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    Feb. 23, 2017

What Role Should the GC or CCO Play in the Audit of a Fund’s Financial Statements? 

The first quarter of the year marks the busy season for finance professionals at private funds. Once the investment manager (or its administrator) finalizes the prior year-end performance for its funds, the firm can officially commence auditing those funds’ financial statements, although preparations have likely been underway for several months. From a regulatory perspective, Rule 206(4)-2 (Custody Rule) of the Investment Advisers Act of 1940 is the driving force behind the flurry with which a hedge fund manager approaches the audit process. See “How Does the Custody Rule Apply to Special Purpose Vehicles Used by Private Equity Funds to Purchase, and Escrow Accounts Used to Sell, Portfolio Companies?” (Jul. 24, 2014); and “How Should Hedge Fund Managers Revise Their Compliance Policies and Procedures in Light of Amendments to the Custody Rule?” (Jan. 20, 2010). Registered commodity pool operators must also adhere to CFTC Regulation 4.22(c), which requires that audited financial reports be delivered to the pool’s investors and filed with the NFA within 90 days of the pool’s fiscal year-end. See “NFA Workshop Details the Registration and Regulatory Obligations of Hedge Fund Managers That Trade Commodity Interests” (Dec. 13, 2012). Of course, even without these regulatory requirements, most institutional investors – particularly those that owe a fiduciary duty to their end-investors – insist that funds to which they allocate undergo an annual audit. To assist our subscribers that are currently engaged in the audit process, this article considers the audit from the perspectives of the fund manager’s chief compliance officer and general counsel. Specifically, we analyze the fund’s audit process and explore the extent to which legal and compliance personnel should be part of that process, or whether this is a purely financial function that is outside their purview. 

U.K. Proposes Legislation to Impose Criminal Liability on Companies and Partnerships Whose Employees and Other Agents Facilitate Tax Evasion (Part One of Two)

The previous three years have generally heralded a new approach to combating tax evasion, with a significant international focus on cross-border cooperation and the extra-territorial application of tax regimes. The U.K. has been at the forefront of such international action, legislating or proposing a series of new rules and regimes in this area. A particular focus of the U.K. authorities has been to implement legislation designed to change the behaviour of individual taxpayers, targeting individuals directly engaged in tax evasion or who indirectly facilitate or enable that tax evasion. For a review of U.S. efforts to combat tax evasion, see “What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?” (Feb. 1, 2013); and “U.S. Releases Helpful FATCA Guidance, but the Law Still Remains” (Mar. 8, 2012). The U.K. has proposed a new set of rules that, if enacted, will introduce a new criminal liability for certain companies and partnerships in circumstances where an employee, agent or service provider facilitates tax evasion by other persons. In this guest article, the first in a two-part series, Sidley Austin partner Will Smith provides an overview of these new rules known as the “failure to prevent the facilitation of tax evasion” rules (UKFP rules). The second article will provide an in-depth discussion of how the UKFP rules may apply to private fund managers, including U.S.-based investment managers that have a link to the U.K. For additional insight from Smith, see “Potential Impact on U.S. Hedge Fund Managers of the Reform of the U.K. Tax Regime Relating to Partnerships and Limited Liability Partnerships” (Mar. 13, 2014); and Smith’s 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).

How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll

As the personal wealth of many mainland Chinese citizens has continued to grow, U.S. and European asset managers are eager to enter that market. Accessing Chinese capital, however, is fraught with barriers to entry, including severe restrictions by the Chinese government on capital outflows by investors. Managers may be able to reach some of these investors through Hong Kong, but that capital raising and asset management activity may trigger a licensing requirement with the Hong Kong Securities and Futures Commission, which is seen as much more hands-on than the SEC and the U.K. Financial Conduct Authority. See “K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). In a recent interview with the Hedge Fund Law Report, Robert Woll, a partner in Mayer Brown’s Hong Kong office, provided an update on the state of the alternative asset management industry in both China and Hong Kong, particularly as it relates to managers establishing a presence in these jurisdictions and marketing to investors. For insight from other Mayer Brown attorneys, see our three-part series on how funds can use subscription credit facilities: “Provide Funds With Needed Liquidity but Require Advance Planning by Managers” (Jun. 2, 2016); “Offer Hedge Funds and Managers Greater Flexibility” (Jun. 9, 2016); and “Operational Challenges for Private Fund Managers” (Jun. 16, 2016).

