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    May 14, 2015

New Swiss Regulations Require Appointment of Local Agents and Increased Disclosure in Hedge Fund Documents

Switzerland has traditionally been an important jurisdiction for the distribution of alternative funds, especially hedge funds.  With the revision of the Federal Act on Collective Investment Schemes of 23 June 2006 (CISA), and its implementing ordinance of 22 November 2006 – the Collective Investment Schemes Ordinance (CISO) – as well as the self-regulatory standards (the Guidelines) issued by the Swiss Funds and Asset Management Association (SFAMA), the formerly liberal rules regarding distribution of hedge funds in Switzerland have been tightened, in particular regarding the level of transparency applicable to hedge fund distribution.  The CISA and the CISO entered into force on March 1, 2013, and the transitional period relating to their implementation recently ended on March 1, 2015.  For more on Switzerland, see “Swiss Hedge Fund Marketing Regulations, BEA Forms and Form ADV Updates: An Interview with Proskauer Partner Robert Leonard,” Hedge Fund Law Report, Vol. 8, No. 9 (Mar. 5, 2015).  In a guest article, Dr. Vaïk Müller and Olivier Stahler of Lenz & Staehelin first distinguish the requirements deriving from the CISA and the CISO, on the one hand, from those deriving from self-regulation, on the other hand.  The authors next review the impact of the new requirements on hedge fund documentation, taking into account the obligations applicable to the intermediaries concerned with the distribution before finally addressing the issue of the timing of the implementation of the SFAMA Guidelines.

Operational Conflicts Arising Out of Simultaneous Management of Hedge Funds and Private Equity Funds (Part Two of Three)

The simultaneous management of hedge funds and private equity funds is rife with potential conflicts of interest, including issues relating to allocation of investment opportunities between the funds, possession of material nonpublic information, valuation and allocation of expenses.  Conflicts of interest – and whether advisers have appropriately discharged their fiduciary duties to identify and eliminate or mitigate and disclose them – remain top enforcement priorities for the SEC and its Asset Management Unit.  See “Regulators from the SEC, CFTC and New York Attorney General’s Office Reveal Top Hedge Fund Enforcement Priorities (Part One of Four),” Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014).  Accordingly, especially in today’s regulatory environment, managers must be aware of and mitigate such conflicts of interest.  This article, the second in a three-part series, discusses operational conflicts arising out of simultaneous management of hedge funds and private equity funds, including conflicts involving the possession of material nonpublic information, valuation, allocation of expenses, personal trading and investors.  The first article explored the structural considerations that give rise to potential conflicts; conflicts involving the investments held by each fund; and conflicts with the allocation of investment and disposition opportunities between affiliated hedge funds and private equity funds.  The third article will address offshore concerns and ways to mitigate conflicts of interest.  See also “Operational Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part Two of Three),” Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

FRA Liquid Alts 2015 Conference Highlights Due Diligence Concerns with Alternative Mutual Funds (Part Three of Three)

With the significant expansion of the liquid alternatives (or alternative mutual fund) space in recent years and the increase in offerings of alternative mutual funds by hedge fund managers, the importance of conducting proper due diligence has commensurately grown.  Investors looking to allocate funds to alternative mutual funds need to consider numerous factors when evaluating potential candidates for investments, and managers deciding to launch alternative mutual funds must also conduct thorough due diligence on service providers for their structures.  This topic was among those discussed at the recent Liquid Alts 2015 conference hosted by Financial Research Associates, LLC.  This article, the third in a three-part series, focuses on the panel discussions of issues investors should consider while conducting due diligence on an alternative mutual fund, as well as due diligence issues managers should consider while establishing a fund structure under the Investment Company Act of 1940 (the ’40 Act).  The first article discussed the keys to successfully launching and operating an alternative mutual fund.  The second article explored ’40 Act fund structures and regulatory concerns with liquid alternative funds.  For more on alternative mutual funds, see “Five Key Compliance Challenges for Alternative Mutual Funds: Valuation, Liquidity, Leverage, Disclosure and Director Oversight,” Hedge Fund Law Report, Vol. 7, No. 28 (Jul. 24, 2014).

K&L Gates Panel Offers Advice on Taxation, Regulatory and Business Integration Issues with M&A Transactions in the Asset Management Industry (Part Two of Two)

As firms in the asset management industry structure merger and acquisition transactions – including joint ventures, acquisitions of minority interests and lift-outs of teams – they need to be aware of the potential issues that arise with such transactions.  Integrating two businesses may result in tax consequences, regulatory issues or other compliance concerns.  A panel of domain experts from K&L Gates recently discussed current trends in the asset management industry and a number of considerations in planning an acquisition or other deal with an asset manager, broker-dealer or adviser, including choice of partner, due diligence, structuring, taxation and various regulatory and compliance considerations.  Moderated by Michael S. Caccese, a practice area leader, the program featured partners Kenneth G. Juster and Michael W. McGrath; and practice area leaders D. Mark McMillan and Robert P. Zinn.  This article, the second in a two-part series, summarizes the key takeaways from that program with respect to taxation, regulatory and business integration concerns.  The first article addressed asset management industry trends, choosing a partner, due diligence and structuring considerations.  See also “PLI Panel Addresses Recent Developments with Respect to Prime Brokerage Arrangements, Alternative Registered Funds and Hedge Fund Manager Mergers and Acquisitions,” Hedge Fund Law Report, Vol. 6, No. 41 (Oct. 25, 2013).

