Nov. 20, 2014

Eight Important Regulatory and Operational Differences Between Managing Hedge Funds and Alternative Mutual Funds

Participants at a recent Financial Research Associates (FRA) event analyzed eight of the most important regulatory and operational considerations in managing alternative mutual funds.  Participants also highlighted how each of those considerations applies differently to hedge funds and alternative mutual funds.  For example, both hedge funds and alternative mutual funds need to be concerned with leverage limitations.  However, the sources of such limitations, their impact on investment strategy, the operational infrastructure necessary to implement and monitor such limitations, relevant compliance issues and other dynamics are different for the different products.  While superficially similar – especially when following similar strategies – hedge and mutual funds are very different products from the perspectives of operations and regulatory compliance.  That was the core thesis of the FRA program; and this article conveys both the key points of difference and the business consequences of such product variation.  See also “The First Steps to Take When Joining the Rush to Offer Registered Liquid Alternative Funds,” Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “How Can Hedge Fund Managers Organize and Operate Alternative Mutual Funds to Access Retail Capital? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 6 (Feb. 7, 2013).

Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them

Like Form PF, the consolidated AIFMD reporting template – commonly referred to as “Annex IV” – requires hedge fund managers to make consistent and persuasive sense out of voluminous and disparate data.  Best practices for Annex IV reporting are emerging; managers’ experience with Form PF provides an analogous but incomplete precedent.  In an effort to identify the chief challenges for hedge fund managers presented by Annex IV, and workable strategies for negotiating those challenges, the Hedge Fund Law Report recently interviewed Jeanette Turner, Managing Director and General Counsel at Advise Technologies, LLC.  Our interview covered, among other topics, the top three pain points felt by hedge fund managers in preparing Annex IV; the different experiences of European Economic Area (EEA) and non-EEA managers; how firms are handling the one-month deadline; the extent to which Form PF guidance is applicable to Annex IV; whether information reported in Annex IV will be made public; how regulators will use that information; key upcoming deadlines; differences in Annex IV reporting for hedge and private equity fund managers; the viability of reverse solicitation; and the continuing (but potentially sunsetting) applicability of national private placement regimes.  This interview was conducted in connection with an AIFMD panel discussion to be held on December 2, 2014 at the Harvard Club of New York City, from 8:30 a.m. to 10:30 a.m.  Turner will participate in that discussion, and she will be joined by John Sampson, Executive Director at Ernst & Young; Richard Webley, Head of Business Advisory Services for Americas, Citi Investor Sales and Relationship Management; and Simon Whiteside, Partner in the London office of Simmons and Simmons.  To attend, please contact or visit  For additional insight from: Turner, see “A Practical Comparison of Reporting Under AIFMD versus Form PF,” Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014); Sampson, see “Eight Key Elements of an Integrated, Efficient and Accurate Hedge Fund Reporting Solution,” Hedge Fund Law Report, Vol. 7, No. 43 (Nov. 13, 2014); Webley, see “Lessons Learned by Hedge Fund Managers from the August 2012 Initial Form PF Filing,” Hedge Fund Law Report, Vol. 5, No. 43 (Nov. 15, 2012); and Whiteside, see “U.K. FCA Guidance Confirms Simplified Transparency Reporting for Certain Private Placements of Master-Feeder Funds,” below, in this issue of Hedge Fund Law Report.

Eighteen Major Banks Agree to Adopt FSB/ISDA Resolution Stay Protocol that Postpones Exercise of Right to Terminate Derivatives on Bank Counterparty Failure

Normally, the bankruptcy of a party to a derivative contract gives the counterparty the right to terminate the contract or exercise certain rights with regard to collateral.  In an effort to reduce systemic risk upon failure of a systemically-important bank or other financial institution, the Financial Stability Board (FSB), in conjunction with the International Swaps and Derivatives Association, Inc. (ISDA), recently announced that 18 major banks have agreed to adopt a protocol that amends the ISDA Master Agreement to suspend early termination rights for two days upon the insolvency of a counterparty.  In theory, this two-day window will allow the distressed counterparty to deal with its derivatives book in an orderly fashion.  Many of those 18 banks (or subsidiaries) serve as prime brokers for private funds; the protocol could put those funds at a disadvantage if their prime broker were to fail.  See “Prime Brokerage Arrangements from the Hedge Fund Manager Perspective: Financing Structures; Trends in Services; Counterparty Risk; and Negotiating Agreements,” Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).  Not surprisingly, hedge funds and other interested trade organizations are pushing back, arguing that the protocol falls short on both substantive and procedural grounds.  In a letter to the FSB, a consortium of buy-side and other trade organizations have argued that the protocol will not work in practice and that it constitutes an improper end run on the legislative process.  This article summarizes the new protocol, the rationale behind its adoption, the buy-side pushback, and insights from Anne E. Beaumont, a partner in Friedman Kaplan Seiler & Adelman LLP.

