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    Dec. 7, 2017

Are Hedge Fund Managers Heeding the Message? Information Request List Provides Insight Into SEC Expectations on the Use of Electronic Communications by Advisers and Employees (Part Two of Three)

Investment advisers frequently use SEC document request lists – either released by the SEC’s Office of Compliance Inspections and Examinations (OCIE) or disseminated by examinees or third parties – to test their ability to efficiently produce documents that may be requested during an actual SEC examination. A document entitled “Information Request List” (Request List), rumored as being used by the SEC to request records in connection with adviser examinations focused on the use of electronic communications by advisers and their employees, has made its way into the public domain. Despite a lack of official confirmation, industry experts that routinely assist clients with SEC examinations agree that the Request List’s substance and form closely resemble those of information requests routinely sent by OCIE. This second article in our three-part series explores the various components of the Request List and analyzes the implications and consequences of certain requests therein. The first article provided background on sweep exams, with particular focus on the putative electronic messaging examination and the potential drivers of SEC focus in this area. The third article will examine best practices for advisers when designing their electronic communications policies, taking into account the items requested in the Request List, as well as how advisers can proactively prepare for future scrutiny in this area. For more on preparing for SEC examinations, see “Mock Audits Are Essential Preparatory Tools for Fund Principals in the Current Regulatory Environment” (Sep. 28, 2017); and “What Hedge Fund Managers Can Expect From SEC Remote Examinations (Part One of Two)” (May 2, 2016).

Recent New York Court of Appeals Decision Eases Path for Investor Lawsuits Against Cayman Funds, but Certain Hurdles Remain

When an offshore fund investor sues in a U.S. court, the defendant may argue that certain claims must be brought derivatively on behalf of the fund, rather than directly by the investor. Cayman law, which frequently governs claims involving offshore hedge funds, presents a number of potential obstacles to derivative claims, however. See “Registered Fund Advisers Delegating to Subadvisers Gain Greater Flexibility From U.S. District Court Ruling to Charge Management Fees” (Mar. 16, 2017); and “Derivative Actions and Books and Records Demands Involving Hedge Funds” (Oct. 17, 2014). Defendants have argued, and some New York courts have held, that a plaintiff’s failure to comply with Rule 12A of the Rules of the Grand Court of the Cayman Islands bars a derivative claim in U.S. courts by depriving the plaintiff of standing, whereas a Massachusetts state trial court found that the rule was merely procedural. Last month, the New York Court of Appeals decided this issue, facilitating lawsuits by Cayman fund investors in the U.S., although significant hurdles remain when bringing claims against hedge fund managers and others. In a guest article, Anne E. Beaumont, partner at Friedman Kaplan Seiler & Adelman, outlines the case history leading up to the Court of Appeals’ ultimate decision, as well as the ruling’s implications for investors, funds and managers. For additional insight from Beaumont, see “How Hedge Fund Managers Can Prepare for the Anticipated ‘End’ of LIBOR” (Aug. 24, 2017); and “Impact on Private Fund Advisers of Obama Administration’s and State Lawmakers’ Actions to Restrict Use of Non-Compete Agreements” (Nov. 10, 2016).

BVI Limited Partnership Act Unites Flexible Features of Different Jurisdictions’ Regulatory Frameworks

One way a jurisdiction may seek to attract private fund managers and increase its standing as an offshore investment haven is by diversifying its stable of available corporate structures. See “Ireland Further Opens the Door for Loan Origination in Europe by Relaxing Restrictions on Eligible Investments by Certain Irish Funds” (Jan. 19, 2017); “New Luxembourg RAIF Structure Offers Marketing Options and Tax Benefits for Non-E.U. Hedge Fund Managers (Part Two of Two)” (Apr. 28, 2016); and “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). The British Virgin Islands (BVI) has recently joined this trend, with the crafting of a bill for the formation of a new and improved limited partnership. The Limited Partnership Act includes a clearly codified role for registered agents, along with safe harbor provisions allowing limited partners to obtain critically important investment data and take other actions to safeguard their interests without endangering their limited liability status. The Hedge Fund Law Report recently interviewed Robert Briant, partner at Conyers Dill Pearman and one of the authors of the act. This article presents Briant’s insights into the limited partnership structure, including its distinguishing features; the envisioned use of the vehicle by hedge and private equity funds; and ways the limited partnership is likely to fit into the international funds market as a whole. For more on the BVI, see “Advantages and Drawbacks of Four Main Fund Structures for Offshore Launches in the BVI” (Apr. 27, 2017); and “Use by Private Fund Managers of the British Virgin Islands for Private Equity Fund Formation and Private Equity Investments” (Nov. 29, 2012).

