apr. 18, 2013).

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  • From Vol. 9 No.7 (Feb. 18, 2016)

    Hedge Funds Face Increased Margin Requirements Under Final Swap Rules (Part One of Two)

    The U.S. prudential regulators recently adopted a joint final rule establishing minimum initial and variation margin requirements for certain non-cleared swaps. The CFTC adopted a substantially similar final rule for swaps not regulated by a U.S. prudential regulator. Hedge funds and other investment funds trading non-cleared swaps with registered swap dealers supervised by either the U.S. prudential regulators or the CFTC will be impacted by these final rules and will likely face increased costs of trading non-cleared swaps. In a two-part guest series, Fabien Carruzzo and Philip Powers – partner and associate, respectively, at Kramer Levin – discuss these final rules and analyze their impact on hedge funds. This first article addresses the calculation of a fund’s material swaps exposure, as well as the requirements under the final rules for covered swap dealers to collect and post initial and variation margin with respect to non-cleared swaps with their counterparties. The second article will address minimum transfer amounts; eligible collateral and haircuts; netting of exposure; documentation and industry initiatives; compliance obligations under the final rules; and the practical implications of the final rules on hedge funds. For additional insight from Carruzzo, see “OTC Derivatives Clearing: How Does It Work and What Will Change?” (Jul. 14, 2011). For more from Kramer Levin practitioners, see “‘Interval Alts’ Combine Benefits of Alternative Mutual Funds and Traditional Hedge Funds” (Jul. 16, 2015).

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  • From Vol. 8 No.43 (Nov. 5, 2015)

    PLI “Hot Topics” Panel Addresses Cybersecurity and Swaps Regulation

    A recent panel discussion at The Practising Law Institute’s Hedge Fund Management 2015 program, “Hot Topics for Hedge Fund Managers,” offered the perspective of an SEC counsel on cybersecurity and a summary of significant developments in swaps regulation, in addition to insight on current investor due diligence practices and a look at the challenges of starting a registered alternative fund.  Nora M. Jordan, a partner at Davis Polk & Wardwell, moderated the discussion, which featured Jessica A. Davis, chief operating officer and general counsel of investment adviser Lodge Hill Capital, LLC; Jennifer W. Han, associate general counsel at the Managed Funds Association; and Aaron Schlaphoff, an attorney fellow in the Rulemaking Office of the SEC Division of Investment Management.  This article summarizes the key takeaways from the program with respect to cybersecurity and swaps regulation.  For additional coverage of PLI’s Hedge Fund Management 2015 program, see “SEC’s Rozenblit Discusses Operations and Priorities of the Private Funds Unit,” The Hedge Fund Law Report, Vol. 8, No. 37 (Sep. 24, 2015).

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  • From Vol. 8 No.36 (Sep. 17, 2015)

    CFTC Requires Most Registered Commodity Pool Operators, Commodity Trading Advisors and Introducing Brokers to Join the NFA

    The Dodd-Frank Act requires hedge fund managers that engage in certain swap-related activities to register with the CFTC as either commodity pool operators (CPOs), commodity trading advisors (CTAs) or introducing brokers (IBs).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Until now, such CFTC registrants have generally only been required to join the National Futures Association (NFA) if they were also engaged in commodities futures transactions.  To ensure that registrants engaging only in swap-related activities join the NFA – and thereby become “subject to the same level of comprehensive NFA oversight” – the CFTC recently adopted Final Rule 170.17 (Rule), which requires all registered CPOs and IBs, as well as many registered CTAs, to join the NFA.  This article summarizes the Rule, the relevant regulatory background and the CFTC’s rationale for adopting it.  For more on the impact of Dodd-Frank on hedge fund managers, see “How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).

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  • From Vol. 8 No.24 (Jun. 18, 2015)

    NFA Conference Addresses Examination Focus Areas, Investigation Processes and Reporting Requirements for Swap Dealers and Major Swap Participants (Part Two of Two)

    As members of the NFA, registered swap dealers (SDs) and major swap participants (MSPs) are subject to examination and investigation by the NFA – an involved process that can lead to disciplinary action.  In addition to compliance with NFA and CFTC regulations, the NFA examines SDs and MSPs for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  While most hedge fund managers likely do not themselves qualify as SDs or MSPs, counterparties with which they do business may be so registered, and non-compliance issues with, or disciplinary action against, those counterparties may affect the managers’ hedge funds.  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring and SD and MSP reporting requirements.  This article, the second in a two-part series, discusses upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  The first article highlighted the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  For more on SDs and MSPs, 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).

