The Hedge Fund Law Report

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

Articles By Topic

By Topic: Regulatory Reporting

  • From Vol. 11 No.19 (May 10, 2018)

    What Fund Managers Can Learn About Cyber-Breach Disclosure From Yahoo’s $35-Million SEC Settlement

    On the heels of publishing disclosure guidance, the SEC has issued an order in its first-ever action against a public company for failing to disclose a material data breach. Altaba Inc. (formerly known as Yahoo) has agreed to a $35‑million fine to settle SEC accusations that it failed to promptly notify investors about its massive 2014 data breach in which hackers stole personal data relating to hundreds of millions of user accounts. The SEC’s cease-and-desist order highlights the nearly two-year delay in fully investigating and notifying the public of the event. During this time period, Yahoo included generic descriptions of its cybersecurity risk factors and incident history in its Forms 10‑K and 10‑Q filings, the order explains. This article analyzes the order and provides lessons to fund managers on disclosing cybersecurity breaches. See “SEC Confirms Cyber Disclosure Expectations in New Guidance” (Apr. 26, 2018).

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  • From Vol. 11 No.18 (May 3, 2018)

    SEC Charges Broker-Dealer With Numerous Violations of Customer Protection, Hypothecation and Reporting Rules

    Rule 15c3-3 under the Securities Exchange Act of 1934 (Exchange Act), known as the Customer Protection Rule, requires broker-dealers to take specific steps to safeguard customer cash and securities. Rule 15c2-1(a)(1) under the Exchange Act prohibits, without customer consent, hypothecation of customer securities that would result in the customer’s securities being commingled with another customer’s securities. A broker-dealer recently settled SEC charges that it had violated both rules, as well as the reporting requirements under the Exchange Act, by permitting cash customers’ fully paid securities to be improperly commingled in omnibus margin accounts at a clearing broker and to be hypothecated without their consent. The broker allegedly used those securities to finance its own operations and margin obligations. The settlement serves as a reminder that private fund advisers should pay close attention to how their brokers are protecting fund assets and whether those brokers are using fund assets to finance their operations. This article details the SEC’s allegations and the terms of the settlement. See “Morgan Stanley Settles SEC Charges Stemming From the Use of Customer Cash to Finance a Broker’s Hedge Positions” (Jan. 19, 2017); and “Merrill Lynch Settlement Reminds Hedge Fund Managers to Be Aware of How Brokers Are Handling Their Assets” (Jul. 7, 2016).

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  • From Vol. 11 No.17 (Apr. 26, 2018)

    SEC Confirms Cyber Disclosure Expectations in New Guidance

    The SEC’s latest guidance emphasizes proper and full disclosures related to cybersecurity risks and incidents throughout relevant filings. In that guidance, the SEC stated that “informing investors about material cybersecurity risks and incidents in a timely fashion” is critical, even if an entity has “not yet . . . been the target of a cyber attack.” The guidance reiterates the SEC’s 2011 guidance and addresses two new topics: (1) “the importance of cybersecurity policies and procedures”; and (2) the “application of insider trading prohibitions in the cybersecurity context.” This article analyzes the guidance and offers practical advice on risk disclosures from a chief compliance officer with experience preparing these types of disclosures. See our three-part series on how fund managers should structure their cybersecurity programs: “Background and Best Practices” (Mar. 22, 2018); “CISO Hiring, Governance Structures and the Role of the CCO” (Apr. 5, 2018); and “Stakeholder Communication, Outsourcing, Co-Sourcing and Managing Third Parties” (Apr. 12, 2018).

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  • From Vol. 11 No.16 (Apr. 19, 2018)

    Compliance Corner Q2-2018: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

    The SEC continues to increase its touchpoints with registered investment advisers. In its most recently published Agency Financial Report, the Commission reported that it examined 15 percent of SEC-registered investment advisers during its 2017 fiscal year, up from 11 percent in 2016 and 8 percent five years ago. Given the SEC’s heightened examination coverage, private fund investment advisers should continue to ensure that they are making timely and accurate filings and meeting required compliance deadlines and obligations in order to reduce potential regulatory scrutiny from SEC staff during examinations. This fourth installment of The Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anthony Frattone, director and consultant, respectively, at ACA Compliance Group, highlights regulatory filings and code of ethics reports that must be completed during the second quarter of 2018. In addition, this article discusses compliance deadlines relating to Rule 22e‑4 under the Investment Company Act of 1940 (the Liquidity Risk Management Program Rule) and the E.U. General Data Protection Regulation (GDPR). For more on GDPR, see “A Fund Manager’s Roadmap to Big Data: Privacy Concerns, Third Parties and Drones (Part Three of Three)” (Jan. 25, 2018).

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  • From Vol. 11 No.11 (Mar. 15, 2018)

    SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens

    The SEC recently published its latest semi-annual Regulatory Flexibility Agenda (Agenda) setting forth rulemaking actions that Chair Jay Clayton and his staff intend to pursue over the next several months. Investment advisers and hedge funds will be directly affected by several of the Agenda items, such as the reporting of proxy votes on executive compensation. Likewise, the Agenda’s provisions relating to business continuity and transition plans will affect investment advisers, although those proposed rules may be difficult to apply, given the variance in hedge fund manager sizes, profiles and leadership structures. Despite implementation and other challenges, the Commission’s push to publicize its rulemaking priorities helps fund managers prepare for possible major regulatory developments and marks a step toward greater transparency and accountability. To that extent, the publication of the Agenda aligns with the Trump administration’s stated pro-business stance. To cast light on the above issues, this article analyzes the Agenda’s provisions that are most relevant to private fund managers and provides insights from legal professionals with experience in SEC enforcement matters. For coverage of recent SEC enforcement trends, see “SEC Enforcement Action Highlights Highly Specific Regulatory Focus on Conflicts of Interest” (Jan. 25, 2018); and “SEC Signals Aggressive Stance on Individual Responsibility, Including Potential CCO Liability, in FY 2017 Annual Report” (Dec. 14, 2017).

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  • From Vol. 11 No.11 (Mar. 15, 2018)

    FCA Solicits Industry Input on Machine-Executable Regulatory Reporting

    The U.K. Financial Conduct Authority (FCA) has been exploring ways to streamline and automate regulatory reporting – one of the critical compliance challenges facing private fund managers. Last November, in a so-called “TechSprint,” the FCA and the Bank of England worked with various financial services and technology firms to develop and successfully implement a machine-executable reporting rule. This project is detailed in a recent report, which also seeks input from market participants and other interested parties on how to proceed with this potentially revolutionary approach to reporting. The report should be of interest to FCA-regulated firms; financial services regulators; regulatory and financial technology companies; and professional services, technology and software providers. This article summarizes the key takeaways from the report. For more on FCA reporting requirements, see FCA Amends Its Position on Annex IV Reporting: U.K. and Non-EEA Managers, Including U.S. Managers, Must Now Report Holdings at Master Fund Level” (Apr. 13, 2017); and “U.S. Managers Marketing to U.K. Investors Could Face Ballooning Reporting Burdens Under Proposed Rule” (Jul. 28, 2016).

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  • From Vol. 11 No.10 (Mar. 8, 2018)

    With the Filing Deadline Looming for Many Advisers, Seward & Kissel Attorneys Provide a Roadmap to Amended Form ADV

    In August 2016, the SEC adopted a number of amendments to Part 1A of Form ADV, which took effect on October 1, 2017. Many advisers are now contending with the revised form in connection with their annual updates that are due March 31. A recent Seward & Kissel presentation offered an overview of the most material and vexing changes, offering practical advice on how to complete the revised form. The program featured Seward & Kissel partners Paul M. Miller, Patricia A. Poglinco and Robert B. Van Grover, along with counsel David Tang. This article summarizes the key points raised by the panelists. For more on the amendments, see our two-part series on what investment advisers need to know about the SEC’s revisions to Form ADV and the recordkeeping rule: “Managed Account Disclosure, Umbrella Registration and Outsourced CCOs” (Nov. 3, 2016); and “Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management” (Nov. 17, 2016). For additional insights from Van Grover and Poglinco, see “Pro-Business Environment of New Administration Continues to Have Challenges and Pitfalls for Private Funds” (Sep. 14, 2017); and “How Studying SEC Enforcement Trends Can Help Hedge Fund Managers Prepare for SEC Examinations and Investigations” (Sep. 8, 2016).

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  • From Vol. 11 No.9 (Mar. 1, 2018)

    What Fund Managers Investing in Virtual Currency Need to Know About NFA Reporting Requirements and the CFTC’s Proposed Interpretation of “Actual Delivery”

    Last December, the NFA adopted new reporting requirements for member commodity pool operators (CPOs) and commodity trading advisors (CTAs) related to virtual currency. Separately, the CFTC published a proposed interpretation of the term “actual delivery” in the context of retail commodity transactions in virtual currency. These actions reflect the enhanced regulatory oversight of virtual currency against the backdrop of spectacular volatility in these products and the recent launch of futures contracts involving virtual currency products. In a guest article, Lawrence B. Patent, of counsel at K&L Gates, reviews the new NFA reporting requirements for CPOs and CTAs; the CFTC’s proposed interpretation of the term “actual delivery”; considerations for hedge fund managers seeking to invest in virtual currency; and the outlook for further regulatory action in this area. See our three-part series on blockchain and the private funds industry: “Basics of the Technology and How the Financial Sector Is Currently Employing It” (Jun. 1, 2017); “Potential Uses by Private Funds and Service Providers” (Jun. 8, 2017); and “Potential Impediments to Its Eventual Adoption” (Jun. 15, 2017). For additional insights from Patent, see our three-part CPO compliance series: “Conducting Business with Non-NFA Members (Bylaw 1101)” (Sep. 6, 2012); “Marketing and Promotional Materials” (Oct. 4, 2012); and “Registration Obligations of Principals and Associated Persons” (Feb. 7, 2013).

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  • From Vol. 11 No.6 (Feb. 8, 2018)

    Cordium and Aite Group Survey Benchmarks Use of “Regtech” by Asset Management Firms

    Private fund managers face a potentially overwhelming stream of compliance requirements and regulatory filing obligations, but technological solutions may assist managers in meeting those obligations and streamlining compliance processes. In 2017, Cordium and Aite Group surveyed executives in the securities and asset management industry to assess their use of “regtech,” which the authors of the study defined as “any technology that is targeted at supporting the compliance function.” Their white paper discussing the results of the study posits that, in order to manage regulatory compliance in an efficient manner, managers must “move from a reactive approach to a more proactive and strategic stance” that incorporates technological solutions. This article highlights the principle takeaways from the study. For additional insight from Aite Group, see “Report Identifies the Building Blocks of Institutional Credibility for Hedge Fund Managers: Operational Efficiency, Robust Risk Management, Integrated Technology and More” (Sep. 19, 2013); and “Report Maps Outsourcing Landscape for Hedge Fund Managers, Including Outsourced Services Offered, Trends, Goals, Drawbacks and Provider Profiles” (Nov. 15, 2012). For further commentary from Cordium, see our three-part series on electronic communications: “SEC Takes Steps to Drill Down” (Nov. 30, 2017); “Information Request List Provides Insight Into SEC Expectations” (Dec. 7, 2017); and “Six Key Issues to Address in Electronic Communication Policies and Guidance on Preparing for Future Scrutiny” (Dec. 14, 2017).

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  • From Vol. 11 No.4 (Jan. 25, 2018)

    Compliance Corner Q1-2018: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

    In light of SEC Chair Jay Clayton’s recent statement that the Commission will continue to focus on the compliance programs of private fund advisers, it is important for those advisers to start 2018 on the right note. See “Will Inadequate Policies and Procedures Be the Next Major Focus for SEC Enforcement Actions?” (Nov. 30, 2017). One effective measure that chief compliance officers can take at the start of this calendar year is to create or update a compliance calendar that tracks regulatory filing deadlines, code of ethics reporting requirements and other relevant compliance tasks and responsibilities. This third installment of The Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Manny Halberstam, director and senior compliance analyst, respectively, at ACA Compliance Group, aims to assist advisers with ensuring that their 2018 compliance calendars are current by highlighting regulatory filings and code of ethics reports that must be completed during the first quarter of 2018. In addition to addressing these first-quarter deadlines, this article discusses the treatment of virtual currency tokens held by employees for purposes of code of ethics reporting, along with the SEC’s growing use of data surveillance and analytics as part of its examination process. For additional guidance on the reporting obligations of advisers, see “Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination (Part Three of Three)” (Oct. 19, 2017); and “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016).

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  • From Vol. 10 No.48 (Dec. 7, 2017)

    ACA Panel Reviews Effects of Impending MiFID II on U.S. Advisers

    A recent ACA Compliance Group (ACA) program examined the impact that the recast Markets in Financial Instruments Directive (MiFID II) will have on fund managers when it takes effect in January 2018, covering delegated portfolio management; market reforms; third-country managers; research payments; best execution; transaction reporting; marketing and product governance rules; recording of telephone conversations; algorithmic trading; and commodity derivatives. See also our two-part series “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II”: Part One (Jun. 18, 2015); and Part Two (Jun. 25, 2015). The program featured Sally McCarthy and Martin Lovick, ACA director and senior principal consultant, respectively. This article summarizes the key takeaways from their presentation. For further insights from ACA, see “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017); and our coverage of its 2017 fund manager compliance survey: “Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Common Measures to Protect MNPI” (Jun. 1, 2017); and “Variety in Expense Allocation Practices and Business Continuity Measures” (Jun. 8, 2017).

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  • From Vol. 10 No.45 (Nov. 16, 2017)

    Thomson Reuters Survey Reveals Concerns About and Shortcomings With AML Compliance

    U.S. financial firms are subject to a constantly evolving regime of domestic and foreign anti-money laundering (AML) regulations. Thomson Reuters (TR) recently asked more than 400 AML professionals for their insights on how to manage organizational AML compliance. The survey covered AML challenges, screening, monitoring, suspicious activity reports, beneficial ownership, enhanced due diligence, screening technology and budgets. Respondents noted challenges with increased regulation, lack of resources, concerns about liability and shortcomings with respect to the suspicious activity report process. This article highlights TR’s key findings. For another recent AML survey, see “ACA 2016 Compliance Survey Covers SEC Exams; Compliance Staffing and Budgeting; Annual and Ongoing Compliance Reviews; and AML/Sanctions Compliance (Part One of Two)” (Jan. 19, 2017).

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  • From Vol. 10 No.41 (Oct. 19, 2017)

    Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Regulatory Filings, Updates to Fund Documents and Preparation for SEC Examination (Part Three of Three)

    Section 208(a) of the Investment Advisers Act of 1940, as well as prior statements made by the SEC, make it clear that an investment adviser is prohibited from using its registration status to suggest that the Commission has approved, recommended or sponsored the adviser. The fact remains, however, that being an SEC registered investment adviser (RIA) carries weight in the industry if for no other reason than registration with the Commission is a threshold issue for some investors. This final article in our three-part series outlining the steps that exempt reporting advisers (ERAs) must take to transition to RIA status reviews the key regulatory filings that RIAs must file examines amendments that ERAs may need to make to their fund documents in anticipation of their change in registration status and provides insight into what newly registered advisers should expect from the SEC examination process. The first article discussed the circumstances under which an ERA would be required to register as an RIA, along with considerations for ERAs augmenting their compliance programs. The second article outlined key policies and procedures that ERAs should consider when drafting their compliance manuals. For more on the examination of RIAs, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017).

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  • From Vol. 10 No.41 (Oct. 19, 2017)

    Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement

    The CFTC’s stated mission is to “foster open, transparent, competitive and financially sound markets.” Essential to fulfilling that mission is vigorous enforcement by the regulator, and as CFTC Chair J. Christopher Giancarlo has made clear, the CFTC will not curtail its duty to enforce the law and punish wrongdoing. The CFTC Division of Enforcement (Division) has attempted to perform this duty by battling manipulation; prosecuting fraud in traditional markets and in new markets, such as virtual currencies; and fighting spoofing. See “Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing” (Oct. 12, 2017); and “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017). Meanwhile, the Division has also aimed to find ways to deter misconduct. As noted by Division Director James McDonald in a recent speech to the NYU Program on Corporate Compliance & Enforcement, to achieve optimal deterrence, the Division needs the endorsement of fund managers and others it polices. To achieve that support, McDonald unveiled the CFTC’s new self-reporting and cooperation program. This article highlights the key points from McDonald’s speech and the mechanics of the new self-reporting regime. For analysis of self-reporting in another context, see “Self-Reporting and Remedying Improper Fee Allocations May Not Be Sufficient for Fund Managers to Avoid SEC Action” (Sep. 15, 2016).

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  • From Vol. 10 No.40 (Oct. 12, 2017)

    Compliance Corner Q4-2017: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

    While the fourth quarter is often the busiest one for regulatory filings and fulfilling other compliance obligations, hedge fund managers should ensure that their compliance programs finish the year on a strong note and that key compliance processes are not neglected. This second installment of The Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anne Wallace, director and analyst, respectively, at ACA Compliance Group, highlights certain notable regulatory filings fund managers need to address in the fourth quarter of 2017. In addition to the filing obligations discussed herein, this article examines recent actions by the SEC relating to virtual currency and electronic communications, along with their potential impact on advisers’ compliance programs. For other recent commentary from the SEC, see “SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017); and “SEC Chair’s Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era” (Jul. 13, 2017). For additional insights from Joseph, see our two-part series “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices”: Part One (Oct. 3, 2013); and Part Two (Oct. 11, 2013).

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  • From Vol. 10 No.29 (Jul. 20, 2017)

    Compliance Corner Q3-2017: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

    What issues should hedge fund manager chief compliance officers (CCOs) be focusing on in the third quarter? In addition to completing the various regulatory filings and requirements due at the end of the quarter, CCOs should focus on building out their compliance programs to include forensic testing and other assessments to address internal risks and SEC staff expectations. See “Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues” (Feb. 23, 2017). To ensure that fund managers stay on top of the regulatory filings they need to perform each quarter, The Hedge Fund Law Report is introducing this quarterly feature. This first installment, authored by Danielle Joseph and Anne Wallace, director and analyst, respectively, at ACA Compliance Group, highlights some notable regulatory filings fund managers need to perform in the third quarter of 2017, including the deadlines and requirements associated with quarterly transaction reports, Form PF, Form ADV and Form 13F. For additional coverage of reporting requirements applicable to fund managers under certain circumstances, see “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016); and our two-part series on regulatory reporting by non-E.U. hedge fund managers under E.U. private placement regimes: “Guidance for Registering” (Dec. 3, 2015); and “Roadmap for Reporting” (Dec. 10, 2015).

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  • From Vol. 10 No.28 (Jul. 13, 2017)

    Unexpected Traps for Filing Other-Than-Annual Amendments Using the Revised Form ADV and How to Avoid Them

    New SEC rules to amend Part 1A of Form ADV will become effective on October 1, 2017. See “The ‘Why’ Behind the Recent Form ADV Amendments: What Information the SEC Will Require and How the Agency Intends to Use It” (May 4, 2017). Much has been written about how a fund manager should complete the amended Form ADV anew as part of its annual updating amendment, which most advisers will file in March 2018. See “A Roadmap of Potential Landmines for Fund Managers to Avoid When Completing the Revised Form ADV” (May 25, 2017). If an adviser is required to amend its Form ADV after October 1, 2017, but prior to its March 2018 annual update (Other-Than-Annual Amendment), however, it may have to disclose additional information, creating a new and larger project out of what otherwise might have been a simple change to its Form ADV. In a guest article, Steven M. Felsenthal, general counsel and chief compliance officer of Millburn Ridgefield Corporation, discusses two potential traps that may cause an adviser to file an Other-Than-Annual Amendment using the amended form, explores the ramifications of doing so and suggests an approach to avoid providing some of this information earlier than anticipated. This article incorporates insights gleaned from personal conversations the author had with industry participants on how to effectively navigate the nuances of the amended Form ADV for an Other-Than-Annual Amendment. For additional insight from Felsenthal, see “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend” (Sep. 18, 2014); and “CFTC and SEC Propose Rules to Further Define the Term ‘Eligible Contract Participant’: Why Should Commodity Pool and Hedge Fund Managers Care?” (Jun. 23, 2011).

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  • From Vol. 10 No.23 (Jun. 8, 2017)

    Blockchain and the Private Funds Industry: Potential Uses by Private Funds and Service Providers (Part Two of Three)

    Blockchain technology – a distributed database used to immutably timestamp and record transactions – is most commonly thought of in a single context, yet its applications are varied and limited only by the objectives of the adopting users. While popular society is fixated on its use for digital currencies (e.g., Bitcoin) or as a medium for illicit transactions, many more practical blockchain applications could greatly enhance the efficacy of the financial sector while also dramatically reducing its overhead expenses, such as by streamlining fund operations while simultaneously improving compliance protocols. This three-part series provides an overview of necessary information and considerations for the eventual integration of blockchain technology into the financial sector. This second article describes various potential uses of blockchain technology, such as reconciling trades and onboarding investors, to improve private fund operational efficiencies and compliance efforts. The first article detailed how blockchain works and provided examples of how major elements of the financial industry (e.g., derivatives trading and repurchase agreements) are already incorporating the technology. The third article will explore how and when the private funds industry will adopt the technology, while presenting issues related to that implementation. For more on how fund managers can utilize technology, see “The SEC’s Broken Windows Approach: Compliance Resources, CCO Liability and Technology Concerns for Hedge Fund Managers (Part Two of Two)” (Oct. 1, 2015); “Can Emerging Hedge Fund Managers Use Technology to Satisfy Business Continuity Requirements and Mitigate Third-Party Risk?” (Sep. 3, 2015); and “Can Private Fund Marketing Be Automated?” (Aug. 7, 2014).

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  • From Vol. 10 No.21 (May 25, 2017)

    A Roadmap of Potential Landmines for Fund Managers to Avoid When Completing the Revised Form ADV

    Effective October 1, 2017, advisers must contend with an updated Form ADV that makes a number of helpful technical changes and streamlines the process for filing umbrella registrations. Despite these beneficial changes, the amended Form ADV imposes significant new reporting duties for separately managed accounts and advisers operating multiple branches. A recent program presented by Proskauer Rose, Advise Technologies and The Hedge Fund Law Report offered a page-by-page guide to understanding the revised form. Moderated by Rorie A. Norton, Associate Editor of The Hedge Fund Law Report, the discussion featured Michael F. Mavrides, partner at Proskauer, and Jeanette Turner, chief regulatory attorney and a managing director at Advise Technologies. This article summarizes their insights. For more from Turner on Form ADV changes, see “The ‘Why’ Behind the Recent Form ADV Amendments: What Information the SEC Will Require and How the Agency Intends to Use It” (May 4, 2017). For additional commentary from Mavrides, see our two-part series on the latest revisions to Form ADV and the so-called “recordkeeping rule”: “Managed Account Disclosure, Umbrella Registration and Outsourced CCOs” (Nov. 10, 2016); and “Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management” (Nov. 17, 2016).

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  • From Vol. 10 No.20 (May 18, 2017)

    Fund Managers Looking to Canadian Market Must Be Aware of Nuances of Canada’s Regulatory Regime

    Having emerged from the global financial crisis relatively unscathed, Canada enjoys a reputation for having a stable and prosperous economy and a base of sophisticated investors interested in opportunities presented by U.S. fund managers. Although there are many political, economic and cultural similarities between the U.S. and Canada, stateside fund managers seeking to market in Canada must pay close attention to the differences between the countries’ regulatory regimes. Specifically, missteps in navigating certain Canadian registration requirements can lead to hefty fees and fines that are easily avoidable. Additionally, fund managers may have to contend with unique cultural and language issues presented by certain provinces, such as Québec. To help readers understand the myriad regulatory and cultural particularities that come into play when marketing funds in Canada, The Hedge Fund Law Report interviewed three partners at Canadian law firm McMillan: Leila Rafi, Michael Burns and Margaret C. McNee. For more on issues faced by U.S. fund managers marketing to Canadian investors, see our two-part series “How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws”: Part One (Apr. 27, 2017); and Part Two (May 4, 2017). 

