Mar. 13, 2014

Potential Impact on US Hedge Fund Managers of the Reform of the UK Tax Regime Relating to Partnerships and Limited Liability Partnerships

Both UK limited partnerships (LPs) and UK limited liability partnerships (LLPs) have, for some years, been widely utilised as part of international investment and management structures of both US sponsors and US managers.  Whilst UK LPs have been widely used as investment vehicles within the private equity industry and, to a lesser extent, in connection with other illiquid investment strategies, the UK LLP has become the vehicle of choice for US managers who have established a presence in the United Kingdom.  The attractions of the UK LLP have been clear, combining the advantage of being taxed as a partnership, whilst still offering limited liability, corporate personality and – importantly – organisational and structural flexibility.  However, as the popularity of the UK LP and, in particular, the UK LLP has increased, so has the level of scrutiny applied by the UK tax authority (HMRC).  Following the conclusion of a 2013 public consultation on measures designed to reform certain aspects of the UK tax regime relating to LPs and LLPs, HMRC have now published draft legislation for inclusion in the UK Finance Bill 2014.  The areas which are subject to the new UK tax legislation can be broadly placed into three categories: (1) countering the use of UK LLPs to disguise what HMRC consider should be employment relationships (and, thereby, avoid certain employment and payroll taxes); (2) countering arrangements whereby economic interests and other entitlements are allocated to or transferred between members of LPs and LLPs; and (3) amending certain aspects of the UK tax regime relating to LPs and LLPs to take account of the remuneration deferral requirements under the EU Alternative Investment Fund Managers Directive.  In a guest article, Will Smith, a partner in the London office of Sidley Austin LLP, discusses the anticipated impact on US hedge fund managers of the draft legislation.

Ropes & Gray Attorneys Discuss the Impact on Private Fund Managers of Final Regulations Under the Volcker Rule

On December 10, 2013, federal agencies issued final regulations for the Volcker Rule (Rule) under the Dodd-Frank Act, which generally prohibits banks from engaging in proprietary trading and from sponsoring or owning interests in certain private funds.  See “Key Legal Considerations in Connection with the Movement of Talent from Proprietary Trading Desks to Start-Up or Existing Hedge Fund Managers: The Talent Perspective (Part One of Three),” Vol. 3, No. 49 (Dec. 17, 2010).  A recent webinar presented by Ropes & Gray LLP provided an overview of key provisions of the Rule, as supplemented by those regulations.  The speakers were Ropes & Gray partners Sarah Davidoff and Mark Nuccio, and associate Richard Loewy.  Nuccio and other colleagues first addressed the Rule in the HFLR when the Rule was in its proposed form.  See “Proposed Volcker Rule and the Effect on Private Fund Sponsors and Investors,” Hedge Fund Law Report, Vol. 4, No. 38 (Oct. 27, 2011).

Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors

At its Investment Adviser Forum on February 20, 2014, partners from law firm Katten Muchin Rosenman LLP addressed a series of legal issues that regularly arise in connection with trading by hedge funds with reasonably liquid strategies.  Those legal issues include fiduciary duty, best execution, soft dollars, principal trades, agency cross trades, cross trades and trade errors.  Forum participants defined these terms as they apply to hedge fund trading strategies and identified legal best practices with respect to each of them.  This article relays the key points from the forum.

Risks Faced by Hedge Fund Managers That Access the Alternative Mutual Fund Market Via Turnkey Platforms

A growing number of hedge fund managers are entering the alternative mutual fund market, attracted by the sizable amount of retail assets available for investment globally.  See “Citi Prime Finance Report Describes the Competition among Traditional, Hedge and Private Equity Fund Managers for $1.3 Trillion in Liquid Alternative Assets (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 22 (May 30, 2013). There are multiple entry points for a hedge fund manager to access this space.  See “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).  One option is for the manager to build its own operational and distribution infrastructure from scratch, but doing so involves considerable cost and execution risk.  See “Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).  An increasingly popular option is for hedge fund managers to join a so-called mutual fund “turnkey platform.”  This option is less costly than building original infrastructure, but it also leaves the manager with less control and other operating risks.  In a guest article, George Silfen and Patrick Sheridan, partner and associate, respectively, at Kramer Levin Naftalis & Frankel LLP, examine some of those key risks and offer practical solutions for hedge fund managers seeking to mitigate them.  See also “Deutsche Bank Survey Describes the Contours of the Nontraditional Hedge Fund Product Market: Investor Appetite, Performance, Marketing, Fees and More,” Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

