For many law firms advising hedge funds, the busiest area of work last year was not start-ups, but helping the funds navigate a regulatory environment that increasingly has their activities in its sights. All the legal teams, and particularly those with transatlantic capability, were consumed by queries about the need to register with the Securities and Exchange Commission in the US, for example.
James Greig is a partner in the London office of Wilmer Cutler Pickering Hale and Dorr, and one of the few lawyers to hedge funds who focuses almost exclusively on regulation. He says the SEC rule change, now overturned, which required many European managers to register their operations, was big business. Historically the US market has required registration, only if a fund has more than 15 US clients, with one hedge fund counting as one client, but from the start of this year, fund managers had to count all of their US investors as separate clients, even though they invest through a
hedge fund. That meant funds looking through the structures and identifying the American investors in each of their composite funds.
Greig says, “For those that opted to register following the SEC rule change, we had been doing a lot of registrations. For those that continued to be unregulated, we had been guiding them on how to organize their affairs to stay outside the scope of the regulations.”
But the SEC rules are just one part of
the jigsaw, with London’s Financial Services Authority also increasingly affording considerable scrutiny to the activities of the hedge funds, not least as they start getting involved in public takeover battles.
Robert VanGrover, a senior partner in the hedge funds practice at US law firm Seward & Kissell, says the regulatory environment is really changing the way the market moves. His firm takes credit for setting up the first hedge fund – AW Jones – in 1949. But now, he says, “What’s happened, as a result of various incidents including September 11, is there’s been more regulation in terms of anti-money laundering, in registration and compliance, and as a result of certain regulatory action and enforcement action. It’s not quite as lightly regulated as it was back in 1949.”
He says the sense in New York is that it will only increase. “Unfortunately, the way the pendulum seems to swing is that once there’s regulation, there’s likely to be more regulation. It will probably increase, which is unfortunate because historically one of the reasons this particular field grew as rapidly as it did was because of the entrepreneurial nature, and the freedom to employ various strategies and to allow those people who performed the best to do financially very well. Now there’s a possibility regulation could stifle some of that entrepreneurship.”
Over here, the case of GLG Partners is a salutary example. The fund, and its trader Philippe Jabre, were each fined £750,000 by the FSA at the start of March for market manipulation, following an investigation that began nine months ago and concerned trades in shares of Sumitomo Mitsui, a Japanese bank. The FSA was looking at whether Jabre should have been excluded from the trades after being made an insider by Goldman Sachs, which was lead-managing an issue of securities in the bank at the time.
Jabre was represented in the FSA case by the European arm of US law firm Dewey Ballantine, while SJ Berwin acted for GLG Partners. SJ Berwin partner Bruce Gardner says that, with fewer new hedge funds starting up, the most interesting legal work for the managers nowadays is on the regulatory side. “Unless you have real depth on the financial services regulatory side, you can’t really call yourself a hedge fund lawyer these days. More and more of core hedge fund issues are regulatory,”
he says.
“The hedge funds operations are becoming more imaginative, and the attitude of regulators is becoming more and more interested in the hedge fund space and what is going on there. The regulatory issues for hedge funds, the big issues like market abuse, are the kinds of questions we are being asked by funds. It’s not so much about setting up funds these days, it is about running them. I get questions like, ‘We are trading this derivative, can we do it and, if so, what is our exposure?’ That is what being a hedge fund lawyer is about these days.”
Lovells, similarly, has focused on building a full-service hedge funds team, advising on everything from start-up, through compliance and regulation, trading, banking, capital markets and litigation.
Partner Simon Atiyah says, “We are targeting the funds that are taking a more aggressive stance in things like distressed debt or private equity, where their investment requires a level of legal activity which perhaps isn’t the case for funds acting more in the liquid securities market, although even in those cases we will do market abuse issues, and compliance issues.
“A lot of the funds push the boundaries on regulation,” he says, “and we work very carefully to make sure they stay the right side of the line.”
Greig at Wilmer Hale says, “We have had a whole flurry of queries on interpreting the panel regime, and the new disclosure regime, because the funds all tend to trade in derivatives and the idea that they might have to disclose that when a takeover is in the offing has come as a bit of a shock. We often act on an ad hoc basis asking questions of the FSA on behalf of our clients.”
He says the large transatlantic funds have been spending a lot of time looking at harmonised compliance systems, and often need a London-based lawyer simply to call the FSA and ask questions on a no-names basis for them. He adds, “My clients all tend to be quite concerned to make sure they play by the rules, as a class they are generally more intent on being rule-abiding than others I work for. The biggest funds are scrupulous to make sure they are doing it right.”
The newly merged law firm Kirkpatrick & Lockhart Nicholson Graham is another targeting the transatlantic regulatory work.
London partner Philip Morgan says, “In the UK, the US registration requirements had meant there were quite a number of hedge fund managers in the UK that were required to be SEC registered, so there has been quite a lot of compliance work coming out of that. That was a good hook to getting into some of those funds. It’s a useful area for us, selling ourselves as a transatlantic firm in those areas, and offering a level of coordination between our practices that possibly sets us apart.”
