Oct. 12, 2017

How Are Your Peers Responding to Investor Demand for Alternative Fee Structures?

As investors grow increasingly sensitive to management and performance fees – and ever more aware of the disparities that may exist between what they are paying and what they are receiving in return – the traditional “2 and 20” fee model faces rising competition from alternative structures. More and more fund managers are testing, marketing and deploying alternative fees and terms with a view toward attracting investors who were dissatisfied with compensating fund principals who do not really deliver. Along with alternative fee structures, innovative terms with respect to hurdle rates and performance-fee crystallization also constitute a growing trend. See “Survey Reveals Substantial Disconnect Between Actual and Desired Hedge Fund Fee Structures” (Aug. 3, 2017); and “Investor Pressure Drives New Performance Compensation Models and Increased Disclosure Obligations for Managers” (Jun. 29, 2017). To provide readers with a sense of how widespread alternative fees and terms are, and of just how competitive the market has become, the Hedge Fund Law Report has conducted a survey of fund managers, asking whether they have experienced strong demand from investors for alternative fees; whether they have offered alternative fees; how investor demand for alternative fee arrangements has varied according to investor size and profile; and how the market has responded to alternative arrangements implemented by managers. This article presents the results of the survey. For results of other industry surveys conducted by the HFLR, see our two-part series on “How Are Your Peers Responding to the Most Intrusive Requests From Hedge Fund Investors?”: Part One (Mar. 17, 2016); and Part Two (Mar. 31, 2016); and our two-part series on trade errors: “How Hedge Fund Managers Define and Handle” (Oct. 15, 2015); and “How Hedge Fund Managers Detect and Bear Responsibility For” (Oct. 22, 2015).

Steps an Exempt Reporting Adviser Must Take to Transition to SEC Registered Investment Adviser Status: Adopting Compliance Policies and Procedures (Part Two of Three)

Designing compliance policies and procedures that are appropriately tailored to a private fund adviser’s risks is a critical component of a compliance program for an SEC registered investment adviser (RIA). Exempt reporting advisers (ERAs) transitioning to RIA status that have not already devoted the time and resources to developing these policies and procedures will likely find this to be the most time-consuming aspect of the registration process. To assist ERAs with the creation and implementation of appropriate compliance policies and procedures, this second article in our three-part series outlines key policies and procedures that ERAs should consider when drafting their compliance manuals. The first article discussed the circumstances under which an ERA would be required to switch to SEC registration, along with considerations for ERAs building out their compliance programs. 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 their change in registration status, as well as guidance as to what newly registered advisers should expect from the SEC examination process. See “Hedge Fund Manager Deerfield Fined $4.7 Million for Failing to Adopt Insider Trading Compliance Policies Tailored to the Firm’s Specific Risks” (Sep. 21, 2017).

Compliance Corner Q4-2017: Regulatory Filings and Other Considerations That Hedge Fund Managers Should Note in the Coming Quarter

While the fourth quarter is often the busiest one for regulatory filings and fulfilling other compliance obligations, hedge fund managers should ensure that their compliance programs finish the year on a strong note and that key compliance processes are not neglected. This second installment of the Hedge Fund Law Report’s quarterly compliance update, authored by Danielle Joseph and Anne Wallace, director and analyst, respectively, at ACA Compliance Group, highlights certain notable regulatory filings fund managers need to address in the fourth quarter of 2017. In addition to the filing obligations discussed herein, this article examines recent actions by the SEC relating to virtual currency and electronic communications, along with their potential impact on advisers’ compliance programs. For other recent commentary from the SEC, see “SEC Chair Clayton Details Eight Guiding Principles for Enforcement and Agency Strategies for Their Implementation” (Aug. 10, 2017); and “SEC Chair’s Budget Testimony Emphasizes Strong Agency Focus on Oversight and Enforcement in Trump Era” (Jul. 13, 2017). For additional insights from Joseph, see our two-part series “ACA Compliance Report Facilitates Benchmarking of Private Fund Manager Compliance Practices”: Part One (Oct. 3, 2013); and Part Two (Oct. 11, 2013).

