Apr. 6, 2017

Dechert Partners Discuss How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect 

With the U.K.’s recent trigger of Article 50 setting in motion a two-year negotiation period for its departure from the E.U., private fund managers are left scrambling for solutions to replace the passporting rights upon which they currently rely to market their funds throughout the E.U. Fortunately, other European jurisdictions – such as Luxembourg, Germany and Ireland – have bolstered their infrastructures and processes to accommodate redomiciled funds and allow private fund managers to continue to access Europe. Each of these jurisdictions presents its own unique opportunities and challenges, however. These issues were analyzed in depth during the opening session of Dechert’s recent Global Alternative Funds Symposium. Moderated by Gus Black, a London-based partner of the firm, the panel featured Joseph Glatt, general counsel, secretary and vice president of Apollo Capital Management; and Dechert partners Patrick Goebel (Luxembourg), Jeff Mackey (Dublin) and Hans Stamm (Munich). This article presents the key takeaways from the panel discussion. For additional insights from Dechert attorneys, see our two-part series on navigating Europe post-Brexit: “Cross-Border Marketing Options and the Viability of Domiciling Funds in Luxembourg” (Nov. 10, 2016); and “Domiciling Funds in Germany or Ireland to Access the E.U. Post-Brexit, the Possible Introduction of PRIIPs and the Rising Prominence of UCITS Structures” (Nov. 17, 2016).

Avoiding Common Pitfalls Under the Custody Rule: Custody Determination, Auditor Independence and Liquidation Audits (Part Two of Two)

The crux of Rule 206(4)-2 under the Investment Advisers Act of 1940 (Advisers Act), commonly referred to as the “custody rule,” is the protection of client and investor assets. There are several areas, however, where an adviser can run afoul of the custody rule. In this second installment of a two-part series, we review the auditor-independence requirement and discuss two additional hazards that may result in non-compliance with the custody rule: failing to realize when the adviser has custody and liquidation audits. The first article detailed options for fund managers to comply with the rule; discussed the frequency with which custody is reviewed during SEC examinations; and identified common weaknesses relating to inadvertent custody, as well as preparation and delivery of audited financial statements. For a discussion of SEC enforcement actions and corresponding penalties involving violations of the custody rule, see “Failure by Investment Advisers to Ensure Accurate Client Billing May Lead to SEC Enforcement Action and Penalties” (Feb. 2, 2017); “Repeat Custody Rule Offenders Face Severe SEC Sanctions” (Dec. 10, 2015); and “SEC Sanctions Two Private Fund Managers for Custody Rule Violations, Including Imposing Statutory Bars on Their Chief Compliance Officers” (Nov. 8, 2013).

Protecting Attorney-Client Privilege and Attorney Work Product While Cooperating With the Government: Implications for Collateral Litigation (Part Three of Three)

When a private fund manager conducts an internal investigation and cooperates with the government, there can sometimes be collateral litigation concerning some issues under review in the investigation. If litigation does arise, and it appears to overlap in some way with issues that are or were under review in an internal investigation, the plaintiffs, prosecutors or defendants in the litigation may request discovery of the manager’s internal investigation files. To support their discovery efforts, litigants may try to argue, among other things, that the privilege and work product protection were waived, perhaps as a result of the manager’s cooperation with the government. The first and second installments of this three-part guest article series by Skadden partner Eric J. Gorman and associate Brook A. Winterhalter addressed ways for managers to establish the privilege and work product protection during internal investigations and government cooperation. This third installment analyzes strategies and legal arguments that fund managers may wish to consider as they seek to shield investigation materials shared with the government from third-party discovery requests in collateral litigation. For more on protecting the attorney-client privilege, see “Federal Court Decision Narrows the Scope of Attorney-Client Privilege Available to Hedge Fund Managers in Internal Investigations” (Jan. 23, 2014); and “Six Recommendations for Hedge Fund Managers Seeking to Protect Themselves From Waiver of Attorney-Client Privilege When Faced With SEC Document Requests” (Jan. 17, 2013).

