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    Jan. 29, 2015

Why Should Hedge Fund Investors Perform On-Site Due Diligence in Addition to Remote Gathering of Information on Managers and Funds? (Part One of Three)

Technology is an important adjunct to hedge fund investments and operations, but the human element continues to loom disproportionately large in operational due diligence.  Institutional investors review voluminous information in the course of due diligence, and a year-long courtship is not unusual before making an investment.  Much of that information is obtained and reviewed remotely, but according to the smart money, an operational due diligence process is not complete without an on-site visit.  What can institutional investors glean on-site that they cannot obtain remotely?  To answer that question, Hedge Fund Law Report interviewed practitioners working in various phases of the hedge fund investment process.  This article – the first in a three-part series – conveys the key findings of our interviews on topics including: general goals of an on-site review; the four core benefits of an on-site review; how to prepare for an on-site visit; the role of background checks and confidentiality agreements; how to structure an on-site visit agenda to maximize productivity; and who should participate in an on-site visit and what materials participants should bring.  The second article in this series will address protocol for the on-site visit, and the third article will discuss an investor’s options following the on-site visit.  See also “Operational Due Diligence from the Hedge Fund Investor Perspective: Deal Breakers, Liquidity, Valuation, Consultants and On-Site Visits,” Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

2014 Was a Series of “Firsts” in the SEC’s Focus on Investment Advisers and Investment Companies

Ever since the SEC created the Asset Management Unit back in 2010, the amount of scrutiny investment advisers face has continued to intensify.  And with this intense scrutiny, the SEC is forging new ground in its regulation of investment managers.  In a guest article, Andrew Dunbar, a partner at Sidley Austin LLP, discusses the series of “firsts” in SEC enforcement actions we saw in 2014 relating to investment advisers.  These firsts included the SEC’s increasing requirement in seeking admissions, as well as actions relating to “pay to play” and fees and expenses.  Understanding these new areas of enforcement, which may develop into trends, can help investment managers navigate the 2015 enforcement climate and update their compliance programs and risk inventories appropriately.  For additional insight from Dunbar, see “How Can Hedge Fund Managers Understand Recent SEC Developments to Mitigate Enforcement Risk?,” Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).

IRS Memo Analyzes Whether Offshore Fund That Engaged in Underwriting and Lending Activities in the U.S. through an Investment Manager Was Engaged in a “Trade or Business” in the U.S. and Subject to U.S. Income Tax

An unnamed offshore fund engaged in certain lending and underwriting activities in the U.S. through an independent investment manager.  The fund asked the IRS whether its activities constituted a “trade or business” in the U.S., such that its U.S. income that was effectively connected to that trade or business would be subject to U.S. income tax.  The IRS’ Office of Chief Counsel issued a memorandum (Chief Counsel Advice Memorandum) in response to that inquiry addressing: (1) when an offshore hedge fund is deemed to be engaged in a U.S. trade or business; and (2) the application to offshore hedge funds of the safe harbors for “trading in stocks or securities.”  This article provides a detailed discussion of the Chief Counsel Advice Memorandum.  For a discussion of another Chief Counsel Advice Memorandum relating to the U.S. tax implications of offshore lending, see “Implications of Recent IRS Memorandum on Loan Origination Activities for Offshore Hedge Funds that Invest in U.S. Debt,” Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).

CFA Institute’s Jonathan Boersma Explains the Purposes and Mechanics of GIPS Compliance by Hedge Fund Managers

The CFA Institute created the Global Investment Performance Standards (GIPS) in the late 1980s to standardize the presentation of performance information by investment managers.  See “Top Ten GIPS Compliance Challenges for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014).  Almost 30 years later, the CFA Institute remains central to the implementation, understanding and ongoing refinement of the Standards.  Jonathan Boersma, head of Professional Standards and executive director of GIPS at the CFA Institute, recently sat for a detailed interview with the Hedge Fund Law Report on GIPS considerations for hedge fund managers.  In particular, Boersma addressed the purposes of GIPS; adoption by geography and manager type; investor preferences with respect to GIPS; pricing, purpose and allocation of costs of GIPS verification services; track record portability; whether GIPS permits the use of hypothetical back-tested performance, model fees or presentation of performance gross of fees; cherry picking and valuation; what constitutes a prospective client; withholding for dividends; and when to include a new fund or account in a GIPS-compliant composite.  For additional insight from Boersma, see “Global Investment Performance Standards Facilitate Reliable, Apples-to-Apples Comparisons by Hedge Fund Investors, and Offer Marketing Opportunities for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 3, No. 9 (Mar. 4, 2010).

Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss CFTC Compliance, Conflicting Regulatory Regimes and Best Marketing Practices (Part Two of Four)

The most difficult compliance issues currently facing the hedge fund industry were front and center at the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  This article, the second in a four-part series covering the Summit, contains insight on CFTC compliance, conflicting regulatory regimes in compliance programs, and the regulatory and operational considerations of marketing from Amanda Olear, associate director of the Division of Swap Dealer Intermediary Oversight at the CFTC; Patricia Cushing, director of compliance at the National Futures Association; Myles Edwards, general counsel and CCO at Constellation Wealth Advisors; Mark Schein, CCO and managing director at York Capital Management; Jeanette Turner, managing director and general counsel at Advise Technologies; Jennifer Duggins, senior vice president and CCO at Chilton Investment Company; Edward Dartley, of counsel at Pepper Hamilton; Marc Baum, general counsel and chief administrative officer at Serengeti Asset Management; and Simon Raykher, general counsel at Kepos Capital LP.  The first article in the series covered regulatory priorities, handling regulatory examinations and cybersecurity preparedness.  The third and fourth installments in the series will cover: proposed changes to Form 13F and Schedule 13D; employment-related disputes with highly compensated employees; insider trading; negotiating terms with institutional investors; negotiating seeding arrangements; and the convergence of mutual funds and hedge funds.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

SEC Investment Management Division Director Norm Champ Identifies the Top 10 Regulatory and Enforcement Lessons Learned during 2014

On December 10, 2014, Norm Champ, outgoing Director of the SEC’s Division of Investment Management (IM), delivered a keynote speech at the ICI 2014 Securities Law Developments Conference.  In his address, Champ discussed the top 10 lessons learned from his work at IM over the past year.  This article summarizes those 10 lessons.  See also “SEC Investment Management Division Director Norm Champ Details Disclosure Challenges Facing Hedge and Alternative Mutual Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 46 (Dec. 11, 2014).

Three Recent Tax Moves: Willkie Welcomes Anthony Carbone in New York; DLA Piper Appoints Geoffrey Scardoni in Luxembourg; and Untracht Early Expands in New York and New Jersey

Notable tax department moves announced in January 2015 included accounting firm Untracht Early – with the additions of Paul Alampi and Suzy Lee – and law firms Willkie and DLA Piper with the additions of Anthony Carbone in New York and Geoffrey Scardoni in Luxembourg, respectively.  See “Key Tax Issues Facing Offshore Hedge Funds: FDAPI, ECI, FIRPTA, the Portfolio Interest Exemption and ‘Season and Sell’ Techniques,” Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015); “How Can Hedge Funds Recoup Overwithholding of Tax on Non-U.S. Source Interest and Dividends?,” Hedge Fund Law Report, Vol. 6, No. 35 (Sep. 12, 2013).

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