The Hedge Fund Law Report

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

Recent Issue Headlines

Vol. 5, No. 3 (Jan. 19, 2012) Print IssuePrint This Issue

  • Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three)

    Most hedge fund managers implement personal trading policies and procedures, that is, rules governing trading by management company personnel for their own accounts rather than for funds or accounts managed by the management company.  Hedge fund managers implement such policies and procedures for either or both of two reasons: because they have to or because they should.  Some hedge fund managers have to implement such policies because they are registered (or required to be registered) with the SEC as investment advisers, and Rule 204A-1 under the Investment Advisers Act of 1940 (Advisers Act) requires registered investment advisers to establish, maintain and enforce codes of ethics that include personal trading policies designed to detect and prevent fraud in connection with personal trading.  Even managers that are not registered and are not required to register frequently implement personal trading policies and procedures as a matter of prudence.  This is because personal trading by management company personnel can violate laws and rules other than Rule 204A-1.  For example, personal trading can – and in the recent past, frequently has – resulted in insider trading violations.  The specific violator in such cases is typically the individual trader, but such violations adversely affect (often dramatically) the management company that employs the violator.  Also, personal trading can result in “front running,” in which an employee of the manager buys or sells a security before engaging in a similar transaction for a managed fund or account.  Similarly, personal trading can result in management company personnel usurping investment opportunities that legally belong to the manager’s funds or accounts.  On usurpation, see “SEC Enforcement Action Against a Private Equity Fund Manager Partner Calls into Question the Value of Self-Reporting in the Private Funds Context,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).  Advisers Act Rule 204A-1 provides minimum standards for registered hedge fund managers in crafting personal trading policies.  But the rule is spare with respect to detail, leaving registered hedge fund managers relatively wide latitude in designing policies and procedures.  That latitude, of course, is constrained by other law and practice, the reality of SEC examinations and expectations on the part of increasingly sophisticated investors.  By the same token, even unregistered hedge fund managers typically look to practice under Rule 204A-1 as a guideline in crafting their own personal trading policies and procedures.  Moreover, once personal trading policies and procedures are in place, they must be, in the language of Rule 204A-1, “maintained” and “enforced” – yet the rule offers little in the way of guidance with respect to maintenance and enforcement.  Accordingly, market practice looms large in the design and implementation of personal trading policies and procedures.  Yet here, as in other areas of hedge fund operations, market practice is challenging to discern reliably.  With an increasing number of hedge fund managers facing an imminent registration deadline, and with substantially all managers facing heightened operating expectations from investors and regulators, The Hedge Fund Law Report is publishing a three-part series of articles that seeks to shed light on market practice with respect to personal trading policies and procedures of hedge fund managers.  This article is the first in the series and addresses: the overarching considerations in establishing a personal trading program; the scope of persons that can and should be covered by the personal trading program; and the reporting obligations that apply to covered persons, including a discussion of the securities covered by the reporting requirements and available exceptions from the reporting requirements.  The second article in this series will highlight various personal trading restrictions, including discussions of restrictions on the number of brokerage firms where covered persons can hold covered securities, the requirement to pre-clear certain transactions, holding periods for investments, blackout periods during which trades cannot be executed and other types of trading restrictions and prohibitions.  The third article in this series will survey recent technological developments designed to facilitate a hedge fund manager’s monitoring of compliance with its personal trading policies and procedures.

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  • Corporate Governance Best Practices for Cayman Islands Hedge Funds

    With the financial crisis of 2008 and 2009, corporate governance practices in the global alternative investment funds industry came under the microscope.  While investor views on how fund directors performed during the crisis vary, what is clear a few years on is that investors, hedge fund managers and service providers have a much better understanding of the role of an independent non-executive director of an alternative investment fund and that a best practice framework has started to become a topic for active discussion in the industry.  As a result, hedge fund investors – particularly institutional investors – are increasingly scrutinizing a fund’s corporate governance structure to ensure that the directors are diligently and skillfully performing their duties in the best interest of the hedge funds on whose boards they serve.  With the global hedge fund industry having its largest presence in the Cayman Islands, this guest article looks at some of the issues relating to corporate governance from the Cayman fund perspective.  The authors of this guest article are Tim Frawley, a Partner in the Investment Funds practice of Maples and Calder, and Peter Huber, Global Co-Head of Maples Fiduciary Services.  Frawley and Huber begin with a historical accounting of Cayman company fund governance.  The authors then explain the various duties owed and roles performed by fund directors.  Next, the authors discuss the findings and implications from the Weavering Macro Fixed Income Fund Limited (In Liquidation) decision handed down last year.  The authors then move to a survey of some current hot-button issues related to fund governance, and conclude with a discussion of anticipated fund governance challenges facing hedge fund managers.