K&L Gates Partners Identify Eight Actions That Hedge Fund Managers Can Take to Avoid Insider Trading Violations (Part Two of Three)

This article is the second in a three-part series discussing practical insights from a recent presentation on insider trading by K&L Gates partners Michael W. McGrath, Carolyn A. Jayne and Nicholas S. Hodge.  This article details eight prophylactic measures that hedge fund managers can implement to avoid insider trading violations.  This article also includes a detailed discussion of what McGrath called “the next great undiscovered country for enforcement actions.”  The first article in this series provided background on aspects of insider trading doctrine relevant to hedge fund managers (including entity liability and special considerations for CFA charter holders) and outlined four enforcement trends bearing directly on hedge fund trading strategies and operations.  The third article in this series will offer concrete recommendations to hedge fund managers for amending their compliance programs to incorporate lessons from recent insider trading enforcement actions.  For more on insider trading issues relevant to hedge fund managers, see “When Does Talking to Corporate Insiders or Advisors Cross the Line into Tipper or Tippee Liability under the Misappropriation Theory of Insider Trading?,” Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).

U.K. FCA Guidance Confirms Simplified Transparency Reporting for Certain Private Placements of Master-Feeder Funds

Non-E.U. fund managers that wish to market funds in the E.U. through private placements are subject to the registration, notification and reporting regimes of the individual member states.  In that regard, the U.K. Financial Conduct Authority (FCA) recently published guidance and corresponding FAQs on the reporting obligations of non-E.U. fund managers that are marketing funds in the U.K. under its private placement regime.  See “Navigating the Patchwork of National Private Placement Regimes: A Roadmap for Marketing in Europe by Non-EU Hedge Fund Managers That Are Not Authorized Under the AIFMD,” Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).  This article summarizes certain key elements of the FCA’s recent guidance that concern reporting in the U.K. by non-E.U. managers.  See also “What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?,” Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014).

Dechert Partners Provide Roadmap to China’s New Shanghai-Hong Kong Stock Connect Program

To date, it has been difficult for hedge funds and other foreign investors to gain direct exposure to the Chinese securities market.  The new Shanghai-Hong Kong Stock Connect program went live this week, offering foreign investors the ability to invest in certain mid- and large-cap Chinese securities through a Hong Kong broker.  A recent program presented by Dechert LLP provided a thorough overview of Stock Connect, with an emphasis on the thorny regulatory issues of beneficial ownership and custody of the securities that are traded under the new regime.  See also “China Launches Landmark Reforms Impacting Hedge Fund Capital Raising, Investments and Operations,” Hedge Fund Law Report, Vol. 5, No. 30 (Aug. 2, 2012).

Examinations, the AIFMD, International and Tax Issues: An Interview with Brian Guzman, Partner and General Counsel at Indus Capital Partners, LLC (Part Two of Two)

The HFLR recently interviewed Brian Guzman, Partner and General Counsel at Indus Capital Partners, LLC, on various top-of-mind issues for hedge fund manager general counsels.  Our interview generally covered valuation, cybersecurity, examinations, the AIFMD, and international and tax issues.  This article, the second in a series, conveys Guzman’s insights on the latter four topics.  In particular, this article discusses the SEC’s top three focus areas in examinations of hedge fund managers; the key differences between SEC and NFA examinations; the chief conflicts in side-by-side management of hedge funds and alternative mutual funds; how the AIFMD has affected marketing by U.S. hedge fund managers to European institutions; challenges in filing Annex IV; achieving consistency across disclosures; notable differences and similarities between international insider trading regimes; transfer pricing issues for hedge fund managers; and post-409A tax deferral strategies.  The first article in this series relayed Guzman’s thoughts on valuation and cybersecurity.  This interview was conducted in connection with (1) the Regulatory Compliance Association’s Compliance, Risk and Enforcement Symposium, which took place on November 4 in New York City – Guzman participated in that Symposium and we will cover it in subsequent issues of the HFLR – and (2) the RCA’s upcoming Regulation, Operations and Compliance (ROC) Symposium, to be held in Bermuda in April 2015.  For additional insight from Guzman, see “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014); “RCA Symposium Clarifies Current Market Practice on Side Letters, Conflicts of Interest, Insider Trading Investigations, Whistleblowers, FATCA and Use of Managed Accounts Versus Funds of One (Part One of Two),” Hedge Fund Law Report, Vol. 6, No. 24 (Jun. 13, 2013).

Travers Smith Expands Financial Services & Markets Practice

Travers Smith LLP recently announced the addition of asset management regulation specialist Stephanie Biggs as a partner.  Biggs has, among other expertise, wide-ranging experience in regulatory and compliance issues affecting private equity firms.  See “Anatomy of a Publicly-Offered Private Equity Investment Vehicle,” Hedge Fund Law Report, Vol. 7, No. 19 (May 16, 2014); “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).

Norton Rose Fulbright Adds Former Director of CFTC’s Division of Clearing and Risk

On November 17, 2014, Norton Rose Fulbright announced that prominent government lawyer Ananda Radhakrishnan has joined its Washington, D.C. office as a partner.  Having served over 12 years in senior positions at the U.S. Commodity Futures Trading Commission, he will strengthen the firm’s regulatory, derivatives and commodities practice.  See “Eighteen Major Banks Agree to Adopt FSB/ISDA Resolution Stay Protocol that Postpones Exercise of Right to Terminate Derivatives on Bank Counterparty Failure,” Hedge Fund Law Report, Vol. 7, No. 43 (Nov. 13, 2014).

The Hedge Fund Law Report Will Not Publish an Issue Next Week and Will Resume Its Regular Publication Schedule the Following Week

The Hedge Fund Law Report will not publish an issue next week, the week starting November 24, 2014 (and including the Thanksgiving holiday), and will resume its regular publication schedule the following week, the week starting December 1, 2014.