Aug. 8, 2019

A Guide for Private Fund Managers to Evaluate Whether They Are Required to File TIC Form SHL – Due August 30, 2019

The U.S. Department of the Treasury recently notified the public of its mandatory quinquennial survey on foreign ownership of U.S. securities, due August 30, 2019. The reporting form (Form SHL) is part of a series of Treasury International Capital (TIC) and related forms that are used to collect data on cross-border investment activity. Generally, Form SHL requires U.S.‑resident entities – including pooled investment vehicles such as hedge and private equity funds – to report detailed information on the value of their U.S. securities that are owned by foreign residents, if that ownership exceeds the exemption described in the form. Fund managers typically file Form SHL on behalf of the U.S.‑resident issuers (i.e., pooled investment vehicles) that they advise. Given the infrequency of this filing and the challenges that TIC forms generally pose for private fund managers, the Hedge Fund Law Report recently interviewed Julien Bourgeois and Matthew E. Barsamian, partner and associate, respectively, at Dechert, about how fund managers can determine whether they must file Form SHL. This article presents their insights. For more on TIC forms, see “Hedge Fund Managers May Be Required to File TIC Form SHC by March 2, 2012” (Feb. 9, 2012). For additional commentary from Dechert attorneys, see our four-part series on “Taxation of Carried Interests for Senior Level Fund Managers”: Part One (Mar. 7, 2019); Part Two (Mar. 14, 2019); Part Three (Mar. 21, 2019); and Part Four (Mar. 28, 2019).

The Robare Decision: Court Says Negligent Conduct Is Not Willful Conduct (Part One of Two)

The SEC has historically treated intentional conduct and negligent conduct as essentially the same. In cases involving material omissions, the SEC has typically considered a negligent omission coupled with intentional conduct, such as the filing of a Form ADV, to satisfy the “willfulness” requirement for charges under Section 207 of the Investment Advisers Act of 1940 (Advisers Act). A recent court decision, however, strongly suggests that more may be needed for a Section 207 charge. Specifically, the U.S. Court of Appeals for the D.C. Circuit (Court) ruled in Robare v. SEC that, although an investment adviser and its principals violated Section 206(2) of the Advisers Act by negligently failing to adequately disclose to investors a financial arrangement with a service provider, that same conduct was not enough to sustain a violation of Section 207 for willful inadequate disclosures to the SEC. This two‑part series analyzes the Robare decision. This first article summarizes the Commission’s findings and the Court’s rulings on those findings. The second article will provide a former senior SEC official’s perspectives on the implications of the Robare decision for both investment advisers and for the SEC’s Division of Enforcement. For coverage of other recent enforcement actions involving disclosure failures, see “SEC Sanctions Adviser and Principal for Cherry Picking and Abuse of Soft Dollars” (Jun. 20, 2019); and “SEC Fines Fund Manager for Failing to Equitably Allocate Fees and Expenses to Its Affiliate Funds and Co‑Investors” (Jun. 6, 2019).

The SEC Weighs in on LIBOR Transition

Recently, the SEC published a Staff Statement on LIBOR Transition (Staff Statement), which contains useful indications of the regulator’s thinking about the London Interbank Offered Rate (LIBOR) transition and also suggests concrete steps that market participants – including hedge funds – should take to address it. In a guest article, Anne E. Beaumont, partner at Friedman Kaplan Seiler & Adelman, discusses the key takeaways of the Staff Statement for private fund managers. For additional commentary from Beaumont on the LIBOR transition, see “How Hedge Fund Managers Can Prepare for the Anticipated ‘End’ of LIBOR” (Aug. 24, 2017). For coverage of other U.K.-related issues, see “Brexit Remains an Immediate FCA Concern for 2019/2020, With Regulatory Evolution a Longer-Term Area of Interest” (Jul. 18, 2019).

SDNY: In Absence of Attorney-Client Relationship, Communications With Consultants Who Happen to Be Attorneys Are Not Protected

Advisers that think that their communications with attorneys at compliance consulting firms are protected by the attorney-client privilege had better think twice. The U.S. District Court for the Southern District of New York recently ruled that communications between an investment adviser and staff attorneys at its compliance consulting firm were not privileged when made within the scope of a “membership agreement” that specifically disclaimed that the consultant’s attorneys were rendering legal advice. The adviser also waived privilege by sending an otherwise privileged tax opinion to its accountants without implementing appropriate safeguards. This article details the background of the litigation, the adviser’s privilege claims and the court’s opinion and order; provides insight on the implication of the decision for private fund managers from a securities litigation attorney; and outlines several best practices that fund managers should consider in order to avoid waiving privilege. See our three-part series on protecting attorney-client privilege and attorney work product while cooperating with the government: “Establishing Privilege and Work Product in an Investigation” (Mar. 23, 2017); “Minimizing Cooperation Risks” (Mar. 30, 2017); and “Implications for Collateral Litigation” (Apr. 6, 2017).

ACA 2019 Hedge Fund Survey Examines SEC Exam Experience, Codes of Ethics, Electronic Communications and Expense Allocations (Part One of Two)

In a recent webinar, L. Allison Charley and Lisa Ollar, both senior principal consultants at ACA Compliance Group (ACA), discussed the results of ACA’s 2019 Alternative Fund Manager Survey pertaining to hedge funds. This article, the first in a two-part series, explores the survey’s demographics and its findings with respect to SEC examination trends, common questions that arise pertaining to an adviser’s code of ethics, surveillance of electronic communications, trade documentation and expense allocations. The second article will review the survey’s findings with respect to insider trading controls adopted by fund managers, cybersecurity, valuation, marketing and custody. See our coverage of ACA’s 2018 compliance survey: “SEC Exam Experience and Insider Trading Controls” (Dec. 13, 2019); and “Fees, Expenses and Custody” (Dec. 20, 2018).

Brent A. Morowitz Joins Pepper Hamilton in New York

Pepper Hamilton announced that Brent A. Morowitz has joined the firm’s New York office as of counsel in its corporate and securities practice group, as well as its funds services group. Previously part of the legal department of a private equity fund of funds, Morowitz counsels investment advisers and private investment funds on regulatory compliance, fund structuring and ongoing operations. For commentary from another Pepper Hamilton attorney, see our two-part series on fundamental structuring issues for investment advisers: “Separately Managed Accounts, Registration and Securities Laws” (Oct. 18, 2018); and “Taxation, Organizational Expenses, Redemptions, Publicly Traded Partnerships, Performance Fees and Alternative Structures” (Nov. 8, 2018).