Nov. 22, 2018

Six Essential Articles for European Hedge Fund Managers From the HFLR’s 2018 Archive

In light of the Thanksgiving holiday in the U.S., this issue of the Hedge Fund Law Report features six articles from 2018 addressing legal issues relevant to European hedge fund managers. Next week (the week starting November 26, 2018), the HFLR will resume regular publication, that is, publication of new content focused on regulatory and related considerations applicable to hedge fund managers in the U.S., the U.K. and other jurisdictions.

How the GDPR Will Affect Private Funds’ Use of Alternative Data

The E.U.’s General Data Protection Regulation (GDPR), which took effect May 25, 2018, primarily affects investment managers and private funds that are based in the E.U. The GDPR’s restrictions on the processing of “personal data” of individuals in the E.U., however, may affect managers and funds that are located outside the E.U. if they process the data of individuals located in the E.U. in connection with the offering of services to those individuals. Because more funds are using alternative data in their operations – notably in driving their trading strategies and making investment decisions – the GDPR may impact how these funds obtain and use alternative data if that data contains what is arguably considered the personal data of individuals in the E.U. To help readers understand the potential impact of the GDPR on funds’ use of alternative data, the Hedge Fund Law Report interviewed Peter D. Greene, partner and vice-chair of the investment management group at Lowenstein Sandler. This article presents his insights. For more on the GDPR, see “How Fund Managers Can Navigate the E.U. General Data Protection Regulation and the Cayman Islands Data Protection Law” (Aug. 9, 2018); and our two-part series “What Are the GDPR’s Implications for Alternative Investment Managers?”: Part One (Apr. 26, 2018); and Part Two (May 10, 2018).

FCA Executive Director Outlines Regulator’s Brexit Preparations and Expectations for Fund Managers

As the two-year period for negotiations regarding the U.K.’s withdrawal from the E.U. (commonly known as “Brexit”) winds down, the U.K. Financial Conduct Authority (FCA) expects fund managers to anticipate various scenarios and prepare accordingly. Nausicaa Delfas, Executive Director of International at the FCA, offered her reflections on the regulator’s preparations for Brexit. During her remarks, Delfas outlined the FCA’s behind-the-scenes work to facilitate a smooth transition; the regulator’s expectations of fund managers and other firms it regulates; and its vision for the future. The speech provides valuable insight to fund managers about what the FCA expects regarding Brexit, as well as what they should be doing currently to prepare. This article highlights Delfas’ key points. For more on Brexit, see “FCA Pledges to Be More Innovative, Transparent and Forward Looking Following Practitioner Survey” (Aug. 23, 2018); “Preparing for Brexit a Key FCA Priority for 2018/2019” (May 31, 2018); and “Dechert Partners Discuss How Cross-Border European Fund Managers Can Prepare for Brexit’s Momentous Regulatory Effect” (Apr. 6, 2017).

Guidance on Expansion of Senior Managers Regime to Fund Managers and Others

In 2016, the U.K.’s Senior Managers and Certification Regime (SM&CR) went into effect for the banking industry, introducing a heightened level of personal responsibility for senior managers at those institutions. The following year, the U.K. Financial Conduct Authority (FCA) took steps to expand the SM&CR to cover all sectors of the financial services industry, including private fund managers. This article outlines the portions of three consultation papers issued by the FCA pertaining to the transition of FCA-regulated firms to the SM&CR that are most relevant to private fund managers. The implementation date for affected firms to transition to the SM&CR is currently slated to be December 9, 2019. For more on the SM&CR, see “FCA Chief Executive Touts Senior Managers Regime and Remuneration Restrictions As Important Incentives to Promote Good Culture at Fund Managers” (Apr. 12, 2018); “FCA Director of Enforcement Details the Goals and Tenets of the Agency’s Senior Managers Regime and Proposed Modifications to Its ‘Early Settlement’ Program” (Feb. 16, 2017); and “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016).

How Fund Managers Can Navigate Establishing Parallel and Debt Funds in Luxembourg in the Shadow of Brexit and Proposed E.U. Delegation Rules

The Association of the Luxembourg Fund Industry (ALFI) organized a seminar that examined different fund structures within Luxembourg, as well as political and regulatory developments within Europe. The seminar featured panel discussions with representatives from asset managers, in addition to financial services, legal and accounting firms. This article highlights the portions of the seminar addressing the establishment of parallel E.U. funds and Luxembourg debt funds; Brexit; and the E.U.’s proposed delegation rules. For additional coverage of the ALFI program, including a summary of the keynote address of H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, along with the portions of the seminar that covered marketing funds in the E.U. and setting up an E.U. alternative investment fund manager, see “Luxembourg Remains a Significant Point of Entry for Non-E.U. Managers to Raise Capital in the E.U.” (May 17, 2018). For more on E.U. regulatory developments, see “With Brexit Looming and New Fund Structures Available, U.S. Hedge Fund Managers Face Risks and Opportunities for Marketing in Europe” (Jun. 9, 2016).

What Are the Implications for Investment Managers of the Revised Prudential Framework for E.U. Investment Firms?

In late 2017, the European Commission (EC) proposed an overhaul of the prudential framework for E.U. investment firms. Investment managers based in the E.U. should monitor the proposal through the legislative process given its eventual implications for not only the level of regulatory capital that those managers would be required to hold, but also for the restrictions on the ways in which those managers would be able to pay their employees and the remuneration disclosures they would be required to make. In a guest article, Leonard Ng and Caitlin McErlane, partner and associate, respectively, at Sidley Austin, explore the implications of the EC’s proposed overhaul of the prudential framework for E.U. investment firms, particularly with respect to E.U. investment managers. For a discussion of other recent issues affecting the E.U., see “How ESMA’s Opinions on the Relocation of U.K. Financial Market Participants to the E.U. May Affect Fund Managers Post-Brexit” (Nov. 16, 2017); and “ECHR Decision Imposes New Criteria for Email Monitoring Practices on Fund Managers With European Operations” (Sep. 28, 2017).

Program Highlights Malta’s Fund-Friendly Environment

A program sponsored by FinanceMalta – a public-private venture promoting Malta as a financial center – provided an overview of private fund formation in Malta; the advantages of domiciling funds and managers there; the nation’s regulatory and tax regimes; and its emerging approach to blockchain and cryptocurrency. Thalius Hecksher, then-global director at TridentTrust, moderated the discussion, which featured Chris Casapinta, country executive for Malta at Alter Domus; Adam de Domenico, founder and CEO of Cordium Malta; James Farrugia, partner at GANADO Advocates; Ivan Grech, a representative of FinanceMalta; and Christopher Portelli, associate partner at EY Malta. This article highlights the key points raised by the panelists. For more on Malta, see “Malta’s New Notified AIF Vehicle Facilitates Quick Market Launches Without Requiring Regulatory Pre-Approval or Burdensome Ongoing Oversight” (Feb. 16, 2017); and “What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta” (Jan. 26, 2017).