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    May 25, 2017

Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures

The private funds industry has been discussing the convergence of hedge and private equity funds for over a decade. The presence of “hybrid” fund vehicles, combining characteristics of both open- and closed-end funds, is nothing new. See “Institutional Investor Forum Focuses on Hedge Fund Manager Fiduciary Duty, SEC Subpoena Power, Hybrid Hedge Fund Structures, Managed Account Platforms, Codes of Ethics and More” (Feb. 4, 2010); and “Can a Capital on Call Funding Structure Fit the Hedge Fund Business Model?” (Nov. 5, 2009). Creatively structured investment vehicles that address relevant investment objectives, or regulatory, tax or similar issues, are becoming increasingly common. As private fund managers struggle to outperform the market and meet investor demands for bespoke fee, liquidity and special terms, those managers will often need to look beyond the master-feeder structure that has served them well for quite some time. For example, hedge funds with historically liquid portfolios are increasingly pursuing assets with longer investment horizons that, in the past, might have been housed in private equity-style products. In a guest article, Akin Gump partner Ira P. Kustin explores a number of tools that managers can use to effectively manage assets with different liquidity characteristics, while also addressing investor liquidity expectations. For additional insight from Kustin, see “Stars in Transition: A New Generation of Private Fund Managers” (Dec. 10, 2009); and “Addressing (and Resisting) Demands for Changes in Hedge Fund Manager Compensation” (Apr. 23, 2009).

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 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).

How Managers Can Structure Direct Lending Funds to Minimize U.S. Tax Consequences to Non-U.S. and Tax-Exempt Investors: Treaty-Based and Registered Fund Structures (Part Two of Two)

As investors continue to clamor for direct lending strategies by private fund managers, legal advisers have kept pace by developing sophisticated fund structures to help manage the tax issues prompted by loan origination. For additional considerations when structuring direct lending funds, see part two of our three-part series on hedge funds as direct lenders: “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016). In a recent program, Kramer Levin Naftalis & Frankel partners Barry Herzog, Kevin P. Scanlan and George M. Silfen discussed four structuring options available to managers seeking to launch a fund that will engage in loan origination. This second article in our two-part series examines treaty-based fund structures and privately offered closed-end direct lending funds. The first article discussed common investment terms for direct lending funds; provided an overview of the tax implications of loan origination activity to foreign and U.S. tax-exempt investors; and discussed how the “season and sell” and blocker structures can minimize the potential tax consequences of loan origination. For more on direct lending, see “The Current State of Direct Lending by Hedge Funds: Fund Structures, Tax and Financing Options” (Oct. 27, 2016).

$97 Million SEC Settlement Highlights Perils of Inaccurate Disclosures and the Agency’s Continued Focus on Conflicts of Interest and Client Overcharges

Ensuring full and accurate disclosure is one of the fundamental goals of the federal securities laws; therefore, a fund’s failure to adopt practices comporting with its disclosures is a surefire way for it to garner unwanted attention from the SEC. Recently, a large dually registered investment adviser and broker-dealer settled SEC charges relating to several compliance failures, including the failure to conduct due diligence on certain third-party managers of its wrap fee platforms as required by its client agreements and SEC filings. 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). In the press release announcing the settlement, C. Dabney O’Riordan, Co-Chief of the Asset Management Unit of the SEC Division of Enforcement, observed that the adviser “failed to ensure that clients were receiving the services they were paying for.” The SEC also asserted that the firm’s weak controls resulted in client overcharges and that it failed to disclose or mitigate the conflict of interest that stemmed from its recommendation of certain mutual fund share classes to clients. This article summarizes the alleged misconduct and the terms of the settlement order. For more on the SEC’s focus on reducing conflicts of interest, 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 “SEC Division Heads Enumerate Enforcement Priorities, Including Conflicts of Interest, Valuation, Performance Advertising and CCO Liability (Part Two of Two)” (May 5, 2016).

Anthony Schouten Joins Pryor Cashman

Pryor Cashman has added Anthony Schouten, a lawyer specializing in investment management, structured finance and derivatives, as a partner in its New York office. Schouten has extensive experience in the collateralized loan obligations and risk-retention fields, and he also focuses largely on derivatives and their related documentation. See our three-part series on “Best Practices for Fund Managers When Entering Into ISDAs”: Negotiation Process and Tactics (Jan. 12, 2017); Negotiating Event of Default and Termination Event Provisions (Jan. 19, 2017); and Negotiating Collateral Arrangements (Jan. 26, 2017).

K&L Gates Enhances Investment Management Practice With Addition of Broker-Dealer Regulatory Attorney

Eden Rohrer has joined the New York office of K&L Gates as a partner. Rohrer’s practice primarily focuses on the securities and broker-dealer industry, including representing brokerage firms in enforcement actions brought by the SEC, FINRA, individual states and even regulators outside the U.S. For insight from other K&L Gates partners, see “New Rule Offers Managers a Way to Raise Capital in China” (Apr. 13, 2017); and our two-part series: “State and Local Lobbying; Pay to Play; and Gifts and Entertainment Limitations” (Mar. 23, 2017); and “Public Disclosure Risks Associated With Accepting State Public Pensions As Investors and How to Mitigate Them” (Mar. 30, 2017).

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