Sep. 6, 2012

JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds

When the JOBS Act (formally the Jumpstart Our Business Startups Act) was signed by President Obama in April, it directed that one of its most transformational provisions – the relaxation of decades-long limits on public offerings of unregistered securities – not go into effect until the Securities and Exchange Commission (SEC) set rules to implement the changes.  Though the SEC was given 90 days, or until July 5, the agency did not act until almost two months after the deadline.  As summer wound down, emotions surrounding the law flared, with a spate of increasingly strident public comment letters filed with the SEC.  Some letters attacked the entire premise of the JOBS Act and urged all manner of burdensome add-ons, while others demanded that the SEC implement the Act without delay and with a minimum of new obligations.  The proposed rules emerged on August 29, with nods to both sides of the debate.  In a guest article, Nathan Greene, a partner and Deputy Practice Group Leader in the Asset Management Group at Shearman & Sterling LLP, discusses the background of the JOBS Act; the proposed rules; special regulatory considerations for investment funds (including considerations under the Investment Advisers Act, Investment Company Act, Commodity Futures Trading Commission rules and Regulation S); factors that may be relevant in assessing the reasonableness of steps taken by investment managers to verify the accredited status of investors; the political debate surrounding the JOBS Act and the rules thereunder; and adjacent regulation that investment managers would do well to keep in mind when adjusting their approaches to marketing in light of the JOBS Act rules.

CPO Compliance Series: Conducting Business with Non-NFA Members (NFA Bylaw 1101) (Part One of Three)

Commodity pool operators (CPOs) that must soon register with the U.S. Commodity Futures Trading Commission (CFTC) and become members of the National Futures Association (NFA) because of the repeal of the CFTC Regulation 4.13(a)(4) registration exemption will need to undertake numerous CFTC and NFA compliance obligations.  One of the key NFA compliance obligations facing new CFTC registrants and NFA members arises out of NFA Bylaw 1101, which prohibits an NFA member, such as a CPO, from conducting business with or on behalf of a non-NFA member that is otherwise required to register with the CFTC.  NFA Bylaw 1101 compliance is also topical for existing NFA members given the repeal of the Regulation 4.13(a)(4) registration exemption, as existing NFA members will need to take steps to ensure that they comply with NFA Bylaw 1101 with respect to any CPOs with whom they are engaged in commodity interest business that currently claim the Regulation 4.13(a)(4) exemption.  Hedge Fund Law Report is publishing a three-part article series focusing in detail on the compliance obligations of CPOs under CFTC and NFA regulations and providing guidance addressing a CFTC-registered CPO’s: (i) conducting business with non-NFA members; (ii) preparation and use of marketing and promotional materials; and (iii) reporting of principals and registration of associated persons.  Each of these topics is also briefly summarized in “Do You Need to Be a Registered Commodity Pool Operator Now and What Does it Mean If You Do? (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  This article is the first in the series and discusses in greater detail the NFA’s guidelines on conducting business with non-NFA members.  The authors of the series are Stephen A. McShea, General Counsel and Chief Compliance Officer of Larch Lane Advisors LLC; Cary J. Meer, a partner at K&L Gates LLP; and Lawrence B. Patent, of counsel at K&L Gates LLP.

U.K. Hedge Fund Manager Taxed on Bonuses Delivered Through Tax-Avoidance Scheme

On July 16, 2012, the First-Tier Tribunal of the U.K. Tax Chamber issued a decision rejecting an appeal by hedge fund manager Sloane Robinson Investment Services Limited of a tax imposed on bonuses it delivered to its director-employees through a tax avoidance scheme.  This article summarizes the decision, including the factual findings, the parties’ arguments and the Tribunal’s legal analysis.  This article also provides insight on what the decision means for tax and compensation structuring for U.K. hedge fund managers.

Grant Thornton Broker-Dealer Industry Symposium Focuses on Capital Requirements, Fiduciary Standards, the JOBS Act, the Volcker Rule and Use of Social Media

On June 19, 2012, Grant Thornton hosted a symposium that highlighted recent regulatory developments impacting brokerage firms, including brokers that have hedge funds as clients.  The aim of the symposium was to arm broker-dealers with valuable information and tools to help them do business in an increasingly regulated industry.  The panelists addressed a number of current issues facing the broker-dealer industry, including: capital requirements for broker-dealers; new fiduciary standards for broker-dealers; the impact of the Jumpstart Our Business Startups (JOBS) Act; regulatory uncertainty surrounding the Volcker Rule; new rule changes impacting broker-dealers; best execution; and the use of social media.  This article summarizes highlights from the symposium on the foregoing topics.  For hedge fund managers, this discussion is relevant for at least two reasons.  First, hedge fund managers routinely interact with broker-dealers in connection with prime brokerage activities, obtaining leverage, borrowing shares to sell short, custody, derivatives transactions and a wide range of other activities.  Second, some hedge fund managers have affiliated broker-dealers.  See “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).

Report Finds Hedge Fund Assets Continued to Grow in First Half of 2012, Particularly for the Largest Single-Manager Hedge Funds

In August 2012, PerTrac, Inc. issued a semi-annual update to a full-year analysis of the composition and size of the single-manager hedge fund and fund of hedge funds industry.

Federal Court Decision Addresses When an Investment Manager Becomes an ERISA Fiduciary

Investment advisers that become ERISA fiduciaries because the fund is deemed to be a “plan assets” fund subject to ERISA may also be deemed to be a fiduciary with respect to ERISA plans that are investors in that fund.  A recent federal court decision addresses, among other things, circumstances in which an investment manager constitutes a “fiduciary” for ERISA purposes, and whether an ERISA fiduciary is liable for breaches that occurred before it became a fiduciary.  See “Applicability of New Disclosure Obligations under ERISA to Hedge Fund Managers,” Hedge Fund Law Report, Vol. 5, No. 9 (Mar. 1, 2012).

Dan Anderson Joins Hedge Funds Group at Ropes & Gray

On August 28, 2012, Ropes & Gray announced that Daniel Anderson has joined the firm in Hong Kong.  For insight from Ropes & Gray attorneys, see “CFTC and SEC Adopt Long-Awaited Rules Excluding Most Hedge Funds from Swap Dealer Registration Requirements,” Hedge Fund Law Report, Vol. 5, No. 21 (May 24, 2012).

Vice-Chairman of FINRA, Stephen Luparello, to Join WilmerHale

On September 4, 2012, WilmerHale announced that Stephen Luparello, currently the vice-chairman of the Financial Industry Regulatory Authority (FINRA), will join the firm as a partner resident in its Washington, D.C. office on October 8, 2012.

Cambridge Associates Appoints Jeffrey Mansukhani Director of Strategy for Research Navigator, the Firm’s Comprehensive Alternative Asset Manager Research Platform

On August 29, 2012, Cambridge Associates, provider of independent investment advice and research to institutional and private clients worldwide, announced that it has named Jeffrey D. Mansukhani a Managing Director of the firm (Director of Research Navigator (SM) Strategy).