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    Feb. 14, 2013

FATCA Implementation Summit Identifies Best Practices Relating to FATCA Reporting, Due Diligence, Withholding, Operations, Compliance and Technology

On December 6, 2012, the Hedge Fund Business Operations Association and Financial Research Associates, LLC jointly sponsored a “FATCA Implementation Summit” in New York City (Summit).  Participants at the Summit discussed compliance requirements, recommendations and strategies in connection with the Foreign Account Tax Compliance Act (FATCA), in particular with respect to registration, reporting, due diligence and withholding.  Participants also addressed the operational and technological demands presented by FATCA, and best practices for meeting those demands.  This article summarizes the practical takeaways from the Summit and offers recommendations that hedge fund managers can apply directly to their FATCA compliance programs.

U.K. Court Decision Helps Define the Amount of “Client Money” That Hedge Funds and Other Clients Are Entitled to Receive After a Brokerage Firm Fails

In the U.K., broker-dealers and other regulated firms must segregate “client money” from the firm’s own funds, and hold such money in trust, to ensure that such money is available for distribution to hedge funds and other clients if the regulated firm fails.  The U.K.’s Financial Services Authority defines “client money” as “any money that a firm receives from or holds for, or on behalf of, a client in the course of, or in connection with its MiFID business.”  When a brokerage firm enters insolvency in the U.K., clients are entitled to prompt distribution of their pro rata share of the client money held by the regulated firm, determined as of the date an administrator is appointed for the firm – an event that is deemed by applicable regulations to be a “primary pooling event” (PPE).  However, until recently, it was not clear how administrators should value client positions that are open upon the occurrence of a PPE.  The U.K. High Court of Justice recently issued a ruling that clarifies how open client positions are to be valued in determining client money entitlements.  This article describes the U.K.’s “client money” regime to protect clients of regulated firms; summarizes the court’s decision and analysis in the ruling; and provides insight from partners at Sidley Austin LLP on the implications of the court’s decision for clients of regulated firms.  See also “How Can Hedge Funds Get Their Money Out of Lehman Brothers International Europe?,” Hedge Fund Law Report, Vol. 2, No. 31 (Aug. 5, 2009).

Peter Tsirigotis of Brown Brothers Harriman Discusses the Operational Challenges Posed by Side Letters

For hedge fund managers, the panoply of legal and fiduciary duty issues raised by side letters is daunting.  For an insightful discussion of some of these issues, see “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters,” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).  Compounding the legal hurdles of side letters are the operational challenges they raise – the need to abide by a patchwork of different promises to different institutions, and the consequent pitfalls in the interstices of those promises.  As SEC examiners and examined managers routinely tell the Hedge Fund Law Report, the most common violations by hedge fund managers are not of external law, but of their own promises and disclosures.  In side letters, therefore, hedge fund managers raise the compliance bar on themselves considerably.  Side letters help raise assets, but they also raise regulatory risk.  Side letters have received considerable attention – including in the HFLR – from the ex ante perspective, that is, from the perspective of a manager negotiating such an instrument.  See, e.g., “RCA Session Covers Transparency, Liquidity and Most Favored Nation Provisions in Hedge Fund Side Letters, and Due Diligence Best Practices,” Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  But side letters have received less attention from the ex post perspective.  There has been, that is, less discussion on how hedge fund managers can live with the deals they strike in side letters.  We recently talked to Peter Tsirigotis, Senior Vice President at Brown Brothers Harriman, to shed some light on this as yet obscure area.  In particular, our conversation with Tsirigotis covered, among other topics: reasons for side letters; categories of side letter rights requested; most favored nation provisions; methods for tracking manager obligations incurred through side letters; technologies used to assist managers in administering side letters; negotiation practices for side letters; and recommendations for protection of confidential information.  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013.  That Symposium is scheduled to include a panel on side letters entitled “Navigating the Side Letter Negotiation & Due Diligence Process.”  Subscribers to the Hedge Fund Law Report are eligible for a registration discount.

What Does the Introduction of a Lighter Touch Fund Manager Regulatory Option in the British Virgin Islands Mean for Hedge Fund Managers?

Historically, fund managers wishing to do business in the British Virgin Islands (BVI) have had to undergo a rigorous process of applying for a full licence (Existing Regime) pursuant to Part 1 of the Securities and Investment Business Act 2010 (SIBA).  However, the BVI recently adopted a “regulation light” fund manager regime (Lighter Touch Regime) for eligible investment managers or investment advisers who have or wish to have a BVI licence to carry out investment management or investment advisory services for funds, without being subjected to certain regulatory requirements under the Existing Regime that may be disproportionate to the scope of their operations.  Among other things, the Lighter Touch Regime, which came into effect on December 10, 2012, expedited and facilitated the manager approval process.  The Lighter Touch Regime can be attractive for managers who have investors who prefer to have their managers subject to regulation and yet wish to avoid the more stringent requirements of the Existing Regime.  In a guest article, Michael J. Burns, James McConvill and Nadia Menezes describe the evolution of SIBA fund manager regulation; the basic requirements of the Lighter Touch Regime, including manager eligibility criteria; the benefits of the Lighter Touch Regime; and the interaction between the Lighter Touch Regime and the Existing Regime.  Burns is the Managing Partner and Head of the Corporate and Commercial department in the BVI office of Appleby; McConvill is a consultant to Appleby in the BVI; and Menezes is a Senior Associate at Appleby in the BVI.

