The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 3, No. 33 (Aug. 20, 2010) Print IssuePrint This Issue

  • Is That Your (Interim) Final Answer? New Disclosure Rules Under ERISA To Impact Many Hedge Funds

    Given the ever-increasing levels of investment from pension plans subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) in hedge funds, ERISA considerations can be significant for fund sponsors and managers, and for other service providers to hedge funds and other private funds.  Sometimes, ERISA issues can rise to the level of being significant business considerations.  The exemption under Section 408(b)(2) of ERISA from ERISA’s prohibited transaction rules permits a service provider to an employee benefit plan to receive compensation for the services in the case of “reasonable compensation” for “necessary” services under a “reasonable” arrangement.  Regulations of the U.S. Department of Labor (the “DOL”) promulgated in 1977 had elaborated on the circumstances in which the exemption would be available.  Much has happened since 1977, and there have been recent comprehensive legislative and regulatory proposals to address the level of fee-related disclosure available to fiduciaries and plan participants and beneficiaries.  On the regulatory side, the DOL recently made extensive revisions to the compensation-related information that plan administrators are required to report annually on the “Form 5500,” and has previously issued proposed regulations that would affect the disclosure of fees charged in connection with participant-directed “401(k)” and other plans.  Following its 2007 release of a controversial set of proposed Section 408(b)(2) regulations, the DOL has now issued long-awaited interim final regulations under Section 408(b)(2) requiring increased disclosure of compensation in the case of certain services to pension plans.  Under the new regulations, where they are applicable, an arrangement for providing services to a pension plan will be treated as “reasonable” only if the service provider discloses to the plan specified compensation-related information.  Notwithstanding the major changes from the 2007 proposals, and arguably reflecting the urgency with which the DOL views these issues, the new regulations are not in reproposed form, but rather are interim final regulations.  The effective date of the new regulations is, however, generally delayed until July 16, 2011.  (It is noted that the new regulations do not apply to “welfare” plans, and that future regulations are expected that would address welfare plans.  The new rules also do not apply to individual retirement accounts and similar arrangements.)  Once the rules become effective, they will apply both to future arrangements as well as to arrangements then already in place.  A failure to meet the requirements for the Section 408(b)(2) exemption could cause the payment of compensation to a provider of services to an employee benefit plan to be a prohibited transaction under ERISA and the corresponding provisions of the U.S. tax code.  The consequences of a prohibited transaction can be extremely significant, including, for example, punitive excise taxes, the possibility of fee disgorgement and other potential liabilities on the service provider.  Thus, it may be critical that fiduciaries and other service providers subject to the new rules be in compliance with the new regulations, once they are applicable.  In a guest article, Andrew L. Oringer, a Partner at Ropes & Gray LLP, and Steven W. Rabitz, a Partner at Stroock & Stroock & Lavan LLP, provide a sampling of some of the issues that may be of particular interest to fund sponsors.

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  • Consequences for Global Hedge Fund Managers of the “Foreign Private Adviser” Exemption Included in the Dodd-Frank Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Act), enacted on July 21, 2010, contains a general rule with respect to private fund adviser registration, and exemptions from that rule.  The general rule is that private fund advisers, such as hedge fund advisers, must register as investment advisers with the U.S. Securities and Exchange Commission (SEC).  The exemptions from that rule provide that certain categories of private fund advisers are not required to register.  Exempted advisers include those that act as advisers solely to venture capital funds or small business investment companies, family offices, private fund managers with less than $150 million in assets under management (AUM) in the U.S. and so-called “foreign private advisers.”  However, although styled a “limited exemption,” the narrowness of the foreign private adviser exemption may expand the range of non-U.S. hedge fund managers required to register with the SEC and broaden the SEC’s regulatory jurisdiction.  This article examines in detail the foreign private adviser exemption and its implications for global hedge fund managers.  In particular, this article: reviews the definition of “foreign private adviser” under Dodd-Frank; offers practitioner insight on how certain of the key concepts in the definition have historically been understood and are likely to be construed by the SEC; discusses the interaction between the foreign private adviser exemption and the exemption for private fund managers with less than $150 million in AUM; analyzes past SEC practice and precedent with respect to global sub-adviser and affiliate arrangements, including a discussion of a key no-action letter; discusses the SEC’s “registration lite” regime for non-U.S. managers of offshore funds with U.S. investors, as explained by the agency in the release accompanying the subsequently-vacated 2004 hedge fund adviser registration rule; explains the three ways in which non-U.S. hedge fund managers that are not eligible for the foreign private adviser exemption may nonetheless avoid registration; identifies the consequences to non-U.S. hedge fund managers who are not eligible for the foreign private adviser exemption and who nonetheless elect to remain in the U.S. market; and concludes with a discussion of the possibility that the narrowness of the foreign private adviser exemption may engender retaliatory protectionist moves by the European Union on hedge fund regulation, or at least may undermine the credibility of any U.S. objections to protectionist provisions in the EU’s Alternative Investment Fund Manager Directive.

