Aug. 10, 2017

Are Fund Platforms Truly a Turnkey Solution? Considerations When Selecting and Negotiating With a Platform Provider (Part Three of Three)

The Alternative Investment Fund Managers Directive regime has increased the frequency with which U.S. fund managers are using sub-funds on an umbrella fund platform (Fund Platform) to market to E.U. investors. This trend has coincided with a proliferation of Fund Platform providers and broader range of terms to negotiate. Consequently, U.S. fund managers need to parse the various features offered by Fund Platform providers and build appropriate protections into their onboarding agreements in order to realize the benefits of this fund structure. This three-part series seeks to familiarize U.S. fund managers with Fund Platforms by analyzing issues to consider when evaluating the structure’s viability. This third article addresses attributes U.S. fund managers should consider when selecting a Fund Platform, as well as key protections to include in the onboarding documents. The first article provided a primer about Fund Platforms relative to other structures and ways that managers can “Brexit-proof” their use of the vehicle. The second article presented pros and cons of operating on Fund Platforms that U.S. fund managers can weigh when determining whether to adopt the structure. See “Beyond the Master-Feeder: Managing Liquidity Demands in More Flexible Fund Structures” (May 25, 2017). For more on marketing in the E.U., see “Six Common Misconceptions U.S. Fund Managers Have About Marketing in Europe” (Mar. 9, 2017); and “Leading Law Firms Discuss Hedge Fund Marketing and Distribution Opportunities in a Post-Brexit World (Part Two of Two)” (Jul. 14, 2016).

Opportunities Abound for U.S. Managers As European Regulators Relax Restrictions on Alternative Lending

Regulations enacted in the aftermath of the 2008 global financial crisis required banks in the U.S. and abroad to curb their lending practices, forcing small and middle-market companies to search for alternative forms of financing to manage and expand their businesses. These events spurred the growth of alternative lending, where non-banking institutions were eager to fill the credit void left from the retrenchment of banks. Although alternative lending has flourished in the U.S., the sector has taken longer to develop in Europe due to the web of local regulations that govern loan origination by non-bank lenders. Europe’s view and approach to non-bank lending, however, has begun to evolve, creating new opportunities for lenders, their investors and borrowers. To help our readers understand the rise of alternative lending in Europe and how U.S. managers can access lending opportunities in Europe, the Hedge Fund Law Report interviewed Jiří Król, deputy chief executive officer and global head of government affairs at The Alternative Investment Management Associated Limited, which is affiliated with the Alternative Credit Counsel. For more on hedge funds as direct lenders, see our three-part series: “Tax Considerations for Hedge Funds Pursuing Direct Lending Strategies” (Sep. 22, 2016); “Structures to Manage the U.S. Trade or Business Risk to Foreign Investors” (Sep. 29, 2016); and “Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms” (Oct. 6, 2016).

A Roadmap for Advisers to Comply With Marketing and Advertising Regulations (Part Two of Two)

An ongoing challenge for advisers is ensuring compliance with the complex set of regulations that govern their marketing practices. A recent program hosted by ACA Compliance Group (ACA) distilled some of the nuances that arise when applying these regulations to the marketing of interests in private funds. The program featured Mark Lawler, ACA senior principal consultant, Matthew Shepherd, ACA principal consultant, and Erika Roess, senior principal consultant at ACA Performance Services. This second article in a two-part series discusses the permissibility of using backtested performance and partial client lists in advertising materials; portability of track records; compensation of solicitors referring separately managed account clients; marketing to investors in private funds; and compliance with private placement requirements. The first article discussed regulations governing performance advertising, compliance with GIPS, recordkeeping requirements relating to marketing materials and the use of past-specific recommendations. For coverage of other ACA events, see “Hedge Fund Managers Are Advised to Build Robust Infrastructure” (Mar. 3, 2016); and “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015).