Ten Key Risks Facing Private Fund Managers in 2017

A recent seminar presented by Proskauer Rose provided valuable insight on emerging risks for hedge fund managers, including the uncertain regulatory landscape, and perennial SEC targets such as conflicts of interest, valuation and performance marketing. The program was moderated by Proskauer partner Timothy W. Mungovan and featured partner Joshua M. Newville; associates Michael R. Hackett and William Dalsen; and special regulatory counsel Anthony Drenzek. This article summarizes their key insights. For additional commentary from Drenzek, see our two-part series on The SEC’s Recent 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).

FCA Report Explores the Impact of Platforms, Governing Bodies and Manager Compensation Structures on Fund Competition (Part One of Two)

The U.K. Financial Conduct Authority (FCA) recently issued its Asset Management Market Study – Interim Report, MS15/2.2 (Report). The FCA surveyed a broad segment of investors, asset managers and other stakeholders to consider the impact on competition in the asset management industry of investor behavior, consultants, barriers to innovation, platforms, fund boards and cost controls. The Report is vital reading for investors that wish to discern fee considerations and risk-management concerns when performing due diligence on funds, as well as for fund managers that need to anticipate and adjust to potential FCA regulatory developments in these areas. This first article sets forth the Report’s findings concerning the impact of platforms, fund governance bodies and manager compensation on fund fees and competition. The second article will detail the Report’s analysis of the benefits of actively managed funds relative to their associated costs, as well as the role that cost controls have on competition. For additional coverage of recent FCA guidance, see “U.K. Investment Advisers Fail to Meet FCA Expectations on Best Execution and Dealing Commissions” (Mar. 23, 2017); “U.S. Managers Marketing to U.K. Investors Could Face Ballooning Reporting Burdens Under Proposed Rule” (Jul. 28, 2016); and “U.K. Financial Conduct Authority Issues Feedback Statement Supporting Proposed E.U. Limits on Soft Dollars” (Mar. 5, 2015).

Deutsche Bank Alternative Investment Survey Details Hedge Fund Fee Rates, Negotiation Strategies and Structure Trends (Part Two of Two)

The results of the 15th annual Alternative Investment Survey, compiled from the responses of 460 global allocators representing nearly $2 trillion in hedge fund assets, have been released by Deutsche Bank Global Prime Finance. This second article in a two-part series describes the portion of the survey detailing typical fee rates, fee negotiations and fee structures, as well as the preferences of allocators. The first article examined the survey results concerning asset-flow trends, including the types of structures and factors that impact those decisions by allocators. For more on fees charged by private funds, see our two-part series on modified high water mark provisions: “May Reduce Risk and Enable Hedge Fund Managers to Retain Talent” (Jun. 4, 2015); and “May Be Difficult for Managers to Market and Implement” (Jun. 11, 2015); as well as our two-part series on tiered management fees: “May Help Hedge Fund Managers Attract Institutional Investors” (Jun. 25, 2015); and “Practical Considerations for Hedge Fund Managers” (Jul. 9, 2015).

McDermott Will & Emery Hires Ian Schwartz As Head of Investment Funds Practice

Ian Schwartz has joined McDermott Will & Emery as a partner in its corporate and transactional division and as head of the firm’s investment funds practice. Schwartz advises clients on fund formation and operation, with a particular focus on private equity funds, as well as on co-investments, collateral debt obligations, buyouts, mezzanine debt and real estate fund transactions. For commentary from other McDermott partners, see “Lessons for Hedge Fund Managers From the Government’s Failed Prosecution of Alleged Insider Trading Under Wire and Securities Fraud Laws” (Jul. 21, 2016); and “SEC’s Hedge Fund Focus to Include Review of Funds That Outperform the Market” (Apr. 29, 2011).