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  • From Vol. 8 No.24 (Jun. 18, 2015)

    CFTC Extends Reporting Relief for Registered Swap Dealers and Major Swap Participants

    In December 2012, the Division of Market Oversight of the Commodity Futures Trading Commission (CFTC) granted swap dealers (SDs) and major swap participants (MSPs) acting as reporting counterparties for swap transactions time-limited no-action relief from certain reporting requirements of Section 45.4 of the CFTC Regulations.  Consequently, SDs and MSPs were spared the significant burden – in time and resources – of complying with the above requirements, which otherwise could have had follow-on effects for hedge fund managers using such SDs and MSPs as counterparties.  Initially set to expire on June 30, 2013, the no-action relief was extended twice for successive one-year periods.  This article summarizes last week’s further extension of the no-action relief to June 30, 2016.  For other recent CFTC no-action relief with respect to SDs and MSPs, see “CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants,” The Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

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  • From Vol. 8 No.22 (Jun. 4, 2015)

    NFA Conference Addresses Examination Processes, Training and Compliance Best Practices for Swap Dealers and Major Swap Participants (Part One of Two)

    Under Dodd-Frank, registered swap dealers (SDs) and major swap participants (MSPs) are required to become members of a registered futures association, such as the NFA or the CFTC.  In addition, Section 4s of the Commodity Exchange Act requires registered SDs and MSPs to meet specific requirements with regard to, among other things, capital and margin; reporting and recordkeeping; daily trading records; business conduct standards; documentation standards; trading duties; and designation of a chief compliance officer.  Registered member firms will be examined by the NFA for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring, and SD and MSP reporting requirements.  This article, the first in a two-part series, highlights the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  The second article will review upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  For more on SDs and MSPs, see “CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants,” The Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

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  • From Vol. 8 No.14 (Apr. 9, 2015)

    CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants

    Commodity Futures Trading Commission (CFTC) Regulation 3.3(f)(2), promulgated under the Commodity Exchange Act, requires the chief compliance officer of a futures commission merchant, swap dealer or major swap participant to furnish an annual report to the CFTC not more than 60 days after the end of the applicable registrant’s fiscal year, simultaneously with the submission of Form 1-FR-FCM or the Financial and Operational Combined Uniform Single Report.  See “CFTC Issues Guidance for Completing Annual CCO Reports of Swaps and Futures Firms,” The Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).  However, in response to a joint request from the Futures Industry Association and the International Swaps and Derivatives Association, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief from those timing requirements.  Consequently, the deadline for those entities to file the required annual report has been extended.  This article explains the mechanics and impact of the extension.

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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.4 (Jan. 24, 2013)

    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 Dodd-Frank Act’s overhaul of over-the-counter derivatives trading will fundamentally change the trading relationship between swap dealers and major swap participants (MSPs) and hedge funds and other counterparties.  Among other things, the Dodd-Frank Act and related CFTC rules will impose significant new obligations on swap dealers and MSPs that will necessitate the amendment of bilateral swap documentation entered into with hedge funds.  To standardize this process, the International Swaps and Derivatives Association, Inc. (ISDA) introduced the August 2012 ISDA Dodd-Frank Protocol (Protocol).  The Protocol is a non-negotiable supplement designed to amend existing swap documentation with the goal of facilitating the exchange of information between swap dealers/MSPs and their counterparties.  While adherence to the Protocol is not mandatory for counterparties, non-adherence is likely to have consequences for their swap trading activities.  To help hedge fund managers understand the Protocol and evaluate whether their funds should adhere to it, The Hedge Fund Law Report recently interviewed Raymond Mouhadeb, a Partner at Katten Muchin Rosenman LLP.  Mouhadeb advises investment managers and sponsors of hedge funds, funds of funds and other investment vehicles on structuring and legal issues, including the applicability of the Dodd-Frank Act and regulations related to derivative transactions.  Our interview with Mouhadeb covered various topics, including: the purpose of the Protocol; understanding the hedge funds to which the Protocol applies; the specific entity that should consider Protocol adherence; consequences of non-adherence; principal concerns related to Protocol adherence; whether onshore funds should consider moving their swap relationships offshore; important compliance dates; the process for signing on to the Protocol; how adherence will lead to disclosure of information about the hedge fund; the types of representations that must be made in adhering to the Protocol; concerns relating to the DF Terms Agreement and the ISDA August DF Supplement; whether parties have entered into arrangements to amend the Protocol; continuing compliance obligations arising out of Protocol adherence; and whether the Protocol will change the procedures for entering into new ISDA agreements.

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  • From Vol. 1 No.4 (Mar. 24, 2008)

    CSX Sues Hedge Funds TCI and 3G for Violating Federal Securities Laws

    • Complaint alleges that funds attempted to change CSX’s corporate structure by withholding information on percentage of CSX shares controlled.
    • CSX claims that the funds used swap agreements to evade federal securities filing requirements and acquired more than 5% of its common stock without making required disclosures.
    • formed a Section 13(d)(3) group with beneficial ownership of over 5% of outstanding CSX common stock, yet allegedly failed to timely file legally required schedules - according to the complaint, to secretly accumulate CSX stock.
    • Allegedly TCI’s disclosures of its CSX share swap position were materially misleading, failing to disclose that swap counterparties intend to vote CSX shares in accordance with TCI’s wishes.
    • CSX seeks to divest funds of shares acquired and to terminate all CSX-referenced swaps from the time they should have been disclosed.
    • CSX requests that the funds be prohibited from (or seeks to limit) voting those shares at the 2008 annual meeting.
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