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    Jun. 18, 2015

Changing Regulations May Restrict Hedge Fund Managers’ Use of Soft Dollars in Europe

Up until relatively recently, the regulatory landscape surrounding soft dollars – or “soft commissions” – had been generally settled in both the U.S. and Europe.  The SEC last gave comprehensive guidance in this area in 2006, while the various European regulatory regimes likewise followed separate approaches with long histories, but in general concordance with the U.S. approach.  The practice, both in Europe and the U.S., had generally been for hedge fund managers to obtain investment research and other brokerage services with client commissions.  However, with the onset of the various Markets in Financial Instruments Directives (known as “MiFID I” and “MiFID II”) and other European initiatives in the past several years, particularly in the United Kingdom, the prognosis for trading and research activities across Europe is in upheaval.  In a guest article, Gerald T. Lins, general counsel of Voya Investment Management, examines the U.S. and U.K. practices for using soft dollars/commissions.  The article then explores the changes under MiFID I and MiFID II to the use of soft commissions in the E.U. and next steps in this area.  For more on soft dollars, see “U.K. Financial Conduct Authority Issues Feedback Statement Supporting Proposed E.U. Limits on Soft Dollars,” Hedge Fund Law Report, Vol. 8, No. 9 (Mar. 5, 2015).

Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II (Part One of Two)

The Markets in Financial Instruments Directive (MiFID I), which came into effect in 2007, is a pan-E.U. regime for regulating financial markets.  It covers areas such as the conduct of business and organizational requirements for investment firms, authorization requirements for regulated markets, regulatory reporting, trade transparency and rules for admission of financial instruments to trading.  The recast directive (MiFID II) and related regulations (MiFIR), which will change MiFID I in several significant respects, were adopted by the European Parliament in May 2014 and will take effect in January 2017.  A recent program presented by the Hedge Fund Law Report and Advise Technologies offered a comprehensive overview of the proposed changes to MiFID I.  Moderated by William V. de Cordova, editor-in-chief of the HFLR, the program featured Jeanette Turner, a managing director at Advise Technologies, and Simon Whiteside, a partner at Simmons & Simmons.  This article, the first in a two-part series, conveys insights from the panel on the impact of MiFID II on private funds; the legislative and regulatory status of MiFID II; inducements, soft dollars and research; conflicts of interest; information and reporting; best execution; recordkeeping; and product governance.  The second article in this series will address access to E.U. markets by non-E.U. firms; direct electronic access; investment advice; transaction reporting; transparency reporting; commodities; trading venues; and preparation for MiFID II.  For a discussion by Turner of the MiFID II implementation process and new transaction reporting requirements, see “MiFID II Expands MiFID I and Imposes Reporting Requirements on Asset Managers, Including Non-E.U. Asset Managers,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  For other collaborations between the HFLR and Advise Technologies, see also “Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filing (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 8 (Feb. 26, 2015); and “HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements,” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).

NFA Conference Addresses Examination Focus Areas, Investigation Processes and Reporting Requirements for Swap Dealers and Major Swap Participants (Part Two of Two)

As members of the NFA, registered swap dealers (SDs) and major swap participants (MSPs) are subject to examination and investigation by the NFA – an involved process that can lead to disciplinary action.  In addition to compliance with NFA and CFTC regulations, the NFA examines SDs and MSPs for compliance with multiple substantive regulatory requirements (Section 4s Implementing Regulations).  While most hedge fund managers likely do not themselves qualify as SDs or MSPs, counterparties with which they do business may be so registered, and non-compliance issues with, or disciplinary action against, those counterparties may affect the managers’ hedge funds.  During the recent NFA Member Regulatory Conference held in New York City, members of the NFA and other industry experts discussed best practices in compliance training, testing and monitoring and SD and MSP reporting requirements.  This article, the second in a two-part series, discusses upcoming examination focus areas; NFA investigations; the Section 4s Implementing Regulation review process; and filings required from SDs and MSPs.  The first article highlighted the main points regarding the NFA’s examination process and NFA expectations concerning member training programs, compliance monitoring and testing.  For more on SDs and MSPs, see “Katten Partner Raymond Mouhadeb Discusses the Purpose, Applicability and Implications of the August 2012 ISDA Dodd-Frank Protocol for Hedge Fund Managers, Focusing on Whether Hedge Funds Should Adhere to the Protocol,” Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).