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  • Delaware High Court Affirms Order Compelling Defunct Hedge Fund Parkcentral Global to Divulge Its List of Limited Partners to Another Limited Partner in Order to Facilitate Future Litigation Against the Fund and Its Affiliates

    On August 12, 2010, the Delaware Supreme Court unanimously affirmed a Chancery Court order compelling hedge fund Parkcentral Global, L.P., to disclose its list of names and addresses of its limited partners to Brown Investment Management, L.P., one of its limited partners.  Brown, which had lost its entire investment in Parkcentral when the fund collapsed, had sought the list in order to contact other limited partners with regard to potential litigation against the fund’s general partner, Parkcentral Capital Management, L.P. (the General Partner), and its auditors.  As previously reported in the Hedge Fund Law Report, the Chancery Court ruled in Brown’s favor.  See “Delaware Chancery Court Permits Limited Partner in Defunct Hedge Fund Parkcentral Global to Obtain a List of Names and Addresses of Other Limited Partners in the Fund,” The Hedge Fund Law Report, Vol. 3, No. 23 (Jun. 11, 2010).  The Supreme Court agreed.  Reviewing a provision of the fund’s Limited Partnership Agreement, which mirrored Title 6, § 17-305 of the Delaware Revised Uniform Limited Partnership Act, it found that the limited partner had a contractual right of access to the shareholder list, which the General Partner could not unilaterally restrict, and that no federal law or regulation preempted Delaware law on this issue of disclosure.  We detail the background of the action and the Court’s legal analysis.

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  • From Philip Goldstein: Salem-Style Justice is Alive and Well in Massachusetts

    In social psychology, the “bystander effect” refers to the phenomenon in which no one person will help when a group of people witnesses a bad act.  And in economics, the free rider problem suggests that a person generally will avoid taking actions, even socially beneficial ones, where the person bears the cost of that action but the benefits are widely dispersed.  Both theories have been robustly proven in experiments and are generally applicable: most people are, quite rationally, bystanders and free riders.  But not Philip Goldstein.  The Principal of Bulldog Investors successfully challenged the 2004 hedge fund adviser registration rule, is currently challenging the constitutionality of Section 13(f) of the Securities Exchange Act of 1934 and is challenging an allegation by the Secretary of the Commonwealth of Massachusetts that the Bulldog website, together with an e-mail sent in response to an inquiry from a Massachusetts resident, constituted an illegal “offer” of unregistered securities.  On July 2, 2010, in the action brought by the Secretary, the Supreme Judicial Court (SJC) of Massachusetts ruled against Goldstein.  The Hedge Fund Law Report has published two articles on that decision.  See “Massachusetts High Court Rules that Website and Single E-Mail Communication to Massachusetts Resident Confer Personal Jurisdiction Over Philip Goldstein’s Hedge Fund Company in Administrative Proceeding,” The Hedge Fund Law Report, Vol. 3, No. 28 (Jul. 15, 2010); “The Bulldog Decision: Implications for Hedge Fund Managers and the Massachusetts Securities Division,” The Hedge Fund Law Report, Vol. 3, No. 32 (Aug. 13, 2010).  In this letter to the editor, Goldstein identifies and discusses shortcomings in the SJC’s legal analysis and in The Hedge Fund Law Report’s coverage of the case.

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  • Akin Gump Promotes Beijing’s Ying White to Partner

    Akin Gump Strauss Hauer & Feld LLP has promoted Ying Z. White to Partner.  White leads the firm’s investment funds practice in its Beijing office.

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  • Addition of Peter W. LaVigne Deepens Goodwin Procter’s Broker-Dealer Expertise

    On August 9, 2010, Goodwin Procter announced the expansion of its Financial Services Group with the addition of Peter W. LaVigne as a Partner in its New York office.  LaVigne advises clients on a broad range of broker-dealer issues.  He joins Goodwin from Sullivan & Cromwell.

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