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    May 5, 2016

Hedge Fund Managers Must Act Now to Determine Potential Exposure to U.K. Transfer Pricing, “Google Tax” and Disguised Investment Management Fee Regimes

The transfer-pricing policies adopted by multinationals has been subject to increased scrutiny for a number of years, a trend that promises greater tax transparency and revisions to the international tax framework. However, U.K.-based investment managers are subject to additional layers of regulation that pose a significantly greater risk, not only at a corporate level but also at an investor and personal level. Since April 2015, U.K.-based hedge fund managers have fallen within the scope of the Diverted Profits Tax and the Disguised Investment Management Fee regimes, two pieces of anti-avoidance legislation that pose their own unique set of challenges but also have themes in common with transfer pricing. In a guest article, Michael Beart, a director at Duff & Phelps, focuses on the legislation and its practical implications for hedge fund managers operating in the U.K. For more from Duff & Phelps practitioners, see “What Should Hedge Fund Managers Understand About Transfer Pricing and How to Manage the Related Risks?” (Nov. 1, 2013); and “Duff & Phelps Roundtable Focuses on Hedge Fund-Specific Valuation, Accounting and Regulatory Issues” (Feb. 4, 2010). 

Filing Obligations and Other Operational Considerations for Hedge Fund Managers Pursuing Activist Strategies (Part One of Two)

Hedge fund managers are increasingly exploring activist strategies, pursuing campaigns against large companies. However, as recent cases (such as the DOJ lawsuit against ValueAct Capital and two of its funds) show, hedge fund managers following activist strategies must see to operational minutiae to maintain compliance with regulations, filing requirements and various exemptions therefrom. Davis Polk & Wardwell recently presented an overview of the trends, tactics and prospects for shareholder activism and engagement in the U.S., the U.K. and Hong Kong. This first article in a two-part series summarizes the panelists’ insights on the global market for activist investing, how companies should engage with activists and disclosure obligations of activist investors, including filing obligations under the Hart-Scott-Rodino Act. The second article in the series will discuss timing and settlement of activist campaigns, prospects for activism, trends in shareholder engagement and proxy access. For additional commentary from Davis Polk practitioners, see our two-part coverage of PLI’s “Hot Topics for Hedge Fund Managers” panel: “Cybersecurity and Swaps Regulation” (Nov. 5, 2015); and “Operational Due Diligence and Registered Alternative Funds” (Dec. 10, 2015).

What Hedge Fund Managers Need to Know About AIFMD’s Depositary Requirement (Part Two of Two)

Among the changes imposed on hedge fund managers by the Alternative Investment Fund Managers Directive (AIFMD) is the European requirement to appoint a fund depositary. Hedge fund managers may be subject to different depositary regimes depending on their and their funds’ domiciles, and appointing a depositary requires attention to numerous practical and operational details. In a recent interview with the Hedge Fund Law Report, Bill Prew, founder and CEO of INDOS Financial Limited, discussed AIFMD’s impact on the hedge fund industry since its introduction in July 2014. This article, the second in a two-part series, sets forth Prew’s thoughts about the practical implications of the new depositary requirements, as well as other industry trends and issues for hedge fund managers. In the first installment, Prew discussed the effect of AIFMD on hedge fund managers and their ability to market funds across Europe. For more on depositary requirements under AIFMD, see our two-part series “Application of the AIFMD to Non-E.U. Alternative Investment Fund Managers”: Part One (May 23, 2013); and Part Two (Jun. 13, 2013); as well as “AIFM Directive: Loosening the Regulatory Noose” (Jun. 17, 2009).

SEC Division Heads Enumerate Enforcement Priorities, Including Conflicts of Interest, Valuation, Performance Advertising and CCO Liability (Part Two of Two)

If historical trends continue, at least one out of ten examinations of investment advisers and investment companies conducted by the SEC Office of Compliance Inspections and Enforcement (OCIE) will be referred to the Division of Enforcement (Enforcement). To avoid becoming subject to sanctions or used to send a message to the industry, hedge fund managers must keep a close watch on areas that Enforcement considers priorities. In addition, as the SEC Division of Investment Management (IM) churns out new rules, guidance and restrictions, hedge fund managers face a corresponding expansion of their compliance obligations. The current initiatives and priorities of Enforcement and IM were some of the topics discussed during a recent day-long seminar hosted by the SEC as part of its Compliance Outreach Program. SEC Chair Mary Jo White delivered opening remarks, and participants included Enforcement Director Andrew Ceresney, IM Director David Grim and OCIE Director Marc Wyatt. The first two segments of the seminar featured Diane C. Blizzard, Associate Director of IM; Jane Jarcho, Deputy Director of OCIE’s National Exam Program; and Anthony S. Kelly, Co-Chief of the Asset Management Unit (AMU) of Enforcement. Our two-part series highlights the key insights from those presentations. This second part examines the priorities and operations of each of Enforcement and IM. The first part discussed SEC initiatives, including the Compliance Outreach Program itself, and also explored OCIE’s characteristics, current campaigns and examination priorities. For more on Enforcement, see “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016); and our series on “The SEC’s Broken Windows Approach”: “Conflicts of Interest and Expense Allocation Concerns” (Sep. 24, 2015); and “Compliance Resources, CCO Liability and Technology Concerns” (Oct. 1, 2015).