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  • From Vol. 10 No.18 (May 4, 2017)

    How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws (Part Two of Two)

    The decision by a U.S. adviser to market to Canada-based investors is often driven by the desire to obtain sizeable allocations from large institutional investors, including government pension plans. This choice, however, should not be made in a vacuum, as steps need to be taken by a firm’s legal, compliance and finance professionals to ensure that advisers comply with Canadian laws when marketing funds and selling their interests. In this two-part series, The Hedge Fund Law Report has identified certain pre-sale considerations (e.g., registration issues and additional disclosures to be provided to prospective purchasers) and post-sale obligations (e.g., regulatory filings and associated fees) for advisers marketing in Canada. This second installment explores when Canadian investment adviser registration requirements are triggered and what they entail; how Canada’s prospectus requirement applies in a private placement; when a U.S. manager must attach a Canadian “wrapper” to its fund’s private placement memorandum; payment of the Ontario capital markets participation fee; and other ongoing reporting requirements. The first article discussed two registration requirements that all advisers to private funds should consider prior to marketing their funds to Canadian investors. For additional insights on doing business in Canada’s funds market, see “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools” (Dec. 4, 2014).

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  • From Vol. 10 No.17 (Apr. 27, 2017)

    How U.S. Managers Can Raise Capital in Canada While Complying With Local Laws (Part One of Two)

    Over the past decade, several factors have caused U.S. private fund advisers to become considerably more aware that many countries have laws restricting a foreign adviser’s ability to market to investors in those jurisdictions. See “K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). Canada is one such country that has long since maintained a comprehensive regulatory framework applicable to both Canadian-based and foreign asset managers seeking to raise capital from local investors. While non-resident advisers generally view compliance with Canada’s rules as manageable, they must still contend with a number of regulatory hurdles. In this two-part series, The Hedge Fund Law Report has identified the key registration issues, as well as ongoing regulatory and filing obligations, that may apply to non-Canadian managers seeking to raise capital in Canada. This first installment discusses two registration requirements that all private fund advisers should consider prior to marketing their funds to Canadian investors. The second article will explore a third registration requirement triggered in the managed account context, as well as a variety of additional rules U.S. managers may need to comply with when marketing their funds. For additional insight about Canada’s regulation of the fund industry, see “AIMA Canada Handbook Provides Roadmap for Hedge Fund Managers Doing Business in Canada” (Sep. 13, 2012).

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  • From Vol. 10 No.15 (Apr. 13, 2017)

    FCA Amends Its Position on Annex IV Reporting: U.K. and Non-EEA Managers, Including U.S. Managers, Must Now Report Holdings at Master Fund Level

    Last summer, the U.K. Financial Conduct Authority (FCA) set out proposals for a significant change to the Annex IV reporting requirements under the Alternative Investment Fund Managers Directive. The FCA proposed amendments to its handbook that would expand the Annex IV reporting obligations of certain alternative investment fund managers (AIFMs) located in the U.K., as well as outside of the European Economic Area (EEA), that market non-EEA alternative investment funds (AIFs) to U.K. investors via the country’s national private placement regime. See “U.S. Managers Marketing to U.K. Investors Could Face Ballooning Reporting Burdens Under Proposed Rule” (Jul. 28, 2016). The new rules would specifically require those AIFMs to file Annex IV reports at the master AIF level; whereas, historically, the FCA had limited reporting by those AIFMs to the feeder AIF level. See “U.K. FCA Guidance Confirms Simplified Transparency Reporting for Certain Private Placements of Master-Feeder Funds” (Nov. 20, 2014). In a guest article, Devarshi Saksena and Lucian Firth, partner and managing associate, respectively, at Simmons & Simmons, consider the implications of this amendment, including what has changed and whom it affects, and provide practical guidance on how firms can comply with the new reporting requirements. For additional insight from counsel at Simmons & Simmons, see “Seward & Kissel Private Funds Forum Offers Practical Steps for Fund Managers to Address HSR Act Enforcement, Tax Reforms, Brexit Uncertainty, MiFID II, Cybersecurity and Side Letters” (Oct. 20, 2016).

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  • From Vol. 10 No.13 (Mar. 30, 2017)

    K&L Gates Program Warns of Public Disclosure Risks Associated With Accepting State Public Pensions As Investors and Advises on How to Mitigate Them (Part Two of Two)

    Many private fund advisers perceive the investments from public pension plans as highly desirable, particularly in a difficult fundraising environment. See “How Emerging Hedge Fund Managers Can Raise Capital in a Challenging Market Without Overstepping Legal Bounds” (Aug. 4, 2016). While the benefits are plentiful, it is important for fund managers to be mindful of federal, state and local regulations surrounding these arrangements. Failure to do so could lead to potential violations of statutory “pay to play” rules, as well as the inadvertent disclosure of proprietary fund information under public record requests and freedom of information (FOI) laws. To apprise fund managers of these issues and help them prepare accordingly, K&L Gates presented a recent program featuring insights from Eric J. Smith, managing director and deputy general counsel at PineBridge Investments, as well as Cary J. Meer and Ruth E. Delaney, partner and associate, respectively, at K&L Gates. This second article in a two-part series covers FOI laws pursuant to which funds could face disclosure issues, as well as ways to protect that information. The first article detailed federal and state pay to play regulations, including restrictions on political contributions and gifts and entertainment. For more on how fund managers can comply with pay to play restrictions, see “The SEC’s Pay to Play Rule Is Here to Stay: Tips for Hedge Fund Managers to Avoid Liability” (Oct. 8, 2015); “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them” (Feb. 5, 2015); and “How Can Hedge Fund Managers Participate in the Political Process Without Violating Pay to Play Regulations at the Federal, State, Municipal or Fund Level?” (Oct. 6, 2011).

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  • From Vol. 10 No.8 (Feb. 23, 2017)

    Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues

    Each year, fund managers attempt to anticipate what new areas the SEC will focus on in its upcoming examinations. In their push to get ahead, however, those managers often fail to adequately perform many of the compliance requirements to which they have been subject for years. The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently issued a risk alert (Risk Alert) which, in some respects, urges fund managers to return to the basics as it pertains to their compliance efforts. This is because the five most common compliance issues identified in deficiency letters to investment advisers by OCIE which were described in the Risk Alert include traditional duties such as maintaining proper books and records, conducting annual compliance reviews and making accurate regulatory filings. All investment advisers should review their compliance policies and procedures considering the Risk Alert to ensure they avoid the five deficiencies highlighted by OCIE. This article summarizes the compliance failures and other items covered by the Risk Alert. For a similar 2014 OCIE alert, see “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities” (Oct. 10, 2014).

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  • From Vol. 10 No.1 (Jan. 5, 2017)

    A Fund Manager’s Guide to Calculating and Reporting Short Sales Under European Regulations

    E.U. Regulation 236-2012 (Regulation), in effect since November 1, 2012, imposed reporting obligations on short sellers of E.U. securities and regulated certain aspects of the credit default swap market. Compliance, however, is difficult due to a lack of available guidance on those reporting requirements. To help clarify these obligations for fund managers, a recent program presented by Advise Technologies (Advise) offered a comprehensive overview of the Regulation, emphasizing the reporting requirements for short-sellers and the calculation of reporting thresholds. Moderated by William V. de Cordova, Editor-in-Chief of the HFLR, the program featured Anna Lawry, counsel at Ropes & Gray, and Marye Cherry, E.U. regulatory counsel at Advise. This article summarizes the panelists’ key insights. For more on the Regulation from Lawry and Cherry, see “How Fund Managers Can Navigate and Avoid the Pitfalls of European Short Sale Reporting Obligations” (Dec. 1, 2016). For a review of U.S. short-selling rules, see “Impact of Regulation SHO on the Short Sale Activity of Hedge Fund Managers and Broker-Dealers” (Nov. 10, 2011). For additional insight from Advise, see our two-part series on how non-E.U. hedge fund managers can comply with E.U. private placement regimes: “Registration” (Dec. 3, 2015); and “Reporting” (Dec. 10, 2015). 

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  • From Vol. 9 No.45 (Nov. 17, 2016)

    The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Retaining Performance Records and Disclosing Social Media Use, Office Locations and Assets Under Management (Part Two of Two)

    On August 25, 2016, the SEC adopted much-anticipated amendments to Form ADV, Part 1A and to Rule 204-2 (recordkeeping rule) under the Investment Advisers Act of 1940. These amendments further the SEC’s agenda to gather more information about its registrant base to inform the agency’s risk-based approach to adviser examinations. See “OCIE Director Marc Wyatt Details Use of Technology and Coordination With Other Agencies to Execute OCIE’s Four-Pillar Mission” (Nov. 3, 2016). In a two-part guest series, Michael F. Mavrides and Anthony M. Drenzek, partner and special regulatory counsel, respectively, at Proskauer Rose, review the amendments to Form ADV and the recordkeeping rule and provide practical guidance to SEC-registered investment advisers on the steps to take prior to the compliance date to ensure their firms are prepared to comply with the amended rules. This second article in the series discusses the new disclosure requirements relating to an adviser’s use of social media; office locations; the amount of an adviser’s proprietary assets and assets under management; the sale of 3(c)(1) fund interests to qualified clients; and the recordkeeping requirements regarding performance claims in communications that are distributed to any person. The first article reviewed the detailed disclosures that advisers will be required to provide with respect to managed account clients and the firm’s chief compliance officer, as well as factors to consider when pursuing an umbrella registration. For additional commentary from Proskauer partners, see “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview With Proskauer Partner Robert Leonard” (Mar. 5, 2015); and “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters” (Feb. 1, 2013). For more on Form ADV, see “How Can Hedge Fund Managers Rebut the Presumption of Materiality of Certain Disciplinary Events in Form ADV, Part 2?” (Jan. 5, 2012); and “Recent SEC Enforcement Action Demonstrates the SEC’s Focus on the Accuracy and Consistency of Disclosures by Hedge Fund Managers in Form ADV” (Jan. 5, 2012).

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  • From Vol. 9 No.43 (Nov. 3, 2016)

    The SEC’s Recent Revisions to Form ADV and the Recordkeeping Rule: What Investment Advisers Need to Know About Managed Account Disclosure, Umbrella Registration and Outsourced CCOs (Part One of Two)

    On August 25, 2016, the SEC adopted amendments to Form ADV, Part 1A, and to Rule 204-2 under the Investment Advisers Act of 1940 (Advisers Act), the so-called “recordkeeping rule.” The amendments were previously proposed on May 20, 2015. See “A Roadmap to the SEC’s Proposed Changes to Form ADV” (Jun. 4, 2015). The amendments to Form ADV provide several points of clarification and elicit new or additional information from investment advisers, while the amendments to Rule 204-2 impose additional recordkeeping requirements on investment advisers with respect to communications that contain performance claims. These changes are designed to better protect clients and investors from fraudulent or otherwise misleading performance information. In a two-part guest series, Michael F. Mavrides and Anthony M. Drenzek, partner and special regulatory counsel, respectively, from Proskauer Rose discuss the practical implications of the amendments and highlight important steps legal and compliance personnel can take to ensure they are prepared in advance of the compliance date. This first article discusses the detailed disclosures that advisers will be required to provide with respect to managed account clients and the firm’s chief compliance officer, as well as factors a registrant should consider with respect to pursuing an umbrella registration. The second article will address the new disclosure requirements relating to an adviser’s use of social media; office locations; the amount of an adviser’s proprietary assets and assets under management; the sale of interests in 3(c)(1) funds to qualified clients; and the recordkeeping requirements regarding performance claims in communications that are distributed to any person. For additional insight from Mavrides, see “Key Legal and Operational Considerations in Connection With Preparing, Filing and Updating Form PF (Part Two of Three)” (Nov. 10, 2011); as well as our two part-series on remote examinations: Part One (May 12, 2016); and Part Two (May 19, 2016). For more on Form ADV, see “When and How Can Hedge Fund Managers Permissibly Disguise the Identities of Their Hedge Funds in Form ADV and Form PF?” (Dec. 1, 2012); and “ALJ Decision Against Investment Adviser Who Received Undisclosed Compensation From a Hedge Fund Manager It Recommended to Clients Highlights SEC Scrutiny of Forms ADV” (May 3, 2012).

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  • From Vol. 9 No.41 (Oct. 20, 2016)

    Seward & Kissel Private Funds Forum Offers Practical Steps for Fund Managers to Address HSR Act Enforcement, Tax Reforms, Brexit Uncertainty, MiFID II, Cybersecurity and Side Letters

    Years after the financial crisis, private funds in the U.S. and Europe continue to be affected by factors as varied as the trends in enforcement of the Hart-Scott-Rodino Antitrust Improvements Act of 1976; reforms to the U.S. tax code; ongoing uncertainty over Brexit, including whether the U.K. will make a “hard” or “soft” departure from the E.U.; cybersecurity risks; and selective disclosure concerns. These issues were the focus of a segment of the second annual Private Funds Forum co-produced by Bloomberg BNA and Seward & Kissel (S&K) on September 15, 2016. The panel was moderated by S&K partner Robert Van Grover and featured James E. Cofer and David R. Mulle, also partners at S&K; Richard Perry, a partner at Simmons & Simmons; Matthew B. Siano, managing director and general counsel of Two Sigma Investments; and Mark Strefling, general counsel and chief operating officer of Whitebox Advisors. This article highlights the salient points made by the panel. For coverage of the first segment of this forum, see our two-part series: “How Managers Can Mitigate Improper Dissemination of Sensitive Information” (Sep. 22, 2016); and “How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading” (Sep. 29, 2016). On Tuesday, November 1, 2016, at 10:00 a.m. EDT, Mulle and fellow S&K partner Steve Nadel will expand on issues relating to side letters in a complimentary webinar co-produced by The Hedge Fund Law Report and S&K. For more information or to register for the webinar, please send an email to rsvp@hflawreport.com.

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  • From Vol. 9 No.38 (Sep. 29, 2016)

    Alleging Dozens of Violations, SEC Charges Leon Cooperman and Omega Advisors With Insider Trading and Failing to Make Regulatory Filings

    On September 21, 2016, the SEC commenced a civil enforcement action in the U.S. District Court for the Eastern District of Pennsylvania against hedge fund manager Leon G. Cooperman and his investment advisory firm, Omega Advisors, Inc. The SEC charges that Cooperman received and traded on material nonpublic information about a proposed asset sale by an underlying portfolio company, netting more than $4 million in illicit profits for the funds and accounts he managed. The SEC also claims that Cooperman committed over 40 violations of beneficial ownership reporting requirements under federal securities law. This article summarizes the SEC complaint, with an emphasis on the insider trading allegations. For more on insider trading, see “K&L Gates Partners Identify Eight Actions That Hedge Fund Managers Can Take to Avoid Insider Trading Violations (Part Two of Three)” (Nov. 20, 2014); and our two-part series entitled “How Can Hedge Fund Managers Apply the Law of Insider Trading to Address Hedge Fund Industry-Specific Insider Trading Risks?”: Part One (Aug. 7, 2013); and Part Two (Aug. 15, 2013). For coverage of a derivative suit brought by Cooperman and his funds against a portfolio company, see “Hedge Fund Initiates Derivative Suit Against Directors of a Portfolio Company Alleging Self-Dealing in Approving an Acquisition” (Jul. 11, 2013).

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  • From Vol. 9 No.31 (Aug. 4, 2016)

    Best Practices for Hedge Fund Managers to Adopt in Anticipation of Enactment of FinCEN AML Rule Proposal

    After more than a decade in the works, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, released proposed rules in August 2015 that will subject registered investment advisers to anti-money laundering (AML) regulation once adopted. See our two-part series on how hedge fund managers can respond to the AML rules proposed by FinCEN: “Establish an AML Program” (Nov. 5, 2015); and “Operate an AML Program” (Nov. 12, 2015). Cadwalader, Wickersham & Taft recently presented a program examining the current AML regime, the requirements of the proposed rules and how those changes will affect hedge fund managers. The program featured Maureen Dollinger, a vice president of financial crime legal at Barclays; Adam Gehrie, general counsel and chief compliance officer (CCO) of Gresham Investment Management; and Cadwalader partners Dorothy Mehta and Joseph Moreno. This article highlights the portions of the panel’s discussion most relevant to hedge fund managers and other investment advisers. For further insight from Mehta, see our two-part series on SEC remote examinations: “What to Expect” (May 12, 2016); and “How to Prepare” (May 19, 2016); as well as “Practical Guidance for Hedge Fund Managers on Preparing For and Handling NFA Audits” (Oct. 17, 2014).

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  • From Vol. 9 No.30 (Jul. 28, 2016)

    U.S. Managers Marketing to U.K. Investors Could Face Ballooning Reporting Burdens Under Proposed Rule

    On July 4, 2016, the U.K. Financial Conduct Authority (FCA) published its Quarterly Consultation Paper No. 13 (Consultation), proposing amendments to the FCA Handbook of particular relevance to U.S. hedge fund managers marketing feeder funds to British investors under Article 42 of the Alternative Investment Fund Managers Directive (AIFMD). If adopted, Chapter 10 of the Consultation would increase the reporting obligations of a subset of alternative investment fund managers located outside of the European Economic Area (EEA) that market non-EEA feeder alternative investment funds to U.K. investors. Specifically, certain hedge fund managers would be required to provide transparency reporting for their master funds, in addition to their feeder funds. This article examines the impact of AIFMD on the U.K.’s national private placement regime (NPPR), the current transparency reporting requirements applicable to U.S. hedge fund managers availing themselves of that NPPR and the impact the Consultation would have on those reporting requirements. For more on AIFMD, see our two-part series on compliance by hedge fund managers: “Increased Compliance Burden” (Apr. 28, 2016); and “AIFMD’s Depository Requirement” (May 5, 2016).  

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  • From Vol. 9 No.29 (Jul. 21, 2016)

    Settlement Clarifies Limitations on Activist Hedge Fund Access to the “Investment Only Exemption from Hart-Scott-Rodino Filing Requirements  

    In April 2016, the DOJ sued VA Partners I, LLC, ValueAct Capital Master Fund, L.P. and ValueAct Co-Invest International, L.P. (together, ValueAct) for alleged violations of the pre-merger notification provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). At issue in the case was whether ValueAct was entitled to rely on the so-called “investment only” exemption to the HSR Act filing requirements (Investment Only Exemption). See “DOJ Lawsuit May Limit Ability of Activist Hedge Funds to Rely on ‘Investment Only’ Exemption From Hart-Scott-Rodino Filing Requirements” (Apr. 14, 2016). On July 12, 2016, the DOJ announced that ValueAct agreed to settle the charges and pay a record $11 million fine. The settlement includes an injunction against certain specified types of conduct which will presumably limit the ability of activist hedge funds to rely on the Investment Only Exemption. This article summarizes the terms of the settlement and its impact on activist hedge funds. For more on activist investing, see “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015); and our two-part series on “Considerations for Hedge Fund Managers Pursuing Activist Strategies”: “Filing Obligations and Other Operational Considerations” (May 5, 2016); and “Settlement, Prospects, Shareholder Engagement and Proxy Access Considerations” (May 12, 2016).

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  • From Vol. 9 No.27 (Jul. 7, 2016)

    Steps Hedge Fund Managers and Other Investment Advisers Should Take Now to Prepare for FinCEN’s Proposed AML Rule (Part Two of Two)

    Under proposed regulations, SEC-registered investment advisers will not be able to simply rely on their existing anti-money laundering (AML) programs and will have to adopt a more formal approach than the risk-based AML programs many have implemented to date. Even those SEC-registered investment advisers that already have robust AML procedures in place will need to address certain key areas if the regulations are adopted in the form proposed. In a two-part guest series, William P. Barry, Kimberly Versace and Jamie Schafer, partner, counsel and associate, respectively, at Richards Kibbe & Orbe, analyze the anticipated role of investment advisers in the U.S. AML regulatory framework. The first article discussed the genesis and impact of the proposed regulations that would apply to investment advisers. This article recommends steps investment advisers should take now to protect themselves in anticipation of the new regulations and ensure they can meet their AML compliance obligations. For more on the proposed AML regulations, see “How Hedge Fund Managers Can Establish an AML Program Under FinCEN’s Proposed Rule (Part Two of Two)” (Nov. 12, 2015). For additional insight from practitioners at RK&O, see the two-part series entitled “Convertible Preferred Stock: How Preferred Is It?”: Part One (Dec. 19, 2013); and Part Two (Jan. 9, 2014).

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  • From Vol. 9 No.26 (Jun. 30, 2016)

    How FinCEN’s Proposed AML Rule Will Affect Hedge Fund Managers and Other Investment Advisers (Part One of Two)

    After years of debate, regulators are poised to require registered investment advisers to implement anti-money laundering (AML) programs mirroring those of banks, broker-dealers and other financial institutions. Not since Dodd-Frank have investment advisers faced such meaningful change to the regulatory framework underlying their operations; they will have to create an infrastructure to facilitate formal compliance with AML rules, as well as suspicious activity reporting and information-sharing requirements that may be new to most advisers. In a two-part guest series, William P. Barry, Kimberly Versace and Jamie Schafer, partner, counsel and associate, respectively, at Richards Kibbe & Orbe, analyze the anticipated role of investment advisers in the U.S. AML regulatory framework. This article discusses the genesis and impact of proposed regulations that would apply to investment advisers. The second article will recommend steps investment advisers should take now to protect themselves in anticipation of the new regulations and ensure they can meet their AML compliance obligations. For more on the proposed AML regulations, see “How Hedge Fund Managers Can Establish an AML Program Under FinCEN’s Proposed Rule (Part One of Two)” (Nov. 5, 2015). For additional insight from practitioners at RK&O, see our two-part “Succession Planning Series”: “A Blueprint for Hedge Fund Founders Seeking to Pass Along the Firm to the Next Generation of Leaders” (Nov. 21, 2013); and “Selling a Hedge Fund Founder’s Interest to an Outside Investor” (Jan. 16, 2014).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    Marketing and Reporting Considerations for Emerging Hedge Fund Managers

    In order to survive and flourish in a market dominated by large, well-established competitors, emerging hedge fund managers must be well versed in the risks and potential dangers of raising funds and be mindful of regulatory compliance blunders, such as incomplete disclosures, insufficient controls and inadequate policies and procedures. See “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013). Pepper Hamilton recently hosted a symposium focusing on a number of these risks and offering practical solutions. Moderated by partner Irwin Latner, the panel discussion featured Adil Abdulali, senior managing director of risk management for Protégé Partners; Christopher Edgar, managing director, capital solutions, for Convergex Prime Services; Andrew Goodman, a partner at Infusion Global Partners; and Chris Lombardy, a managing director at Duff & Phelps. This article highlights the key points raised by the panel. Other articles addressing issues faced by emerging managers include: “Establishing a Hedge Fund Manager in Seventeen Steps” (Aug. 27, 2015); and “Stars in Transition: A New Generation of Private Fund Managers” (Dec. 10, 2009).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    Practical Issues Faced by U.S.-Based Managers When Establishing U.K.-Listed Funds (Part One of Two)

    U.K.-listed closed-end funds have become an increasingly popular source of permanent capital for the global asset management industry. Used for all manner of investment strategies, these vehicles are ideally suited for illiquid strategies such as private equity, and have also been used as feeder funds into single-manager hedge funds. Over the past several years, U.S.-based managers have been coming to London for the relatively greater regulatory flexibility offered by the U.K.-listed funds markets as compared to U.S. public securities markets. In a two-part guest series, Tim West and Dinesh Banani, partners at Herbert Smith Freehills, provide a practical overview of key issues facing U.S.-based managers considering establishing a fund listed in the U.K. This first article explores listing and eligibility requirements for popular U.K. listing venues; continuing obligations for U.K.-listed funds; structuring and jurisdictional considerations; and marketing under the Alternative Investment Fund Managers Directive. The second article will consider the impact of certain U.S. securities laws that would apply to the U.K. listing of the shares of a closed-end fund offered by a U.S.-based manager. See also “Regulatory and Practitioner Perspectives on Alternative Mutual Fund Compliance Risk” (Feb. 26, 2015).

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  • From Vol. 9 No.18 (May 5, 2016)

    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).

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    AIFMD Has Increased Compliance Burden on Hedge Fund Managers (Part One of Two)

    The Alternative Investment Fund Managers Directive (AIFMD) significantly changed the European legal and regulatory landscape for hedge fund managers, affecting their ability to market funds in Europe, increasing their compliance burden and imposing new requirements on funds. In a recent interview with The Hedge Fund Law Report, Bill Prew, founder and CEO of INDOS Financial Limited, discussed AIFMD’s practical impact on the hedge fund industry since its introduction in July 2014. This article, the first in a two-part series, sets forth Prew’s thoughts about the effect of AIFMD on hedge fund managers and the ability of managers to market their funds across Europe. In the second installment, Prew will discuss the practical implications of the depositary requirements imposed by AIFMD on hedge fund managers, as well as other industry trends and issues. For additional insight from Prew, see our series on Advise Technologies’ program for non-E.U. hedge fund managers under E.U. private placement regimes: “Guidance for Registering” (Dec. 3, 2015); and “Roadmap for Reporting” (Dec. 10, 2015). For more on AIFMD, see “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated” (Oct. 22, 2015).