Seward & Kissel Study Examines Key Terms in Seed Deals: Structuring the Seeder’s Interest, Key Person Covenants and Lock-Ups (Part One of Two)

With overall launches of new hedge funds trending downward in 2016 due to the challenges these managers face in trying to raise capital, seeding activity was even weaker in 2016, when compared to 2015. This was one of the findings of a recent Seward & Kissel (S&K) study that analyzed key terms in seed-deal transactions, using data gleaned from seed deals executed in 2016 where S&K represented one of the parties in the seeding transaction. This two-part series analyzes key observations from the study and S&K’s findings with respect to the evolution of seed-deal terms. This first installment reviews the current seeding environment and discusses the results from the study concerning the following seed-deal provisions: prevalence of equity shares versus revenue shares; key-person covenants; and lock-ups. The second installment will explore the study’s findings with respect to additional seed-deal terms, including participation, capacity, most favored nation and consent rights; transparency terms; and the pros and cons of buyout rights for managers. The series also includes insights from Gary Anderson, partner at S&K and lead author of the study. For more from S&K on seeding, see “Seward & Kissel Private Funds Forum Analyzes Trends in Hedge Fund Seeding Arrangements and Fee Structures (Part One of Two)” (Jul. 23, 2015).

Two Recent Settlements Demonstrate CFTC’s Continued Focus on Spoofing

Preventing and responding to market manipulation is one of the primary mandates of the SEC and CFTC, the latter of which recently entered into settlement orders with a bank and a day trader, alleging in each case that the respondents had engaged in spoofing – a manipulative practice by which a trader enters multiple orders for a given commodity or futures contract with no intention of executing them in order to move the price of that contract in a desired direction. This article analyzes the terms of the settlement orders, which were issued around the same time as the decision by the U.S. Court of Appeals for the Seventh Circuit in U.S. v. Coscia, which upheld the constitutionality of the anti-spoofing provision of the Commodity Exchange Act. See “Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing” (Sep. 7, 2017). For more on spoofing, see “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017); “Managing the Machine: How Hedge Fund Managers Can Examine and Document Their Automated Trading Strategies (Part One of Two)” (Jan. 7, 2016); and “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015).

ESMA Strives to Prepare Markets As MiFID II, MiFIR and Brexit Approach

With the January 3, 2018, deadline for implementation of the revised Markets in Financial Instruments Directive (MiFID II) fast approaching, and the markets awaiting clarity on the future E.U.-U.K. relationship after Brexit, European regulators and market participants face unprecedented changes in the structure and composition of securities and funds markets. For a fund manager to update its trading policies and procedures and ensure they are fully compliant with the coming regimes requires detailed awareness of pending changes with respect to data collecting and reporting rules, trading obligations, transitional calculations, suitability guidelines, transparency waivers, position limits and many other topics and issues. In the context of Brexit, where more than one exit scenario is possible, it is necessary to proceed with the utmost caution and to devote particular attention to third-country and equivalence issues. All of these points came across in a pair of recent public addresses by Verena Ross, Executive Director of the European Securities and Markets Authority (ESMA), on September 20, 2017, and by Steven Maijoor, ESMA’s Chair, on October 2, 2017. To help readers understand the issues facing the European and global securities and funds markets, this article summarizes the key points from both speeches. For additional commentary from ESMA, see “ESMA Opinion Resolves Inconsistent U.S. and European Asset Segregation Models, Thereby Facilitating Cross-Border Transactions by European Funds” (Sep. 7, 2017); and “ESMA Opinion Sets Forth Four Common Principles for UCITS Share Classes” (Mar. 16, 2017).

Upcoming HFLR and Seward & Kissel Webinar to Explore Key Trends in Fund Side Letters

On Wednesday, October 18, 2017, at 10:00 a.m. EDT, the Hedge Fund Law Report and Seward & Kissel will be co-producing a complimentary webinar entitled “2016‑17 Side Letter Trends: A Conversation With Seward & Kissel’s Steve Nadel.” In this webinar, William V. de Cordova, Editor‑in‑Chief of the Hedge Fund Law Report, and Seward & Kissel partner Steve Nadel will discuss issues fund managers commonly face with respect to side letters and how the side letter landscape has evolved over the past year. Seward & Kissel recently completed its second annual study of side letters entered into by its hedge fund manager clients, considering the prevalence and features of common side letter provisions, and attendees will benefit from the insights gleaned by Nadel – lead author of the study. To register for the webinar, click here.

Stroock Adds Private Funds Partner in New York

Stroock has expanded its private funds practice with the hiring of partner Eric Requenez in New York. Requenez advises investment advisers, fund sponsors and investment banks on the structuring and marketing of public and private funds and securities offerings, in addition to a broad array of regulatory compliance and reporting issues, in the context of mergers and acquisitions as well as funds transactions. For prior insights from Stroock partners, see “Stroock Seminar Identifies Five Strategies for Mitigating the Risk of Supervisory Liability for Hedge Fund Manager CCOs” (Jan. 16, 2014).