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  • Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Four of Four)

    This article is the fourth in a four-part series by Maria Gabriela Bianchini, founder of Optionality Consulting.  The first article in this series identified factors that hedge fund managers should consider in determining whether to open an office in Asia and compared the relative merits of Hong Kong and Singapore as locations for an office.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four),” The Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).  The second article in this series discussed technical steps and considerations for the actual process of opening an office in either Hong Kong or Singapore.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Two of Four),” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).  The third article in this series described the practical impact of Singapore’s new regulatory regime on hedge fund managers.  See “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Three of Four),” The Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15 2012).  This article series concludes with a discussion of topical regulatory issues regarding opening an office in Hong Kong.

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  • Delaware Chancery Court Sanctions Legendary Investor Michael Steinhardt for Trading in Occam/Calix Shares Based on Confidential Information He Received While Serving as a Representative Plaintiff in a Class Action Against Occam

    In October 2010, plaintiffs Michael Steinhardt (Steinhardt), two hedge funds managed by Steinhardt, Derek Sheeler and Herbert Chen (Chen) commenced a class action lawsuit seeking to enjoin the proposed acquisition of defendant Occam Networks, Inc. (Occam) by Calix, Inc. (Calix) and challenging the fairness of the transaction.  The injunction was denied and the transaction closed in February 2011, but the litigation continued.  During discovery, the defendants learned that Steinhardt and Chen had traded in Occam and Calix shares while subject to a confidentiality order that prohibited trading in shares of Occam and Calix and the use of non-public information discovered in the course of the suit.  The defendants moved for sanctions against them.  The Delaware Chancery Court ruled that Steinhardt had violated his fiduciary duty as a class representative, dismissed him and his funds from the suit with prejudice, and imposed various sanctions on them.  The Court denied the motion as against Chen.  We detail the facts of the case and the Court’s reasoning.

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  • What Legal Ammunition Is Available to Investors to Challenge Aggressive Liquidity Management by Hedge Fund Managers?

    In August 2008 – at the height of the credit crisis – funds managed by Eden Rock Capital Management sought to redeem from funds managed by Stillwater Capital.  Stillwater refused to honor such redemption requests and allegedly engaged in a series of transactions intended to hinder such redemptions.  In March 2011, the Eden Rock funds sued Stillwater, the Stillwater funds and Stillwater’s successor, alleging fraudulent conveyance, fraud, breach of contract and related claims.  See “Investment Manager Eden Rock Financial Sues Hedge Fund Stillwater Capital and Gerova Financial Group in New York State Supreme Court,” The Hedge Fund Law Report, Vol. 4, No. 14 (Apr. 29, 2011).  The New York State Supreme Court recently ruled on Eden Rock’s claims.  This article summarizes the factual background – focusing on the redemption dispute – and the Court’s decision.  The experience of the crisis – in particular, the combustible combination of investors seeking liquidity and managers unwilling to part with it – has already influenced hedge fund structuring, due diligence, side letters and many other aspects of the hedge fund business.  But even in non-crisis times, micro factors will result in occasional, fund-specific illiquidity that is hard to predict at the time of an investment.  Accordingly, it is important for hedge fund managers and investors to understand the viability of various legal claims available to contest liquidity management mechanisms.  While the liquidity management mechanisms at issue in this matter are complicated and unlikely to be reproduced verbatim, the matter nonetheless illuminates how a court will evaluate claims in the nature of fraudulent conveyance, fraud and breach of contract as applied to typical hedge fund structures and redemption-related disputes.

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  • Disgorgement Payments to the SEC are Not an Insurable Loss Under New York Law

    On December 14, 2011, the New York State Appellate Division, First Department dismissed an attempt by Bear Stearns & Co. and Bear Stearns Securities Corporation (together, Bear Stearns) to claim disgorgement payments to the Securities and Exchange Commission (SEC) as an insurable loss.  See generally “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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  • Rajaratnam Prosecutor Jonathan Streeter to Join Dechert as Partner in Litigation Practice

    On January 13, 2012, Dechert LLP announced that Jonathan R. Streeter will join the firm in February as a litigation partner.  Streeter most recently was Deputy Chief of the Criminal Division at the United States Attorney’s Office for the Southern District of New York.  Notably, Streeter served as trial counsel for the government on United States v. Raj Rajaratnam.  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).

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  • Rothstein Kass Adds Gary S. Kaminsky as Principal in Business Advisory Services Group

    On January 17, 2012, Rothstein Kass announced that Gary S. Kaminsky joined the firm as a Principal in the Business Advisory Services Group.

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