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  • From Vol. 9 No.14 (Apr. 7, 2016)

    Steps That Alternative Investment Fund Managers Need to Take Today to Comply With the Global Trend Toward Tax Transparency (Part One of Two)

    If one word can describe the focus of international tax policy today, that word is transparency. Taxing authorities around the world continue to demand increased levels of transparency and reporting from alternative investment funds (AIFs) and other financial institutions with respect to their investors, business operations and transactions. This increased focus on transparency will affect planning and compliance for AIFs, their management companies and investors. Despite the obvious challenges, taking a proactive approach to reporting and planning issues could enhance an AIF’s position in a competitive market. In a two-part guest series, Dmitri Semenov, Jun Li, Lucas Rachuba and Carter Vinson of Ernst & Young (EY) highlight challenges and recommend steps for AIFs to meet these global planning and reporting challenges. This first article addresses global reporting and areas on which AIFs should immediately focus. The second article will discuss planning and other long-term considerations for hedge funds and other AIFs to consider. For more on tax transparency, see “Understanding the Intricacies for Private Funds of Becoming and Remaining FATCA-Compliant” (Sep. 12, 2013). For commentary from other EY professionals, see “Critical Components of a Hedge Fund Manager Cybersecurity Program: Resources, Preparation, Coordination, Response and Mitigation” (Jan. 15, 2015); and “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands” (Sep. 4, 2014).

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  • From Vol. 9 No.10 (Mar. 10, 2016)

    Current and Former Directors of SEC Division of Investment Management Discuss Hot Topics Under the Investment Company Act

    The Practising Law Institute’s 2016 Investment Management Institute began with a keynote address by David Grim, the current Director of the SEC Division of Investment Management, followed by a panel discussion with two former Directors of that Division: Barry P. Barbash, now a partner at Willkie, and Paul F. Roye, currently a director of Capital Research and Management Company. Grim’s address focused on four important topics that had been discussed at the SEC program commemorating the 75th anniversary of the Investment Company Act and the Investment Advisers Act: exchange-traded funds; private fund advisers; disclosure and reporting; and the role of a fund’s board in oversight. The panel then focused on recent SEC rulemaking initiatives that affect mutual funds. This article encapsulates the key takeaways from their discussions. For more on exchange-traded funds, see “SEC Commissioner Calls for Increased Transparency and Accountability in Capital Markets” (Mar. 3, 2016).

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  • From Vol. 9 No.2 (Jan. 14, 2016)

    Navigating FCA and SEC Cybersecurity Expectations (Part Two of Two)

    To address the divergent expectations and requirements of relevant regulators, hedge fund managers operating in multiple jurisdictions must develop a coordinated approach to cybersecurity when designing cyber-compliance programs. This two-part series examines the operations of the U.K. Financial Conduct Authority (FCA) and the SEC, both of which have increased their focus on cybersecurity, albeit with differing approaches. Part One discussed the FCA and SEC as regulators of financial services in their respective jurisdictions and outlined the guidance issued, and the methods adopted, by the two regulators. This article explores how hedge fund managers can navigate the current regulatory environments, including existing guidance, in the U.S. and the U.K., and simultaneously satisfy the requirements of each regulator. See also “RCA Panel Outlines Keys for Hedge Fund Managers to Implement a Comprehensive Cybersecurity Program” (Jun. 18, 2015).

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  • From Vol. 8 No.48 (Dec. 10, 2015)

    Advise Technologies Program Provides Non-E.U. Hedge Fund Managers with Roadmap for Reporting Under E.U. Private Placement Regimes (Part Two of Two)

    Concerns about disparate registration and reporting requirements imposed by the national private placement regimes (NPPRs) that have arisen since the Alternative Investment Fund Managers Directive (AIFMD) became effective have caused many non-E.U. hedge fund managers to hesitate when considering marketing their funds into the E.U.  However, as marketing under the NPPRs has evolved in the two years since the AIFMD took effect, much has been learned about how each jurisdiction’s regulators intends to treat non-E.U. fund managers.  A recent program presented by Advise Technologies sought to dispel some of the concerns of non-E.U. fund managers with respect to registration and reporting requirements and offered insights into how NPPRs function in practice.  The program, “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think,” was moderated by William V. de Cordova, Editor-in-Chief of The Hedge Fund Law Report, and featured Bill Prew, Founder and CEO of INDOS Financial; Tim Slotover, Founder and Director of flexGC; Jeanette Turner, Managing Director and General Counsel of Advise Technologies; and Arne Zeidler, Founder and Managing Director of Zeidler Legal Services.  This article, the second in a two-part series, summarizes the key takeaways from the program with respect to the regulatory reporting requirements and the evolution of marketing under the NPPRs.  The first article addressed the initial entry requirements, pre-investment disclosures and annual reporting requirements under the NPPRs.  For more from Turner on marketing and reporting under the AIFMD, see “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); and “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).

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  • From Vol. 8 No.47 (Dec. 3, 2015)

    Advise Technologies Program Provides Guidance for Non-E.U. Hedge Fund Managers Registering Under E.U. Private Placement Regimes (Part One of Two)

    Many non-E.U. fund managers have hesitated to market their funds into the E.U. since the Alternative Investment Fund Managers Directive (AIFMD) took effect, because of national private placement regime (NPPR) requirements of each country in which the manager wants to market.  Non-E.U. managers have been concerned about potentially burdensome and disparate registration and reporting requirements.  A recent program presented by Advise Technologies sought to dispel some of those concerns and offered insights into how the NPPRs function in practice.  The program, “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think,” was moderated by William V. de Cordova, Editor-in-Chief of The Hedge Fund Law Report, and featured Bill Prew, Founder and CEO of INDOS Financial; Tim Slotover, Founder and Director of flexGC; Jeanette Turner, Managing Director and General Counsel of Advise Technologies; and Arne Zeidler, Founder and Managing Director of Zeidler Legal Services.  This article, the first in a two-part series, summarizes the key takeaways from the program with respect to initial entry requirements, pre-investment disclosures and annual reporting requirements under the NPPRs.  The second article will address regulatory reporting requirements and the evolution of marketing under the NPPRs.  For more from Slotover, Turner and Zeidler on the AIFMD, see “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated,” The Hedge Fund Law Report, Vol. 8, No. 41 (Oct. 22, 2015).  For more on marketing funds into the E.U., see “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era,” The Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015); “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-E.U. Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014); and “Four Strategies for Hedge Fund Managers for Accessing E.U. Capital Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).

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  • From Vol. 8 No.47 (Dec. 3, 2015)

    Hedge Fund Managers May Receive Extra Time to Prepare for MiFID II

    The Markets in Financial Instruments Directive recast under the new directive (MiFID II) and related regulations (MiFIR) are currently scheduled to take effect in January 2017, and hedge fund managers trading in Europe will need to be prepared for the accompanying significant changes to the environment.  See “FCA Urges Hedge Fund Managers to Prepare for MiFID II,” The Hedge Fund Law Report, Vol. 8, No. 42 (Oct. 29, 2015).  However, the European Securities and Markets Authority (ESMA) recently concluded that a number of “technically complex elements envisaged in MiFID will not be operational by the time that MiFID II will become applicable.”  Citing the need for a full overhaul (by industry supervisors as well as ESMA) of systems under MiFID I and the fact that the technical rules that shape those systems will only become effective a few months prior to January 2017, ESMA has offered several proposals for delaying the effective date for MiFID II and MiFIR.  This article discusses ESMA’s rationale for the delay and its proposals, as well as the European Parliament’s MiFID II negotiating team’s response.  For more on MiFID II and MiFIR, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015); and our two-part coverage of Simmons & Simmons and Advise Technologies’ Comprehensive Overview of MiFID II: Part One, Vol. 8, No. 24 (Jun. 18, 2015); and Part Two, Vol. 8, No. 25 (Jun. 25, 2015).

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  • From Vol. 8 No.44 (Nov. 12, 2015)

    How Hedge Fund Managers Can Operate an AML Program Under FinCEN’s Proposed Rules (Part Two of Two)

    Under the recent proposal by the Financial Crimes Enforcement Network (FinCEN), investment advisers that are registered or required to be registered with the SEC would have to meet the suspicious activity reporting and anti-money laundering (AML) requirements of the Bank Secrecy Act.  To do so, hedge fund managers and other investment advisers would be required to report suspicious activity and retain records relating to certain fund transfers.  During Pepper Hamilton’s seminar, “Investment Management and Hedge Funds: What’s Happening Now?,” partners Gregory Nowak and Timothy McTaggart, as well as Walter Donaldson, managing director of Freeh Group International Solutions, LLC, discussed the proposed rule, including its mandates and anticipated impact on the hedge fund industry.  This article, the second in a two-part series, examines those specific reporting, information sharing and recordkeeping requirements, as well as the adoption and implementation of the rule.  The first article summarized the panelists’ discussion of the proposed rule and the elements of an AML program that it would require.  For more from Nowak, see “Conflicts and Opportunities Offered by Concurrent Management of Employee-Owned Hedge Funds and Outside-Investor Hedge Funds,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).

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  • From Vol. 8 No.43 (Nov. 5, 2015)

    How Hedge Fund Managers Can Establish an AML Program Under FinCEN’s Proposed Rule (Part One of Two)

    The Financial Crimes Enforcement Network recently proposed a rule that would broaden the application of the Bank Secrecy Act’s suspicious activity reporting and anti-money laundering (AML) requirements to include investment advisers that are registered or required to be registered with the SEC.  The proposal would also include investment advisers in the general definition of “financial institution,” which, among other things, would require them to file currency transaction reports and keep records relating to the transmittal of funds.  See “Do Hedge Funds Really Pose a Money Laundering Threat?  A Decade of Regulatory False Starts Raises Questions,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  During Pepper Hamilton’s seminar, “Investment Management and Hedge Funds: What’s Happening Now?,” partners Gregory Nowak and Timothy McTaggart, as well as Walter Donaldson, managing director of Freeh Group International Solutions, LLC, outlined the basics of the proposed rule and its impact on the hedge fund industry.  This article, the first in a two-part series, summarizes the panelists’ discussion of the proposed rule and elements of an AML program that it would require.  The second article will discuss requirements with respect to reporting suspicious activity, information sharing and recordkeeping, as well as adoption and implementation of the rule.  For more from Nowak, see “Tax Proposals and Tax Reforms May Affect Rates and Impose Liabilities on Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

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  • From Vol. 8 No.41 (Oct. 22, 2015)

    AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated

    With the introduction of Europe’s Alternative Investment Fund Managers Directive (AIFMD), non-E.U. alternative investment fund managers (AIFMs) have sought information about what the directive means for them and whether they should avoid Europe altogether.  Generally speaking, the sentiment has been negative, with firms warned about the need to register in – and comply with distinct reporting requirements in – each jurisdiction, as well as the need to disclose sensitive compensation information.  In the end, most U.S. firms have opted to rely on reverse solicitation or simply stay out of Europe for the time being.  In the two years since AIFMD went into effect, much has been learned about how Member State regulators intend to treat non-E.U. AIFMs.  In many ways, AIFMD is easier than expected for non-E.U. AIFMs.  In short, a non-E.U. firm wishing to market in Europe should not let fear of AIFMD get in its way.  In a guest article, Jeanette Turner, managing director and general counsel at Advise Technologies, Tim Slotover, founder of flexGC, and Arne Zeidler, founder and managing director of Zeidler Legal Services, examine the obligations of non-E.U. AIFMs under the National Private Placement Regimes (NPPRs) of individual European countries and explore alternatives to the NPPRs for non-E.U. AIFMs to market their funds in Europe.  On Tuesday, October 27, 2015, from 8:00 a.m. to 10:00 a.m. EDT, Turner, Slotover and Zeidler will expand on the thoughts in this article – as well as other areas of AIFMD that affect non-E.U. hedge fund managers – in a seminar entitled “Non-E.U. Fund Managers: Why AIFMD Is Easier Than You Think.”  For more information and to register for the panel discussion, click here.  For additional insight from Turner, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015); and “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015).

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  • From Vol. 8 No.38 (Oct. 1, 2015)

    Prohibited Transaction, Reporting and Side Letter Considerations Under ERISA for European Hedge Fund Managers (Part Two of Three)

    A growing number of European hedge fund managers are actively seeking injections of capital from U.S. investors subject to the Employee Retirement Income Security Act of 1974 (ERISA).  Hedge fund managers wishing to “cross-over” their funds into the ERISA regulatory sphere must, however, be cognizant of the increased and complex tangle of regulations and compliance obligations which have often deterred European managers from pursuing ERISA assets.  This second article in a three-part series examines particular issues U.K. and other European managers face stemming from prohibited transactions rules and reporting requirements under the ERISA regime and offers approaches to side letters for European managers raising capital from ERISA plans.  The first article analyzed the pertinent issues affecting European managers relating to liability standards and incentive fees.  The final article in the series will address concerns relating to indicia of ownership requirements, bond documentation and other issues.  See also “Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse (Part Five of Five),” The Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014); and “RCA PracticeEdge Session Highlights the Key Points of Intersection between ERISA and Hedge Fund Investments and Operations,” The Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).

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  • From Vol. 8 No.37 (Sep. 24, 2015)

    FCA Proposes Changes to Authorized Investment Funds Regulation

    In a recently issued Consultation Paper, the U.K. Financial Conduct Authority (FCA) presented three sets of proposals for regulating authorized investment funds in the United Kingdom.  These proposals consist of rules and guidance necessary to implement changes to the European Directive on Undertakings for Collective Investment in Transferable Securities (UCITS); operation of the new European long-term investment fund vehicle; and other changes to fund regulation that the FCA deems necessary.  This article summarizes the changes to the rules and guidance in the FCA Handbook relevant to managers of, and other parties involved with, authorized funds in the U.K., including hedge funds.  For a summary of the proposals in the Consultation Paper relating to UCITS management company issues, including remuneration, transparency and whistleblowing requirements, see “FCA Consults on Implementation of UCITS V Provisions Applicable to Managers,” The Hedge Fund Law Report, Vol. 8, No. 36 (Sep. 17, 2015).  For more on UCITS, see “UCITS: An Opportunity for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 2, No. 27 (Jul. 8, 2009); and “Convergence of Hedge Fund Strategies and the UCITS Structure in Europe Mirrors Convergence of Hedge Fund Strategies and Mutual Fund Structures in the United States,” The Hedge Fund Law Report, Vol. 2, No. 37 (Sep. 17, 2009).

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  • From Vol. 8 No.35 (Sep. 10, 2015)

    ESMA Clarifies MiFID II Trading Suspension, Reporting and Notice Obligations Which Could Affect Hedge Funds

    The European Securities and Markets Authority has published draft implementing technical standards (ITS) required under the recast Markets and Financial Instruments Directive (MiFID II) and seeks public comments on them.  The three draft ITS address procedures for suspending or removing financial instruments from trading venues (or lifting a suspension); reporting by data reporting services providers; and aggregated position reporting for commodity derivatives, emission allowances and related derivatives.  The procedures are relevant to hedge fund managers trading in securities affected by these obligations.  This article examines the background to each group of ITS and sets out the key propositions contained therein.  For more on MiFID II, see, “ESMA Releases Final Report on MiFID II Technical Standards for Hedge Fund Management Firms,” The Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015); and “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  For another recent proposal, see “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions,” The Hedge Fund Law Report, Vol. 8, No. 31 (Aug. 6, 2015).

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  • From Vol. 8 No.35 (Sep. 10, 2015)

    Certain Hedge Funds and Their Managers Face Looming Form BE-180 Filing Requirement

    Every five years, the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce conducts a benchmarking survey of financial services transactions between U.S. and foreign persons.  A U.S. “financial services provider” – a term that encompasses hedge funds and their managers – that purchased more than $3 million of specified financial services from, or sold more than $3 million of such services to, foreign persons in fiscal 2014, is required to file BEA Form BE-180.  A firm notified of the survey by the BEA is also required to complete and file portions of the form even if it is not otherwise obligated to do so.  This article summarizes the filing requirements, the information required to be provided and the fund-specific guidance provided by the BEA.  Hedge fund managers may also be subject to reporting on BEA Forms BE-10, BE-11 and BE-13, which track direct investments in U.S. and foreign businesses.  See “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview with Proskauer Partner Robert Leonard,” The Hedge Fund Law Report, Vol. 8, No. 9 (Mar. 5, 2015); and “Certain Hedge Fund Managers and Funds That Engage in Foreign Transactions Will Need to File Form BE-11 Imminently,” The Hedge Fund Law Report, Vol. 5, No. 26 (Jun. 28, 2012).

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  • From Vol. 8 No.34 (Sep. 3, 2015)

    In Third Point Settlement, FTC Takes Narrow View of “Investment Only” Exemption to Hart-Scott-Rodino Premerger Notification Requirements

    A recent settlement with the Federal Trade Commission (FTC) clarifies the applicability of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) to certain investment fund activities.  Relying on an exemption for acquiring voting securities solely for investment purposes (that does not result in the acquirer owning more than 10% of the target’s voting securities), Third Point LLC (Third Point) and three funds that it manages acquired shares of an issuer in excess of the HSR Act thresholds.  The FTC and DOJ brought this enforcement action, claiming that the exemption did not apply because of particular actions with respect to board or management representation at the issuer.  This article summarizes the relevant provisions of the HSR Act, the specific charges against Third Point and its funds, as well as the terms of – and FTC rationale for – the settlement.  For more activity by Third Point, see “How Can a Hedge Fund Manager Dislodge a Poison Pill at a Public Company?,” The Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).  For analysis of other issues affecting activist investing, see “Top SEC Officials, Law Firm Partners and In-House Counsel Discuss Private Fund Enforcement Priorities, Tender Offer Rules Applicable to Activist Investing, Valuation Challenges, Personal Trade Monitoring and Compliance Testing (Part Four of Four),” The Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015); “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools,” The Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014); and “Did Pershing Square and Valeant Violate Insider Trading, Antitrust or Tender Offer Rules in Their Pursuit of Allergan?,” The Hedge Fund Law Report, Vol. 7, No. 17 (May 2, 2014).

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  • From Vol. 8 No.31 (Aug. 6, 2015)

    Hedge Funds Are Required to Disclose Basket Option Contracts and Basket Contracts

    The IRS has recently set its sights on “basket option contracts” and “basket contracts,” suspecting that certain hedge funds and other taxpayers have improperly used those structures to defer recognition of ordinary income and short-term gains on assets within the basket, and to claim long-term capital gains treatment on exercise of the option or termination of the contract.  IRS Notice 2015-47 deems basket option contracts to be “listed transactions.”  IRS Notice 2015-48 deems basket contracts to be “transactions of interest.”  The Notices apply to transactions in effect on or after January 1, 2011; taxpayers who were parties to basket option contracts or basket contracts on or after that date will have to report them retroactively, even for years for which they have already filed returns.  This article summarizes the key provisions of each Notice.  For more on taxation of options, see “Tax Practitioners Discuss Taxation of Options and Swaps and Impact of Proposed IRS Regulations,” The Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).  For a discussion of other strategies that investors have used to seek long-term gains treatment on investments, see “Tax Practitioners Discuss Taxation of Swaps, Wash Sales, Constructive Sales, Short Sales and Straddles at FRA/HFBOA Seminar (Part Four of Four),” The Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).  The IRS has previously targeted certain swaps.  See “IRS Directive and HIRE Act Undermine Tax Benefits of Total Return Equity Swaps for Offshore Hedge Funds,” The Hedge Fund Law Report, Vol. 3, No. 12 (Mar. 25, 2010).

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  • From Vol. 8 No.29 (Jul. 23, 2015)

    SEC Settlement Suggests that Hedge Fund Managers Have Responsibility for Counterparties’ Reporting Obligations

    The SEC recently settled an enforcement action against a registered investment adviser that allegedly provided inaccurate daily trade files to four prime brokers, leading to violations of federal securities laws.  Resulting from operational issues that persisted for almost six years, over half a billion shares were listed inaccurately in prime brokers’ ledgers, and sales of millions of shares were reported inaccurately by prime brokers on blue sheets provided to the SEC and the Financial Industry Regulatory Authority.  In a settlement illustrating the importance of broker-dealer records to the hedge fund industry, the SEC clarified a core component of regulatory investigations as well as a substantial risk to the integrity of the investigative process.  Consequently, hedge fund managers may bear some responsibility for the accurate reporting and compliance obligations of their counterparties.  This article summarizes the background to the order; highlights the SEC’s findings; and discusses the lessons to be learned from the case.  For another recent SEC settlement regarding prime brokers, see “SEC Settlement Suggests that Prime Brokers Have Due Diligence and Disclosure Obligations with Respect to Manager-Provided Hedge Fund Valuations,” The Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015).  For more on prime brokerage generally, see “Prime Brokerage Arrangements from the Hedge Fund Manager Perspective: Financing Structures; Trends in Services; Counterparty Risk; and Negotiating Agreements,” The Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).

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  • From Vol. 8 No.25 (Jun. 25, 2015)

    Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II (Part Two of Two)

    As the Markets in Financial Instruments Directive is recast under the new directive (MiFID II) and related regulations (MiFIR), it is important for hedge fund managers and other firms to prepare for the changes taking effect in January 2017.  To assist in that effort, a recent program presented by The Hedge Fund Law Report and Advise Technologies offered a comprehensive overview of the proposed changes under MiFID II and MiFIR.  Moderated by William V. de Cordova, editor-in-chief of the HFLR, the program featured Jeanette Turner, a managing director at Advise Technologies, and Simon Whiteside, a partner at Simmons & Simmons.  This article, the second in a two-part series, addresses access to E.U. markets by non-E.U. firms; direct electronic access; investment advice; transaction reporting; transparency reporting; commodities; trading venues; and preparation for MiFID II.  The first article conveyed insight from the panel on the impact of MiFID II on private funds; the legislative and regulatory status of MiFID II; inducements, soft dollars and research; conflicts of interest; information and reporting; best execution; recordkeeping; and product governance.  For more on MiFID II, see “Changing Regulations May Restrict Hedge Fund Managers’ Use of Soft Dollars in Europe,” The Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).  For a discussion by Turner of the MiFID II implementation process and new transaction reporting requirements, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  For other collaborations between the HFLR and Advise Technologies, see also “Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filing (Part One of Two),” The Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).

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  • From Vol. 8 No.24 (Jun. 18, 2015)

    NFA Conference Addresses Examination Focus Areas, Investigation Processes and Reporting Requirements for Swap Dealers and Major Swap Participants (Part Two of Two)

    As members of the NFA, registered swap dealers (SDs) and major swap participants (MSPs) are subject to examination and investigation by the NFA – an involved process that can lead to disciplinary action.  In addition to compliance with NFA and CFTC regulations, the NFA examines SDs and MSPs for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  While most hedge fund managers likely do not themselves qualify as SDs or MSPs, counterparties with which they do business may be so registered, and non-compliance issues with, or disciplinary action against, those counterparties may affect the managers’ hedge funds.  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring and SD and MSP reporting requirements.  This article, the second in a two-part series, discusses upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  The first article highlighted the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  For more on SDs and MSPs, see “Katten Partner Raymond Mouhadeb Discusses the Purpose, Applicability and Implications of the August 2012 ISDA Dodd-Frank Protocol for Hedge Fund Managers, Focusing on Whether Hedge Funds Should Adhere to the Protocol,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).

