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    Oct. 5, 2017

Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Registration Triggers and Building a Compliance Department (Part One of Three)

Unlike advisers exempt from SEC registration prior to the enactment of the Dodd-Frank Act, advisers claiming exemption from registration as “exempt reporting advisers” (ERAs) under one of the act’s narrow exemptions do not operate entirely outside of the SEC’s radar. Although ERAs are not registered with the SEC, they are nonetheless required to file and disclose certain information on Form ADV Part 1. This three-part series is designed to assist ERAs transitioning from the status of ERA to that of an SEC registered investment adviser (RIA). This first article discusses the circumstances under which an ERA would be required to switch to SEC registration, along with considerations for an adviser when building out its compliance program. The second article will outline key policies and procedures that an ERA should consider when drafting its compliance manual. The third article will review the regulatory filings required to be filed by RIAs, amendments that ERAs may need to make to their fund offering documents in anticipation of a change in registration status, as well as guidance as to what newly registered advisers should expect from the SEC examination process. For additional background on ERAs, see “ACA Webcasts Detail Exempt Reporting Adviser Qualifications and Compliance Obligations” (Mar. 8, 2012); and “Impact of the Foreign Private Adviser Exemption and the Private Fund Adviser Exemption on the U.S. Activities of Non-U.S. Hedge Fund Managers” (May 13, 2011).

How Recent Developments Under BEPS May Affect Fund Managers’ Ability to Use Special Purpose Vehicles

The Organisation for Economic Co-operation and Development (OECD) has implemented a number of reforms in an effort to combat tax strategies that exploit mismatches between tax treaties and artificially shift value from high-tax countries to low-tax ones. One of these reforms – the Base Erosion and Profit Shifting (BEPS) initiative – is designed to restrict the ability of companies, including fund managers, to establish investment platforms in jurisdictions with favorable tax treaties in order to take advantage of tax benefits. See “Treaties Offer Fund Managers Means to Reclaim Overpayments but Require Updating to Keep Pace With the Market” (Jun. 15, 2017); and our two-part series “Steps That Alternative Investment Fund Managers Need to Take Today to Comply With the Global Trend Toward Tax Transparency”: Part One (Apr. 7, 2016); and Part Two (Apr. 14, 2016). In a guest article, Will Smith and Caleb McConnell, partner and associate, respectively, at Sidley Austin, explore recent developments relating to the proposals for implementing Article 6 of the BEPS initiative, which could affect the ability of fund managers to use special purpose vehicles to hold investments for their funds in jurisdictions covered by BEPS. For additional insights from Smith, 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 our two part series “U.K. Disguised Fee Rules May Result in Increased U.K. Taxation of Investment Fees to Individuals Affiliated With Hedge Fund Managers”: Part One (Apr. 16, 2015); and Part Two (Apr. 23, 2015).

SEC Tackles Internal Cybersecurity Issues While Sharpening Cybersecurity Enforcement Focus

The SEC recently disclosed in both a press release and Chair Jay Clayton’s Senate testimony that a 2016 hack of its test filing system may have provided a basis for illicit trading. Experts and SEC officials do not expect the breach to dampen the SEC’s focus on cybersecurity enforcement, however. See “SEC Review of Cybersecurity Finds Gains Since 2014, but Cites Gaps in Training and Compliance” (Aug. 24, 2017); and “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017). In fact, the SEC has announced the formation of its Cyber Unit to consolidate its efforts. This article analyzes Clayton’s testimony and earlier statement regarding the hack; explores the effect of the breach on SEC enforcement; and examines the SEC’s cybersecurity efforts and focus. For additional commentary from Clayton, see “Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017); and “Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era” (Jul. 13, 2017).

Challenges and Solutions in Managing Global Compliance Programs

U.S. fund managers face a host of federal and local regulations, along with aggressive enforcement by the SEC and other regulators, all of which make developing an effective compliance program essential. When managers operate abroad, those challenges are multiplied. A recent webinar sponsored by ACA Compliance Group (ACA) offered perspectives into the challenges of structuring a global compliance program; developing global compliance standards; and ensuring proper program staffing, monitoring, oversight and testing. The program was moderated by ACA consultant Matthew Girandola and featured ACA partner Alan K. Halfenger and David Owen, managing director and global regulatory counsel at Allianz Global Investors. This article summarizes the key points raised by the panelists. For additional commentary from ACA, see “A Roadmap for Advisers to Comply With Marketing and Advertising Regulations”: Part One (Aug. 3, 2017); and Part Two (Aug. 10, 2017).

Seward & Kissel Study Finds Reduced Fees and MFN Clauses Remain Most Prevalent Side Letter Terms

Side letters remain an important means by which private fund managers can offer appealing terms to prospective investors. Seward & Kissel (S&K) recently completed its second annual study of side letters entered into by its hedge fund manager clients. The Seward & Kissel 2016/2017 Hedge Fund Side Letter Study examines the types of investors that enter into side letters, the amounts they typically invest, the most common side letter terms and details about separately managed accounts. This article examines S&K’s findings, which provide fund managers with valuable insight into the terms requested by institutional investors as well as visibility into the activities of their peers. See “HFLR and Seward & Kissel Webinar Explores Common Issues in Negotiating and Monitoring Side Letters” (Nov. 10, 2016). For coverage of S&K’s 2015/2016 side letter study, see “Seward & Kissel Study Finds MFN Clauses and Reduced Fees Most Prevalent Terms in Side Letters” (Oct. 6, 2016). On Wednesday, October 18, 2017, at 10:00 a.m. EDT, Steve Nadel, lead author of the study and a partner in S&K’s investment management practice, will expand on the topics in this article – as well as other issues relating to side letters – in an upcoming webinar co-produced by the Hedge Fund Law Report and S&K. To register for the webinar, click here.

Monica Gogna Joins Dechert in London

Dechert has strengthened its financial services practice in London with the hiring of partner Monica Gogna. Gogna advises asset management firms on a wide range of cross-border regulatory and compliance issues, with a particular concentration on the revised E.U. Markets in Financial Instruments Directive (MiFID II). For commentary from Gogna, see “ESMA Opinion Sets Forth Four Common Principles for UCITS Share Classes” (Mar. 16, 2017); and “Leading Law Firms Debate Effect of Hard vs. Soft Brexit on Hedge Fund Managers (Part One of Two)” (Jul. 7, 2016).

Winston & Strawn Expands Investment Funds Practice

The funds practice of Winston & Strawn in New York has grown with the firm’s hiring of partners Beth Kramer and Scott Naidech. Kramer and Naidech advise fund managers in the U.S. and abroad on fund formation, fund management and regulatory compliance matters. For coverage of another recent hire at the firm, see “Winston & Strawn Adds Finance Partner in New York” (Sept. 22, 2016).

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