The firm is not the only one to have thought such a thing, but with regulatory interest showing no signs of abating, it could prove a lucrative new selling point.
James Greig is a partner in the London office of Wilmer Cutler Pickering Hale and Dorr, and one of the few lawyers to hedge funds who focuses almost exclusively on regulation. He says the SEC rule change, now overturned, which required many European managers to register their operations, was big business. Historically the US market has required registration, only if a fund has more than 15 US clients, with one hedge fund counting as one client, but from the start of this year, fund managers had to count all of their US investors as separate clients, even though they invest through a
hedge fund. That meant funds looking through the structures and identifying the American investors in each of their composite funds.
Greig says, “For those that opted to register following the SEC rule change, we had been doing a lot of registrations. For those that continued to be unregulated, we had been guiding them on how to organize their affairs to stay outside the scope of the regulations.”
But the SEC rules are just one part of
the jigsaw, with London’s Financial Services Authority also increasingly affording considerable scrutiny to the activities of the hedge funds, not least as they start getting involved in public takeover battles.
Robert VanGrover, a senior partner in the hedge funds practice at US law firm Seward & Kissell, says the regulatory environment is really changing the way the market moves. His firm takes credit for setting up the first hedge fund – AW Jones – in 1949. But now, he says, “What’s happened, as a result of various incidents including September 11, is there’s been more regulation in terms of anti-money laundering, in registration and compliance, and as a result of certain regulatory action and enforcement action. It’s not quite as lightly regulated as it was back in 1949.”
He says the sense in New York is that it will only increase. “Unfortunately, the way the pendulum seems to swing is that once there’s regulation, there’s likely to be more regulation. It will probably increase, which is unfortunate because historically one of the reasons this particular field grew as rapidly as it did was because of the entrepreneurial nature, and the freedom to employ various strategies and to allow those people who performed the best to do financially very well. Now there’s a possibility regulation could stifle some of that entrepreneurship.”
Over here, the case of GLG Partners is a salutary example. The fund, and its trader Philippe Jabre, were each fined £750,000 by the FSA at the start of March for market manipulation, following an investigation that began nine months ago and concerned trades in shares of Sumitomo Mitsui, a Japanese bank. The FSA was looking at whether Jabre should have been excluded from the trades after being made an insider by Goldman Sachs, which was lead-managing an issue of securities in the bank at the time.
Jabre was represented in the FSA case by the European arm of US law firm Dewey Ballantine, while SJ Berwin acted for GLG Partners. SJ Berwin partner Bruce Gardner says that, with fewer new hedge funds starting up, the most interesting legal work for the managers nowadays is on the regulatory side. “Unless you have real depth on the financial services regulatory side, you can’t really call yourself a hedge fund lawyer these days. More and more of core hedge fund issues are regulatory,”
he says.
“The hedge funds operations are becoming more imaginative, and the attitude of regulators is becoming more and more interested in the hedge fund space and what is going on there. The regulatory issues for hedge funds, the big issues like market abuse, are the kinds of questions we are being asked by funds. It’s not so much about setting up funds these days, it is about running them. I get questions like, ‘We are trading this derivative, can we do it and, if so, what is our exposure?’ That is what being a hedge fund lawyer is about these days.”
Lovells, similarly, has focused on building a full-service hedge funds team, advising on everything from start-up, through compliance and regulation, trading, banking, capital markets and litigation.
Partner Simon Atiyah says, “We are targeting the funds that are taking a more aggressive stance in things like distressed debt or private equity, where their investment requires a level of legal activity which perhaps isn’t the case for funds acting more in the liquid securities market, although even in those cases we will do market abuse issues, and compliance issues.
“A lot of the funds push the boundaries on regulation,” he says, “and we work very carefully to make sure they stay the right side of the line.”
Greig at Wilmer Hale says, “We have had a whole flurry of queries on interpreting the panel regime, and the new disclosure regime, because the funds all tend to trade in derivatives and the idea that they might have to disclose that when a takeover is in the offing has come as a bit of a shock. We often act on an ad hoc basis asking questions of the FSA on behalf of our clients.”
He says the large transatlantic funds have been spending a lot of time looking at harmonised compliance systems, and often need a London-based lawyer simply to call the FSA and ask questions on a no-names basis for them. He adds, “My clients all tend to be quite concerned to make sure they play by the rules, as a class they are generally more intent on being rule-abiding than others I work for. The biggest funds are scrupulous to make sure they are doing it right.”
The newly merged law firm Kirkpatrick & Lockhart Nicholson Graham is another targeting the transatlantic regulatory work.
London partner Philip Morgan says, “In the UK, the US registration requirements had meant there were quite a number of hedge fund managers in the UK that were required to be SEC registered, so there has been quite a lot of compliance work coming out of that. That was a good hook to getting into some of those funds. It’s a useful area for us, selling ourselves as a transatlantic firm in those areas, and offering a level of coordination between our practices that possibly sets us apart.”
The firm is not the only one to have thought such a thing, but with regulatory interest showing no signs of abating, it could prove a lucrative new selling point.