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  • From Vol. 8 No.24 (Jun. 18, 2015)

    CFTC Extends Reporting Relief for Registered Swap Dealers and Major Swap Participants

    In December 2012, the Division of Market Oversight of the Commodity Futures Trading Commission (CFTC) granted swap dealers (SDs) and major swap participants (MSPs) acting as reporting counterparties for swap transactions time-limited no-action relief from certain reporting requirements of Section 45.4 of the CFTC Regulations.  Consequently, SDs and MSPs were spared the significant burden – in time and resources – of complying with the above requirements, which otherwise could have had follow-on effects for hedge fund managers using such SDs and MSPs as counterparties.  Initially set to expire on June 30, 2013, the no-action relief was extended twice for successive one-year periods.  This article summarizes last week’s further extension of the no-action relief to June 30, 2016.  For other recent CFTC no-action relief with respect to SDs and MSPs, see “CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants,” The Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

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  • From Vol. 8 No.21 (May 28, 2015)

    MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers

    The Markets in Financial Instruments Directive (MiFID I) is being recast as MiFID II and MiFIR (together, MiFID II) to form the legal framework governing requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services in the E.U.  MiFID II broadly expands MiFID I and will have a significant impact on all asset managers, not just E.U. firms.  In a guest article, Jeanette Turner, managing director and general counsel at Advise Technologies, LLC, provides an introduction to the MiFID II reporting requirements affecting asset managers.  On Wednesday, June 10, 2015, from 10:00 a.m. to 11:00 a.m. EDT, Turner will expand on the thoughts in this article – as well as other areas of MiFID II that affect asset managers – in a webinar entitled “A Practical Introduction to MiFID II for Asset Managers: What You Need to Know Now,” which will be moderated by The Hedge Fund Law Report.  She will be joined in that webinar by Simon Whiteside, a partner at Simmons & Simmons.  To register for the webinar, click here.  For further insight from Turner, see “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); and “HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements,” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).  The Hedge Fund Law Report interviewed Turner in “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014); and she co-authored “A Practical Comparison of Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014).

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  • From Vol. 8 No.19 (May 14, 2015)

    K&L Gates Panel Offers Advice on Taxation, Regulatory and Business Integration Issues with M&A Transactions in the Asset Management Industry (Part Two of Two)

    As firms in the asset management industry structure merger and acquisition transactions – including joint ventures, acquisitions of minority interests and lift-outs of teams – they need to be aware of the potential issues that arise with such transactions.  Integrating two businesses may result in tax consequences, regulatory issues or other compliance concerns.  A panel of domain experts from K&L Gates recently discussed current trends in the asset management industry and a number of considerations in planning an acquisition or other deal with an asset manager, broker-dealer or adviser, including choice of partner, due diligence, structuring, taxation and various regulatory and compliance considerations.  Moderated by Michael S. Caccese, a practice area leader, the program featured partners Kenneth G. Juster and Michael W. McGrath; and practice area leaders D. Mark McMillan and Robert P. Zinn.  This article, the second in a two-part series, summarizes the key takeaways from that program with respect to taxation, regulatory and business integration concerns.  The first article addressed asset management industry trends, choosing a partner, due diligence and structuring considerations.  See also “PLI Panel Addresses Recent Developments with Respect to Prime Brokerage Arrangements, Alternative Registered Funds and Hedge Fund Manager Mergers and Acquisitions,” The Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).

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  • From Vol. 8 No.17 (Apr. 30, 2015)

    Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era

    Currently, U.S. and other non-European managers wishing to market alternative investment funds (AIFs) in Europe may only do so by way of any available national private placement regime or otherwise by “reverse enquiry” at the initiative of the relevant investor (subject to local rules).  By the end of July 2015, the European Securities and Markets Authority has to provide advice to the European Commission as to whether the “marketing passport” under the Alternative Investment Fund Managers Directive, currently available only to European Economic Area (EEA) alternative investment fund managers of EEA AIFs, should be extended.  In a guest article, Simon Whiteside, a partner at Simmons & Simmons LLP, examines what would be the consequences for U.S. and other non-European fund managers were the passport to become available to them, and also looks at what other options they would have for marketing AIFs throughout the EEA.  For additional insight from Whiteside, see “Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD,” The Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015); “Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 Annex IV Filings (Part One of Two),” The Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015); and Part Two of Two, Vol. 8, No. 8 (Feb. 26, 2015).  For insight from Simmons & Simmons more generally, see “Structures and Characteristics of Alternative Investment Funds,” The Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).

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  • From Vol. 8 No.14 (Apr. 9, 2015)

    CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants

    Commodity Futures Trading Commission (CFTC) Regulation 3.3(f)(2), promulgated under the Commodity Exchange Act, requires the chief compliance officer of a futures commission merchant, swap dealer or major swap participant to furnish an annual report to the CFTC not more than 60 days after the end of the applicable registrant’s fiscal year, simultaneously with the submission of Form 1-FR-FCM or the Financial and Operational Combined Uniform Single Report.  See “CFTC Issues Guidance for Completing Annual CCO Reports of Swaps and Futures Firms,” The Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).  However, in response to a joint request from the Futures Industry Association and the International Swaps and Derivatives Association, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief from those timing requirements.  Consequently, the deadline for those entities to file the required annual report has been extended.  This article explains the mechanics and impact of the extension.

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  • From Vol. 8 No.12 (Mar. 27, 2015)

    Sidley Austin, Ivaldi Capital and Advise Technologies Share Lessons for U.K. Hedge Fund Managers from the January 2015 AIFMD Annex IV Filing

    In January of this year, many hedge fund managers faced their first “Annex IV” (transparency reporting) filings under the AIFMD.  On March 11, 2015, The Hedge Fund Law Report and Advise Technologies, LLC sponsored a panel discussion in London on lessons from the first filing of specific relevance to U.K. hedge fund managers.  In particular, the panel considered the recent experiences of managers in preparing for, submitting and, if necessary, amending Annex IV; FCA guidance on Annex IV obtained in a private meeting; negotiating the general lack of availability of guidance; and allocation of the cost of Annex IV reporting.  For a discussion of allocating expenses in an analogous context, see “How Should Hedge Fund Managers Allocate Form PF Expenses Between Their Hedge Funds and Their Management Entities?,” The Hedge Fund Law Report, Vol. 5, No. 25 (Jun. 21, 2012).  Panelists also offered a number of valuable lessons from their recent filing experiences and suggestions for facilitating future filings.  The program, “AIFMD Annex IV – Lessons Learned from the January Filing,” featured Nick Jarrett, Managing Partner and Chief Technology Officer at Ivaldi Capital; Leonard Ng, Partner and co-head of the E.U. Financial Services Regulatory group at Sidley Austin; and Jeanette Turner, Managing Director at Advise Technologies.  See also “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); “HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements,” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

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  • From Vol. 8 No.9 (Mar. 5, 2015)

    Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates:  An Interview with Proskauer Partner Robert Leonard

    The Hedge Fund Law Report recently interviewed Robert Leonard, a partner in Proskauer’s Hedge Funds Group, on implications of the recently effective Swiss Collective Investment Scheme for marketing hedge funds in Switzerland; two new forms required by the Bureau of Economic Analysis to be filed by certain hedge funds; and considerations arising out of Form ADV annual amendments.  This interview was conducted in connection with the Hedge Funds Care 17th Annual NY Open Your Heart to the Children Benefit, to be held in New York City tonight, March 5, 2015.  For more on Hedge Funds Care, click here; for registration information on tonight’s Open Your Heart to the Children Benefit, click here.  See also “The Changing Face of Alternative Asset Management in Switzerland,” The Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012).

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  • From Vol. 8 No.8 (Feb. 26, 2015)

    Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filing (Part Two of Two)

    Many hedge fund managers made their first AIFMD Annex IV filing in January 2015.  That process generated actionable lessons for hedge fund managers that can be grouped into three disciplines: regulation, data and logistics.  On February 18, 2015, The Hedge Fund Law Report and Advise Technologies sponsored a panel discussion addressing lessons from the January 2015 filing in each of these three disciplines.  Simon Whiteside, a partner at Simmons & Simmons LLP, addressed regulation; Stefanie Kirchheimer, a director at PricewaterhouseCoopers, discussed data; and Jeanette Turner, Managing Director and General Counsel for Advise, focused on logistics; HFLR Publisher Mike Pereira moderated.  This article conveys insights from the panel on Annex IV filing logistics, technical issues and clarifications from regulators.  A prior article covered reporting obligations, data, calculations and interpretations.  See also “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).

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  • From Vol. 8 No.8 (Feb. 26, 2015)

    RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part Two of Two)

    Hedge funds are subject to regulatory scrutiny, and enforcement actions against managers have been increasing in frequency and sophistication.  Hedge fund managers therefore need to ensure compliance with the ever-growing range of regulations to which they are subject; and registered managers need to prepare for routine and other examinations by regulators.  In order to assist managers with these aims, the Regulatory Compliance Association held its Compliance, Risk and Enforcement 2014 Symposium (RCA Symposium) in New York City.  This article, the second in a two-part series, summarizes the Symposium participants’ insights on risks associated with regulatory reporting and emerging AIFMD issues.  The first article in the series covered the NFA’s and SEC’s risk-focused tools and technologies; the SEC’s 2015 examination and enforcement priorities; and preparing for SEC examinations.  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.  For a discussion of another RCA program, see “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them,” The Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015).

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  • From Vol. 8 No.7 (Feb. 19, 2015)

    Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filings (Part One of Two)

    Many hedge fund managers made their first AIFMD Annex IV filing in January 2015.  The process involved, among other things, construing and applying authority, collecting and organizing relevant data, drafting and revising the form, interacting with regulators, filing in multiple jurisdictions and correcting errors.  The process generated questions – many of them – ranging from the arcane to the mundane.  At a high level, managers wondered (and still wonder) how regulators will use Annex IV data.  Will they, for example, use the data to target manager examinations or as ammunition in enforcement actions?  At a more practical level, managers contended with missing national codes, non-working log-ins and validation errors.  Somewhere in the middle of the policy-to-particulars spectrum were a series of unique data calculation questions, for example, on how to calculate leverage and link cash borrowings to investments.  In short, in the world of AIFMD, January 2015 was a “teachable moment.”  Recognizing as much, The Hedge Fund Law Report and Advise Technologies, LLC sponsored a panel discussion yesterday that memorialized the more important lessons from January 2015 Annex IV filings.  The program featured representatives of three disciplines: Simon Whiteside, a partner at Simmons & Simmons LLP, on regulators and reporting obligations; Stefanie Kirchheimer, a director at PricewaterhouseCoopers, on data, calculations and interpretations; and Jeanette Turner, Managing Director and General Counsel at Advise Technologies, LLC, on filing logistics and technical issues.  HFLR Publisher Mike Pereira moderated.  This article – the first in a two-part series – summarizes the key insights from the panel with respect to reporting obligations, data, calculations and interpretations.  The second article in this series will address filing logistics, technical issues and clarifications from regulators.  See also “HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements,” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015); “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).

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  • From Vol. 8 No.6 (Feb. 12, 2015)

    Seven Tips and Lessons Learned from January 2015 AIFMD Filers

    The vast majority of fund managers under the Alternative Investment Fund Managers Directive (AIFMD) have now survived their first filing of the consolidated AIFMD reporting template – commonly referred to as Annex IV.  Fund managers that have yet to file can learn from the experiences of those who just filed in January 2015, for the reporting period that ended on December 31, 2014.  In this guest article, Jeanette Turner, Managing Director & General Counsel at Advise Technologies, LLC, shares useful feedback and lessons learned from hedge and other fund managers that filed in January.  Next Wednesday, February 18, from 10:00 a.m. to 11:00 a.m. EST, Turner will expand on the thoughts in this article in a webinar entitled “Lessons Learned from the January Filing.”  She will be joined in that webinar by Simon Whiteside, a partner at Simmons and Simmons LLP, and Stefanie Kirchheimer, a Director at PwC.  The webinar will be moderated by The Hedge Fund Law Report.  To register for the webinar, click here.  For further insight from Turner, see “HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements,” The Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).  The Hedge Fund Law Report interviewed Turner in “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014); and she co-authored “A Practical Comparison of Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014).

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  • From Vol. 8 No.5 (Feb. 5, 2015)

    Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Insider Trading, Proposed Changes to Form 13F and Schedule 13D and Employment-Related Disputes (Part Three of Four)

    This is the third article in a four-part series covering the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  This article summarizes the primary points made at the Summit relating to insider trading, proposed changes to Form 13F and Schedule 13D and employment-related disputes with highly-compensated employees.  The first article in the series covered regulatory priorities, handling regulatory examinations and cybersecurity preparedness.  The second article discussed CFTC compliance, conflicting regulatory regimes in compliance programs and the regulatory and operational considerations of hedge fund marketing.  The last installment in the series will cover negotiating terms with institutional investors, structuring 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 32013 Part 22013 Part 12012 Part 22012 Part 120112010; and 2009.

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  • From Vol. 8 No.2 (Jan. 15, 2015)

    HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements

    On December 2, 2014, The Hedge Fund Law Report and Advise Technologies sponsored a panel discussion that provided practical guidance on the Annex IV reporting regime under the AIFMD, discussed how that regime overlaps with the U.S. Form PF reporting regime, and considered how and whether “soft marketing” and “reverse solicitation” may be used in the E.U. by managers who wish to avoid or postpone the reporting requirements imposed on managers who market funds in the E.U. under national private placement regimes.  The program, entitled “An in depth discussion on AIFMD reporting requirements and lessons learned from those who have already filed,” featured Jeanette Turner, Managing Director and General Counsel for Advise Technologies, LLC; Simon Whiteside, a partner at Simmons and Simmons LLP; Richard Webley, Head of Business Advisory Services for Americas, Citi Investor Sales and Relationship Management; and John Sampson, an Executive Director at Ernst & Young LLP.  This article summarizes the key insights from that presentation.  For an overview of Annex IV reporting issues, see “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” The Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).  See also “Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD,” The Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).

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  • From Vol. 8 No.1 (Jan. 8, 2015)

    Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD

    The Alternative Investment Fund Managers Directive (AIFMD) continues to dominate discussions on global hedge fund regulation, marketing, remuneration, risk, reporting and related topics.  In this guest article, two of the leading global authorities on the AIFMD – Samuel K. Won, Founder and Managing Director of Global Risk Management Advisors, and Simon Whiteside, a Partner in the London office of Simmons & Simmons LLP – provide comprehensive answers to 14 of the questions most frequently asked by U.S. and other non-E.U. managers on the impact and implementation of the AIFMD.  Specifically, Won and Whiteside discuss the viability of reverse enquiry; the interaction between capital introduction and reverse enquiry; reliance on national private placement regimes; remuneration, side letter and leverage disclosure; AIFMD versus Form PF; content and frequency of AIFMD reporting; Annex IV reporting on master funds; and AIFMD-relevant risk management and reporting considerations.  See also “A Practical Comparison of Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014).

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  • From Vol. 8 No.1 (Jan. 8, 2015)

    CFTC Issues Guidance for Completing Annual CCO Reports of Swaps and Futures Firms

    Pursuant to Sections 4d(d) and 4s(k) of the Commodity Exchange Act (CEA), which were added to the CEA by the Dodd Frank Act, registered futures commission merchants, swap dealers and major swap participants (collectively, registrants) are obligated to designate an individual to serve as the entity’s chief compliance officer (CCO).  The duties and qualifications of such CCOs are set forth in CFTC Regulation 3.3.  Regulation 3.3(e) requires a CCO to “prepare a written report that covers the most recently completed fiscal year of the [registrant], and provide the annual report to the board of directors or the senior officer” and specifies the matters that must be covered by that report (Annual Report).  The first Annual Reports were recently submitted to the CFTC’s Division of Swap Dealer and Intermediary Oversight (Division).  Upon review of those Annual Reports, and after discussions with registrants, the Division has issued a Staff Advisory providing guidance to CCOs on completing Annual Reports.  The CFTC’s Annual Report requirement is in addition to the SEC requirement that investment advisers conduct a general annual compliance review.  See “How Hedge Fund Managers Should Approach Preparing For, Conducting and Documenting the Annual Compliance Review (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 12 (Mar. 22, 2012); and Part Two of Two.

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them

    Like Form PF, the consolidated AIFMD reporting template – commonly referred to as “Annex IV” – requires hedge fund managers to make consistent and persuasive sense out of voluminous and disparate data.  Best practices for Annex IV reporting are emerging; managers’ experience with Form PF provides an analogous but incomplete precedent.  In an effort to identify the chief challenges for hedge fund managers presented by Annex IV, and workable strategies for negotiating those challenges, The Hedge Fund Law Report recently interviewed Jeanette Turner, Managing Director and General Counsel at Advise Technologies, LLC.  Our interview covered, among other topics, the top three pain points felt by hedge fund managers in preparing Annex IV; the different experiences of European Economic Area (EEA) and non-EEA managers; how firms are handling the one-month deadline; the extent to which Form PF guidance is applicable to Annex IV; whether information reported in Annex IV will be made public; how regulators will use that information; key upcoming deadlines; differences in Annex IV reporting for hedge and private equity fund managers; the viability of reverse solicitation; and the continuing (but potentially sunsetting) applicability of national private placement regimes.  This interview was conducted in connection with an AIFMD panel discussion to be held on December 2, 2014 at the Harvard Club of New York City, from 8:30 a.m. to 10:30 a.m.  Turner will participate in that discussion, and she will be joined by John Sampson, Executive Director at Ernst & Young; Richard Webley, Head of Business Advisory Services for Americas, Citi Investor Sales and Relationship Management; and Simon Whiteside, Partner in the London office of Simmons and Simmons.  To attend, please contact RSVP@AdviseTechnologies.com or visit rsvp.AdviseTechnologies.com.  For additional insight from: Turner, see “A Practical Comparison of Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014); Sampson, see “Eight Key Elements of an Integrated, Efficient and Accurate Hedge Fund Reporting Solution,” The Hedge Fund Law Report, Vol. 7, No. 43 (Nov. 13, 2014); Webley, see “Lessons Learned by Hedge Fund Managers from the August 2012 Initial Form PF Filing,” The Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012); and Whiteside, see “U.K. FCA Guidance Confirms Simplified Transparency Reporting for Certain Private Placements of Master-Feeder Funds,” below, in this issue of The Hedge Fund Law Report.

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    U.K. FCA Guidance Confirms Simplified Transparency Reporting for Certain Private Placements of Master-Feeder Funds

    Non-E.U. fund managers that wish to market funds in the E.U. through private placements are subject to the registration, notification and reporting regimes of the individual member states.  In that regard, the U.K. Financial Conduct Authority (FCA) recently published guidance and corresponding FAQs on the reporting obligations of non-E.U. fund managers that are marketing funds in the U.K. under its private placement regime.  See “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).  This article summarizes certain key elements of the FCA’s recent guidance that concern reporting in the U.K. by non-E.U. managers.  See also “What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?,” The Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014).

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  • From Vol. 7 No.43 (Nov. 13, 2014)

    Eight Key Elements of an Integrated, Efficient and Accurate Hedge Fund Reporting Solution

    Alternative asset managers are faced with an unprecedented demand for reporting.  Prior to 2012, investment managers issued as few as six reports per year.  However, given new legislation and regulations as a result of the financial crisis, managers now potentially face filing more than 60 reports per year, including investor reports and due diligence reports, Forms PF, CPO-PQR, AIFMD, TIC-S, SLT, TIC-B, SEC 13F, Solvency II and Basel III, plus CFTC and EMIR derivative reporting, among others.  In addition to the number of reports that need to be filed, all of them need to be completed quickly.  What is worse is that they are not spaced out evenly over the year and tend to come due at the same time.  Consequently, firms need to devote extra resources during peak reporting times, only to then redeploy them during lulls.  This makes efficiency difficult to achieve.  Only a systematic, thoughtful and holistic approach can bring efficiencies to these demanding reporting requirements.  In a guest article, John Sampson, an executive director in the Financial Services Office of Ernst & Young LLP, describes an eight step framework for an integrated, effective and repeatable hedge fund reporting solution.

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  • From Vol. 7 No.42 (Nov. 6, 2014)

    What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?

    Since the Alternative Investment Fund Managers Directive (AIFMD) took effect, a non-E.U. fund manager that wishes to market funds into the E.U. is faced with complying with the individual – and disparate – private placement regimes of the E.U. member states.  See “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).  Alternatively, the manager may wait passively for E.U. investors to seek out the manager, an unpredictable and fraught process known as “reverse solicitation.”  A recent program sponsored by CounselWorks provided guidance on when a manager is “marketing” in the E.U. so as to trigger compliance with the AIFMD, the steps that such a manager must take to comply with local private placement requirements, and how reverse solicitation works in various E.U. states.  See also “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013); and Part One of Two.

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  • From Vol. 7 No.41 (Oct. 30, 2014)

    A Practical Comparison of Reporting Under AIFMD versus Form PF

    Europe’s Alternative Investment Fund Managers Directive (AIFMD) is in full effect and the consolidated AIFMD reporting template – commonly referred to as Annex IV – is now final.  Although some fund managers have already filed Annex IV, the vast majority will do so in January 2015, for the reporting period ending on December 31, 2014.  A prior article in the HFLR described efforts to harmonize Annex IV and Form PF.  See “A Practical Guide to AIFMD Reporting for Non-E.U. Fund Managers: Reporting Under AIFMD versus Form PF,” The Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013).  This article updates the discussion in that prior article, providing a useful side-by-side comparison of reporting under the two forms.  Firms should take note that even where this comparison highlights similarities between the two forms, there are still certain nuances that could trip up filers (and this article provides examples of such nuances).  The authors of this article are Jeanette Turner, Managing Director & General Counsel at Advise Technologies, LLC; David Vaughan, a partner in Dechert LLP’s Washington, D.C. office; Chris Gardner, a partner in Dechert LLP’s London office; and Rachel Fenwick, an associate in Dechert LLP’s London office.

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  • From Vol. 7 No.37 (Oct. 2, 2014)

    Happily Ever After? – Investment Funds that Live with ERISA, For Better and For Worse (Part Five of Five)

    This is the final installment in our five-part serialization of a treatise chapter by Dechert LLP partner Andrew Oringer.  The chapter analyzes ERISA as it applies to private fund managers, references relevant authority and highlights critical compliance issues.  This article discusses trust requirements, custody, ERISA’s bonding rules, reporting of investments and direct filings with the Department of Labor, reporting issues (relating to compensation, hard-to-value assets and gifts and entertainment) and prime brokers.  The fourth article in this series addressed self-dealing issues relating to fee structures, certain special issues for plans of financial institutions, services for multiple funds, payment or reimbursement of expenses, employer securities and employer real property and certain miscellaneous exceptions (including foreign exchange and cross trading).  The third article focused on prohibited transactions, qualified professional asset managers, the “service provider” exemption and the exemption for compensation for services.  The second article covered fiduciary duty considerations, including delegation, allocation of investment opportunities, varied interests of fund investors, indemnification and insurance, investments in portfolio funds, enforcement-related matters and diversification requirements.  And the first article discussed the “plan assets” rules and rules for the delegation and allocation of fiduciary responsibility.

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  • From Vol. 7 No.37 (Oct. 2, 2014)

    Industry Experts Discuss SEC’s Newly Adopted Revisions to Regulation AB

    SEC Regulation AB governs the offering, reporting and disclosures relating to the sale of asset-backed securities.  On August 27, 2014, the SEC approved a set of sweeping changes to Regulation AB, commonly referred to as Regulation AB II.  A panel of industry experts recently discussed the key provisions of Regulation AB II.  The program was hosted by the Asset Securitization Report and sponsored by Bingham McCutchen, LLP.  Elliott M. Kass, of SourceMedia, moderated the discussion.  The speakers were Steven Glynn, a Vice President and Counsel at Barclays; Ryan O’Connor, a Director and Counsel of Citigroup Global Markets Inc.; Ian W. Sterling, an Executive Director and Assistant General Counsel of J.P. Morgan; John Arnholz, a Partner at Bingham; and Charles Sweet, a Managing Director at Bingham.  See also “CLO 2.0: How Can Hedge Fund Managers Navigate the Practical and Legal Challenges of Establishing and Managing Collateralized Loan Obligations? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 26 (Jun. 27, 2013).

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  • From Vol. 7 No.28 (Jul. 24, 2014)

    Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD

    The European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) established a comprehensive regime to regulate investment funds that are not organized under the Undertakings for Collective Investment in Transferable Securities Directive and that are based in or marketed into the EU.  See “Application of the AIFMD to Non-EU Alternative Investment Fund Managers (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  July 22, 2014 was a critical compliance deadline under the AIFMD.  As of that date, in order to market funds in the EU, EU fund managers must be fully authorized under the AIFMD.  Non-EU managers that are ineligible for, or that do not wish to seek, full AIFMD authorization must rely on the private placement regimes of each EU state in which the manager will market; alternatively, they might consider relying on “reverse solicitation” or joining an AIFMD-authorized platform.  See “Four Approaches to Fund Marketing and Distribution Under the AIFMD,” The Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014).  A recent program sponsored by Covington & Burling LLP and Augentius provided a timely recap of the requirements and challenges facing non-EU fund managers that wish to market into the EU in reliance on the private placement regimes.

