Apr. 13, 2017

Private Fund Managers Should Continue Aggressive Compliance Efforts Despite New Administration

As President Trump’s administration disseminates its economic and fiscal agendas and policies, many see the arrival of an era of lighter regulation after years of record-breaking enforcement activity by the SEC. See “What the SEC’s Enforcement Statistics Reveal About the Regulator’s Focus on Hedge Funds and Investment Advisers” (Oct. 20, 2016). This is reinforced by the pro-business policies endorsed by President Trump, which were largely codified by the February executive order outlining a set of “core principles” for the economy. See “How the Trump Administration’s Core Principles for Financial Regulation May Benefit the U.S. Funds Industry (Part One of Two)” (Feb. 16, 2017). Despite this sentiment, however, advisers and funds are ill-advised to let their guards down. Amid the general optimism, many questions persist. How will the SEC and other regulatory agencies function in the Trump era? Will budget cuts make a significant difference in an era of technologically enhanced enforcement? Is the SEC’s review of registered investment advisers likely to drop below the current estimated 10 percent? Will the SEC attempt to allocate some of its enforcement functions among other regulators? Are advisers and funds sufficiently preparing for examinations under the new SEC regime? To cast light on these and other urgent questions, the Hedge Fund Law Report has conducted an in-depth interview with Benjamin Kozinn, who recently joined the law firm of Lowenstein Sandler as a partner, and this article sets forth his insights. For commentary from Kozinn’s colleague Matthew A. Magidson, see “A Practical Guide to the Implications of Derivatives Reforms for Hedge Fund Managers” (Jul. 25, 2013).

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).

New Rule Offers Managers a Way to Raise Capital in China

Until recently, the only way for a U.S. fund manager to offer fund management services in China was through a non-controlling interest in a joint venture with a local manager. Earlier this year, the Asset Management Association of China issued a new rule permitting “wholly foreign-owned enterprises” (WFOEs) to offer private funds to qualified Chinese individual and institutional investors. For more on raising capital in China, see “How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll” (Feb. 23, 2017). In a recent program moderated by Sanjay Lamba, assistant general counsel of the Investment Adviser Association, K&L Gates partners Henry Wang and Joshua J. Yang offered a detailed roadmap to the formation and authorization of a private fund WFOE. This article summarizes the speakers’ insights. For a comprehensive look at opening a hedge fund management company in Hong Kong, see our four-part series “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia”: Part One (Dec. 1, 2011); Part Two (Dec. 8, 2011); Part Three (Dec. 15, 2011); and Part Four (Jan. 19, 2012).

Credit Suisse Investor Survey Finds Steady Demand for Hedge Funds and Growing Demand for Less-Liquid Products

Credit Suisse Capital Services (CS) recently released the results of its 2017 hedge fund industry survey covering anticipated asset flows by strategy and region; hedge fund selection and redemption drivers; fees; industry risks; early stage investing; and non-traditional hedge fund products. Among the survey’s key findings is that steady growth in allocations to hedge funds is coinciding with rising interest in non-traditional products (e.g., illiquid credit/direct lending and alternative mutual funds). This corroborates other industry survey findings and should put traditional fund managers on notice as they pursue their fundraising efforts. This article summarizes CS’ key findings. For coverage of past CS investor surveys, see “Despite Significant Redemptions, Credit Suisse Survey Finds Investors Remain Committed to Hedge Funds” (Aug. 4, 2016); “Growing Demand by Hedge Fund Investors for Managed Accounts, Long-Only Funds and Alternative Mutual Funds” (Apr. 7, 2016); and “Investor Appetite for Alternative Investment Vehicles and Strategy Preferences” (Aug. 27, 2015).

Failure to Disclose Fees Received From Third-Party Broker-Dealers May Result in Significant Penalties for Investment Advisers

A recent SEC settlement order illustrates that undisclosed conflicts of interest remain in the agency’s crosshairs. A registered investment adviser had a relationship with a third-party broker-dealer pursuant to which it received a portion of the revenues earned by the clearing broker on certain mutual funds purchased by the adviser’s clients. The SEC asserted that, while the adviser disclosed to its clients some features of the relationship, the adviser’s failure to disclose the revenue-sharing arrangements or the resulting conflict of interest violated the anti-fraud and compliance rule provisions of the Investment Advisers Act of 1940. This settlement should be of particular interest to advisers that receive compensation outside of traditional management fee and incentive compensation arrangements. As a best practice, advisers should periodically identify all compensation received by the adviser and its affiliates, ensure that compensation is accurately disclosed and consider whether the receipt of that compensation raises conflicts of interest that need to be communicated to clients. This article summarizes the SEC’s allegations and the terms of the order. For additional insight on the SEC’s scrutiny of compensation received by advisers, see “Former SEC Asset Management Unit Co-Chief Describes the Agency’s Focus on Conflicts of Interests and Increased Efforts to Crack Down on Private Fund Managers” (Sep. 15, 2016); and “Absent Proper Disclosure, Allocation of Manager Expenses to Funds May Bring Significant SEC Penalties” (Sep. 29, 2016).

FCA Report Details the Failure of Actively Managed Funds to Eclipse Benchmarks Despite High Investor Charges and Poor Cost Controls (Part Two of Two)

The U.K. Financial Conduct Authority (FCA) has directed its attention toward manager practices in the asset management industry that could have the effect of stifling competition in a manner detrimental to investors. The FCA recently surveyed a broad segment of investors, asset managers and other stakeholders to determine the scope of this problem, publishing the results in its Asset Management Market Study – Interim Report, MS15/2.2. Fund managers should carefully review this exhaustive report to understand potential future FCA examination topics, while investors can use the findings to enhance their diligence of funds prior to investing. This second article in a two-part series examines the report’s findings concerning the performance of actively managed funds, the amount of charges passed on to investors by managers and certain deficiencies in fund cost-control efforts. The first article evaluated fund fees and competition through the prisms of platform usage, manager compensation and fund governance. For coverage of additional issues pertinent to U.K. managers and investors, see “Dechert Partners Discuss How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect” (Apr. 6, 2017); and “FCA Emphasizes Need for Fund Managers to Monitor and Clearly Communicate Financial Benchmarks and Investment Practices” (Apr. 28, 2016).

Mintz Levin Adds Corporate and Securities Partner in New York

Mintz Levin has hired Anthony J. Marsico as a corporate and securities partner in New York. Marsico advises clients – including hedge funds and private investment firms seeking to invest in publicly traded companies – on initial public offerings, follow-on offerings and a variety of registered and private debt and equity securities transactions, including public and private equity line offerings, registered direct offerings and debt-for-equity exchanges. For additional commentary from Mintz Levin attorneys, see “How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated With the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?” (Mar. 7, 2013); and our three-part series “What Concerns Do Mobile Devices Present for Hedge Fund Managers, and How Should Those Concerns Be Addressed?”: Part One (Apr. 12, 2012); Part Two (Apr. 19, 2012); and Part Three (Apr. 26, 2012).