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).

The “Why” Behind the Recent Form ADV Amendments: What Information the SEC Will Require and How the Agency Intends to Use It

On August 25, 2016, the SEC adopted amendments to Form ADV that will become effective October 1, 2017. The amendments are designed to improve the depth and quality of information collected, to facilitate risk-monitoring initiatives, to assist the SEC staff in its risk-based examination program and to provide additional disclosure to investors and the public. In a guest article, Jeanette Turner, chief regulatory attorney and a managing director at Advise Technologies, provides an introduction to these recent amendments to Form ADV to help firms determine how to alter their internal procedures and processes. For additional insight from Turner, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers” (May 28, 2015). On Thursday, May 11, 2017, from 12:00 p.m. to 1:00 p.m. EDT, Turner will expand on the thoughts in this article – as well as other ramifications of the recent amendments to Form ADV – in a webinar entitled “2017 Form ADV Changes,” which will be moderated by Rorie A. Norton, an associate editor of the Hedge Fund Law Report. Turner will be joined by fellow panelist Michael F. Mavrides, a partner at Proskauer Rose. To register for the webinar, click here. For further commentary from Mavrides on what investment advisers need to know about these SEC revisions to Form ADV and the recordkeeping rule, see our two-part series: “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).

BakerHostetler Panel Analyzes the Trump Effect on the SEC’s Initiatives and Enforcement Efforts

A recent program presented by BakerHostetler provided timely insight on how the SEC and its enforcement priorities may evolve under the new president’s regulatory agenda, as well as how the new administration may affect the markets in general and private funds in particular. For another look at Trump’s potential effect on the fund industry, see “Ways the Trump Administration’s Policies May Affect Private Fund Advisers” (Mar. 2, 2017). Mark A. Kornfeld, partner at BakerHostetler, moderated the discussion, which featured former SEC Commissioner Troy A. Paredes, founder of Paredes Strategies LLC; Marie Noble, partner, general counsel and chief compliance officer at SkyBridge Capital; and BakerHostetler senior adviser Hon. Michael A. Ferguson and partner Marc D. Powers. This article summarizes the portions of the presentation most relevant to hedge fund managers. See our two-part series on an earlier BakerHostetler conference for additional commentary from Kornfeld and Powers: “Shifts in Enforcement Policies and Tactics As Industry Anticipates New Administration and SEC Chair” (Jan. 5, 2017); and “SEC Use of Administrative Proceedings and Whistleblower Incentives, and Guidance for Fund Managers Facing an Examination” (Jan. 19, 2017). 

SEC, NFA and OFAC Shed Light on Their AML Enforcement Efforts and Priorities

The effort to prevent and stamp out money laundering in the financial sector is a massive undertaking requiring constant diligence on the part of companies, financial institutions, law firms and, of course, regulatory agencies. Three U.S. agencies in particular – the SEC, the NFA and the Office of Foreign Assets Control (OFAC) – are largely responsible for carrying out the bulk of investigative and enforcement work in the anti-money laundering (AML) arena, and each has approached this responsibility in a different manner. See our two-part series on complying with the Financial Crimes Enforcement Network’s (FinCEN’s) proposed AML rule: “How FinCEN’s Proposed AML Rule Will Affect Hedge Fund Managers and Other Investment Advisers” (Jun. 30, 2016); and “Steps Hedge Fund Managers and Other Investment Advisers Should Take Now to Prepare” (Jul. 7, 2016). Additionally, AML efforts heavily depend on the ability and commitment of financial sector firms to file suspicious activity reports when they know of or suspect violations. These points came across in a recent Regulatory Compliance Association (RCA) panel featuring representatives from each of the aforementioned regulatory agencies: Jamie Rose, Deputy Chief of Regulated Industries Oversight for OFAC; Eric Kringel, Senior Counsel and Bank Secrecy Act Specialist in the SEC’s Division of Enforcement; and Valerie O’Malley, Director of the Compliance Department at the NFA. This article presents the takeaways from the panel of direct relevance to investment funds and broker-dealers. For coverage of other RCA events, see “Best Practices for Investment Advisers Using Social Media to Mitigate Advertising Rule Violations and Other Risks” (Mar. 23, 2017); and “Risks With Investment Allocation, Trade Execution, Soft Dollars, Client Solicitation and Valuation” (Apr. 14, 2016). On May 18, 2017, RCA will host its annual Enforcement, Compliance & Operations Symposium in New York City. For additional information or to register for the symposium, click here.

FCA Details Three of Its 2017 Priorities: Competition in the Asset Management Market, Liquidity Management and Custodians 

The U.K. Financial Conduct Authority (FCA) recently published its updated mission statement, business plan and sector views for 2017. In a forward to the mission statement, FCA Chief Executive Andrew Bailey said that its purpose is to give “firms and consumers greater clarity about how and why we prioritise, protect and intervene in financial markets.” These publications provide detailed insight into the FCA’s priorities in 2017, which include addressing concerns relating to competition in the asset management market, liquidity management and custodians. This article summarizes the portions of the publications most relevant to the hedge fund industry. For coverage of a prior FCA business plan, see “FCA 2016-2017 Regulatory and Supervisory Priorities Include Focus on AML, Cybersecurity and Governance” (Apr. 14, 2016).

Barclays Survey Identifies Two Key Areas of Interest for Hedge Fund Allocators in 2017: Small Managers and Non-Traditional Products (Part Two of Two)

After surveying nearly 350 allocators, representing approximately one-third of hedge fund industry assets, Barclays Capital Solutions Group expressed renewed optimism – tempered by a reasonable amount of caution – in its 2017 survey report on the global hedge fund industry. This second article in a two-part series discusses how allocators are currently negotiating preferential investment terms and two asset categories attracting a disproportionate share of interest: smaller managers and non-traditional hedge fund products. The first article examined the recent performance by the hedge fund industry – including a more nuanced view of its underperformance – and evaluated investor allocation plans and preferences for 2017. For coverage of other surveys from Barclays, see “Family Office Perspectives on Hedge Fund Allocation Percentages, Strategies, Liquidity, Fees, Track Record and Investor Base” (Nov. 14, 2013); and “Increased Financing Costs for Hedge Funds Due to Regulatory Changes Affecting Prime Broker Financing” (Oct. 18, 2012).

Former SEC Chief of Staff Rejoins Shearman & Sterling

Lona Nallengara has returned to Shearman & Sterling as a partner in its capital markets and corporate governance practices. While at the SEC, Nallengara served as Deputy Director, and later Acting Director, of the Division of Corporate Finance; oversaw enforcement efforts in the asset management space; and had oversight of the adoption and enforcement of sweeping rules and statutes such as the Dodd-Frank Act and the JOBS Act. For insight from Nallengara’s partners, see “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising” (Jul. 18, 2013); and our three-part series “How Can Hedge Fund Managers Structure Their In-House Marketing Activities to Avoid a Broker Registration Requirement?”: Part One (Sep. 12, 2013); Part Two (Sep. 19, 2013); and Part Three (Sep. 26, 2013).