May 18, 2017

Asset Managers Must Adapt to Increasing Protections for Internal Whistleblowing Under Dodd-Frank

The U.S. Court of Appeals for the Ninth Circuit recently aligned itself with the Second Circuit by concluding that the anti-retaliation provisions afforded to whistleblowers under the Dodd-Frank Act also protect employees that internally report suspected securities law violations. This widens the circuit split with the 2013 decision by the Fifth Circuit that employees are protected from retaliation only if they report to the SEC. The Ninth Circuit’s decision coincides with the SEC’s aggressive promotion of whistleblowing by penalizing employers with policies or practices interfering with an individual’s ability to report suspected securities law violations to regulators. The SEC’s actions, coupled with this widening circuit split, have moved whistleblower considerations to the forefront of employment decisions by asset managers. In particular, in jurisdictions like New York, where employment is “at will” and no statute protects private company employees from reprisal for blowing the whistle on suspected securities law violations, employers must thoughtfully craft employment policies, practices and documentation to manage risk. In a guest article, Seward & Kissel partner Anne C. Patin outlines the split among certain circuit courts as to the scope of the SEC’s whistleblower protections, and provides guidance to asset managers on how to proceed in light of the various interpretations of the SEC whistleblower rules. For more on whistleblower issues, see “How Promoting Internal Reporting Can Reduce Risk of Regulatory Intervention for Hedge Fund Managers” (Aug. 11, 2016); and “How Hedge Fund Managers Can Protect Privileged Internal Investigations Without Violating SEC Whistleblower Rule 21F-17” (May 21, 2015).

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, 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). 

Client Consent and Other Issues Requiring Careful Consideration by Fund Managers Involved in M&A Transactions

Transactions for all or part of the ownership of a private fund manager were common in 2016, and observers expect them to continue with greater frequency as fund managers seek ways to consolidate functions and save costs. In the funds sector, however, any change-of-ownership deal poses myriad legal questions and issues because of the number of parties with vested interests in a given manager as a buyer, seller or limited partner. See “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues” (May 20, 2011). Obtaining consent from so many parties – and avoiding trouble from regulators and litigious investors – requires an intimate understanding of the legal issues involved and the types of approvals needed to proceed with the transaction. These issues came across in a panel discussion hosted by Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA), and featuring Davis Polk partners Michael Davis, Leor Landa and Gregory S. Rowland. This article presents the key takeaways from the discussion. For coverage of prior programs hosted by MLA, see “Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations” (Oct. 6, 2016); and our two-part series on SEC examinations: “What Hedge Fund Managers Need to Know” (Jun. 16, 2016); and “Fees, Conflicts, Investment Allocations and Other Hot Topics” (Jun. 30, 2016).

How Managers Can Structure Direct Lending Funds to Minimize U.S. Tax Consequences to Foreign and U.S. Tax-Exempt Investors: “Season and Sell” and Blocker Structures (Part One of Two)

As banks focus on making large loans to corporations, some fund managers are stepping into the void and offering loans to small- and mid-sized businesses. Unlike investments in traded securities, loan origination in the U.S. raises tax issues for certain U.S. tax-exempt and foreign investors. See parts one and three of our series on hedge funds as direct lenders: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016). A recent seminar featuring Kramer Levin partners Barry Herzog, Kevin P. Scanlan and George M. Silfen provided a roadmap for managers seeking to form direct lending funds that minimize the adverse tax consequences to investors not otherwise subject to U.S. tax. This first article in our two-part series discusses common investment terms for direct lending funds; provides an overview of the tax implications from loan origination activity to foreign and U.S. tax-exempt investors; and discusses the tax mitigation benefits of “season and sell” and blocker structures. The second article will delve into treaty-based fund structures and privately offered closed-end direct lending funds as additional potential solutions to these direct lending tax concerns. For additional insights from Scanlan, see our three-part series on “Closing a Hedge Fund to Outside Investors”: Factors to Consider (Jan. 21, 2016); Operational Considerations (Jan. 28, 2016); and Mechanical Considerations (Feb. 4, 2016).

SEC Officials Discuss Cybersecurity Examination Priorities and Provide Guidance on When to Disclose Cyber Events (Part Two of Two)

Reasoning that the variety of entities that it regulates precludes the SEC from dictating a single workable cybersecurity solution, the agency generally takes a principles-based approach to cybersecurity regulation. This leaves registrants to wonder if their procedures and safeguards will withstand scrutiny during an SEC examination. This was addressed during the recent IAPP Global Privacy Summit at a presentation featuring Stephanie Avakian, Acting Director of the SEC Division of Enforcement, Shamoil Shipchandler, SEC Regional Director for the Fort Worth Regional Office, and Jay Johnson, partner at Jones Day. This second article in our two-part series discusses the SEC’s cybersecurity examination process and provides guidance on disclosing cyber incidents. The first article highlighted the agency’s cybersecurity-related enforcement actions and coordination with law enforcement and state regulators. For more on managing cyber risks, see “Cyber Insurance Coverage, Pre-Breach Mitigation Efforts and Post-Breach Response Plans Can Reduce Harm to Fund Managers From Cyber Attacks” (Jan. 19, 2017); and “Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure” (Jul. 7, 2016).

SEC Private Fund Statistics Report Indicates Rising Concentration of NAV With the Largest Hedge Funds and Increasingly Favorable Liquidity Terms for Investors

The Risk and Examinations Office of the SEC Division of Investment Management recently released a compilation of private fund statistics, providing data from Form PF and Form ADV filers from the fourth quarter of 2014 through the third quarter of 2016. This article summarizes relevant data in the report on hedge funds and their advisers, including investor base, leverage, derivatives and trading strategies. For coverage of earlier SEC reports, see “SEC Release of Private Fund Statistics Illuminates Key Trends in Hedge Fund Industry” (Nov. 5, 2015); and “Report Describes the SEC’s Use of Form PF for Hedge Fund Manager Examination Targeting and Risk Management” (Oct. 10, 2014).

David Stauber Joins Pepper Hamilton in New York

Pepper Hamilton has enhanced its tax practice with the addition of David Stauber as of counsel in its Manhattan office. Stauber advises clients on the domestic and cross-border tax aspects of fund formation; securities offerings; mergers and acquisitions; and restructurings. For insight from other Pepper Hamilton partners, see “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016); as well as our two-part series on how hedge funds can protect their brands and intellectual property: “Trademarks and Copyrights” (Feb. 23, 2017); and “Trade Secrets and Patents” (Mar. 9, 2017).