How Should Hedge Fund Managers Approach Formulating Risk Assessment Plans and What Regulatory Risks Should Be On Their Radar?

On January 30, 2013, consulting firm The Regulatory Fundamentals Group (RFG) and risk management software developer MyComplianceOffice hosted a webinar entitled “Enterprise-Wide Hedge Fund Risk Assessment,” designed to help hedge fund managers understand risk assessments.  More specifically, the webinar described the “framework for conducting an enterprise-wide risk assessment” and highlighted a broad range of legal and regulatory risks to be considered.  Importantly, the speakers pointed out that “regulators other than the SEC and CFTC drive much of the regulation impacting hedge fund managers.”  See, e.g., “Hedge Fund Managers May Be Required to File TIC Form SHC by March 2, 2012,” Hedge Fund Law Report, Vol. 5, No. 6 (Feb. 9, 2012).  This article summarizes key points from the webinar.

Second Circuit Hears Oral Arguments in Case Highlighting Potential Risks Hedge Funds Face in Investing in Foreign Entities That Are Later Nationalized and Claim Sovereign Immunity Protection

In January 2013, the U.S. Court of Appeals for the Second Circuit (Court of Appeals) heard oral arguments in a case involving whether the U.S. Foreign Sovereign Immunities Act (FSIA) bars hedge funds from enforcing their rights relating to notes purchased from a privately held foreign bank that was later nationalized by a foreign government.  The U.S. District Court for the Southern District of New York (Court) previously held in the same matter that no waiver of immunity or statutory exception applied to eliminate the bank’s sovereign immunity protection, notwithstanding the fact that the hedge funds purchased the notes while the bank, which had expressly consented to New York jurisdiction and law, was still private.  The Court’s decision appears to reflect a strong preference for preserving sovereign immunity even in instances when, prior to nationalization, the notes were purchased from a private entity that expressly consented to jurisdiction.  By contrast, see “Hedge Funds Win Battle to Enforce Argentina’s Defaulted Bonds as Second Circuit Upholds Ruling that Argentina Violated Pari Passu Clause by Paying on New Bonds While Refusing to Pay on Defaulted Bonds,” Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012).  If upheld by the Court of Appeals, the pending case may significantly increase the risk hedge funds face from investing in entities that could be nationalized by foreign governments.  This article summarizes the Court’s holding and analysis in this case, with a particular emphasis on the Court’s approach to application of the FSIA in this context.  See also “The Impact of Asymmetric Information, Trade Documentation, Form of Transfer and Additional Terms of Trade on Hedge Funds’ Trade Risk in European Secondary Loans (Part Two of Two),” Hedge Fund Law Report, Vol. 4, No. 38 (Oct. 27, 2011).

Anthony Maniscalco Joins New Business in Blackstone Alternative Asset Management to Buy Interests in Hedge Fund Managers

On February 12, 2013, Blackstone Alternative Asset Management (BAAM), a division of The Blackstone Group, announced that Anthony Maniscalco, the former Head of Alternative Asset Management within Barclays’ Financial Institutions Investment Banking Division, has joined.  He will be a Managing Director on BAAM’s Investment Team, focusing his efforts with Greg Hall and other senior team members on building out its platform to purchase ownership interests in hedge fund businesses.  See “Buying a Majority Interest in a Hedge Fund Manager: An Acquirer’s Primer on Key Structuring and Negotiating Issues,” Hedge Fund Law Report, Vol. 4, No. 17 (May 20, 2011).

Chadbourne Expands Its Private Funds Practice Group in New York

On February 12, 2013, Chadbourne & Parke LLP announced that Sean Dailey has joined the firm’s New York office as counsel in the private funds group.

Throgmorton Hires Former Morgan Stanley European Controller to Expand Outsourced Alternative Fund Manager CFO Service

On February 13, 2013, Throgmorton, a U.K. specialist accountancy and back office service provider, announced the hire of Carolyn Twist, a former Executive Director and European Controller at Morgan Stanley, who has been brought on board to bolster the company’s outsourced COO/CFO service.  For more on outsourcing, see “Aite Group Report Maps Outsourcing Landscape for Hedge Fund Managers, Including Outsourced Services Offered, Trends, Goals, Drawbacks and Provider Profiles,” Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012).

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