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    Jan. 30, 2014

Ropes & Gray Partners Share Experience and Best Practices Regarding the JOBS Act, the Volcker Rule, Broker Registration, Information Barriers, Examination Priorities, Multi-Year Incentive Fees and Swap Execution Facilities

On February 4, 2014 – this coming Tuesday – the New York office of Ropes & Gray will host GAIM Regulation 2014.  The event will feature an all-star speaking faculty including general counsels and chief compliance officers from leading hedge fund managers, top partners from Ropes and other law firms and officials from the SEC, CFTC, FINRA and other U.S. and global regulators.  The intent of the event is to share best practices in a private setting, and to hear directly from relevant regulators.  For a fuller description of the event, click here.  The Hedge Fund Law Report recently interviewed three Ropes partners on some of the more noteworthy topics expected to be discussed at GAIM Regulation 2014.  Generally, we discussed SEC and regulatory issues with Laurel FitzPatrick, co-leader of Ropes’ hedge funds practice and co-managing partner of its New York office; CFTC and derivatives issues with Deborah A. Monson, a partner in Ropes’ Chicago office; and enforcement issues with Zachary S. Brez, co-chair of Ropes’ securities and futures enforcement practice.  Specifically, our long form interview with these partners included detailed discussions of the future of hedge fund advertising following the JOBS Act; the impact of the Volcker rule on hedge fund hiring and trading; fund manager responses to the SEC’s focus on broker registration of in-house marketing personnel; best practices for preparing for and navigating SEC examinations; structuring multi-year incentive fees; the impact of swap execution facilities on hedge fund manager obligations and cleared derivatives execution agreements; recent National Futures Association developments relevant to hedge fund managers; design and enforcement of robust information barriers; measures that managers can take to preserve the firm before and after initiation of an enforcement action; government enforcement priorities for hedge fund managers; and specific financial products likely to face government scrutiny in the next two years.

Tax Practitioners Discuss Taxation of Foreign Investments and Distressed Debt Investments at FRA/HFBOA Seminar (Part Three of Four)

During the 15th Annual Effective Hedge Fund Tax Practices seminar sponsored by Financial Research Associates and the Hedge Fund Business Operations Association, tax experts at two separate sessions addressed the taxation of foreign investments, including withholding at the source, rules regarding controlled foreign corporations and issues concerning the taxation of distressed debt investments.  This article, our third in a four-part series covering the seminar, summarizes salient points from those two sessions.  Panelists for the “Working Through Tax Implications of Foreign Investments” session included, among others, Len Lipton, a managing director at GlobeTax Services and Philip S. Gross, a partner at Kleinberg, Kaplan, Wolff & Cohen, P.C.  The session entitled “Tax Considerations for Distressed Debt Transactions” was presented by David C. Garlock, Director of Financial Services at Ernst & Young LLP.  The first installment in this series covered three sessions addressing the contribution and distribution of property to fund investors, the allocation of investment gains and losses to fund investors and the preparation of Forms K-1.  See “Hedge Fund Tax Experts Discuss Allocations of Gains and Losses, Contributions to and Distributions of Property from a Fund, Expense Pass-Throughs and K-1 Preparation at FRA/HFBOA Seminar (Part One of Four),” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014).  The second installment discussed issues impacting foreign investors in foreign funds, including basics of withholding with respect to fixed or determinable annual or periodic gains, profits or income (FDAPI); the portfolio interest exemption from FDAPI withholding; the pitfalls of effectively connected income (ECI) for offshore hedge funds; and the sources of ECI.  See “Tax Experts Discuss Provisions Impacting Foreign Investors in Foreign Hedge Funds During FRA/HFBOA Seminar (Part Two of Four),” Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

How Can Hedge Fund Managers Structure, Implement and Enforce Information Barriers to Mitigate Insider Trading Risk Without Impairing Securities Trading? (Part Three of Four)

This is the third article in Hedge Fund Law Report’s four-part series on information barriers in the hedge fund context.  Generally, the series explores why hedge fund managers might want to implement information barriers and identifies best practices for doing so.  Specifically, this third article describes how a firm can limit access to material nonpublic information within the information barrier control environment and outlines policies and procedures designed to bolster the effectiveness of information barriers.  The first article in this series provided an overview of various insider trading controls, including restricted lists, watch lists and information barriers, explaining how they can work together; described four principal benefits available from the use of robust information barriers; highlighted the types of firms that can benefit most from the implementation of information barriers; and described the types of firms that will find the implementation of robust information barriers most challenging.  The second article discussed the legal and regulatory basis for information barriers and described the building blocks of effective information barriers (including the key players, physical components and technological processes).  The fourth article will discuss the benefits of training and compliance surveillance related to information barriers and describe the four most significant challenges faced by hedge fund managers in structuring, implementing and enforcing robust information barriers.