RCA Panel Outlines Keys for Hedge Fund Managers to Implement a Comprehensive Cybersecurity Program

The growing threat of cyber attacks within the hedge fund community requires managers to develop and implement policies and procedures that address the cybersecurity risks unique to their firms.  The SEC continues to focus on cybersecurity issues, requiring hedge fund managers to increase their diligence with respect to cybersecurity compliance and ensure plans are in place to respond to cyber attacks.  See “SEC Guidance Update Suggests a Three-Step Framework for Investment Manager Cybersecurity Programs,” Hedge Fund Law Report, Vol. 8, No. 18 (May 7, 2015); and “Benchmarking and Best Practices for Hedge Fund Manager Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015).  Policies and procedures should allow employees to respond quickly to cyber attacks, and once those plans are in place, employee education and training are needed to establish a robust cybersecurity plan.  During a panel at the recent RCA Enforcement, Compliance & Operations Symposium, speakers outlined the SEC’s expectations in relation to cybersecurity, key elements of developing a robust cybersecurity plan and responses to cyber attacks.  This article highlights the salient points made during that panel.

Public Pension Plan Investments May Increase the Risk That Hedge Fund Managers May Breach Fiduciary Duties

Pension funds are significant sources of assets for private fund managers.  Hedge fund managers seeking investments from pension funds face a number of practical and legal concerns – including the possible need to register as a municipal advisor, the complex ERISA regime, pay to play rules and dealing with pension consultants – that may not otherwise arise with respect to individuals or other types of institutional investors.  In addition, as exemplified by a recent SEC order against an investment adviser and two of its principals, public pension plan investors may increase the range of responsibilities for hedge fund managers that, if not adequately discharged, can lead to breach of those managers’ fiduciary duties, with potential serious consequences.  In the order, the SEC claims that the respondents engaged in fraudulent conduct by soliciting several state public pensions to invest in one of their alternative investment fund of funds, even though the fund did not satisfy the criteria established under applicable state law for alternative investments by public pension funds.  This article summarizes the relevant provisions of state law, the alleged misconduct by the respondents and the SEC’s charges.  For more on public pension funds, see “Why and How Do Corporate and Government Pension Plans, Endowments and Foundations Invest in Hedge Funds?,” Hedge Fund Law Report, Vol. 6, No. 14 (Apr. 4, 2013).

CFTC Extends Reporting Relief for Registered Swap Dealers and Major Swap Participants

In December 2012, the Division of Market Oversight of the Commodity Futures Trading Commission (CFTC) granted swap dealers (SDs) and major swap participants (MSPs) acting as reporting counterparties for swap transactions time-limited no-action relief from certain reporting requirements of Section 45.4 of the CFTC Regulations.  Consequently, SDs and MSPs were spared the significant burden – in time and resources – of complying with the above requirements, which otherwise could have had follow-on effects for hedge fund managers using such SDs and MSPs as counterparties.  Initially set to expire on June 30, 2013, the no-action relief was extended twice for successive one-year periods.  This article summarizes last week’s further extension of the no-action relief to June 30, 2016.  For other recent CFTC no-action relief with respect to SDs and MSPs, see “CFTC Extends Annual Report Deadline for Futures Commission Merchants, Registered Swap Dealers and Major Swap Participants,” Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015).

Willkie Expands Asset Management Practice in London

On June 15, 2015, Willkie Farr & Gallagher announced that investment funds lawyer Solomon Wifa has joined the firm as a partner in London.  Wifa has represented sponsors in the formation of, and institutional investors with respect to their investments in, global private equity, hedge, buyout, mezzanine and venture capital funds.  For insight from Willkie, see “Is the Use of an Independent Valuation Firm Superior to a Manager’s Internal Valuation Process?,” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015); “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); and “Investment Research and Insider Trading on ‘Outside Information’,” Hedge Fund Law Report, Vol. 4, No. 29 (Aug. 25, 2011).

Ropes & Gray Adds Broker-Dealer Counsel to Asset Management Practice in New York

On June 16, 2015, Ropes & Gray announced that Brynn Rail has joined the firm’s asset management practice in New York as counsel, focusing primarily on broker-dealer regulatory issues.  For insight from the firm, see “Estate Planning Tips for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014); “Ropes & Gray Attorneys Discuss the Impact on Private Fund Managers of Final Regulations Under the Volcker Rule,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); and “Ropes & Gray Partners Share Insights Gleaned from Successfully Navigating Presence Examinations with Hedge Fund Manager Clients,” Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013). 

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