Cybersecurity and Outsourcing Remain Key and Potentially Costly Operational Issues for Hedge Fund Managers

As the hedge fund investor base has shifted steadily toward institutional investors, so too have the expectations of those investors regarding a fund manager’s operations and infrastructure. Performance is no longer sufficient to attract institutional capital; institutional investors also want to know that managers are in compliance with all applicable regulatory requirements and have robust internal controls. See “Hedge Fund Managers Are Advised to Build Robust Infrastructure” (Mar. 3, 2016); and “DMS Review Highlights Issues With Regulation, Institutionalization and Customization of Hedge Funds” (May 21, 2015). According to Mark E. Ruddy, a founder of law firm Ruddy Gregory, if a manager is seeking institutional money and that manager’s back office operations are not in order, institutional investors “are going to walk away immediately.” A recent program at the CTA Expo Emerging Manager Forum, hosted by the CME Group, considered the challenges facing new managers, focusing on the new NFA cybersecurity rules and adoption of other policies and procedures. The program was moderated by Ruddy and featured Marc Nagel, an attorney, CPA and futures industry consultant; and Douglas E. Arend, of counsel at Greenberg Traurig. This article highlights key insights from the panelists’ discussion.

European Commissioner Addresses Disproportionate Regulation, Difficulties of Hedge Funds to Rely on AIFMD Passport and Increased Compliance Burden

In the wake of the financial crisis and as Europe moves toward Capital Markets Union (CMU), the European Commission (EC) has increased regulation applicable to hedge fund managers and others in the financial services industry. However, this increased regulatory framework has had unintended consequences on European financial markets, disproportionally affecting certain areas, reducing financing available to the wider economy and increasing the compliance burden for market participants. European Commissioner Jonathan Hill recently delivered a progress report on the CMU and discussed the regulatory framework and actions the EC is taking to ensure that it is appropriately fostering growth. This article summarizes Hill’s speech, focusing on portions most relevant to hedge fund managers, including his views on the European Market Infrastructure Regulation and the effectiveness of the marketing passport under the Alternative Investment Fund Managers Directive. For more on the CMU, see “ESMA Chair Calls for Increased Transparency and Regulatory Convergence As Interest Rates Rise” (Jan. 28, 2016); and “E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers” (Oct. 8, 2015). For additional commentary from Hill, see “European Commissioner Emphasizes Need for Proportionate Regulation to Promote the CMU” (Mar. 17, 2016); and “European Commissioner Calls for Economic and Regulatory Coordination” (Oct. 8, 2015). 

Patrick Sweeney Rejoins Shearman & Sterling Investment Funds Practice

Shearman & Sterling has expanded its investment funds practice with the addition of Patrick D. Sweeney, who rejoins the firm as counsel in its New York office. Sweeney provides comprehensive legal counsel to investment managers, covering regulatory advice; fiduciary obligations; private fund formation and offerings; investment transactions; joint ventures and acquisitions; and regulatory audits. For insight from Shearman & Sterling attorneys, see “Potential Pitfalls for Hedge Fund Managers in the Ever-Expanding Use of English Schemes of Arrangement” (Jul. 11, 2014); and our series “The Best-Laid Plans: Preventing Rule 10b5-1 Plans from Going Awry”: Part One (Jun. 6, 2014); Part Two (Jun. 13, 2014).

Seyfarth Shaw Welcomes Distressed Debt and Claims Trading Attorney

Timothy C. Bennett has joined the corporate department of Seyfarth Shaw as senior counsel. Bennett will head the development of the firm’s new distressed debt and claims trading practice. Bennett’s recent experience includes the purchase and sale of bankruptcy claims, terminated derivative contracts, loan portfolios, restricted stock, interests in liquidating funds, structured settlements and LSTA and LMA trades for bank debt of domestic and foreign borrowers. See “Hedge Fund Managers Trading Distressed Debt Must Understand LMA Standard Form Documentation” (Feb. 25, 2016); and “U.K. Supreme Court Resolves Ambiguity in Standard LMA Terms for Sales of Loan Participations” (Apr. 2, 2015). For more from Seyfarth Shaw partners, see “Are There Still Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses After Morrison v. National Australia Bank Ltd.?” (Jul. 8, 2010); “New Hedge Fund Transparency and Investors’ Rights – The Times They Are A Changin’” (Aug. 19, 2009); and “Are There Avenues for Recovery in United States Courts for Overseas Hedge Fund Losses?” (July 23, 2009).

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