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  • From Vol. 7 No.21 (Jun. 2, 2014)

    When and How Can Hedge Fund Managers Close Hedge Funds in a Way that Preserves Opportunity, Reputation and Investor Relationships?  (Part Two of Two)

    This is the second article in our two-part series on best practices for closing hedge funds.  The first article in this series laid out an eight-step framework for executing fund closures, and this article discusses many of the difficult issues that managers encounter when working through that eight-step framework.  In particular, this article analyzes the following themes or issues that regularly come up in connection with closing hedge funds: what happens to the rights and obligations in side letters; holdbacks, reserves and clawbacks; three strategies for handling side pockets and illiquid assets; management and performance fees; litigation, contingent liabilities and indemnification; how to handle an account managed in parallel with a closed fund; whether to include or exclude a closed fund in performance information and advertising; investor relations best practices; and the three most common mistakes hedge fund managers make in closing funds.

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  • From Vol. 7 No.17 (May 2, 2014)

    Did Pershing Square and Valeant Violate Insider Trading, Antitrust or Tender Offer Rules in Their Pursuit of Allergan?

    Amid the sound and fury surrounding the hostile bid for Allergan by an entity jointly formed by Pershing Square Capital Management and Valeant Pharmaceuticals, a recurring question is whether the bid or the transactions leading up to it violated securities or antitrust law.  The short answer is no.  This article explains why.  See also “Can Activist Hedge Fund Managers Provide Special Compensation to Nominees That Are Elected to the Board of a Target? An Interview with Marc Weingarten, Co-Head of the Global Shareholder Activism Practice at Schulte Roth & Zabel,” The Hedge Fund Law Report, Vol. 7, No. 16 (Apr. 25, 2014).

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  • From Vol. 7 No.12 (Mar. 28, 2014)

    Greenlight Capital Action against Seeking Alpha Illustrates the Benefits and Limitations of Obtaining Confidential Treatment of Quarterly Reports on Form 13F

    David Einhorn’s hedge fund management company, Greenlight Capital, Inc. (Greenlight), recently commenced an action in the New York State Supreme Court, New York County (Court), against Seeking Alpha, Inc. (SA), to discover the name of an anonymous blogger who allegedly revealed Greenlight’s position in Micron Technologies (Micron).  In July 2013, Greenlight quietly began to accumulate a position in Micron.  To that end, it requested confidential treatment of that position in the next periodic report on Form 13F that it was obligated to file with the SEC.  However, in November 2013, an anonymous contributor to SA’s website, SeekingAlpha.com, allegedly revealed Greenlight’s investment in Micron.  Greenlight claimed that that information was revealed in breach of a duty of confidentiality and sought permission from the Court to (1) force SA to provide it with the contributor’s identity and contact information and (2) serve pre-action discovery demands on SA in order to obtain that information and any of the contributor’s archived postings on that site.  On March 24, Greenlight filed a Notice of Discontinuance of that lawsuit.  On the same day, The New York Times reported that Greenlight had learned the identity of the contributor; a spokesman for SA told The Times that SA did not reveal the contributor’s name to Greenlight.  This article first describes the factual background and legal claims in Greenlight’s now discontinued action against SA.  This article then summarizes authority on obtaining confidential treatment of Form 13F information, including the statutory and regulatory context, guidance from the SEC’s Division of Investment Management, law firm insight and relevant litigation.

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  • From Vol. 7 No.12 (Mar. 28, 2014)

    Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors

    For at least the last four years, the Cayman Islands legislative, regulatory and judicial authorities have been focused on improving fund governance.  Three noteworthy examples of this focus include the August 2011 Weavering decision, the January 2013 Statement of Guidance on fund governance and the January 2014 issues paper on statutory codification of directors’ duties.  On the last, see “What Are the Duties of Directors of Cayman Islands Hedge Funds, and Should Those Duties Be Codified?,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).  The latest action by Cayman authorities on fund governance is a bill (Bill), gazetted on March 21, 2014, with the short title “Directors Registration and Licensing Law, 2014.”  The Bill generally requires directors of “covered entities” to be registered and requires professional directors of covered entities to be licensed.  This article explains the mechanics of the proposed registration and licensing regime, the regime’s application to non-resident directors, the proposed phase-in schedule, disciplinary provisions, insurance requirements and the “register of directors” referenced in the Bill.

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  • From Vol. 7 No.11 (Mar. 21, 2014)

    New York City Bar’s “Hedge Funds in the Current Environment” Event Focuses on Hedge Fund Structuring, Private Fund Examinations, Compliance Risks and Seeding Arrangements

    On March 5, 2014, the New York City Bar held the most recent edition of its annual “Hedge Funds in the Current Environment” event.  Panelists at the event – including general counsels and chief compliance officers (CCOs) from leading hedge fund managers and partners from top law firms – addressed hedge fund structuring considerations (including the purposes and mechanics of mini-master funds); the myth of the unregulated hedge fund; analogies between regulatory examinations and investor due diligence; seven key areas of regulatory interest in hedge fund examinations; five headline issues confronting CCOs; four pros and seven cons of hedge fund seeding arrangements; and a structuring alternative to seeding ventures.  This article highlights the salient points from the event.  For our coverage of the 2012 edition of this event, see “Davis Polk ‘Hedge Funds in the Current Environment’ Event Focuses on Establishing Registered Alternative Funds, Hedge Fund Manager M&A and SEC Examination Priorities,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).

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  • From Vol. 7 No.4 (Jan. 30, 2014)

    K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part One of Two)

    K&L Gates partners and in-house counsel gathered on December 10, 2013 at the firm’s annual investment management seminar to provide updates on some of the most pertinent topics impacting the private fund industry.  This two-part series summarizes salient points from various sessions at the seminar.  This first installment summarizes a session covering CFTC and NFA regulations impacting registered commodity pool operators and commodity trading advisors as well as U.S. and European regulations governing transactions in swaps and other over-the-counter derivatives, including discussions of swap execution facilities and the European Market Infrastructure Regulation.  The second installment will discuss two sessions, one addressing the newest approaches and strategies used by the SEC to examine investment managers and bring enforcement actions where necessary, and another tackling the implications of the JOBS Act for fund managers.

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  • From Vol. 6 No.40 (Oct. 17, 2013)

    Daniel New, Executive Director of E&Y’s Asset Management Advisory Practice, Discusses Best Practices on “Hot Button” Hedge Fund Compliance Issues: Disclosure, Expense Allocations, Insider Trading, Political Intelligence, CCO Liability, Valuation and More

    The task of serving as chief compliance officer (CCO) of a hedge fund manager is becoming progressively more challenging in light of ever-increasing regulatory obligations, heightened enforcement activity and resource constraints.  CCOs can benefit from understanding the best practices being employed by their peers, and customizing relevant practices to their businesses.  As Executive Director of Ernst & Young’s Asset Management Advisory Practice, Daniel New sees a cross-section of compliance practices at brand-name hedge fund managers.  He sees what works from a compliance perspective, and what needs work.  The Hedge Fund Law Report recently interviewed New on a range of issues regularly encountered by hedge fund manager CCOs.  The interview spanned topics including consistency of fund marketing and disclosure documents; a CCO’s role in preparing and completing Form PF and other regulatory filings; structuring and memorializing annual compliance reviews; allocating expenses between a manager and its funds; insider trading and political intelligence controls; social media use by manager personnel; a CCO’s risk management responsibilities; outsourcing of CCO functions in light of resource constraints; and mitigating rogue trading risks.  The breadth of topics covered reflects the expansiveness of a typical CCO’s portfolio.  The idea behind this interview is to enable CCOs to allocate their scarcest resource – time – more effectively.  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Compliance, Risk & Enforcement 2013 Symposium, to be held at the Pierre Hotel in New York City on October 31, 2013.  For a fuller description of the Symposium, click here.  To register for the Symposium, click here.  Subscribers to The Hedge Fund Law Report are eligible for a registration discount.

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  • From Vol. 6 No.35 (Sep. 12, 2013)

    Understanding the Intricacies for Private Funds of Becoming and Remaining FATCA-Compliant

    The Foreign Account Tax Compliance Act (FATCA) heralds a new world order for the disclosure of tax information related to offshore accounts.  FATCA requires Foreign Financial Institutions (FFIs), including offshore private funds, to provide tax information on accounts maintained by specified U.S. persons, recalcitrant investors or nonparticipating financial institutions.  Given the IRS’ unprecedented extraterritorial powers to gather information on FFIs operating as private funds, FATCA will impose tremendous burdens (both in terms of time and cost) on such offshore private funds.  Yet, the law offers little practical guidance on how managers can establish and maintain programs to become and remain FATCA-compliant.  With this in mind, this guest article – authored by Peter Stafford, an Associate Director at DMS Offshore Investment Services – is designed to help offshore private funds identify and address some of the challenges they face in becoming FATCA-compliant.  Among other things, this article, organized in a question and answer format, addresses: the timeline for FATCA compliance; steps necessary to register with the IRS; whether certain funds are exempt from FATCA; the roles and responsibilities of the FATCA Responsible Officer (FRO); who should serve as the FRO; FATCA reporting to regulators; components of an effective FATCA compliance program; effective investor due diligence procedures; FATCA disclosures in fund documents; insurance coverage for and indemnification of the FRO; and allocation of FATCA-related expenses between the fund and the manager.  For more background on FATCA and its obligations, see “What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.34 (Aug. 29, 2013)

    SEC’s First Report on Initial Form PF Filings Offers Insight into How the Agency Is Using the Collected Data for Examinations, Enforcement and Systemic Risk Monitoring

    The Dodd-Frank Act directed the SEC to collect data with regard to hedge funds, private equity funds and other private funds in order to assist the Financial Stability Oversight Council (FSOC) in evaluating and monitoring systemic risk.  In October 2011, the SEC created Form PF for that purpose.  The first full reporting cycle ended on April 30 of this year.  See “Challenges Faced By, Risks Encountered By and Lessons Learned From First Filers of Form PF,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013); and “Lessons Learned by Hedge Fund Managers from the August 2012 Initial Form PF Filing,” The Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012).  The Dodd-Frank Act also directed the SEC to report annually to Congress on how the SEC “has used the data collected regarding private funds under the Dodd-Frank Act to protect investors and the integrity of the markets.”  Based on that directive, the SEC’s Division of Investment Management recently issued its first Form PF report.  The report provides an overview of the Form PF reporting regime; general data relating to initial filers; and, perhaps most interestingly, a discussion of how the SEC is using and proposes to use the data gathered, beyond providing it to the FSOC.  This article summarizes the key takeaways from the Report.

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  • From Vol. 6 No.30 (Aug. 1, 2013)

    A Roadmap and Recommendations for Hedge Fund Managers Facing Presence Examinations

    In the fall of 2012, the SEC unleashed its latest tactic aimed at identifying potential issues and deficiencies for newly registered investment advisers – the “presence examination.”  See “OCIE Warns Newly Registered Hedge Fund Advisers to Watch Out for ‘Presence Examinations,’” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  These “focused, risk-based” examinations came on the heels of the recent influx of SEC registrants (resulting from Dodd-Frank legislation) and are driven in large part by the limited resources available to the SEC staff.  Namely, of the more than 4,000 private fund advisers registered with the SEC (as of April 2013), more than 1,500 registered since July 21, 2010, representing an increase of more than 50 percent in registered private fund advisers.  Through the Presence Examination initiative, the SEC is looking to reach as many of these new registrants as possible, substituting mini risk-based examinations in lieu of traditional “full-blown” examinations, which have historically proved ineffective at reaching the masses.  As of April 2013, approximately 20 percent of all advisers that have been registered for more than three years had never been examined.  In an April 16, 2013 speech at the 2013 NASAA Public Policy conference, SEC Commissioner Elisse B. Walter noted that the Presence Exam initiative creates a way to “meaningfully engage, assess risk, and establish a presence and credibility” with new registrants, serving as a reminder that “we’re out here, keeping an eye on things.”  Many newly registered private fund managers will face presence examinations in the next two years.  In a guest article, Jillian Timmermans, a Partner and Vice President at Cordium, provides a roadmap and practical recommendations that will help such managers navigate the presence examination process more effectively.

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  • From Vol. 6 No.29 (Jul. 25, 2013)

    Schulte, Cleary and MoFo Partners Discuss How the Final and Proposed JOBS Act Rules Will Impact Hedge Fund Managers and Their Funds

    On July 10, 2013, the SEC adopted and proposed various rules to implement the JOBS Act enacted last year.  The adopted rules will (1) permit general solicitation and advertising for offerings made in reliance on Rule 506 under Regulation D and Rule 144A under the Securities Act of 1933, and (2) disqualify certain “bad actors” from being able to offer securities in reliance on Rule 506.  The SEC also proposed certain rule changes impacting Rule 506 offerings that would enhance Form D reporting; require legends on general solicitation and advertising materials; apply new anti-fraud rules to Rule 506 advertising materials; and require pre-filing of general solicitation and advertising materials with the SEC for a two-year period.  See “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising,” The Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  During a recent Practising Law Institute briefing, expert panelists Paul N. Roth, a founding partner of Schulte Roth & Zabel LLP; Alan L. Beller and Nicolas Grabar, both partners at Cleary Gottlieb Steen & Hamilton LLP; and David M. Lynn, a partner at Morrison & Foerster LLP, explained the SEC rulemaking; dissected the differences between the adopted rules and the 2012 rule proposals; and considered the implications of the rule changes for hedge funds offering securities in reliance on Rule 506.  This article summarizes the salient points raised by the expert panel during the briefing.

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  • From Vol. 6 No.28 (Jul. 18, 2013)

    SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising

    When the JOBS Act (formally the Jumpstart Our Business Startups Act) was signed by President Obama last year, it directed that one of its most transformational provisions – the relaxation of decades-long limits on public offerings of unregistered securities – not go into effect until the Securities and Exchange Commission (SEC) set rules to implement the changes.  After more than a year of delay, the agency’s implementing rules are now here.  But the SEC at the same time proposed a raft of controversial additions to the new rules, ensuring that the politically charged debate around the JOBS Act – in which consumer advocates and certain lobbies (such as that for the mutual fund industry) vigorously oppose the law and its opportunities for private funds while many business groups push for it – will continue.  The awkward compromise offered by that two-step has nods to both sides of the debate.  On the one hand, the SEC rules reflect only one of many changes called for by JOBS Act opponents, that being some increase in procedures to confirm investor qualifications (this addition was expected, although the final guidance is more strongly worded than in the SEC’s original proposal from a year ago).  See “JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012).  On the other hand, the SEC proposal now asks whether the agency should add a number of new requirements that will cheer the opposition.  Lest there be any mistake that the SEC is flashing a yellow light, the release also says that the agency’s examination staff will be charged with monitoring new offering activity in the private funds industry and that firms that expand their marketing profile should carefully consider their compliance infrastructure before doing so.  On the same day that the SEC adopted the JOBS Act rules, it also adopted new rules that foreclose reliance on Regulation D in the case of securities offerings involving felons and other “bad actors.”  In a guest article, Nathan J. Greene, a partner and Co-Practice Group Leader in the Investment Funds Group at Shearman & Sterling LLP, describes the above-referenced JOBS Act rulemaking in more detail and highlights important implications for hedge fund managers.

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  • From Vol. 6 No.26 (Jun. 27, 2013)

    PLI Panel Addresses Marketing and Brokerage Issues Impacting Hedge Fund Managers, Including Marketing to State Pension Plans, Capital Introduction and Broker Implications of In-House Marketing Activities

    At the Practising Law Institute’s Hedge Fund Compliance and Regulation 2013 program, an expert panel comprised of SEC attorneys and industry practitioners shared insights on topics involving marketing and brokerage issues that impact hedge fund managers.  Among other things, the wide-ranging discussion covered the regulatory perils that accompany marketing to government pension funds, including local, state and federal pay-to-play and lobbying laws; capital introduction programs; the European Union’s Alternative Investment Fund Managers Directive; broker regulations implicated by in-house fund marketing activities; and investment-related regulations impacting broker-dealers and their hedge fund clients, including the Market Access Rule, circuit breakers, the use of dark pools, short selling, securities lending and large trader reporting.  This article summarizes the highlights from the panel discussion that are most pertinent to hedge fund managers.  See also “PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013); “PLI Panel Provides Regulator and Industry Perspectives on SEC and NFA Examinations, Allocation of Form PF Expenses, Annual Compliance Review Reporting and NFA Bylaw 1101 Compliance,” The Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

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  • From Vol. 6 No.21 (May 23, 2013)

    RCA Symposium Panels Discuss New CFTC and NFA Regulations Governing Obligations of Hedge Fund Managers Required to Register as CPOs or CTAs

    On April 18, 2013, the Regulatory Compliance Association held its Regulation, Operations & Compliance 2013 Symposium (RCA Symposium) in New York City.  Panels during the RCA Symposium covered various topics, including new regulations of the U.S. Commodity Futures Trading Commission and the National Futures Association (NFA) that apply or will apply to numerous hedge fund managers.  The two panels that tackled these issues addressed, among other things, registration obligations of commodity pool operators (CPO) and their principals and associated persons; reporting and other obligations applicable to new CPO and CTA registrants; Bylaw 1101; required ethics training programs; regulations governing marketing and promotional materials; and NFA audits.  This article addresses salient points from both sessions.  See also “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part Two of Two),” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).

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  • From Vol. 6 No.11 (Mar. 14, 2013)

    What Critical Issues Must Hedge Fund Managers Understand to Inform Their Preparation of Schedules K-1 for Distribution to Their Investors?

    Most hedge funds are taxed as partnerships and therefore pass through items of income, gains and losses to their fund investors, rather than facing taxation on such items at the partnership level.  As a result, hedge fund managers are responsible for preparing and distributing to their investors a Schedule K-1 to Form 1065, which shows an investor’s share of a fund’s income, gains, losses, credits and other items for each tax year that must be reported to the Internal Revenue Service on the investor’s individual income tax return.  Nonetheless, preparation of this schedule can present a litany of challenges which can confound many hedge fund managers.  Moreover, preparation of K-1s cannot be entirely outsourced to an accounting firm; a manager must understand what the accounting firm is doing and be able to evaluate its work.  Recognizing the complexity and importance of this topic, a recent webinar provided a top-level refresher course on the tax considerations that influence the structuring of hedge funds and addressed numerous issues involved in the preparation of Schedule K-1, such as the difference between “trader funds” and “investor funds,” and allocation and adjustment rules that have tax consequences for hedge fund investors.  This article summarizes key takeaways from that program.

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  • From Vol. 6 No.7 (Feb. 14, 2013)

    FATCA Implementation Summit Identifies Best Practices Relating to FATCA Reporting, Due Diligence, Withholding, Operations, Compliance and Technology

    On December 6, 2012, the Hedge Fund Business Operations Association and Financial Research Associates, LLC jointly sponsored a “FATCA Implementation Summit” in New York City (Summit).  Participants at the Summit discussed compliance requirements, recommendations and strategies in connection with the Foreign Account Tax Compliance Act (FATCA), in particular with respect to registration, reporting, due diligence and withholding.  Participants also addressed the operational and technological demands presented by FATCA, and best practices for meeting those demands.  This article summarizes the practical takeaways from the Summit and offers recommendations that hedge fund managers can apply directly to their FATCA compliance programs.

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  • From Vol. 6 No.4 (Jan. 24, 2013)

    Challenges Faced By, Risks Encountered By and Lessons Learned From First Filers of Form PF

    With the initial Form PF filings behind us, now is an opportune time to take stock of what lessons hedge fund advisers have learned from their experience with Form PF to date.  In a guest article, Tim Wilson (co-head of the risk practice of Global Risk Management Advisors) and Jonathan Miller (a partner in the New York office of Sidley Austin LLP) address, based on their work and discussions with first filers and other advisers, the following questions that advisers have asked them about Form PF: (1) What were the major challenges that large hedge fund advisers faced in completing their August and November 2012 filings?  (2) What are the principal risks to which hedge fund advisers are exposed as a result of their filings?  (3) What lessons should hedge fund advisers draw from the experience of first filers?  Addressing these questions can assist all Form PF filers in avoiding critical mistakes in preparing for, completing and making future Form PF filings.  The responses to these questions can be instrumental not only to those hedge fund advisers that have yet to make their initial Form PF filings, but also to those hedge fund advisers that will be making subsequent filings.  See also “Lessons Learned by Hedge Fund Managers from the August 2012 Initial Form PF Filing,” The Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012).

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  • From Vol. 5 No.47 (Dec. 13, 2012)

    When and How Can Hedge Fund Managers Permissibly Disguise the Identities of Their Hedge Funds in Form ADV and Form PF?

    Historically, hedge fund managers generally have not been required to disclose information about their funds to regulators or the public.  Hedge funds were excluded from the definition of “investment company” in the Investment Company Act of 1940 and therefore did not have to file registration statements, as mutual funds do.  Many hedge fund managers were not required to register as investment advisers and therefore did not have to file Form ADV, which contains fund information.  And the U.S. had no analogue to the U.K. FSA’s periodic reports on systemic risk posed by hedge funds.  Hedge funds are still excluded from the investment company definition, but many managers now must register and file Form ADV.  See “How Can Hedge Fund Managers Rebut the Presumption of Materiality of Certain Disciplinary Events in Form ADV, Part 2?,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012).  And, as the industry well knows, the U.S. has implemented its own version of systemic risk reporting by private fund managers via Form PF.  See “Assumptions to Consider in Completing Form PF Effectively: Experiences from First Filers,” The Hedge Fund Law Report, Vol. 5, No. 39 (Oct. 11, 2012).  Form ADV requires hedge fund managers to disclose significant fund information to regulators and the public, and Form PF requires managers to disclose voluminous and detailed fund information to regulators.  However, the instructions to both forms now allow a manager to preserve the anonymity of its private funds by using a code or designation to identify the funds referenced in those forms.  Some well-known hedge fund managers reportedly have taken advantage of this new opportunity, and there is speculation that more managers will do so.  Nonetheless, the relief provided in the instructions is conditioned on satisfaction of delineated obligations.  This article provides an overview of key considerations for fund managers that wish to mask the identities of their private funds in Form PF and Form ADV filings.  Specifically, this article outlines some of the reasons why hedge fund managers may wish to shield the identities of their private funds in Form ADV and Form PF; the circumstances under which hedge fund managers can mask the identity of their private funds; how fund managers can go about disguising the identities of their private funds; whether such masking will raise suspicion from regulators and investors; and best practices for managers that wish to implement a masking strategy.

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  • From Vol. 5 No.47 (Dec. 13, 2012)

    NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests

    The National Futures Association (NFA) held a workshop (workshop) in New York on October 23, 2012 to help commodity pool operators (CPOs) and commodity trading advisors (CTAs) – including hedge fund managers that trade commodity interests – determine whether they must register with the U.S. Commodity Futures Trading Commission and the NFA, and to understand their regulatory obligations if they are required to do so.  Topics discussed during the workshop included popular CPO and CTA registration exemptions; reporting requirements for registrants, including those related to disclosure documents and financial reports; requirements related to promotional materials and sales practices for registrants; and the NFA audit process.  This article provides feature length coverage of the key topics discussed during the workshop.

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  • From Vol. 5 No.43 (Nov. 15, 2012)

    Lessons Learned by Hedge Fund Managers from the August 2012 Initial Form PF Filing

    Form PF has presented, and continues to present, daunting challenges for hedge fund managers required to file the form.  Very large hedge fund advisers – those with $5 billion in regulatory assets under management – were required to file their initial Forms PF by August 29, 2012.  The initial filing highlighted some best practices as well as some pitfalls associated with the Form PF process.  On October 11, 2012, at the Princeton Club in Manhattan, Global Risk Management Advisors, Inc., Citi Prime Finance, Imagine Software, Sidley Austin LLP and The Hedge Fund Law Report hosted a seminar entitled, “Lessons Learned and Not Learned From the August 2012 Initial Form PF Filing.”  The seminar participants all had direct experience with the initial round of Form PF filings, and the seminar offered an occasion to reflect on that experience and extract lessons from it.  In particular, participants at the seminar discussed specific lessons learned from the initial filing process; some common mistakes made by first filers; how to craft assumptions used in Form PF; the treatment of derivative positions in Form PF; how regulators will use the information in Form PF in connection with enforcement actions against hedge fund managers; how to handle investor requests for Form PF or the data in it; allocation of costs of preparing Form PF; and other challenges presented by the form.  This article summarizes the key takeaways from the seminar.