Current and Former Regulators and Prosecutors Particularize the Enforcement Challenges Facing Hedge Fund Managers in 2014

Current and former regulators and prosecutors from the SEC, CFTC and New York State Attorney General’s (NYSAG) Office recently offered insight on the enforcement landscape confronting hedge fund managers during a session entitled “Current Hedge Fund and Private Equity Fund Enforcement Priorities – The Enforcers’ Perspective,” which was part of PLI’s “Hedge Fund and Private Equity Enforcement & Regulatory Developments 2013” program.  Barry R. Goldsmith, a partner at Gibson, Dunn & Crutcher LLP, moderated the session.  The speakers were Stephen L. Cohen, an Associate Director at the SEC’s Division of Enforcement; Chad Johnson, Chief of the Investor Protection Bureau of the NYSAG’s Office; Colleen P. Mahoney, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, and former SEC acting general counsel and Deputy Director of its Division of Enforcement; and Manal Sultan, Deputy Director and a chief trial attorney for the Division of Enforcement of the CFTC.  As is customary, Cohen, Johnson and Sultan all noted that the views they expressed were not official statements of agency policy.  This article summarizes the salient points raised during the panel discussion.  For details of a 2013 speech by Bruce Karpati, the former Chief of the Asset Management Unit of the SEC’s Division of Enforcement, outlining the SEC’s enforcement priorities for 2013, see “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).

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)

K&L Gates partners and in-house counsel gathered on December 10, 2013 at the firm’s annual investment management seminar to provide updates on some of the most pertinent topics impacting the private fund industry.  This two-part series summarizes salient points from various sessions at the seminar.  This first installment summarizes a session covering CFTC and NFA regulations impacting registered commodity pool operators and commodity trading advisors as well as U.S. and European regulations governing transactions in swaps and other over-the-counter derivatives, including discussions of swap execution facilities and the European Market Infrastructure Regulation.  The second installment will discuss two sessions, one addressing the newest approaches and strategies used by the SEC to examine investment managers and bring enforcement actions where necessary, and another tackling the implications of the JOBS Act for fund managers.

SEC Charges Two Houston-Based Advisory Firms, Including a Hedge Fund Manager, with Principal Transaction, Custody Rule, Compliance Rule and Code of Ethics Violations

On November 26, 2013, the SEC issued an order instituting administrative and cease-and-desist proceedings against hedge fund manager Parallax Investments, LLC (Parallax) and a second order against investment adviser Tri-Star Advisors, Inc. (TSA), and executives of each firm.  The orders charged respondents with, among other things, engaging in thousands of principal transactions through an affiliated brokerage firm without notifying their clients or obtaining the required consent beforehand as required by Section 206(3) of the Investment Advisers Act of 1940 (Advisers Act).  See “When and How Can Hedge Fund Managers Engage in Transactions with Their Hedge Funds?,” Hedge Fund Law Report, Vol. 4, No. 45 (Dec. 15, 2011).  The SEC also charged Parallax and its chief compliance officer with violating Rule 206(4)-2 of the Advisers Act (Custody Rule) for failing to comply with the exception from various Custody Rule requirements as a result of reliance on the pooled investment vehicle exception.  See “How Does the SEC Approach Custody Issues in the Course of Examinations of Hedge Fund Managers?, Hedge Fund Law Report, Vol. 5, No. 18 (May 3, 2012); and “Recently Published SEC Risk Alert Reveals Significant Deficiencies in Custody Practices of Hedge Fund Managers and Other Investment Advisers,” Hedge Fund Law Report, Vol. 6., No. 10 (Mar. 7, 2013).  The SEC also charged Parallax with failing to establish a tailored compliance manual and to conduct annual compliance reviews as required by Rule 206(4)-7 under the Advisers Act and for failing to establish and maintain a code of ethics as required by Rule 204A-1 under the Advisers Act.  See “How Hedge Fund Managers Should Approach Preparing For, Conducting and Documenting the Annual Compliance Review (Part Two of Two),” Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012); and “Key Legal and Operational Considerations for Hedge Fund Managers in Establishing, Maintaining and Enforcing Effective Personal Trading Policies and Procedures (Part One of Three),” Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  This article summarizes the SEC’s factual and legal allegations levied against Parallax, TSA and their executive officers.

Sutherland Welcomes Private Investment Fund Partner Yasho Lahiri to Its New York Office

On January 21, 2014, Sutherland Asbill & Brennan LLP announced that Yasho Lahiri, who advises clients on the formation of and investment in alternative investment funds, has joined the firm’s Financial Services Practice in New York as a partner.  He previously was a partner at Baker Botts.  For recent insight from Lahiri, see “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013); and Part Two of Two, Vol. 6, No. 47 (Dec. 12, 2013).

Albert Cho Joins Weil as Private Funds Partner in Hong Kong Office

On January 23, 2014, Weil, Gotshal & Manges LLP announced that Albert Cho will join the firm as a partner in its global Private Funds Group.  He will be based in the Hong Kong office.

Jones Day Welcomes Alessandro Corno as Partner in Milan

Jones Day recently announced that Alessandro Corno has joined the firm’s Milan Office as a partner in the Private Equity Practice.  For insight from Jones Day, see “PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).

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