Fund of Funds Shareholders Lack Standing to Challenge Advisory Fees Paid by Underlying Funds

Section 36(b) of the Investment Company Act of 1940 permits a registered investment company’s shareholders to sue the fund’s investment adviser for breach of fiduciary duty for charging excessive fees to the company. In a recent decision, the U.S. Court of Appeals for the Eighth Circuit ruled that a shareholder of a fund of funds cannot sue the fund’s adviser for fees paid by an underlying fund to its respective investment adviser. As investors choose to invest through funds of funds, as well as the increasingly popular funds of alternative mutual funds, they need to understand what rights and powers they have – and which they cede – under these approaches. Likewise, managers must remain aware of the extent to which their abilities to charge fees could be challenged by underlying investors in fund of fund complexes. This article summarizes the statutory and factual background of the suit and the Eighth Circuit’s reasoning. For other suits concerning Section 36(b), see “Registered Fund Advisers Delegating to Subadvisers Gain Greater Flexibility From U.S. District Court Ruling to Charge Management Fees” (Mar. 16, 2017); and “In Light of Convergence of Hedge Fund Strategies and Mutual Fund Structures, Mutual Fund Advisory Fee Case Before U.S. Supreme Court May Affect Future Profitability of Hedge Fund Industry” (Sep. 24, 2009).

SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation

Amid widespread anticipation about the contours of the regulatory landscape and the tenor of securities law enforcement under the new U.S. presidential administration, SEC Chair Jay Clayton has sought to detail a vision of his agency’s enforcement priorities and goals. See “SEC Chair’s Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era” (Jul. 13, 2017). In doing so, he has charted a new course for the SEC while simultaneously displaying fidelity to many of the initiatives and priorities touted by his predecessor, Mary Jo White. In a recent speech, Clayton set forth eight guiding principles for the SEC in coming months, including an emphasis on “Main Street” investors and the role of technology in monitoring and enforcing applicable regulations. This address provides valuable insight into the agency’s priorities so that fund managers can adjust their practices to avoid entering the SEC’s enforcement crosshairs. This article summarizes the principles detailed in Clayton’s speech, as well as some of the strategies he presented for implementing these principles. For coverage of a speech by former Chair White, see “Outgoing SEC Chair Outlines New Model for Enforcement Priorities in 2017 and Beyond” (Jan. 12, 2017). For additional analysis of SEC priorities and goals, see “Former SEC Senior Counsel Offers Insight on SEC Enforcement Focus and Priorities” (Sep. 1, 2016).

Daniel Serota Joins Sidley Austin in New York

Sidley Austin has gained Daniel Serota – a transactional lawyer specializing in mergers and acquisitions for financial institutions, private equity funds and corporations in the technology, healthcare, media and telecommunications sectors – as a partner in its New York office. For coverage of another recent hire at the firm, see “Former SEC Associate Director Joins Sidley Austin in Washington, D.C.” (Mar. 2, 2017). For additional commentary from Sidley partners, see “Recent Tax Developments May Make U.K. Limited Companies More Favorable Than U.K. LLPs for U.S. Fund Managers” (Apr. 20, 2017); and “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015).

Harneys Expands BVI Funds and Regulatory Practice

Nadia Menezes has joined the funds and regulatory practice of Harneys as counsel in the British Virgin Islands. Menezes advises clients on hedge, private equity and real estate fund launches; fund restructurings; corporate transactions; and regulatory compliance issues. For additional insights from Menezes, see “What Does the Introduction of a Lighter Touch Fund Manager Regulatory Option in the British Virgin Islands Mean for Hedge Fund Managers?” (Feb. 14, 2013); and “Implications for Hedge Funds of Changes to the British Virgin Islands’ Securities and Investment Business Act” (Apr. 30, 2010).

The HFLR Will Not Publish Next Week and Will Resume Its Regular Publication Schedule the Following Week

Please note that the HFLR will not publish an issue during the week beginning August 14, 2017, and will resume its normal weekly publication schedule the following week starting August 21, 2017.