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  • From Vol. 5 No.42 (Nov. 9, 2012)

    Annual Thompson Hine Hedge Fund Seminar Focuses on Implications for Hedge Fund Managers of the JOBS Act, Form PF and Form CPO-PQR

    On October 4, 2012, Thompson Hine LLP hosted its annual Hedge Fund Seminar, which this year was entitled, “The JOBS Act and Dodd-Frank – Two Years Later.”  Speakers at the event addressed the impact of Form PF and Form CPO-PQR as well as the anticipated impact of the Jumpstart Our Business Startups (JOBS) Act on hedge fund managers.  In addition, the speakers discussed the building blocks of a culture of compliance at hedge fund management companies.  This article summarizes the most salient points raised at the seminar.

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  • From Vol. 5 No.40 (Oct. 18, 2012)

    Tax Efficient Hedge Fund Structuring in Anticipation of the New 3.8% Surtax on Net Investment Income and Proposals to Limit Individuals’ Tax Deductions

    In the current political environment, high income U.S. persons are likely to see their income tax rates on investment income rise and their ability to deduct investment-related expenses further curtailed.  Consequently, such investors and their advisors are likely to become more concerned about the difference between pre-tax and after-tax returns from competing investment alternatives.  It is generally known that hedge funds are somewhat tax-inefficient investments for U.S. high income individual investors.  Some funds often employ trading strategies that generate attractive pre-tax returns, but often generate income taxed at the highest rates.  Although the mutual fund industry has rolled out many new funds for the general public that are marketed as “tax managed” or “tax efficient” funds, the same trend has not been as evident in the hedge fund world.  This fact is a bit unusual since, as discussed in this article, individual investors in hedge funds organized as tax partnerships face a much greater risk of tax inefficiency than investors that invest in shares of corporations that are mutual funds (regulated investment companies under the Internal Revenue Code).  Given the increasing competition for assets under management as well as the factors described above, hedge fund managers should engage in tax planning throughout the tax year to make their funds more tax-efficient and should consult with their tax advisors with respect to the tax changes which will surely come in the future.  In some cases, fund managers should reconsider the structures of their funds that are available to such U.S. individual investors.  In a guest article, A.J. Alex Gelinas, a tax partner at Sadis & Goldberg LLP, analyses tax changes relevant to hedge fund managers and investors that are about to go into effect, or that are likely to go into effect in the future as Congress faces the need to increase tax revenues, and the effect such tax law changes may have on the marketing of hedge funds to U.S. high income individuals.  The article provides concrete tax structuring suggestions and also serves as a comprehensive overview of fundamental principles of tax structuring for hedge funds.

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  • From Vol. 5 No.39 (Oct. 11, 2012)

    Assumptions to Consider in Completing Form PF Effectively: Experiences from First Filers

    The summer of 2012 proved to be a challenging one for many private fund professionals involved in the preparation of the first wave of Form PF filings.  In particular, Large Hedge Fund Advisers were required to make their first Form PF filing by August 29, 2012.  What emerged from the frenzied summer and the post-filing chatter is a common theme that can be gleaned by the title of this article.  Your assumptions will play an important role in how you complete Form PF and whether you do so effectively.  There are many assumptions that can be safely made and many that conclusively cannot be made.  In a guest article, Kelli Brown and Peter J. Chess provide guidance for both the experienced and inexperienced future Form PF filers.  Brown is a principal and co-founder of Sol Hedge, LLC, a hedge fund consulting firm, and Chess is an associate in the Corporate and Securities practice group at Pillsbury Winthrop Shaw Pittman LLP.  For more guidance on successful preparation and completion of Form PF, see “Ten Steps to a Successful Form PF,” The Hedge Fund Law Report, Vol. 5, No. 17 (Apr. 26, 2012).

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  • From Vol. 5 No.33 (Aug. 23, 2012)

    Ten Key Lessons Learned From Test Filings of Form PF

    When Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010, some investment advisers worried about how changes to registration and reporting would impact them.  Chief among their anxieties was Form PF, a new filing requirement imposing substantial reporting requirements upon many investment advisers previously exempt from regulatory scrutiny.  More specifically, Form PF is a private, confidential filing required to be made by certain SEC-registered investment advisers on a quarterly or annual basis.  Designed to assist the Financial Stability Oversight Council in monitoring systemic risk, it requires the reporting of a broad range of data on private funds, including portfolio, performance and risk information.  In a guest article, Robert Diaz, managing director of SS&C GlobeOp, discusses ten broadly applicable lessons learned about Form PF preparation and filing.  These lessons are based on months of preparing and coordinating practice filings with SS&C GlobeOp clients.  This article also includes a chart offering a visual representation of the complexity and time pressure of many of the relevant data classifications in Form PF (e.g., RAUM, derivative exposure, etc.).

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  • From Vol. 5 No.32 (Aug. 16, 2012)

    CFTC Issues Responses to Frequently Asked Questions Concerning Registration Exemption Eligibility and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisors

    On August 14, 2012, the staff of the Commodity Futures Trading Commission (CFTC) Division of Swap Dealer and Intermediary Oversight issued responses to a number of questions raised by market participants in the aftermath of recent amendments to CFTC rules and regulations, which impacted the registration status and compliance obligations of many commodity pool operators (CPOs) and commodity trading advisors, particularly in light of the elimination of the Rule 4.13(a)(4) CPO registration exemption.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  These responses provide answers to registration and compliance questions in a variety of areas.  This article summarizes the guidance that is most pertinent to hedge fund managers.

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  • From Vol. 5 No.26 (Jun. 28, 2012)

    Hedge Funds and Managers Must File Foreign Bank Account Reports by June 30, 2012

    Every U.S. person or entity that had either a financial interest in, or signatory authority or other authority over, a financial account in a foreign country must file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), commonly referred to as an “FBAR,” if the aggregate value of such account(s) exceeded USD $10,000 at any time during calendar year 2011.  In a guest article, Joseph Pacello, a tax principal at Rothstein Kass, and Deirdre Joyce, a senior international tax manager at Rothstein Kass, discuss, with respect to FBAR filings: imminent filing deadlines; key definitions; notable changes for 2010 and subsequent year reporting; FBAR constructive ownership rules; significant penalties for failure to file; the 2012 offshore voluntary disclosure program; six specific examples of FBAR reporting requirements; and filing instructions.  The article concludes with a chart comparing Form 8938 and FBAR filing requirements.

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  • From Vol. 5 No.26 (Jun. 28, 2012)

    Certain Hedge Fund Managers and Funds That Engage in Foreign Transactions Will Need to File Form BE-11 Imminently

    The U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) collects information on foreign investment by U.S. persons by issuing surveys that must be completed and returned by certain U.S. persons, which could include hedge fund managers and hedge funds.  One of these surveys, called the Annual Survey of U.S. Direct Investment Abroad (Form BE-11) requires U.S. persons that own, directly or indirectly, 10% or more of the voting securities of a foreign affiliate to complete and file Form BE-11 by May 31 of each year if the foreign affiliate crosses certain financial thresholds.  Form BE-11 has recently garnered significant attention within the hedge fund industry because the BEA has informally indicated that it may take enforcement action against those U.S. persons that fail to file Form BE-11 as required.  As such, as the May 31, 2012 deadline approached, many hedge fund managers petitioned for an extension to the filing deadline, and the BEA indicated that it would provide short extensions (from one month to three months) for filers.  The length of the extension varies depending on the number of Forms BE-11 required to be filed.  Failure to file Form BE-11 as required may lead to civil and criminal penalties.  This article discusses Form BE-11 filing requirements applicable to hedge fund managers.

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  • From Vol. 5 No.19 (May 10, 2012)

    Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part Two of Two)

    On February 9, 2012, the Commodity Futures Trading Commission (CFTC) amended the CFTC Rules to rescind an exemption from commodity pool operator (CPO) registration heavily relied upon by hedge fund managers.  This development, in combination with statutory changes to the Commodity Exchange Act enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will require many hedge fund managers to register as CPOs.  This article is the second part of a two-part series by Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC, providing an overview of the current regulatory landscape of CFTC regulations impacting CPOs.  Part one of this series focused on the managers of private funds and their CPO registration and compliance obligations.  In particular, part one discussed: the regulatory framework governing commodity pools and CPOs and the remaining exemption from CPO registration for managers who operate or control a private fund; the compliance obligations of a registered CPO; and the enforcement mechanisms and penalties for non-compliance.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do?  (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  This part two focuses on the funds (i.e., commodity pools) operated or controlled by registered CPOs.  Specifically, this article discusses: general fund disclosure and reporting obligations applicable to CPOs; the exemptions from certain of those disclosure and reporting obligations available under CFTC Rules 4.7 and 4.12; and the reporting obligations applicable to funds operating under those exemptions.

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  • From Vol. 5 No.19 (May 10, 2012)

    Is the New Form ADV Investor Friendly?

    When the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) repealed the “private adviser exemption” from registration contained in Section 203(b)(3) of the Investment Advisers Act (Advisers Act), many hedge fund managers who enjoyed the exemption found themselves facing the sure fate of having to register with the U.S. Securities and Exchange Commission as investment advisers.  Many of these managers had to file their first Form ADV by March 30, 2012.  March 30 was also the deadline for all previously registered investment advisers to file amendments to their current Form ADV.  Over a month has passed since the March 30 deadline and it is clear, from the viewpoint of an investor, that the new Form ADV has proved to be a mixed bag of good and bad.  In this guest op-ed, Siddhya Mukerjee and Michael Schmieder – both senior operational analysts at Aksia LLC, responsible for performing all aspects of hedge fund operational due diligence – analyze how new Form ADV has helped and hindered the operational and investment due diligence efforts of hedge fund investors.

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  • From Vol. 5 No.18 (May 3, 2012)

    How Do New Commodities Regulations Impact Hedge Fund Managers with Respect to Registration, Marketing, Trading, Audits and Drafting of Governing Documents?

    On February 9, 2012, the U.S. Commodity Futures Trading Commission (CFTC) rescinded an exemption from commodity pool operator (CPO) registration found in CFTC Rule 4.13(a)(4) that was previously heavily relied upon by many hedge fund managers.  The rescission of that exemption also narrowed the availability of an exemption from commodity trading adviser (CTA) registration found in CFTC Rule 4.14(a)(8) which was also relied upon heavily by many hedge fund managers.  As such, many hedge fund managers will need to register as CPOs or CTAs with the CFTC, become members of the National Futures Association (NFA) and become subject to CFTC and NFA regulations.  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Bearing this in mind, law firm Kleinberg, Kaplan, Wolff & Cohen, P.C. (KKWC) and hedge fund administrator CACEIS jointly hosted a webinar (Webinar) on April 19, 2012 to outline changes in the regulatory regime for CPOs and CTAs.  During the Webinar, Martin D. Sklar, a Member of KKWC, and Darren J. Edelstein, an Associate at KKWC, shared their expertise on numerous topics, including a discussion of the remaining exemptions from CPO and CTA registration for hedge fund managers; the steps taken to register a CPO or a CTA and its respective principals and associated persons; the various CFTC and NFA regulations impacting CPOs and CTAs; and the reporting requirements applicable to registered CPOs and CTAs, including completion and filing of Form CPO-PQR and CTA-PR.  The Hedge Fund Law Report interviewed Sklar and Edelstein following the Webinar to conduct a deeper dive into some of the topics discussed during the Webinar, including a discussion of: the Rule 4.13(a)(3) de minimis exemption; which hedge fund management entities should register as CPOs and CTAs; what marketing, trading and other regulations affect registered CPOs and CTAs; whether and to what extent registered CPOs and CTAs are subject to CFTC and NFA audit; whether hedge fund managers must add additional disclosures or change their subscription documents to allow them to comply with CFTC and NFA regulations; and the biggest challenges hedge fund managers face with respect to registering as a CPO or CTA and becoming subject to CFTC and NFA regulations.

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  • From Vol. 5 No.17 (Apr. 26, 2012)

    Ten Steps to a Successful Form PF

    The Form PF (PF is short for “private funds”) is a new Securities and Exchange Commission reporting form for investment advisers to private funds that have at least $150 million in private fund assets under management.  Comprising 42 pages and divided into 4 sections with corresponding subsections, Form PF may appear daunting at first.  The task of completing and filing the Form also entails categorizations, specific and nuanced reporting requirements and Form-specific calculations, not to mention the fact that improperly completed Forms may be delayed or even rejected.  However, with the proper tools and plan of attack, an adviser will be able to fulfill its reporting requirements and improve its data platform for a host of other reporting and filing requirements.  Form PF necessitates working with large amounts of data.  So, early planning, coordination and organization are essential for success.  In a guest article, Jay Gould, a Partner at Pillsbury Winthrop Shaw Pittman LLP and leader of Pillsbury’s Investment Funds & Investment Management practice team, and Kelli Brown, Director of Private Funds at Data Agent, LLC, describe ten steps that a hedge fund manager should take for successful Form PF completion and filing.

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  • From Vol. 5 No.10 (Mar. 8, 2012)

    ACA Webcasts Detail Exempt Reporting Adviser Qualifications and Compliance Obligations

    While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) repealed the exemption from registration found in Section 203(b)(3) of the Investment Advisers Act of 1940 (Advisers Act) historically relied upon by most hedge fund managers with fewer than 15 clients, it created several more narrowly tailored adviser registration exemptions, including separate exemptions for advisers solely to venture capital funds and advisers solely to private funds with aggregate regulatory assets under management (Regulatory AUM) of less than $150 million (private fund adviser exemption).  See “Registration, Reporting, Disclosure and Operational Consequences for Hedge Fund Managers of the SEC’s New ‘Regulatory Assets Under Management’ Calculation,” The Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).  These advisers now fall into a newly created class of advisers called exempt reporting advisers.  Although exempt reporting advisers are exempt from SEC registration, they are nonetheless required to fulfill certain regulatory obligations not applicable to unregistered advisers, including completing certain items in Part 1A of Form ADV, maintaining certain books and records and submitting to SEC examinations.  Exempt reporting advisers are also subject to other compliance obligations imposed by the Advisers Act, including the pay-to-play restrictions contained in Rule 206(4)-5.  See “Key Elements of a Pay-to-Play Compliance Program for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010).  With this in mind, the ACA Compliance Group (ACA) held two separate webcasts to highlight issues important to advisers that may qualify as exempt reporting advisers.  This article summarizes some of the highlights from both webcasts with relevance to hedge fund managers.

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  • From Vol. 5 No.9 (Mar. 1, 2012)

    Registration, Reporting, Disclosure and Operational Consequences for Hedge Fund Managers of the SEC’s New “Regulatory Assets Under Management” Calculation

    The SEC’s newly-adopted assets under management (AUM) calculation, known as an investment adviser’s “regulatory assets under management” (Regulatory AUM), will have numerous important regulatory implications for hedge fund managers.  Among other things, the calculation will govern whether the manager must or may register with the SEC as an investment adviser; whether the manager must file Form ADV; and which parts, if any, of Form PF the manager must complete and file.  See “Former SEC Commissioner Paul Atkins Discusses the Big Issues Raised by Form PF: Law, Operations, Confidentiality, Risk Management, Disclosure, Enforcement and Policy,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Unfortunately for many hedge fund managers, the calculation of a firm’s Regulatory AUM is quite different from the calculation of the firm’s traditional AUM.  Also, in certain circumstances, large hedge fund managers may need to calculate their Regulatory AUM for each month.  Therefore, hedge fund managers must understand their Regulatory AUM and arrange to have it calculated in a timely fashion to ensure that they will comply with applicable registration and reporting requirements.  This article begins by defining Regulatory AUM and discussing how to calculate it.  The article then discusses the applicability of a firm’s Regulatory AUM with respect to the hedge fund adviser registration regime; the various exemptions from adviser registration; and the various new reporting obligations imposed on hedge fund advisers, including those relating to Form PF.  The article concludes with an analysis of some of the challenges associated with Regulatory AUM and specific guidance on navigating such challenges.

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  • From Vol. 5 No.8 (Feb. 23, 2012)

    Former SEC Commissioner Paul Atkins Discusses the Big Issues Raised by Form PF: Law, Operations, Confidentiality, Risk Management, Disclosure, Enforcement and Policy

    Form PF has created legal and business challenges for hedge fund managers.  On the legal side, managers and their counsel have been scrambling to determine whether they have to file the form, for which entities, when, what data they must include, how frequently they must update the form, and so on.  On the business side, the questions have been even more challenging.  The form requires managers to compile and organize data that is disparate, voluminous and dynamic.  Some of the data is internal to the manager, and some is external, at service providers; much of the data is quantitative, but some is qualitative and discretionary; and substantially all of the data is dynamic – it changes over time, even over the relatively compressed time in which managers have to file their first Forms PF.  Operationally, managers have to coordinate the efforts of service providers that otherwise would operate independently.  Technology will have a large role to play in smart Form PF compliance, but will not substitute for competent human oversight and project management.  In short, Form PF is a challenge.  To help hedge fund managers think through the challenge, we at The Hedge Fund Law Report have published and will continue to publish best-of-breed thinking and analysis on the hardest questions raised by Form PF.  See, e.g., “Form PF: Operational Challenges and Strategic, Regulatory and Investor-Related Implications for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  In a similar vein, a session at the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium will identify and address critical issues and pitfalls with respect to Form PF.  That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York.  For more information, click here.  To register, click here.  (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.)  One of the anticipated speaking faculty members for the Form PF session at the upcoming RCA Symposium is Paul S. Atkins, CEO of Patomak Global Partners, LLC, and former Commissioner of the U.S. Securities and Exchange Commission.  We recently had the privilege of interviewing Atkins on some of the hardest questions raised by Form PF for hedge fund managers.  Generally, our interview covered topics including interpretation, operations, technology, confidentiality, risk management, disclosure, enforcement and policy.  Atkins was candid, knowledgeable and insightful, and his points are important reading for any hedge fund manager looking to get it right on Form PF.  The full text of our interview is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 5 No.7 (Feb. 16, 2012)

    CFTC Adopts Final Rules That Are Likely to Require Many Hedge Fund Managers to Register as Commodity Pool Operators

    On February 9, 2012, the Commodity Futures Trading Commission (CFTC) adopted final rules (Final Rules) amending Part 4 of its regulations promulgated under the Commodity Exchange Act governing commodity pool operators (CPOs) and commodity trading advisers (CTAs).  Notably for hedge funds, the Final Rules, among other things, rescind the exemption from CPO registration contained in Rule 4.13(a)(4), which is relied on substantially in the hedge fund industry.  Notably for hedge funds, the Final Rules differ from the rule amendments proposed by the CFTC (Proposed Rules) on January 26, 2011, in that the Final Rules do not rescind the exemption from CPO registration under Rule 4.13(a)(3) for hedge funds that conduct a de minimis amount of trading in futures, commodity options and other commodity interests.  For an in-depth discussion of the Proposed Rules, see “CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds,” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  As a result, unless an exemption is otherwise available, the Final Rules will require a CPO to register with the National Futures Association if the managed commodity pool (i.e., hedge fund) conducts more than a de minimis amount of speculative trading in futures, commodity options and other commodity interests; and CPO registration imposes significant obligations on registrants.  This article provides a detailed summary of the CFTC’s Final Rules and highlights relevant changes from the Proposed Rules.  The article focuses on the provisions of the Final Rules with most direct application to hedge fund managers following commodities-focused investment strategies.

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  • From Vol. 5 No.6 (Feb. 9, 2012)

    Hedge Fund Managers May Be Required to File TIC Form SHC by March 2, 2012

    Hedge fund managers should consider as soon as possible whether they are required to file Treasury International Capital (TIC) Form SHC, Report of U.S. Ownership of Foreign Securities, Including Selected Money Market Instruments.  Basically, Form SHC requires the reporting of information regarding foreign securities owned by U.S. residents.  A hedge fund manager is required to file Form SHC if it meets a $100 million threshold for “reportable securities” determined on an aggregate basis for all funds under management.  For 2011, Form SHC is due by March 2, 2012, and reporting is based on the fair value of assets determined as of December 31, 2011.  In a guest article, Philip Gross and Allison Bortnick, Member and Associate, respectively, at Kleinberg, Kaplan, Wolff & Cohen, P.C., discuss the parameters of Form SHC, including a discussion of who must file Form SHC and what securities are covered; the composition of Form SHC; and the approach that hedge fund managers may take to determine whether they must file Form SHC, and, if reporting is required, how to complete Form SHC.

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  • From Vol. 5 No.4 (Jan. 26, 2012)

    FinCEN Working on a Proposed Rule That Would Require Investment Advisers to Establish Anti-Money Laundering Programs and Report Suspicious Activity

    On November 15, 2011, James H. Freis, Jr., Director of the Financial Crimes Enforcement Network (FinCEN), delivered remarks to the American Bankers Association/American Bar Association’s annual money laundering enforcement conference.  2011 was the fifth year in a row in which Freis delivered remarks to the annual gathering.  See also “FinCEN Withdraws AML Rule Proposals for Alternative Investment Entities,” The Hedge Fund Law Report, Vol. 1, No. 25 (Nov. 26, 2008).

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  • From Vol. 4 No.45 (Dec. 15, 2011)

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

    Any asset manager who chooses to open up an office in Singapore will have significant interaction with the Monetary Authority of Singapore (MAS), which acts as Singapore’s unified financial services regulator.  The MAS has confirmed that in the first half of 2012, it will implement a new regulatory structure over asset managers that maintain an investment management office in Singapore.  This article is the third 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).  This article describes Singapore’s new regulatory structure for hedge fund managers, which is expected to take effect in the first half of 2012, and discusses the application of the new regulations with respect to staffing, compensation, taxation, compliance, regulatory filings and other matters.  Part four will conclude the series with a discussion of Hong Kong.

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  • From Vol. 4 No.45 (Dec. 15, 2011)

    CFTC Position Limit Rules Challenged in Lawsuit by ISDA and SIFMA

    On Friday, December 2, 2011, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) jointly filed a complaint in the U.S. District Court for the District of Columbia against the Commodity Futures Trading Commission (CFTC).  Their complaint challenges the final rules adopted by the CFTC at its October 18, 2011 meeting establishing speculative position limits on 28 commodity futures, option contracts and economically equivalent commodity swaps (the Position Limit Rules).  This article summarizes the Position Limit Rules and the lawsuit challenging them.  For hedge fund managers that trade covered commodities or derivatives based on them, the Position Limit Rules and the lawsuit can directly affect trading volumes and strategies.  See also “Recent CFTC Settlement with Former Moore Capital Trader Illustrates a Number of Best Compliance Practices for Hedge Fund Managers that Trade Commodity Futures Contracts,” The Hedge Fund Law Report, Vol. 4, No. 30 (Sep. 1, 2011).

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  • From Vol. 4 No.37 (Oct. 21, 2011)

    Technical and Operational Considerations for Hedge Fund Managers in Connection with Preparing, Filing and Updating Form PF

    The Financial Stability Oversight Council (FSOC) recently approved a proposed rule and guidance setting out the metrics and process it would use to designate a nonbank financial company as systemically important under the Dodd-Frank Act.  In that proposed rule, the FSOC noted that “[w]ith respect to hedge funds and private equity firms . . . less [systemic risk related] data is generally available about these companies than about certain other types of nonbank financial companies.”  Accordingly, “[b]eginning in 2012, advisers to hedge funds and private equity firms and commodity pool operators and commodity trading advisors will be required to file Form PF with the Securities and Exchange Commission or the Commodity Futures Trading Commission, as applicable, on which form such companies will make certain financial disclosures.  Using these and other data, the [FSOC] will consider whether to establish an additional set of metrics or thresholds tailored to evaluate hedge funds and private equity firms and their advisers.”  In its proposed form, Form PF calls for voluminous and detailed disclosure of financial, risk, counterparty and other information by hedge fund managers.  Understanding the scope of required information presents complicated legal challenges, and complying with the anticipated disclosure obligations presents unique operational challenges.  Accordingly, on October 25, 2011 – Tuesday of next week – Advise Technologies and The Hedge Fund Law Report will be co-sponsoring a seminar on legal and operational considerations for hedge fund managers in connection with completing, filing and updating Form PF.  The seminar will take place from 8:00 a.m. to 10:00 a.m. at the Helmsley Hotel at 212 East 42nd Street in Manhattan.  To register, click here or call 212-576-1170.  In anticipation of the seminar, The Hedge Fund Law Report interviewed Stephen Casner, CEO of HazelTree Fund Services, on how hedge fund managers can negotiate some of the more complex operational challenges presented by Form PF.  The full text of our interview is included in this issue of The Hedge Fund Law Report.

