Jun. 20, 2019

Understanding the Wells Process: SEC Enforcement Staff Views of the Process (Part Two of Three)

Despite their standard disclaimer that the views they express are their own and do not necessarily represent the views of the SEC or its staff, the personal views expressed by SEC employees provide valuable insight for fund managers on the regulator’s inner workings. For example, a 2018 speech by Steven Peikin, Co‑Director of the SEC’s Enforcement Division (Enforcement), spelled out his view of the Wells process. Peikin’s speech provides suggestions for successfully navigating this process for the subjects of SEC investigations. In addition, other Enforcement staff provided tips for Wells submissions and Wells meetings at a recent conference. This three-part series demystifies the Wells process – and the pre-Wells process – for fund managers. This second article examines the views of members of Enforcement on the Wells process. The first article discussed the origins of the Wells process and its key elements, as well as the impact of the Dodd-Frank Act. The third article will explain the increasingly important pre-Wells notice process and the key steps of the process overall, including ways for a manager to determine whether to offer a Wells submission in response to a Wells notice. For coverage of another speech by Peikin, see “What Remedies and Relief Can Fund Managers Expect in SEC Enforcement Actions?” (Jan. 10, 2019).

ALFI Chairwoman and Director General Discuss Luxembourg Fund Structures, FinTech and Brexit

The Association of the Luxembourg Fund Industry (ALFI) recently held its New York roadshow, which featured discussions on, among other topics, Brexit, sustainable investing and private market strategies. After the seminar, the Hedge Fund Law Report interviewed Denise Voss and Camille Thommes, ALFI chairwoman and director general, respectively, in connection with the reserved alternative investment fund and revamped Luxembourg limited partnership regimes; the prominence of debt funds in Europe; Luxembourg’s approach to financial technology; and the impact of geopolitical forces. This article presents their thoughts on the foregoing. For additional commentary from Voss, see “How Luxembourg Is Affected by Regulatory Developments and the E.U. Retail Distribution Environment (Part Two of Two)” (Jan. 31, 2019).

Considerations for Hedge Fund Managers When Evaluating Management Shares for Their Cayman Funds

Most offshore hedge funds are established as Cayman Islands exempted companies, and a significant majority of offshore hedge funds appears to issue management shares – which are the sole voting shares in the fund – to the investment manager and non-voting shares to investors. Management shares typically do not participate in the economics of the offshore hedge fund. In a guest article, Philip S. Gross, partner at Kleinberg Kaplan, discusses the U.S. tax issues – and some non-tax issues – raised by the use of management shares in Cayman Islands exempted companies and explores how the U.S. tax issues, which are often overlooked, need to be taken into account and weighed against the non-tax issues in determining whether to use management shares. For additional insights from Gross, see “The Impact of Revenue Ruling 2014‑18 on Compensation of Hedge Fund Managers and Employees” (Jun. 19, 2014); and “Hedge Fund Managers May Be Required to File TIC Form SHC” (Feb. 9, 2012). For further commentary on the issuance of voting versus non-voting shares in Cayman funds, see “Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA” (Feb. 12, 2015).

SEC Sanctions Adviser and Principal for Cherry Picking and Abuse of Soft Dollars

Investment advisers that fail to follow their own policies, procedures and disclosures are exposing themselves to significant regulatory risk. An SEC enforcement action against a hedge fund manager and its principal is a recent example of this danger. The manager and its principal, contrary to their disclosures to investors, allegedly benefited themselves by disproportionately allocating favorable trades to funds in which they held interests and by using soft dollar credits earned through client trading to pay the principal’s personal expenses and for other impermissible purposes. This article summarizes the relevant procedural background of the enforcement action, the alleged misconduct and the terms of the settlement order. See “RCA Session Spotlights Risks With Investment Allocation, Trade Execution, Soft Dollars, Client Solicitation and Valuation” (Apr. 14, 2016).

Emerging Managers Need Appropriate Infrastructure – Not Only Solid Performance – To Attract Investors

Performance alone is not enough to ensure that a new manager will have a successful fund launch. A panel discussion at a recent CTA Expo – Emerging Manager Forum conference explored the other critical factors that allocators consider when deciding whether to invest with a new manager, including the manager’s infrastructure, service providers, documentation and internal controls. Dorothy D. Mehta, partner at Cadwalader, moderated the discussion, which featured Norma Richmond, senior manager at Cohen & Company; Rafael Beck, managing director at Integrated Solutions; and Robert DeMuria, president of Compliance Supervisors International, Inc. This article highlights the key takeaways from the presentation. See “Establishing a Hedge Fund Manager in Seventeen Steps” (Aug. 27, 2015).

Private Funds Lawyer Tram Nguyen Joins Mayer Brown

Mayer Brown announced that Tram N. Nguyen has joined the firm as a partner in its corporate and securities practice. Nguyen, who will split her time between the firm’s Washington, D.C., and New York offices, represents hedge, private equity, credit, venture and other investment funds in all aspects of fund formation, fund structuring and capital raising. She also has extensive experience advising private fund managers on complex regulatory matters, including registration, examinations and reporting requirements. For additional insights from Nguyen, see our two-part series on the use of target returns: “Common Practices, Benefits and Drawbacks for Hedge Fund Managers of Using Target Returns” (Apr. 23, 2015); and “Legal Risks for Hedge Fund Managers of Using Target Returns” (Apr. 30, 2015). See also “Aligning Employee and Investor Interests Under the Volcker Rule” (Jun. 2, 2014).