Inadequate Disclosure of Expense Allocations May Carry Unintended Consequences

The SEC recently settled two enforcement actions relating to a hedge fund adviser that allegedly failed to disclose payment of certain operational and administrative expenses to investors.  The first action – against the adviser, its CEO and its general counsel – alleged that the respondents violated the antifraud provisions of the Advisers Act and filed inaccurate Forms ADV.  The inadequate disclosures also allegedly violated the custody rule, because the funds’ financial statements failed to disclose adequately the related party transactions and, therefore, were not GAAP-compliant.  Inadequate disclosure of expense allocations remains a hot-button issue with the SEC.  See “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015); and “Battle-Tested Best Practices for Private Fund Expense Allocations,” Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).  The second action, against the funds’ outside auditor, asserted that he aided and abetted the adviser’s violation of the custody rule and engaged in improper professional conduct.  For analysis of another enforcement action in which shortcomings in preparing and disseminating financial statements led to custody rule violations, see “SEC Charges Two Houston-Based Advisory Firms, Including a Hedge Fund Manager, with Principal Transaction, Custody Rule, Compliance Rule and Code of Ethics Violations,” Hedge Fund Law Report, Vol. 7, No. 4 (Jan. 30, 2014).  This article details the facts surrounding the inadequate disclosures, the SEC’s charges and the settlement terms. 

Canadian Report Finds that U.S. Private Equity Investment Costs Are Significantly Underreported

Alternative asset classes – particularly private equity – are typically more expensive and have more complex cost structures than public asset classes, making cost disclosure and benchmarking difficult.  A recent report by an independent benchmarking and research organization based in Toronto analyzed the reporting and disclosure of private equity funds and determined that less than half of the substantial private equity costs incurred by U.S. pension funds are currently being disclosed.  This article summarizes the key findings in the report.  See also “Four Recommendations to Help Private Equity Fund Managers Reduce the Risk of Conveying Misleading Valuation Information to Prospective and Existing Investors,” Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013).

Greenberg Traurig Expands Funds and Derivatives Capabilities in New York

On May 8, 2015, Greenberg Traurig announced the addition of Anthony L. Perricone and Nanette Aguirre as shareholders in its New York Corporate & Securities practice.  For insight from the firm, see “Investment Opt-Out Rights for Hedge Fund Investors: Regulatory Risks, Operational Challenges and Seven Best Practices (Part Three of Three),” Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013).  Perricone represents clients in fund formation and investment management matters.  His practice focuses on private fund sponsors, investment managers, institutional investors and family offices.  See “Benefits and Burdens for Hedge Fund Managers in Establishing or Converting to a Family Office,” Hedge Fund Law Report, Vol. 7, No. 22 (Jun. 6, 2014).  Aguirre is experienced in negotiating derivative, trading and prime brokerage agreements with global prime brokers.  See “Factors to Be Considered by a Hedge Fund Manager When Selecting a Prime Broker,” Hedge Fund Law Report, Vol. 7, No. 45 (Dec. 4, 2014).

K&L Gates Bolsters Investment Management Practice in London

The London office of K&L Gates recently added Jacob Ghanty as a partner in the investment management practice.  For insight from the firm, see “Experts Offer Advice on Initiating and Structuring M&A Transactions in the Asset Management Industry (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015); and Part Two of Two, in this issue.  Ghanty has advised clients on the Retail Distribution Review and Markets in Financial Instruments, Insurance Mediation, Payment Services and Alternative Investment Fund Managers directives, among other topics.  See “Passports, Platforms and Private Placement: Options for Marketing Funds in Europe in the Post-AIFMD Era,” Hedge Fund Law Report, Vol. 8, No. 17 (Apr. 30, 2015).

Kleinberg Kaplan Adds Partner Richard Guidice to Hedge Fund Practice

Kleinberg, Kaplan, Wolff & Cohen recently announced that Richard Guidice, Jr. has joined the firm as a partner in the hedge fund practice.  Guidice focuses his practice on the formation and structuring of U.S. and offshore hedge funds, private equity funds, real estate funds and funds-of-funds.  For insight from KKWC, see “Recent Cases Reduce the Impact of Newman on Insider Trading Enforcement,” Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015); and “Insurance Dedicated Funds Offer Hedge Fund Exposure Plus Tax, Underwriting and Asset Protection Advantages for Investors,” Hedge Fund Law Report, Vol. 6, No. 28 (Jul. 18, 2013).  Guidice also assists clients with acquisitions and sales of investment advisers and conducts due diligence reviews of prospective alternative investments for large institutional investors and public pension funds.  See “Citi Survey Highlights Opportunities for Hedge Fund Managers as Institutional Investors Seek to Optimize Their Portfolios (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 22 (Jun. 6, 2014); and Part Two of Two, Vol. 7, No. 23 (Jun. 13, 2014).

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