Feb. 1, 2018

How Advisers to Private Funds Can Prepare for Challenges and Opportunities in 2018: Tax Reform, Blockchain Technology and Alternative Fee Structures

One year into the Trump presidency, advisers to private funds are considerably better informed than they were a year ago about what policies and approaches to expect from the regulatory agencies charged with overseeing the financial sector. But while the legal and compliance sides of the industry settle in to the new normal, 2018 promises to present its own set of challenges and opportunities for private fund managers. The potential impact of the much-heralded Tax Cuts and Jobs Act (Tax Act) – in particular the nuances of the Tax Act’s treatment of carried interest – will continue to be the subject of extensive analysis. Advisers to private funds stand to benefit from an array of opportunities in the bold new field of blockchain technology, one of whose principal applications, bitcoin, surged spectacularly at the end of 2017. Moreover, the poor returns and outflows of capital that plagued hedge funds in 2016 have generally not been a distinguishing feature of 2017 and the new year, leaving open the question of whether advisers will continue to offer alternatives to the “2 and 20” fee structure. To shed light on these crucial market issues, the Hedge Fund Law Report interviewed John P. Broadhurst and James J. Frolik, two partners at Shartsis Friese in San Francisco who are on the front lines of advising managers on the impact of the Tax Act; the spread of blockchain technology and its lures and drawbacks for fund managers; and the trend of alternative fee structures and arrangements. This article presents their thoughts on the foregoing. For more on how blockchain is impacting the private funds industry, see “Private Fund Advisers and Service Providers Must Evolve Their Businesses to Keep Pace With Innovations in Technology, or Risk Becoming Obsolete” (Jan. 18, 2018).

High- and Low-Tech Innovations for Fund Managers to Overcome Compliance Training’s Drawbacks

The challenge for any organization’s compliance team is to create meaningful, cost-effective and durable training while simultaneously satisfying legal and regulatory requirements, especially in highly regulated industries such as asset management. Training can be a repetitive drag for those compelled to take it: a mandatory but possibly dreaded, boring entry on an employee’s or vendor’s work agenda. Transforming compliance and ethics learning requires imagination, shorter training sessions, testing-out options, creation of ongoing narratives and leverage of various communication tools into an effective and efficient program, observed Gary Collins, managing director at BNP Paribas, speaking on a panel of fellow compliance officers at the 2017 Compliance & Ethics Institute, sponsored by the Society of Corporate Compliance and Ethics. Joining Collins, who moderated the session, were Melinda Miller, vice president and manager of regulatory compliance at HSBC, and Cassandra Knight, the former head of company compliance at Morgan Stanley, now at PayPal. This article explores their key insights. See “How Investment Managers Can Prevent and Manage Claims of Harassment in the Age of #MeToo” (Dec. 14, 2017); “NFA Conference Addresses Examination Process, Training and Compliance Best Practices for Swap Dealers and Major Swap Participants (Part One of Two)” (Jun. 4, 2015); and “How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Four of Four)” (Feb. 6, 2014).

New Tax Law Carries Implications for Private Funds

On December 22, 2017, President Trump signed H.R. 1, the Tax Cuts and Jobs Act (Tax Act), into law. The Tax Act makes the most significant revisions to the Internal Revenue Code (IRC) since the 1986 tax reform. A recent Proskauer program offered an overview of the provisions of the Tax Act most likely to affect private fund managers. The program featured Proskauer partners Arnold P. May and Amanda H. Nussbaum, along with senior counsel Brian D. Huber and Marguerite R. Lombardo. This article highlights the key takeaways from their presentation. For coverage of another recent tax development, see our two-part series on how the new partnership audit regulations affect private funds: “Understanding the BBA and Appointing a Partnership Representative” (Oct. 19, 2017); and “Imputed Underpayments, Push-Out Elections and Fund Document Provisions to Amend” (Nov. 2, 2017).

FCA Issues 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 U.K. Financial Conduct Authority (FCA) recently took steps to expand the SM&CR to cover all sectors of the financial services industry, including private fund managers. This expanded coverage is expected to become effective in 2018. The FCA has issued three consultation papers pertaining to the transition of FCA-regulated firms to the SM&CR. This article outlines the portions of those consultation papers that are most relevant to private fund managers. For more on the SM&CR, see “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).

ACA 2017 Fund Manager Compliance Survey Addresses Investment Allocations, Conflicts of Interest and Valuation (Part Two of Two)

ACA Compliance Group (ACA) recently discussed the findings of its 2017 Alternative Fund Manager Compliance Survey in a webinar featuring Colleen Marencik and Brian Lattanzio, director and consultant, respectively, at ACA. This article, the second in a two-part series, discusses the survey’s findings with respect to investment allocation practices by private equity and real estate managers, including co-investments; cross transactions; best execution and fees; conflicts of interest; and valuation. The first article examined the survey’s findings regarding recent SEC examination experiences, along with hedge fund trading and counterparty issues, including best execution; soft dollars; principal transactions and cross trades; dark pools; and trade errors. For additional commentary from ACA, see our two-part roadmap to maintaining books and records: “Compliance With Applicable Regulations” (Nov. 2, 2017); and “Document Retention and SEC Expectations” (Nov. 9, 2017); and our two-part series “A Roadmap for Advisers to Comply With Marketing and Advertising Regulations”: Part One (Aug. 3, 2017); and Part Two (Aug. 10, 2017). See also our coverage of ACA’s 2016 Compliance Survey; 2015 Compliance Survey; 2014 Compliance Survey; and 2013 Compliance Survey.

Sophie Reguengo Joins Ogier in Jersey

Sophie Reguengo has joined Ogier’s Jersey office as counsel, after nearly 15 years of practicing law in the funds markets of Jersey and Hong Kong. Reguengo has extensive expertise in the formation and management of private funds, particularly those in the private equity and real estate sectors, and in the navigation of complex cross-border regulatory issues. For another recent hire at Ogier, see “James Bermingham Joins Ogier in Luxembourg” (Nov. 2, 2017). For commentary from current or former Ogier attorneys, see “Jersey Offers Range of Marketing and Distribution Options, Operational Support for Investment Funds” (Mar. 9, 2017); and “Key Insights for Fund Managers Establishing Listed and Private Funds in Guernsey” (Jan. 5, 2017).