Despite the DOL Fiduciary Rule’s Uncertain Future Under the Trump Administration, Managers Should Continue Preparing for Its April 2017 Implementation (Part Two of Two)

As part of his first 100 days in office, President Donald J. Trump has set his sights on easing some of the existing regulations in the financial sector to ostensibly allow it to flourish. To that end, he issued a presidential memorandum on February 3, 2017 (Presidential Memorandum), ordering the Department of Labor to review the fiduciary duty rule (DOL Fiduciary Rule). This review may lead to a reevaluation of who or what should be officially classified as a fiduciary, with all the legal obligations that classification entails, and may spur a dialogue between regulators and the funds sector. Although legal experts disagree as to the likelihood of the DOL Fiduciary Rule’s ultimate survival, its defeat is far from a fait accompli. Those potentially subject to the DOL Fiduciary Rule can and should continue revising their practices, documents and disclosures where appropriate. This two-part series evaluates the recent orders issued by the Trump administration that target the financial industry, including insights from attorneys specializing in financial regulations, employment and labor law, so that fund managers can respond accordingly. This second article in the series considers the potential ramifications of the proposed changes to the DOL Fiduciary Rule and their impact on hedge fund managers. The first article summarized the Trump administration’s executive order, entitled “Core Principles for Regulating the United States Financial System,” which detailed the financial sector policies of the new administration. For more on how protecting retirement investors has recently been an SEC priority, see “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); and “SEC Division Heads Enumerate OCIE Priorities, Including Cybersecurity, Fees, Bad Actors and Never-Before Examined Hedge Fund Managers (Part One of Two)” (Apr. 28, 2016).`

How Hedge Funds Can Protect Their Brands and IP: Pepper Hamilton Attorneys Discuss Trademarks and Copyrights (Part One of Two)

An adviser’s name and proprietary trading methods can be among its most valuable assets. A panel of intellectual property (IP) attorneys at Pepper Hamilton’s recent symposium offered a thorough overview of the fundamental elements of trademark, copyright, trade secret and patent law, as well as practical examples of how IP law intersects with fund management. The panel was moderated by Pepper Hamilton partner Gregory J. Nowak and featured Evan H. Katz, a managing director of alternative asset investment firm Crawford Ventures, Inc.; Pepper Hamilton partners Michael K. Jones and Peter T. Wakiyama; and associates Lori E. Harrison and Joseph J. Holovachuk. This article, the first in a two-part series, discusses how investment managers can safeguard their brands through trademarks and protect their copyrightable materials. The second article will explore the panelists’ insights with respect to trade secrets and patents in the investment management context. For more on IP protection, see “Trending Issues in Employment Law for Private Fund Managers: Non-Compete Agreements, Intellectual Property, Whistleblowers and Cybersecurity” (Nov. 17, 2016). For additional insight from Pepper Hamilton, see “Marketing and Reporting Considerations for Emerging Hedge Fund Managers” (Jun. 16, 2016). For more from Nowak, see “Tax Proposals and Tax Reforms May Affect Rates and Impose Liabilities on Hedge Fund Managers” (Apr. 16, 2015).

Top Five Compliance Deficiencies in OCIE Risk Alert Include Annual Compliance Reviews, Accurate Regulatory Filings and Custody Issues

Each year, fund managers attempt to anticipate what new areas the SEC will focus on in its upcoming examinations. In their push to get ahead, however, those managers often fail to adequately perform many of the compliance requirements to which they have been subject for years. The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently issued a risk alert (Risk Alert) which, in some respects, urges fund managers to return to the basics as it pertains to their compliance efforts. This is because the five most common compliance issues identified in deficiency letters to investment advisers by OCIE which were described in the Risk Alert include traditional duties such as maintaining proper books and records, conducting annual compliance reviews and making accurate regulatory filings. All investment advisers should review their compliance policies and procedures considering the Risk Alert to ensure they avoid the five deficiencies highlighted by OCIE. This article summarizes the compliance failures and other items covered by the Risk Alert. For a similar 2014 OCIE alert, 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).

BDO Hires Joe Pacello in New York

Accounting firm BDO USA has hired Joe Pacello as a tax partner in its New York office. Pacello advises hedge funds, private equity funds, funds of funds and other investment vehicles on the tax components of their transactions. For insight from Pacello, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation” (Dec. 20, 2012); and “IRS Enhancing Its Scrutiny of Tax Shelter Disclosures by Hedge Funds” (Feb. 3, 2011). 

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