Oct. 10, 2014

Davis Polk and Sidley Partners and MFA GC Address the Maze of Hedge Fund Marketing Regulation in the U.S. and E.U. (Part One of Two)

This is the first article in a two-part series focusing on a recent Practising Law Institute program entitled “Hedge Fund Management 2014.”  This article examines the key points from a panel on European hedge fund regulation and Securities Act Rule 506(c) offerings.  In this panel, Stuart J. Kaswell, Executive Vice President, Managing Director and General Counsel of the Managed Funds Association in Washington, D.C., addressed ways in which the Alternative Investment Fund Managers Directive (AIFMD), the Markets in Financial Instruments Directive (MiFID), the Markets in Financial Instruments Regulation (MiFIR) and recent activity by the European Securities and Markets Authority (ESMA) are complicating the process by which U.S.-based hedge fund managers approach and interact with European investors.  Thomas J. Kim, a partner at Sidley Austin, discussed Rule 506(c) offerings and recent harmonization of SEC and CFTC guidance on general solicitation.  See “Further CFTC Harmonization of Rules for Hedge Funds: A Welcome and Continuing Trend,” Hedge Fund Law Report, Vol. 7, No. 35 (Sep. 18, 2014).  Davis Polk partner Nora M. Jordan chaired the program and participated in the panel that is the subject of this article.

Battle-Tested Best Practices for Private Fund Expense Allocations

Private fund managers face conflicts of interest and regulatory risks when they allocate fees and expenses among themselves, the funds they manage and portfolio companies of those funds.  See “All-Star Panel at RCA PracticeEdge Session Analyzes Five Key Regulatory Challenges Facing Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 37 (Oct. 2, 2014).  A recent presentation covered the statutory and regulatory regime that governs expense allocations and disclosures, the consequences of failing to comply with that regime, best practices in regard to expense allocations, investor due diligence, and how to respond to discovery of allocation errors or deficiencies in policies and procedures.  In examinations, speeches and other contexts, the SEC has been focusing on fee and expense allocations by private fund managers.  See “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  For a comprehensive overview of the regulatory and practical issues concerning allocation of fund and manager expenses, see “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 18 (May 2, 2013); and Part Two.  For a comprehensive discussion of the allocation of Form PF expenses in particular, see “How Should Hedge Fund Managers Allocate Form PF Expenses Between Their Hedge Funds and Their Management Entities?,” Hedge Fund Law Report, Vol. 5, No. 25 (Jun. 21, 2012).

Usable Lessons and Proven Survival Techniques from the Hedge Fund Examination Trenches

A recent PracticeEdge session presented by the Regulatory Compliance Association explored the panelists’ experiences with SEC and NFA examinations and provided an overview of key substantive issues that are likely to be addressed in those exams.  The program was moderated by Christopher M. Wells, a partner at Proskauer Rose LLP.  The other speakers were Cynthia Marian, a Vice President, Chief Compliance Officer and Deputy General Counsel of Tinicum, Inc.; Dianne Mattioli, CCO of Hedgemark Securities; Mark Polemeni, CCO – Asset Management at Citadel, LLC; and Catherine Smith, General Counsel of Guidepoint Global, LLC.  See also “RCA Symposium Offers Perspectives from Regulators and Industry Experts on 2014 Examination and Enforcement Priorities, Fund Distribution Challenges, Conducting Risk Assessments, Compliance Best Practices and Administrator Shadowing (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities

Andrew J. Bowden, the Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE), recently spoke at the CFA Institute’s 2014 GIPS Standards Annual Conference.  He noted that the SEC has recently completed GIPS training for its examination staff and that OCIE has been pursuing several important initiatives.  He discussed those initiatives, recent enforcement actions involving performance-reporting issues and the continuing improvement of the SEC’s technological capabilities.  For additional insight from Bowden, see part two of our series on the RCA’s Compliance, Risk & Enforcement 2013 Symposium, held in December 2013, at which Bowden delivered the keynote address.  See also “OCIE Director Andrew Bowden Describes the Primary Compliance Failings of Private Equity Managers with Respect to Fees, Expenses, Limited Partnership Agreements, Valuation and Marketing,” Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014).

Report Describes the SEC’s Use of Form PF for Hedge Fund Manager Examination Targeting and Risk Management

In its second annual staff report (Report) on how the SEC is using information collected in Form PF filings, the staff of the SEC’s Division of Investment Management provided background on the aims of its efforts (includes an Appendix charting updated “census” data reflecting filers as of May 7, 2014), and detailed how the agency is using the information collected on Form PF – for examinations, investigations, risk monitoring, guidance and consultation.  For a summary of the SEC’s first PF filing report, see “SEC’s First Report on Initial Form PF Filings Offers Insight into How the Agency Is Using the Collected Data for Examinations, Enforcement and Systemic Risk Monitoring,” Hedge Fund Law Report, Vol. 6, No. 34 (Aug. 29, 2013).  See also “A Practical Guide to AIFMD Reporting for Non-U.S. Fund Managers: Reporting Under AIFMD versus Form PF,” Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013).

K&L Gates Welcomes Former CalPERS General Counsel as Partner in Seattle

Peter Mixon recently joined K&L Gates’ Seattle office as a partner.  Most recently, Mixon served as general counsel for the California Public Employees’ Retirement System (CalPERS).  For insight from K&L Gates, see “K&L Gates Investment Management Seminar Addresses Compliance Obligations for Registered CPOs and CTAs, OTC Derivatives Trading, SEC Examinations of Private Fund Managers and the JOBS Act (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014); and Part Two of Two, Vol. 7, No. 5 (Feb. 6, 2014); and “Key Investment and Operational Restrictions Imposed on Alternative Mutual Funds by the Investment Company Act of 1940 (Part Two of Two),” Hedge Fund Law Report, Vol. 7, No. 25 (Jun. 27, 2014).  For a provocative discussion of the interaction between pension funds and investment managers, see “Understanding U.S. Public Pension Plan Delegation of Investment Decision-Making to Internal and External Investment Managers,” Part One, Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014); Part Two, Vol. 7, No. 5 (Feb. 6, 2014); and Part Three, Vol. 7, No. 7 (Feb. 21, 2014).

Dillon Eustace Expands Cayman and Dublin Offices with New Hires

Dillon Eustace recently expanded its global practice with the senior hire of Jonathan Law to its Cayman office, and the addition of Fionnán Gannon in its Dublin office.  For insight from Dillon Eustace, see “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans,” Hedge Fund Law Report, Vol. 7, No. 34 (Sep. 11, 2014).