Former Senior SEC Attorneys Offer Insight on Chair Clayton’s Priorities and the Current Enforcement Climate (Part One of Two)

Under former Chair Mary Jo White’s “broken windows” approach to enforcement, the SEC pursued minor infractions in an effort to prevent more serious misconduct. Although some have expressed hope that the Commission will become more pragmatic under Chair Jay Clayton, particularly in light of President Trump’s pro-business rhetoric, it remains difficult for fund managers to obtain perspective into the inner workings of the SEC and its enforcement agenda. A recent program hosted by Brian T. Davis and Dimitri G. Mastrocola, partners at international recruiting firm Major, Lindsey & Africa (MLA), provided fund managers with that valuable insight into the SEC, explaining the shift in tone under Clayton and offering perspectives on the regulator’s potential agendas. Moderated by Simpson Thacher partner Olga Gutman, the program featured partners David W. Blass, former Chief Counsel and Associate Director in the SEC Division of Trading and Markets, and Michael J. Osnato, Jr., former Chief of the Complex Financial Instruments Unit of the SEC Division of Enforcement. This two-part series summarizes the panel’s insights. This first article discusses the “zero-tolerance” approach under White, the direction Clayton intends to take and the SEC’s enforcement agenda. The second article will explore the SEC’s regulatory agenda, as well as the examination and enforcement referral process. For more from Simpson Thacher, see “Structuring Private Funds to Avoid ERISA While Accommodating Benefit Plan Investors”: Part One (Feb. 5, 2015); and Part Two (Feb. 12, 2015). For coverage of prior programs hosted by MLA, see “Client Consent and Other Issues Requiring Careful Consideration by Fund Managers Involved in M&A Transactions” (May 18, 2017); and “Former Prosecutors Address Trends in Cybersecurity for Alternative Asset Managers, Diligence When Acquiring a Company and Breach Response Considerations” (Oct. 6, 2016).

ACA Panel Reviews Effects of Impending MiFID II on U.S. Advisers

A recent ACA Compliance Group (ACA) program examined the impact that the recast Markets in Financial Instruments Directive (MiFID II) will have on fund managers when it takes effect in January 2018, covering delegated portfolio management; market reforms; third-country managers; research payments; best execution; transaction reporting; marketing and product governance rules; recording of telephone conversations; algorithmic trading; and commodity derivatives. See also our two-part series “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II”: Part One (Jun. 18, 2015); and Part Two (Jun. 25, 2015). The program featured Sally McCarthy and Martin Lovick, ACA director and senior principal consultant, respectively. This article summarizes the key takeaways from their presentation. For further insights from ACA, see “Challenges and Solutions in Managing Global Compliance Programs” (Oct. 5, 2017); and our coverage of its 2017 fund manager compliance survey: “Continued SEC Focus on Compliance, Conflicts of Interest and Fees, and Common Measures to Protect MNPI” (Jun. 1, 2017); and “Variety in Expense Allocation Practices and Business Continuity Measures” (Jun. 8, 2017).

Tax Expert Provides Insight Into Recent U.S. Tax Court Decision on Taxation of Foreign Investments in U.S. Partnerships

The U.S. Tax Court’s recent decision in Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Commissioner of Internal Revenue departed from a longstanding Internal Revenue Service (IRS) revenue ruling that made sales of U.S. partnership interests by foreign partners subject to tax in the U.S. See “U.S. Tax Court Ruling May Lead to Increased After-Tax Returns for Foreign Investors That Invest in U.S. Partnerships” (Aug. 3, 2017). A recent webinar offered a primer on U.S. taxation of foreign investors, an analysis of the IRS revenue ruling, an overview of the Tax Court’s reasoning in the Grecian Magnesite decision and its implications. The program was sponsored by The Financial Executives Alliance, a national affinity group administered by First Republic Bank, and featured Pepper Hamilton partner Steven D. Bortnick. This article highlights the principal points from the presentation. For further commentary from Bortnick, see “Tax Proposals and Tax Reforms May Affect Rates and Impose Liabilities on Hedge Fund Managers” (Apr. 16, 2015).

Kramer Levin Broadens Private Equity and Corporate Practices

Kramer Levin has hired Todd Lenson and Jordan Rosenbaum as partners in its corporate and private equity practices in New York. Lenson and Rosenbaum advise private equity funds, hedge funds, portfolio companies, REITs and family offices on cross-border transactions including mergers; acquisitions; divestitures; and debt and equity offerings. For commentary from other Kramer Levin partners, see our two-part series on how managers can structure direct lending funds to minimize U.S. tax consequences to non-U.S. and tax-exempt investors: “‘Season and Sell’ and Blocker Structures” (May 18, 2017); and “Treaty-Based and Registered Fund Structures” (May 25, 2017); as well as 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).

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