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  • From Vol. 4 No.27 (Aug. 12, 2011)

    SEBI Proposes to Regulate Indian Hedge Funds

    On August 1, 2011, the Securities and Exchange Board of India (SEBI) proposed a comprehensive set of draft regulations for all types of Alternative Investment Funds (AIFs), including private equity, venture capital, private investment in public equity, real estate and strategy funds (which includes hedge funds).  SEBI published the “Concept Paper on Proposed Alternative Investment Funds Regulation” in response to gaps in India’s regulatory regime and the concomitant risks to its markets.  The proposals aim to deter unfair trade practices and mitigate conflicts of interest via regulations mandating registration, imposing disclosure requirements, and setting limits on targeted investors, fund size, fund tenure, and fund strategies, including the extent of leverage and use (without investor consent) of complex structured products.  The resulting regulations, termed “SEBI (AIF) Regulations of 2011,” overhaul the regulatory regime currently in place, which had allowed funds, including hedge funds, to conduct business effectively without oversight.  See “Working Paper Analyzes India’s Approach to Hedge Fund Regulation,” The Hedge Fund Law Report, Vol. 1, No. 14 (Jun. 19, 2008).  This article details the background of the regulatory environment that resulted in this concept paper, and the proposed regulations as they pertain to hedge funds.  For a discussion of a jurisdiction in which hedge fund managers commonly organize entities to access Indian opportunities, see “Hedging into Africa through Cayman and Mauritius,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).

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  • From Vol. 4 No.25 (Jul. 27, 2011)

    Second Circuit Decision Sends CSX and Hedge Fund Suitors TCI and 3G Back to District Court to Examine When Funds Formed a “Group” to Acquire CSX Stock, Leaving Unresolved the Issue of Beneficial Ownership of Shares Referenced in Cash-Settled Total-Return Equity Swaps

    In 2006, hedge funds sponsored by The Children’s Investment Fund Management and 3G Capital Management (respectively, TCI and 3G, or the Funds) believed shares of railroad giant CSX Corporation (CSX) were undervalued and sought to “unlock” that value by influencing CSX management.  The Funds acquired positions in CSX both directly and through cash-settled total-return equity swaps that referenced CSX stock.  See “IRS Directive and HIRE Act Undermine Tax Benefits of Total Return Equity Swaps for Offshore Hedge Funds,” The Hedge Fund Law Report, Vol. 3, No. 12 (Mar. 25, 2010).  Unable to persuade CSX management to change its policies, in January 2008, the Funds commenced a proxy fight.  In response, CSX sued the Funds for violating the disclosure requirements of Section 13(d) of the Securities and Exchange Act of 1934.  CSX argued that the Funds were the beneficial owners of the CSX shares that the Funds' counterparties had acquired to hedge the swap contracts and that the Funds had been operating as an undisclosed “group.”  The District Court agreed and enjoined the Funds against future violations of Section 13(d) but refused to prohibit the Funds from voting their shares at the CSX meeting.  See “District Court Holds that Long Party to Total Return Equity Swap May be Deemed to have Beneficial Ownership of Hedge Shares Held by Swap Counterparty,” The Hedge Fund Law Report, Vol. 1, No. 14 (Jun. 19, 2008).  Each of the parties appealed different parts of the District Court’s decision, and on July 18, 2011 – almost three years after the appeal was argued – the Second Circuit issued its long-awaited decision in the matter.  This article summarizes the Second Circuit’s decision.  For a summary of the original complaint in this matter, see “CSX Sues Hedge Funds TCI and 3G for Violating Federal Securities Laws,” The Hedge Fund Law Report, Vol. 1, No. 4 (Mar. 24, 2008).

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  • From Vol. 4 No.21 (Jun. 23, 2011)

    SEC Delays Registration Deadline for Hedge Fund Advisers, and Clarifies the Scope and Limits of Registration Exemptions for Private Fund Advisers, Foreign Private Advisers and Family Offices

    At an open meeting held on June 22, 2011, the Securities and Exchange Commission adopted and amended rules that will directly affect the registration, reporting and disclosure obligations of U.S. and non-U.S. hedge fund managers.  While the texts of most of those rules or rule amendments remain to be published as of this writing, comments by SEC commissioners at the open meeting outlined the general scope of the final rules and amendments.  Of particular relevance to hedge fund managers, the SEC addressed the following topics at the open meeting: delay of registration and reporting deadlines; who may and must register with the SEC and the states based on assets under management; the private fund adviser exemption; the foreign private adviser exemption; continuing relevance of the Unibanco no-action letter for global hedge fund sub-­advisory relationships; filing, recordkeeping and examination obligations of exempt reporting advisers; and the exemption from registration for family offices.  This article offers more detail on the SEC’s statements on each of the foregoing topics at the open meeting.

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  • From Vol. 4 No.6 (Feb. 18, 2011)

    Private Equity Investment Adviser Full Value Advisors, L.L.C., Loses Appeal to D.C. Circuit in Bid to Avoid Filing Disclosures of Stock Positions Under Section 13(f) of the Securities Exchange Act of 1934

    Section 13(f) of the Securities Exchange Act of 1934 requires institutional investment managers to disclose their investment positions to the Securities and Exchange Commission (SEC).  That information is then made public unless an exemption from disclosure applies.  In applying for an exemption, the investment manager must submit detailed information to the SEC, including the information that the manager desires to avoid disclosing, to enable the SEC to consider the application.  Appellant investment adviser Full Value Advisors, L.L.C. (Full Value) submitted an incomplete Form 13F disclosure form to the SEC and requested an exemption from disclosure.  The SEC denied the application on the ground that Full Value had failed to provide sufficient information on which to base a decision.  Full Value appealed the SEC’s determination, claiming that the disclosure requirements constituted an impermissible regulatory taking of property under the Fifth Amendment and violated its free speech rights under the First Amendment.  The U.S. Court of Appeals for the D.C. Circuit held that mandatory disclosure to the SEC did not violate either Amendment.  It also dismissed the appeal as unripe for consideration in so far as it related to Full Value’s claims regarding the potential disclosure of its Form 13F information to the public.  We summarize the Court’s decision.

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  • From Vol. 4 No.5 (Feb. 10, 2011)

    CFTC Proposes New Reporting and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers and Jointly Proposes with the SEC Reporting Requirements for Dually-Registered CPO and CTA Investment Advisers to Private Funds

    On January 26, 2011, the U.S. Commodity Futures Trading Commission (CFTC) proposed amendments to Part 4 of its regulations promulgated under the Commodity Exchange Act (CEA) governing Commodity Pool Operators (CPOs) and Commodity Trading Advisers (CTAs).  The CFTC announced a joint effort with the U.S. Securities and Exchange Commission (SEC) proposing the adoption of a new rule on reporting for investment advisers required to register with the SEC that advise one or more private funds and that are also CPOs or CTAs required to register with the CFTC (dual registrants).  This joint endeavor, mandated by Section 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), would obligate dual registrants to file newly-created Form PF with the SEC in order to satisfy both Commissions’ filing requirements.  In an effort to harmonize its rules with this regulatory scheme, the CFTC separately announced a proposed amendment requiring all registered CPOs and CTAs to electronically file newly-created Forms CPO-PQR and CTA-PR with the National Futures Association (NFA) pursuant to § 4.27 of the CFTC regulations, forms substantively identical to Form PF.  The CFTC has also proposed further changes to its regulations that it deemed necessary in the wake of recent economic turmoil and the new regulatory environment engendered by the Dodd-Frank Act.  These proposed amendments would: (1) rescind the exemption from registration for CPOs provided in §§ 4.13(a)(3) and (a)(4) of its regulations; (2) revise § 4.7 so that CPOs may no longer claim an exemption from certifying certain annual reports; (3) incorporate the definition of “accredited investor” promulgated by the SEC in Regulation D into § 4.7; (4) reinstate the criteria for claiming an exclusion from the definition of CPO provided in § 4.5; (5) require any CPO or CTA seeking exemptive relief pursuant to §§ 4.5, 4.13 and 4.14 to annually renew their request with the NFA; and (6) require an additional risk disclosure statement under §§ 4.24 and 4.34 for any CPO or CTA engaged in swap transaction.  The CFTC intends to promulgate these new rules in an effort to provide effective oversight of the commodity futures and derivatives markets and to manage the risks, especially systemic risks, posed by any pooled investment vehicles under its jurisdiction.  This article provides a detailed summary of the CFTC’s proposed amendments.

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  • From Vol. 3 No.47 (Dec. 3, 2010)

    Repeal of Dodd-Frank Confidentiality Protection for SEC: What Investment Advisers Lost and What Remains

    On October 5, 2010, President Obama signed Senate Bill 3717 (“Bill”) into law, amending the Investment Advisers Act of 1940 (the “IAA”) by repealing a broad exemption of the Securities and Exchange Commission (“SEC”) from the Freedom of Information Act (“FOIA”) and other disclosure obligations enacted only three months before by Section 929I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Section 929I, which added Section 210(d) to the IAA, exempted the SEC from being compelled through FOIA and non-FOIA litigation to disclose information obtained by the SEC in connection with reporting obligations of financial institutions, including in connection with the SEC’s surveillance, risk assessment, regulatory or oversight activities.  The SEC had requested the exemption to facilitate its enforcement activities.  According to the SEC, financial institutions resist providing the agency with non-public information on the grounds that the SEC might not be able to keep it confidential, particularly from competitors or other third parties seeking the information through discovery in connection with commercial litigation or otherwise.  After the SEC used Section 210(d) to avoid disclosing details of its failure to detect the Bernie Madoff Ponzi scheme, Congress determined that Section 210(d) was overbroad, and repealed the provision.  In a guest article, Hillel M. Bennett and Gary L. Granik, both Partners at Stroock & Stroock & Lavan LLP, and Alessandro J. Sacerdoti, an Associate at Stroock, discuss in detail: the reporting and filing requirements applicable to investment advisers, as established by Dodd-Frank; the new confidentiality protections for filed information included in Dodd-Frank; confidential treatment of information obtained by the SEC during examinations and investigations; Exemption 8 of FOIA; the Aguirre case; requests by investment advisers for confidential treatment of non-public information disclosed to the SEC during an examination or investigation; confidentiality of proprietary information under Dodd-Frank; and potential legislative action with respect to confidentiality of information filed with or obtained by the SEC.

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  • From Vol. 3 No.20 (May 21, 2010)

    How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA's More Onerous Prohibited Transaction Provisions? (Part Two of Three)

    This is the second article in a three-part series of articles we are doing on ERISA considerations in the hedge fund context.  Specifically, the first article in this series dealt with how hedge funds and their managers can become − and avoid becoming − subject to ERISA.  See "How Can Hedge Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA's More Onerous Prohibited Transaction Provisions? (Part One of Three)," The Hedge Fund Law Report, Vol. 3, No. 19 (May 14, 2010).  This article deals with the consequences to hedge funds and their managers of becoming subject to ERISA.  And the third article will detail strategies for accepting investments from "benefit plan investors" above 25 percent of any class of equity interests issued by a hedge fund while avoiding many of the more onerous prohibited transaction provisions and other restrictions imposed by ERISA.  In short, the structure of this series is: application, implications, avoidance.  As explained in the first article, the occasion for this series is the gulf between forecasts and experience with respect to inflows into hedge funds globally.  Forecasts suggest that the rate of new investments into hedge funds should be increasing, but experience suggests that fundraising remains a primary challenge for many hedge fund managers, even seasoned managers with good track records.  We think that one explanation for this gulf may involve the nature of the anticipated new assets: many of those assets are likely to come from U.S. corporate pension funds.  Such investors generally employ a long and conscientious pre-investment due diligence process, or from the hedge fund perspective, involve a longer sales cycle.  But when they invest, they invest for the long term.  That is, we think those new assets are out there, and are moving slowly and carefully into hedge funds, focusing on a wider range of considerations when allocating capital, including considerations beyond track record such as transparency, liquidity, risk controls, regulatory savvy and other "non-investment" criteria.  (Most hedge fund blowups have been the result of operational rather than investment failures.)  U.S. corporate pension funds are the quintessential ERISA investor.  Therefore, when competing for allocations from U.S. corporate pension funds, facility with the contours of ERISA (it's an infamously byzantine statute) will be a competitive advantage for hedge fund managers.  The purpose of this series of articles is to help hedge fund managers hone that competitive advantage.  If a hedge fund comes within the jurisdiction of ERISA, the hedge fund and its manager become subject to a series of new obligations and limitations that otherwise would not apply.  Most notably on the obligations side, the manager becomes subject to a more particularized fiduciary duty standard than is imposed by the Investment Advisers Act or Delaware law.  And most notably on the limitations side, the hedge fund (which is deemed to constitute "plan assets" for ERISA purposes) is prohibited from engaging in a series of transactions with so-called "parties in interest."  This article explains the ERISA-specific fiduciary duty, as well as ERISA's per se prohibited transactions, in greater detail.  In addition, on the obligations side, this article details the unique ERISA reporting regime, focusing on the Department of Labor's (DOL) Form 5500 Schedule C (including a discussion of reporting requirements with respect to direct compensation, indirect compensation, eligible indirect compensation and gifts and entertainment); and custody and bonding requirements.  And on the limitations side, this article discusses, in addition to prohibited transactions, limitations imposed on hedge funds and managers with respect to: performance fees; cross trades; principal trades; soft dollars; affiliated brokers; securities issued by the employer who sponsors the relevant ERISA plan; expense pass-throughs; indemnification and exculpation; and placement or finders' fees (and related "pay to play" considerations).  Finally, this article discusses the broad reach of liability and the penalties that may be imposed for violations of ERISA's obligations or limitations, and the cure provisions available for certain breaches.  While this article outlines a seemingly oppressive set of consequences flowing from application of ERISA to a hedge fund and manager, it should be noted that the third article in this series will strike a considerably more optimistic note.  The list of prohibited transactions under ERISA is so long, and the definition of party in interest so broad, that literal compliance with ERISA would actually run contrary to the intent of ERISA, which is to protect retiree money.  That is, a hedge fund manager or other investment manager forced to comply with all of the investment and operational prohibitions of ERISA would not be able to effectively serve the interests of benefit plan investors.  Recognizing this, the DOL has promulgated an extensive series of "class exemptions" that provide relief from the prohibited transaction and other provisions of ERISA, and the DOL from time to time also provides individual exemptions (similar to the SEC's no-action letter process).  Those categories of relief will be the subject of the third article in this series.

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  • From Vol. 3 No.6 (Feb. 11, 2010)

    Application to Hedge Fund Managers of the Internal Control Report Requirement of the Amended Custody Rule

    Under the amended custody rule, registered hedge fund managers that are excepted from the surprise examination requirement still may be subject to the internal control report requirement.  That is, under the amended custody rule, a registered hedge fund manager with actual or deemed custody of client assets generally would be required to undergo an annual surprise examination.  However, the rule contains an exception to the surprise examination requirement for advisers to pooled investment vehicles that deliver annual audited financial statements (prepared by an independent, PCAOB-registered accountant) to investors in the pool within 120 days of the end of the pool’s fiscal year (180 days for funds of funds).  See “How Can Hedge Fund Managers Structure Managed Accounts to Remain Outside the Purview of the Amended Custody Rule’s Surprise Examination Requirement?,” The Hedge Fund Law Report, Vol. 3, No. 5 (Feb. 4, 2010).  Similarly, under the amended custody rule, a registered hedge fund manager that self-custodies client assets or uses a related person to custody client assets is required to obtain or receive from that related person, at least annually, a written report from a PCAOB-registered accountant describing (as discussed more fully in this article) the manager’s or the related person’s custody controls, tests of those controls performed by the accountant and the results of such tests.  The amended custody rule does not contain an exception to the internal control report requirement for advisers to pooled investment vehicles.  Accordingly, a hedge fund manager may avoid the surprise examination requirement while remaining subject to the internal control report requirement.  For example, a hedge fund manager controlled indirectly by a bank holding company that custodies client assets at a broker-dealer also indirectly controlled by that bank holding company would be subject to the internal control report requirement, but could avoid the surprise examination requirement.  While the so-called Volcker Rule would prohibit the foregoing scenario, even independent hedge fund managers that custody assets at affiliated broker-dealers would have to comply with the internal control report requirement.  See "Senate Banking Committee Hears Testimony from Hedge Fund Industry Experts and Academics on 'Volcker Rule,'" below, in this issue of The Hedge Fund Law Report.  Because commissioning an initial internal control report and subsequent reports is likely to be expensive, especially for smaller hedge fund managers, the internal control report requirement generated controversy when the custody rule amendments were originally proposed.  Nonetheless, the requirement made it into the final rule, and the SEC’s apparent disregard of industry comments on this point appears to contain an element of action-forcing: the SEC’s stated goal in amending the custody rule was to “encourage custodians independent of the adviser to maintain client assets as a best practice whenever feasible.”  A hedge fund manager that maintains custody at an independent custodian would not be subject to the internal control report requirement.  Therefore, the cost of preparing internal control reports may be understood as a penalty for self-custody or related-party custody.  In an effort to assess the real impact of the internal control report requirement on hedge fund managers, this article discusses: the specific elements required to be included in internal control reports; who may prepare such reports; the interaction of surprise examinations and internal control reports; potential use by the SEC of such reports in the course of inspections and examinations; whether or not such reports will be public; how such reports will factor into the institutional investor due diligence process; and fee levels and structures for preparation of internal control reports.

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  • From Vol. 3 No.4 (Jan. 27, 2010)

    How Does the Amended Custody Rule Change the Balance of Power Between Hedge Fund Managers and Accountants?

    The bad news about the amended custody rule is the surprise examination requirement.  The good news, at least for many hedge fund managers, is the annual audit exception.  (That is, the amended custody rule contains an exception from the surprise examination requirement for advisers to pooled investment vehicles that are annually audited by a PCAOB-registered accountant and that distribute audited financial statements prepared in accordance with GAAP to fund investors within 120 days (180 days for funds of funds) of the fund’s fiscal year end.)  See “SEC Adopts Investment Adviser Custody Rule Amendments,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  The qualified news is that while many hedge fund managers may avail themselves of the annual audit exception, an appreciable number may not.  For example, managers whose funds are audited by non-PCAOB-registered accountants, or that do not (or cannot) distribute audited financial statements to fund investors within 120 days of the fund’s fiscal year end, would not be eligible for the annual audit exception.  See “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010).  For such “ineligible” hedge fund managers, the surprise examination requirement may complicate operations for at least two reasons.  First, it creates a de facto annual audit requirement.  The substance of a surprise examination – explained in the SEC’s adopting release and a related interpretive release providing specific guidance for accountants – closely resembles the substance of an annual audit.  (The substance of a surprise examination is discussed in more detail in this article.)  Moreover, as the SEC pointed out in the adopting release accompanying the custody rule amendments, a hedge fund manager’s inability to predict which transactions an auditor will test in the course of an annual audit is analogous to the “surprise” element of the examination requirement.  Second – and perhaps more controversially – the surprise examination requirement may complicate operations for hedge fund managers that are not eligible for the annual audit exception because of various SEC reporting requirements imposed on accountants that conduct surprise examinations.  Those reporting requirements are described in more detail in this article, but in pertinent part would require an accountant to file with the SEC, within four business days of resignation, dismissal or other termination from an engagement to provide surprise examinations, Form ADV-E, along with an explanation of any problems that contributed to such resignation, dismissal or other termination.  Importantly, Form ADV-E, along with the accompanying explanation, would be publicly available.  According to the adopting release, the policy rationale for such public availability is to enable current and potential clients of an adviser to assess for themselves the importance of the explanation provided by the accountant for its resignation, dismissal or other termination.  The concern haunting the subset of hedge fund managers that are (or are concerned about becoming) subject to the annual surprise examination requirement is that the Form ADV-E filing requirement may – in cases where reasonable minds can differ on close accounting and valuation calls – further enhance the leverage of accountants over managers.  In other words, the concern is that revised Form ADV-E may increase the volume and specificity of an accountant’s “noisy withdrawal,” and in recognition of that, may increase risk aversion on the part of hedge fund managers in dealings with accountants.  The rejoinder to this argument is that accountants already have considerable leverage over hedge fund managers, as evidenced most starkly by the consequences flowing from withholding of an unqualified audit opinion letter.  See, e.g., “Former CFO of Highbridge/Zwirn Special Opportunity Fund Sues Ex-Partner Daniel B. Zwirn for Defamation and Breach of Contract,” The Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).  In an effort to assess the extent to which the custody rule amendments may alter the balance of power between accountants and hedge fund managers, this article examines: how custody is defined in the amended custody rules (because custody is a condition precedent for application of the surprise examination requirement); the substance of the surprise examination requirement; the three exceptions from the surprise examination requirement; relevant SEC reporting requirements (on Form ADV-E); expert insight on whether and how the SEC reporting requirements may increase the leverage of accountants vis-à-vis hedge fund managers; existing accountant leverage (including a discussion of audit representation letters); who bears the cost of a surprise examination; and PCAOB resource limits.

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  • From Vol. 2 No.47 (Nov. 25, 2009)

    New CFTC Rules Significantly Amend Reporting Requirements Applicable to Commodities-Focused Hedge Fund Managers

    On November 9, 2009, the Commodity Futures Trading Commission (CFTC) adopted several amendments to its regulations applicable to commodity pool operators (CPOs).  These Final Rules specify detailed information that must be included in periodic account statements and annual reports for commodity pools with more than one series or class of ownership interest; clarify that periodic account statements must disclose either the net asset value (NAV) per outstanding participation unit in the pool, or the total value of a participant’s interest in the pool; extend the time period for filing and distributing annual reports of commodity pools that invest in other funds; codify existing CFTC staff interpretations regarding proper accounting and financial statement presentation of certain income and expense items in financial reports; streamline annual reporting requirements for pools ceasing operation; establish conditions for use of International Financial Reporting Standards in lieu of U.S. Generally Accepted Accounting Principles and clarify and update several other requirements for periodic and annual reports to be prepared and distributed by CPOs.  The Final Rules become effective on December 9, 2009 and apply to commodity pool annual reports for fiscal years ending December 31, 2009 or later.  The amended rules will have a significant effect on the regulatory environment in which commodities-focused hedge fund managers operate.  Accordingly, this article offers a detailed explanation of the amendments and the resulting new reporting obligations applicable to CPOs.

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  • From Vol. 2 No.46 (Nov. 19, 2009)

    How Will Registration and Reporting Impact Hedge Fund Managers? An Interview with Todd Groome, Non-Executive Chairman of the Alternative Investment Management Association

    On November 3, 2009, the Alternative Investment Management Association (AIMA) reiterated its support for the registration of hedge fund managers operating in the U.S. and for the reporting of systemically relevant information by larger managers to national authorities in the interest of financial stability.  The following day, the Financial Services Committee of the U.S. House of Representatives, by a vote of 41 to 28, approved a bill that would impose a registration mandate, The Private Fund Investment Advisers Act of 2009, sponsored by Rep. Paul Kanjorski (D-PA).  See “U.S. House of Representatives Holds Hearings on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009); “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  The Hedge Fund Law Report recently interviewed Todd Groome, who since December 2008 has served as Non-Executive Chairman of the AIMA.  (Before assuming his current role, Groome was an Advisor in the Monetary and Capital Markets Department of the International Monetary Fund (IMF).)  Our interview focused on topics including: the range of appropriate information for financial reports to national authorities; the capacity of administrators to analyze and act on that information; the disproportionate costs of compliance with reporting requirements for smaller managers; the need to preserve the confidentiality of the information (in its pre-aggregated form) that may be reported by managers; the sources of systemic risk and how to mitigate it; the sharing of information among national authorities; the development of an official multi-national information template; the threat of a tax-driven flight of talent and capital from London; sound practices for hedge fund administrators; the continued viability of an in-house administration option; and the policy or politics behind last year’s bans on short selling in the financial services industry in both the U.S. and the U.K.  The first half of the full transcript of that interview is included in this issue of The Hedge Fund Law Report.  The remainder of the full transcript will be included in a subsequent issue.