SEC’s David Blass Expands on the Analysis in Recent No-Action Letter Bearing on the Activities of Hedge Fund Marketers

The SEC recently issued a no-action letter (Letter) calling into question the long-held assumption that the receipt of transaction-based compensation necessarily requires broker registration.  See “SEC No-Action Letter Suggests That There May Be Circumstances in which Recipients of Transaction-Based Compensation Do Not Have to Register as Brokers,” Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).  At a recent webinar, David W. Blass, Chief Counsel and Associate Director in the SEC’s Division of Trading and Markets, and others offered important insights on the applicability and interpretation of the Letter.  See also “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).

Six Challenges in Connection with FATCA Compliance by Hedge Fund Managers

The Foreign Account Tax Compliance Act (FATCA) aims to combat tax evasion by providing the IRS with information about U.S. accounts held at foreign financial institutions (FFIs) and imposing a 30% withholding tax on payments to FFIs that fail to register with the IRS by April 25, 2014.  For hedge fund managers, FATCA creates a broad new registration, compliance and reporting regime.  In a guest article, Rod White, Regional CEO of Equinoxe Alternative Investment Services for Bermuda and U.S. operations, identifies six of the primary challenges that hedge fund managers and their service providers face in complying with that new regime.  See also “A Checklist for Updating Hedge Fund and Service Provider Documents for FATCA Compliance,” Hedge Fund Law Report, Vol. 7, No. 7 (Feb. 21, 2014).

P. Georgia Bullitt Joins Willkie’s Asset Management Group in New York

On March 10, 2014, Willkie Farr & Gallagher LLP announced that P. Georgia Bullitt has joined the firm as a partner in the Asset Management Group in New York.  Bullitt focuses on securities and derivatives trading issues, regulation of broker-dealers, investment advisers and other financial intermediaries and trade-related documentation.  For insight from Willkie, see “Investment Research and Insider Trading on ‘Outside Information’,” Hedge Fund Law Report, Vol. 4, No. 29 (Aug. 25, 2011); “The Lehman Bankruptcy and Swap Lessons Learned Negotiating an ISDA Master Agreement in Today’s Market,” Hedge Fund Law Report, Vol. 2, No. 9 (Mar. 4, 2009); and “Impact of Hedge Fund Redemptions Under ERISA,” Hedge Fund Law Report, Vol. 2, No. 2 (Jan. 15, 2009).

Mark Browne Joins Dechert as Partner in Dublin

On March 11, 2014, Dechert LLP announced that Mark Browne has joined the firm as a partner with its Financial Services Group in its Dublin office.  He was recently a partner in the Financial Services Department of Mason Hayes & Curran specializing in Investment Funds.  For insight from Dechert, see “Dechert Webinar Highlights Key Deal Points and Tactics in Negotiations between Hedge Fund Managers and Futures Commission Merchants Regarding Cleared Derivative Agreements,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).  For insight from Browne, see “Redomiciling Offshore Investment Funds to Ireland, the European Gateway,” Hedge Fund Law Report, Vol. 4, No. 8 (Mar. 4, 2011).

Michael Fein Joins Okapi Partners as Senior Managing Director

On March 7, 2014, Okapi Partners LLC – a proxy solicitation and investor response firm that advises corporations, institutional investors and mutual fund companies – announced that it has named Michael Fein as a senior managing director to lead business development efforts.  For insight from Okapi, see “How Will Changes to Proxy Access and Broker Voting Rules Impact Activist Hedge Fund Investors?,” Hedge Fund Law Report, Vol. 2, No. 30 (Jul. 29, 2009).