Jun. 13, 2019

Understanding the Wells Process: Origin and Key Elements (Part One of Three)

The Wells process notifies a party that it is under investigation by the SEC and provides an opportunity for that party to present its side of the story before the Commission decides whether to proceed with an enforcement action. The process aims to collect for the Commission the views of both its staff and the investigation’s subject on the facts and circumstances that form the basis for the staff’s recommendation. Successful navigation of the Wells process can result in reduced charges, modified relief and settlement – and even no enforcement action at all in some cases. In the wake of the Dodd‑Frank Act, however, the period of time while an SEC investigation is underway but before a Wells notice is formally issued has become even more important. In addition, the increase in parallel criminal investigations of conduct also under investigation by the SEC has changed the calculus of whether and how to respond to a Wells notice. This three-part series demystifies the Wells process – and the pre-Wells process – for fund managers. This first article discusses the origin of the Wells process and its key elements, as well as the impact of Dodd-Frank. The second article will examine the views of members of the SEC’s Enforcement Division on the Wells process. The third article will explain the increasingly important pre-Wells notice process and the key steps of the overall process, including ways for a manager to decide whether to offer a Wells submission in response to a Wells notice. See “How to Prepare for an SEC Investigation: The Pequot Precedent” (Jan. 21, 2009).

Practical Tax Considerations Arising From Trends in European Fund Structuring

A developing theme over recent years has been the extent to which current fund structures will continue to achieve the aim of minimizing tax leakage. This theme has largely emanated from coordinated action of the Organisation for Economic Co‑Operation and Development and E.U. member states to tackle and prevent perceived tax avoidance and treaty abuse. As a result, it is now important to carefully consider not only whether the economic substance of a fund structure can withstand scrutiny from a tax perspective, but also whether it will continue to minimize tax leakage in the future. In a guest article, Will Smith and Caleb McConnell, partner and associate, respectively, at Sidley Austin, address a number of the important changes to the international tax framework that have affected the tax planning involved in fund structuring. In addition, the authors provide practical points to consider for a European fund structure in light of these international tax changes. For analysis of other tax issues, see “Sidley Panel Discusses Operational and Tax Challenges of Hybrid Funds” (May 23, 2019); “How Fund Managers May Deploy Opportunity Zone Funds to Defer and Partially Eliminate Capital Gains” (Apr. 18, 2019); and “France Welcomes Foreign Asset Managers With Softened Tax Treatment of Carried Interest” (Dec. 6, 2018). For additional commentary from Smith and McConnell, see “How the E.U. Tax-Haven Blacklist May Affect Private Funds Formed in Blacklisted Jurisdictions” (Nov. 2, 2017); and “Recent Tax Developments May Make U.K. Limited Companies More Favorable Than U.K. LLPs for U.S. Fund Managers” (Apr. 20, 2017).

Walkers Partners Analyze Key Similarities and Differences Between the BVI and Cayman Islands As Fund Domiciles

The British Virgin Islands and the Cayman Islands are two of the most popular domiciles for offshore private funds due to their tax-neutral regimes, sophisticated business infrastructures and well-developed legal systems. A recent program presented by the Investment Management Due Diligence Association looked at the similarities and differences between the two jurisdictions and offered commentary as to which might be the better choice under various circumstances. Daniel Strachman, managing director of A&C Advisors LLC, moderated the discussion, which featured Walkers partners Oliver Bell and Dorothy Scott. This article summarizes the key takeaways from their presentation. For additional insights from Walkers partners, see our two-part coverage of the 2018 Walkers Fundamentals Hedge Fund Seminar: “Fund Launches, Asset Flows, Strategies, Durations, Fees, Governance and Hot Topics” (Dec. 20, 2018); and “Suspensions, Liquidations and Restructurings” (Jan. 17, 2019).

In Effort to Increase Transparency, CFTC Publishes Its First Enforcement Manual

The Division of Enforcement (Division) of the CFTC recently published an enforcement manual (Manual) that provides an overview of the Division’s operations; a discussion of its investigative tools; and a roadmap to the prosecution and settlement of enforcement proceedings. This article outlines the portions of the Manual most relevant to private fund managers that are registered with the CFTC. For commentary from CFTC Director of Enforcement James M. McDonald, see “Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement” (Oct. 19, 2017).

Deutsche Bank 2019 Alternative Investment Survey Details Observed and Expected Performance and Allocation Preferences (Part One of Two)

Deutsche Bank Global Prime Finance (DB) recently completed its 17th annual global alternative investment survey. This year, DB analyzed responses from 425 allocators that manage or advise roughly $1.74 trillion of hedge fund assets. This article, the first in a two-part series, details the portions of the DB survey report that cover observed and expected performance and allocation preferences, including with respect to environmental, social and governance products; initial and target allocation sizes; and minimum fund size. The second article will cover additional allocation preferences, including with respect to investment vehicles, region and strategy; the continued decline in hedge fund fees; and early stage investing. For coverage of previous editions of DB’s annual survey, see our two-part coverage of the 2017 survey: Part One (Mar. 30, 2017); and Part Two (Apr. 6, 2017); and our two-part coverage of the 2016 survey: Part One (Mar. 17, 2016); and Part Two (Mar. 24, 2016).

Greg Baker, Former SEC Senior Counsel, Joins Lowenstein Sandler in New York

H. Gregory Baker, former Senior Counsel in the SEC’s Enforcement Division, has joined Lowenstein Sandler’s New York office as a partner in the firm’s capital markets litigation and white collar criminal defense practices. Given his asset management background, Baker will also advise clients in Lowenstein’s investment management practice. For coverage of an enforcement action Baker brought while at the SEC, see “SEC Settles First Two Enforcement Actions Against Robo-Advisers” (Feb. 14, 2019). For insights from another Lowenstein partner, see our three-part series on open-source software: “What Is It, and How Are Fund Managers Using It?” (Feb. 21, 2019); “What Are the Benefits and Risks of Using It?” (Feb. 28, 2019); and “How Fund Managers Can Mitigate Its Risks” (Mar. 7, 2019).