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  • From Vol. 2 No.38 (Sep. 24, 2009)

    Holtz Rubenstein Reminick Hosts Conference on “Uncovering Foreign Income: The Implications and Consequences of Foreign Bank Account Reporting”

    On September 16, 2009, the accounting firm Holtz Rubenstein Reminick (HRR) hosted a seminar on reporting of foreign bank accounts, for both income tax and anti-money laundering purposes.  Reporting on foreign income has become headline news of late.  Notably, in February 2009, UBS, the largest Swiss bank by assets, reached a settlement with the U.S. Internal Revenue Service (IRS) in which UBS agreed to give the IRS hundreds of names of Americans suspected of using UBS accounts to evade U.S. income taxes.  Several UBS clients have been prosecuted. The HRR seminar was chiefly designed to address the issue of whether people who have accounts with UBS or other foreign banks should make voluntary disclosure to the IRS of the existence of such accounts and other data with respect to such accounts.  Panelists also briefly discussed the still-undecided issue of whether an interest in an offshore hedge fund must, under the Bank Secrecy Act, be reported in a Report of Foreign Bank and Financial Accounts (FBAR).  See “IRS Indicates that U.S. Persons May be Required to Report Interests in Offshore Hedge Funds in Reports of Foreign Bank and Financial Accounts,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009).  We detail the relevant points from the conference.

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  • From Vol. 2 No.30 (Jul. 29, 2009)

    SEC’s Order in the Perry Case Effectively Creates a Presumption that Beneficial Ownership Acquired as Part of an Activist or Merger Arbitrage Strategy Is Not “In the Ordinary Course,” and thus May Require the Filing of a Schedule 13D

    On July 21, 2009, the Securities and Exchange Commission (SEC) settled with New York-based hedge fund manager Perry Corp. over alleged securities law violations for failure to report that a fund it managed (Perry) had purchased a significant amount of stock in a public company.  The SEC Order found that Perry failed to disclose its acquisition of nearly 10 percent of the common stock of Mylan Laboratories Inc., a company that had just announced a proposed acquisition of King Pharmaceuticals Inc.  Perry was engaged in a merger arbitrage strategy and would have benefited from the Mylan-King merger.  The conclusions in the Order raise several questions about the obligation of a hedge fund to file a Schedule 13D, particularly if the fund is engaged in merger arbitrage or activist strategies.  Specifically, the Order appears to significantly narrow the circumstances in which beneficial ownership of the equity of a publicly traded company may be considered acquired “in the ordinary course” when acquired by a hedge fund following a merger arbitrage or activist strategy.  In fact, it may effectively create a presumption that such trading is not in the ordinary course, and thus any hedge fund following such a strategy that crosses the five percent threshold must file a Schedule 13D within 10 days of crossing the threshold, as explained more fully in this article.  In addition, the Perry Order highlights the ongoing tension between hedge funds and regulators over how much transparency hedge funds need to provide to the public.  We outline the filing requirements under Section 13(d)(1) of the Securities Exchange Act of 1934, provide a comprehensive summary of the Perry Order then describe the implications of the Perry Order for the obligations of hedge funds to file Schedule 13Ds (and 13Gs).  We also discuss the implications of the Perry Order for filing obligations based on beneficial ownership arising out of total return equity swap positions, and confidentiality concerns raised by the Order.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    Investors’ Working Group Recommends Delayed Disclosure of Holdings to Regulators and Registration of Hedge Fund Advisers

    As the calls for additional regulation of the hedge fund industry continue to mount, the Investors’ Working Group (IWG) has added its recommendations to the growing list of proposals to oversee the industry.  The IWG is an independent task force sponsored by the CFA Institute Centre for Financial Market Integrity and the Council of Institutional Investors.  On July 15, 2009, the IWG issued a report (Report) recommending that investment managers, including managers of hedge funds and private equity funds, be required to make regular disclosures to regulators on a real-time basis to protect against systemic risk.  The IWG also advocated requiring hedge fund managers to register as investment advisers with the SEC, a proposal that has been echoed by various legislators and the U.S. Treasury.  We offer a detailed description of the parts of the Report most relevant to hedge funds, and include industry responses to the Report.

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  • From Vol. 2 No.27 (Jul. 8, 2009)

    Hedge Fund Managers Retaining “Private Regulators” to Demonstrate a Credible Commitment to Compliance

    Trust is at the heart of the relationship between hedge fund managers and hedge fund investors.  While some investors have bargained for significant transparency, managers are almost always at an informational advantage vis-à-vis their investors with respect to their specific investment activities.  Those gaps in information are generally filled by two elements: law and trust.  Since law is an imperfect and often ex post remedy, trust remains the glue that holds the investment management relationship together.  But in the wake (or the midst) of a lengthy credit crisis, the Madoff scandal and a wave of redemption suspensions and gate impositions, trust is in short supply among hedge fund investors.  In practical terms, this translates into one of the toughest money-raising and money-retaining environments on record.  In response to these dynamics, the role of third-party service providers to hedge funds and managers has been evolving in ways that would have been difficult to foresee in early 2007.  Specifically, a growing number of hedge fund managers have been granting third-party administrators and other service providers unprecedented powers over their investments and operations.  For example, as discussed more fully in this article, the London-based manager of the recently-launched Gyldmark Liquid Macro Fund has empowered PCE Investors to block trades outside of the fund’s mandate and to liquidate the fund (consistent with its governing documents) if the fund is down more than ten percent in a given year.  Managers are granting such powers to service providers as a way of credibly demonstrating to current and potential investors an irrevocable commitment to compliance and best practices.  In such circumstances, the role of the service provider has evolved from solely providing services to the manager or fund to providing an objective check on the manager’s activities.  For this reason, service providers retained to provide such a role have come to be known as “private regulators.”  And in various cases they are providing a level of de facto regulation more draconian than anything proposed in Congress, by the Obama administration or by EU authorities.  We outline the services traditionally provided to hedge funds and hedge fund managers by third-party service providers; the shift to private regulation and the specific types of powers granted to private regulators; doubts expressed by some market participants about the practicability of private regulation; liability and indemnification concerns; and procedures regarding reporting of violations or suspected violations and “noisy withdrawals.”

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Should Hedge Funds Register as Commodity Pool Operators?

    A common mistaken belief among many is that hedge funds are unregistered and unregulated investment vehicles.  While certain exemptions exist under the Investment Company Act of 1940 for registration, a hedge fund that trades in commodity options and futures contracts may be required to register as a commodity pool operator (CPO).  In a guest article, Ernest Edward Badway and Amit Shah, Partner and Associate, respectively, at Fox Rothschild LLP, discuss the questions that a hedge fund should consider in evaluating whether to register as a CPO, including what a commodity pool is, who must register as a CPO, registration exemptions, registration requirements, compliance requirements and more.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    IRS Indicates that U.S. Persons May be Required to Report Interests in Offshore Hedge Funds in Reports of Foreign Bank and Financial Accounts

    On June 12, 2009, in the course of a teleconference jointly sponsored by the American Bar Association and the American Institute of Certified Public Accountants, Internal Revenue Service (IRS) officials stated that a U.S. person’s equity interest in offshore hedge funds (as well as offshore mutual funds and similar pooled investment vehicles) constitutes a foreign financial account.  Under this view, U.S. persons with investments in offshore hedge funds would be required to file Treasury Form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts (FBAR) with respect to such interests.  In recent guidance, the IRS clarified that certain U.S. persons will have until September 23, 2009 to file FBARs in respect of 2008 calendar year.  The IRS officials on the call framed the interpretation as a “clarification” of the existing filing regime, but the interpretation nonetheless took the hedge fund community by surprise: heretofore, U.S. persons with interests in offshore hedge funds generally had not filed FBARs based solely on those interests.  While the filing is not terribly onerous, the new interpretation may be understood as part of the federal government’s more general effort to obtain more information about hedge funds.  However, this move is different from recent hedge fund regulation bills in Congress or the Obama administration’s proposals in that while those efforts focus on obtaining information from hedge fund managers, this new and more expansive understanding of the range of required FBAR filers focuses on hedge fund investors.  The primary concern it raises – other than the surprise factor and the danger of accidentally tripping up an evolving rule that can result in liability – is that at the margin, the required disclosures will serve as a disincentive for required filers to invest in offshore hedge funds.  One of the historic attractions of investments in offshore hedge funds was the relative anonymity they offered to investors.  To a degree, the IRS’ new interpretation cuts back on the opportunity for anonymity.  We discuss the new IRS interpretation in detail, and offer, among other things, relevant excerpts from the transcript of the call in which the IRS espoused its new interpretation.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Consistent With International Trends, Cayman Islands Monetary Authority May Require More Transparency from Cayman-Registered Hedge Funds

    The Cayman Islands Monetary Authority is planning to increase the transparency required of hedge funds registered in the popular offshore jurisdiction.  Specifically, it is contemplating extending the scope of information called for in Fund Annual Reports, and the range of uses to which such information may be put.  This article reviews the existing system of disclosure in the Caymans, and the most likely changes.  It also discusses the possible impact of such changes on the competitive position of the Cayman Islands vis-à-vis other offshore financial centers.

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  • From Vol. 2 No.22 (Jun. 3, 2009)

    Committee on Capital Markets Regulation Releases Report on How to Reduce Systemic Risk in the American Financial System

    On May 26, 2009, the Committee on Capital Markets Regulation, an independent and nonpartisan research organization made up of 25 industry leaders, released a report entitled, “The Global Financial Crisis: A Plan for Regulatory Reform.”  The report outlines the committee’s plans for creating a more effective and more investor-friendly American financial regulatory structure.  The Committee posits that the most effective system of regulation must achieve four critical objectives: (1) reduced systemic risk; (2) increased investor protection through greater transparency; (3) a unified financial regulatory system with greater accountability; and (4) a coordinated international approach based on globally coordinated rules.  We offered a detailed synopsis of the report.

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  • From Vol. 2 No.18 (May 7, 2009)

    Future Regulation of Private Funds: How the Draft EU Directive & US Legislative Proposals Compare

    The new world order for private funds is beginning to take shape, from a regulatory perspective at least.  We now have legislative proposals to apply additional regulation to private funds – hedge funds and private equity funds – on both sides of the Atlantic: legislation introduced in the U.S. Congress and, last week, a draft EU Directive on Alternative Investment Fund Managers.  Both sets of proposals will potentially add significant additional regulatory obligations and cost.  However, as the proposals stand to date, the changes seem likely to add greater additional burden for those managing private funds from an EU jurisdiction than their U.S. competitors.  Some of the proposed changes on both sides of the Atlantic are welcome – but some, particularly in the EU proposals, are of doubtful benefit and have the potential to add significant additional cost for the industry.  In a guest article, Richard Horowitz, a Partner at Clifford Chance US LLP, compares the likely shape of future regulation of private funds in the U.S. and the EU.

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  • From Vol. 2 No.16 (Apr. 23, 2009)

    Will Hedge Fund Industry Self-Regulatory Codes, Such as the “Standards” Promulgated by The Hedge Fund Standards Board, Preempt Additional Hedge Fund Regulation or Complement It?

    The increasingly frequent and occasionally shrill calls for government regulation of the hedge fund industry often ignore an important fact: the industry itself has promulgated various codes of conduct and best practices that are significantly more detailed, practicable and equitable to the various affected constituencies than any bill or rule thus far proposed in the U.S., U.K. or other jurisdiction.  In the U.S., the President’s Working Group on Financial Markets in January issued its final reports on hedge fund best practices; the practices, if adopted, are intended to reduce systemic risk and improve investor protection.  See “President’s Working Group Releases Final Best Practices Reports for Hedge Fund Managers and Investors,” The Hedge Fund Law Report, Vol. 2, No. 5 (Feb. 4, 2009).  Along similar lines, the Hedge Fund Standards Board (HFSB) in the U.K. has adopted standards developed by the Hedge Fund Working Group, a predecessor organization, covering, among other things, disclosure, valuation, risk management, fund governance and shareholder conduct.  Like the PWG, the HFSB is a voluntary, market-led initiative.  For hedge funds, these various codes of conduct raise important issues, including: precisely how the codes operate; the pros and cons of signing on; similarities and differences between the different codes; and whether compliance with the codes will be required, either by law or the institutional investor market.  This article explores each of these issues.

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  • From Vol. 2 No.12 (Mar. 25, 2009)

    FSA Publishes Revised Disclosure Rules for Contracts for Difference

    The United Kingdom Financial Services Authority (FSA) recently published a Policy Statement (PS09/3), which expands its regime for the disclosure of major shareholdings to include contracts for difference (CfD) and similar financial instruments.  The Policy Statement responds to comments received by the FSA in response to its Consultation Paper (08/17) and includes final rules for the new disclosure regime for CfDs and other similar financial instruments.  We explore the material terms of the new Policy Statement, and discuss similar developments with respect to the disclosure regime applicable to total return equity swaps under United States law.

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  • From Vol. 2 No.7 (Feb. 19, 2009)

    “Oversight of Private Pools of Capital” Is Firmly on the Reform Agenda – What It Might Mean for U.S. Fund Managers

    At Mary Schapiro’s January confirmation hearing for her nomination as Chair of the Securities and Exchange Commission, she called for registration of hedge funds.  Members of the Senate Banking Committee promptly pledged to help with legislation, and bills to that effect were put forward before the month was out.  At about the same time, the “Group of 30” – an international committee of current and former senior regulators and bankers – released 18 recommendations for reform of financial market oversight.  Recommendation #4 is titled “Oversight of Private Pools of Capital” and calls for registration and regulation of managers of leveraged investment pools.  With that background it should be clear that the consensus in Washington, DC is that regulation of hedge funds – and likely private equity funds as well – should be part of the overhaul of US financial markets.  In a guest article, Shearman & Sterling partner Nathan Greene fleshes out what that consensus might mean by outlining potential new obligations for fund managers.

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  • From Vol. 2 No.2 (Jan. 15, 2009)

    Establishing, Maintaining and Exiting a Minority Equity Position: U.S. Securities Law Considerations for Hedge Funds

    A hedge fund that takes a minority equity position in a U.S. public company may encounter a variety of complex issues under the federal securities laws and other investment-related statutes.  In a guest article, Scott Budlong, a partner in the New York office of Richards Kibbe & Orbe LLP, and other RKO attorneys and an advisor to the firm, offer a comprehensive discussion of the most important of these U.S. legal issues from the perspective of an equity investment’s lifecycle: establishing, maintaining and exiting the position.

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  • From Vol. 2 No.1 (Jan. 8, 2009)

    Provisional Settlement in Short-Swing Profits Lawsuit Brought by CSX Shareholder Against Hedge Funds TCI and 3G: The 8% Solution

    Based in large part on Judge Lewis A. Kaplan’s June 11, 2008 opinion in the case of CSX v. TCI and 3G (which was detailed in the June 19, 2008 Hedge Fund Law Report), a CSX shareholder recently filed a lawsuit against TCI and 3G alleging violations of Section 16(b) of the Securities Exchange Act of 1934, the provision prohibiting short-swing profits.  The parties have settled the suit, pending court approval – but, as always, the settlement occurred in the “shadow” of relevant law and legal uncertainty.  We detail the legal backdrop before which the case has provisionally settled, and we show how legal uncertainty can translate into a dollars-and-cents reduction of claimed damages in the context of settlement of securities claims.

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  • From Vol. 2 No.1 (Jan. 8, 2009)

    The Hedge Fund Law Report Adds Innovative Features to its Regulatory & Legislative Chart

    Recently, we added innovative new features to our Regulatory & Legislative Chart to enhance its utility and relevance for subscribers.  Those new features include the following:

    ·        A “Sort Chart” function, which enables subscribers to (1) filter the Chart by jurisdiction or (2) sort the Chart by Entity, Topic, Action or Publication Date.

    ·        A “Maximize Chart” function, which enables subscribers to view the Chart in a larger format, for easier reading and navigation.

    ·        A “Search Chart” function, which enables subscribers to search the full Chart by key word.

    ·        A “Track This Item” function for each item listed in the Chart, which enables subscribers to receive immediate e-mail updates any time an item in the Chart is updated.

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  • From Vol. 1 No.29 (Dec. 24, 2008)

    The Hedge Fund Law Report Launches Interactive Regulatory & Legislative Chart

    The response to the international financial crisis has included an unprecedented volume and complexity of new law and regulation – a trend likely to continue and even increase in the U.S. when the next Congress convenes and the new administration takes office.  Much of that new authority will affect hedge funds and their managers, directly or indirectly.  To help our subscribers navigate the shifting regulatory landscape as efficiently as possible, we at The Hedge Fund Law Report are proud to announce the launch of our new Regulatory & Legislative Chart.

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  • From Vol. 1 No.27 (Dec. 9, 2008)

    Revised Short Sale Reporting Requirements May Still Go Too Far

    As part of its continued effort to monitor and understand short selling, the SEC decided in October to extend until August 1, 2009 short sale and position reporting requirements first enacted in an emergency order issued on September 18.  The agency intends to use the information in reports to craft and evaluate regulation.  Hedge funds, however, have been nearly unanimous in their opposition to short reporting.  In this second part of a two-part series, we explain the background, content and practical implications of the new short sale rules, and the likely future course of rulemaking on the topic.

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  • From Vol. 1 No.26 (Dec. 3, 2008)

    Be Prepared: How Hedge Fund Managers Can Get Ready to Testify Before Congress

    With what we anticipate will be increasing frequency, hedge fund managers are finding themselves summoned to that most public of forums – the witness table at Congressional hearings – the most salient example being the recent hearings conducted by the House Committee on Oversight and Government Reform at which five prominent hedge fund managers testified under oath.  (Those hearings were covered in detail in the November 25, 2008 issue of The Hedge Fund Law Report.)  In this environment, the question is no longer how to stay off the stage, but what to do and say when you’re on it – and, even more important, how to prepare for it.  We detail specific strategies that hedge fund managers can use to prepare for Congressional testimony.

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  • From Vol. 1 No.25 (Nov. 26, 2008)

    House Hearings on Hedge Funds’ Role in the Financial Crisis

    The heads of five of the most successful U.S. hedge funds testified on November 13 before the House Committee on Oversight and Government Reform.  In the course of the hearings, Committee members evidenced concern about systemic risk posed by hedge funds, and expressed interest in greater government oversight of hedge fund operations, investments and taxation.  The hearing offered a foreshadowing of heightened government scrutiny that hedge funds are likely to face when the 111th Congress convenes in January under substantially increased Democratic majorities in both houses.

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  • From Vol. 1 No.24 (Nov. 12, 2008)

    CFTC Approves New National Futures Association Rules Mandating Forex-Specific Risk Disclosure Statement, Periodic Account Statements and Annual Reports

    The Commodity Futures Trading Commission has approved new National Futures Association Compliance Rules 2-41 and 2-42, effective November 30, 2008. The new rules change the disclosure and reporting regimes for hedge funds and others that trade foreign exchange – we explain how.

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  • From Vol. 1 No.20 (Sep. 4, 2008)

    UK Imposes Strict Rules on Derivatives Disclosure, Perhaps Setting the Stage for More Hedge Fund Regulation in the US

    In a policy statement due later this month, the FSA is expected to propose that so-called contracts for difference (CFDs) must be disclosed as if they were common shares. CFDs are equity derivatives that enable traders to obtain exposure to the price performance of a wide variety of assets – including equity shares, indices and commodities – without directly owning the underlying assets. The new UK disclosure regime would be consistent with the recent decision in the US case of CSX v. TCI & 3G (which was covered in the June 19, 2008 issue of The Hedge Fund Law Report). According to the FSA, such a general disclosure regime for long CFD positions will be “the most effective way of addressing concerns in relation to voting rights and corporate influence.” However, hedge fund industry participants have criticized the move as “heavy-handed” and unnecessary. Also, hedge fund professionals have expressed a concern that the new disclosure regime could reduce trading volumes and increase the cost of capital.

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  • From Vol. 1 No.18 (Aug. 11, 2008)

    Senate Proposals and GAO Report Focus on Taxation of Cayman Islands Accounts

    On the heels of continued congressional concern about tax evasion among offshore accounts, including offshore hedge funds, a spokesman for the Senate Finance Committee told The Hedge Fund Law Report that lawmakers will attempt to “move legislation this year” addressing the issue. At a recent hearing on Cayman Islands accounts, Sen. Max Baucus, chairman of the Finance Committee, outlined a series of proposals centering on strengthening rules relating to Reports of Foreign Bank and Financial Accounts. The Finance Committee hearing focused on a recent Government Accountability Office report titled “Cayman Islands: Business and Tax Advantages Attract U.S. Persons and Enforcement Challenges Exist.” The GAO report found that for many hedge funds, a primary purpose of establishing a Cayman Islands domicile is tax minimization. The GAO report noted that efforts to prevent illegal tax avoidance are hindered by the IRS’s “lack of jurisdictional authority to pursue information, difficulty in identifying beneficial owners due to the complexity of offshore financial transactions and relationships among entities,” and other factors. Cayman attorneys, however, remain confident in the robust legal and regulatory structure in the Cayman Islands and, in fact, read the GAO report as complimentary of the Cayman system.

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  • From Vol. 1 No.14 (Jun. 19, 2008)

    District Court Holds that Long Party to Total Return Equity Swap May be Deemed to Have Beneficial Ownership of Hedge Shares Held by Swap Counterparty

    In a case of first impression, with potentially important consequences for activist hedge funds, the US District Court for the Southern District of New York ruled on June 11, 2008 that two hedge funds that had accumulated substantial economic positions in publicly-traded railroad operator CSX Corporation, principally via cash-settled total return equity swaps, were deemed to have beneficial ownership of the hedge shares held by their swap counterparties.

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  • From Vol. 1 No.14 (Jun. 19, 2008)

    Working Paper Analyzes India’s Approach to Hedge Fund Regulation

    A recent working paper analyzes various strategies that have been adopted by the Securities and Exchange Board of India in regulating the hedge fund industry, and examines in detail their advantages and disadvantages.

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  • From Vol. 1 No.8 (Apr. 22, 2008)

    SEC to Issue Standardized Examination Letter

    • New, more concise requirements expected in upcoming months to replace last year’s highly criticized SEC NY Regional formal examination letter requirements.
    • Revised requirements to be narrowed to include disclosure of client assets under management, risk management and internal controls.
    • Compliance officers urged to integrate new SEC requirements into policies, procedures and practices.
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  • From Vol. 1 No.5 (Mar. 31, 2008)

    International Accounting Standards Board Issues Discussion Paper to Simplify Financial Instrument Reporting

    • IASB discussion paper identifies varying methods and rules as main cause of complexity in financial reporting.
    • Paper proposes revised reporting standards and seeks to replace IAS 39.
    • Paper suggests intermediate and long term approaches to problems related to financial instrument measurement.
    • Suggested interim approaches include simplifying measurement requirements; replacing existing requirements with fair value measurement principles; and simplifying or eliminating hedge accounting requirements.
    • Single, uniform fair value measurement method - appropriate for all types of financial instruments - urged as the most promising long term solution.
    • Cost-based measurement method rejected for failing to provide information about future cash-flow prospects.
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  • From Vol. 1 No.2 (Mar. 11, 2008)

    SEC, at open meeting, votes unanimously to propose new rules restricting naked short sales and streamlining the ETF approval process, and to amend the rules relating to privacy of investor data

    • At an open meeting on March 4, 2008, the SEC voted unanimously to: (1) propose a rule cracking down on short selling, (2) propose two rules to streamline the ETF approval process and (3) amend Regulation S-P, dealing with the privacy of investor data.
    • Our reporter, Jonathan Pollard, attended the open meeting and spoke to lawyers and regulators in attendance, and others.
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  • From Vol. 1 No.1 (Mar. 3, 2008)

    SEC issues final rule revising and mandating electronic filing of Form D

    • SEC issued final rule release amending the information required to be included in Form D and the filing procedure for the form.
    • Phase-in period from 2/15/08 to 3/14/09 during which filers can file on paper or electronically; electronic filing only starting 3/15/09.
    • Categories of information required to be included in revised Form D include: description of issuer’s business from a list of industry classifications rather than in a narrative; date of first sale; Securities Act and Investment Company Act exemptions or exclusions claimed; minimum investment; broker-dealer CRD number for anyone receiving sales compensation; free writing option; no identification of 10% owners required; current required disclosure regarding application of proceeds replaced with disclosure of amounts paid for sales commissions and amount of gross proceeds paid to executives of issuer.
    • Required amendments to correct material mistake of fact, to reflect changes in information provided and annually for continuous offerings.
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