Jul. 9, 2015

Practical Considerations for Hedge Fund Managers Implementing Tiered Management Fees (Part Two of Two)

As hedge fund managers have implemented tiered management fees, largely in response to investor demands, investors have generally responded positively to such terms.  However, managers must bear in mind certain practical considerations when offering a tiered management fee structure – whether as part of the fund’s general terms or on a one-off basis to certain investors.  This article, the second in a two-part series, discusses the benefits of tiered management fees; examines investor response to and demand for tiered management fee structures; and provides practical guidance for hedge fund managers seeking to implement such structures.  The first article discussed the increasing prevalence of tiered management fees, the rationale behind their implementation and approaches to structuring them.  For more on management fees, see “Sidley Partners Discuss Evolving Hedge Fund Fee Structures, Seed Deal Terms, Single Investor Hedge Funds, Risk Aggregators, Expense Allocations, Co-Investments and Fund Liquidity (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014); and “Industry Perspectives on Hedge Fund Fee Pressures, Expense Allocations and Liquidity Terms,” Hedge Fund Law Report, Vol. 6, No. 31 (Aug. 7, 2013).

Non-E.U. Hedge Fund Managers May Not Be Required to Comply with AIFMD’s Capital and Insurance Requirements

The alternative investment fund managers directive (AIFMD) is a complex and, in places, ambiguous and contradictory piece of legislation.  Four full years after being published in the Official Journal of the European Union and two years after coming into effect, aspects of AIFMD continue to be misunderstood by the asset management industry and its service providers.  In a guest article, Akin Gump partner Christopher Leonard examines the extent to which non-E.U. fund managers must comply with the capital and insurance requirements of AIFMD.  For additional insight from Akin Gump, see “Structuring Private Funds to Profit from the Oil Price Decline: Due Diligence, Liquidity Management and Investment Options,” Hedge Fund Law Report, Vol. 8, No. 11 (Mar. 19, 2015); “Akin Gump Partners Discuss Non-U.S. Enforcement, Insider Trading in Futures, Failure to Supervise Charges and Other Evolving Insider Trading Challenges for Hedge Fund Managers,” Hedge Fund Law Report, Vol. 6, No. 45 (Nov. 21, 2013); and “Akin Gump Partners Present Overview of Recent Developments in Fund Taxation, Fund Manager Transactions and Hedge and Private Equity Fund Investment Terms,” Hedge Fund Law Report, Vol. 6, No. 48 (Dec. 19, 2013).

RCA Panel Discusses Pay to Play Rules, GIPS Compliance, Disclosures, Risk Assessments and ERISA Proposals

Panelists at the recent RCA Enforcement, Compliance & Operations Symposium emphasized the importance of understanding and complying with the various requirements applicable to fund managers.  In particular, speakers discussed compliance with pay to play rules; GIPS compliance and performance reporting; disclosure requirements; and risk assessment requirements.  Additionally, panelists discussed a proposed expansion of the fiduciary definition under ERISA.  This article highlights the key points arising from discussion of the foregoing issues.  For additional coverage of the Symposium, see “RCA Panel Highlights Conflicts of Interest Affecting Fund Managers,” Hedge Fund Law Report, Vol. 8, No. 26 (Jul. 2, 2015); and “RCA Panel Outlines Keys for Hedge Fund Managers to Implement a Comprehensive Cybersecurity Program,” Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).

SEC Enforcement Action Involving “Broken Deal” Expenses Emphasizes the Importance of Proper Allocation and Disclosure

In recent years, the SEC has closely focused on the allocation of expenses between private fund managers and the funds they manage.  See “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates,” Hedge Fund Law Report, Vol. 8, No. 20 (May 21, 2015).  In an enforcement action presaged in a May 2015 speech by Marc Wyatt, acting director of the SEC’s Office of Compliance Inspections and Enforcement, the SEC has charged a registered investment adviser with fraud for allocating broken deal expenses to its flagship private equity funds, while failing to disclose to investors in those funds that it did not allocate any such expenses to co-investors in the deals.  See “Acting OCIE Director Discusses the Office’s Focus on Private Equity Managers and Emphasizes the Importance of Disclosure by Advisers,” Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015).  The SEC also claimed that the adviser failed to maintain policies and procedures governing such allocations.  Without admitting or denying the SEC’s allegations, the adviser has agreed to a settlement order with the SEC.  This article summarizes the factual background of the enforcement proceeding, the SEC’s specific charges and the terms of the settlement.  For discussion of other recent enforcement actions involving expense allocations by private equity managers, see “Enforcement Action against Private Equity Fund Manager Highlights Five Aspects of the SEC’s Thinking on Allocation of Expenses,” Hedge Fund Law Report, Vol. 7, No. 36 (Sep. 25, 2014); and “SEC Order Suggests That Private Fund Operating Expenses Should Be Allocated Based on Line-by-Line Determinations Rather Than an Across-the-Board Percentage Split,” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  For a discussion of the statutory framework governing expense allocations, the consequences of improper allocations and best practices for expense allocations, see “Battle-Tested Best Practices for Private Fund Expense Allocations,” Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).  For more on expense allocations, see “How Should Hedge Fund Managers Approach the Allocation of Expenses Among Their Firms and Their Funds? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 19 (May 9, 2013).

FCA Hedge Fund Survey Examines Key Risk Metrics Applicable to Hedge Funds

The U.K. Financial Conduct Authority (FCA) recently released a survey outlining the key findings from its data analysis of the hedge fund industry.  In an attempt to identify funds or trends with the potential to pose systemic risk, the FCA explored various aspects listed under the proposed Assessment Methodology for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions, including the extent of OTC trading, liquidity buffers and re-hypothecation.  The FCA highlighted unencumbered asset ratios as a key indicator.  This article reviews the survey’s main findings.  For coverage of previous systemic risk analysis by the U.K. regulator, see “U.K.’s FSA Issues Biannual Report Assessing Possible Sources of Systemic Risk from Hedge Funds,” Hedge Fund Law Report, Vol. 5, No. 11 (Mar. 16, 2012).

Irish Central Bank Issues Guidance on Fund Director Time Commitments

The Central Bank of Ireland (Central Bank) recently announced recommendations regarding individuals holding numerous directorships and the satisfaction of their oversight duties.  This announcement follows a “thematic review” of the number of directorships held by individuals on the boards of Irish investment funds and fund management companies and assessment of the time allocated by such individuals to their service as directors.  This article explores the Central Bank’s recent letter to industry on the subject and its related Guidance on Directors’ Time Commitments.  For additional information on governance in the private fund space in general, and the roles of directors in particular, see “Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA,” Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); and “Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors,” Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014). 

Katten Adds Former SEC Enforcement Chief Richard Marshall as Partner in Its Financial Services Practice

Katten Muchin Rosenman has announced that regulatory compliance attorney and former SEC enforcement chief Richard D. Marshall has joined its New York office as a partner in its financial services practice.  For more from Katten, see “What Hedge Fund Claim Traders Need to Know About the Visa/MasterCard Settlement,” Hedge Fund Law Report, Vol. 8, No. 25 (Jun. 25, 2015); “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); and “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).

Mark Perlow Joins Dechert as Partner in San Francisco

Dechert recently announced that it has expanded its SEC regulatory and funds practice with the addition of Mark D. Perlow as a partner.  He represents mutual funds, hedge fund managers, investment advisers, fund boards of directors and broker-dealers on a broad range of regulatory and transactional matters.  For insight from Perlow, see “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); “K&L Gates and Cordium Detail the Structuring, Investment and Operational Mechanics of Entry by Hedge Fund Managers Into the Alternative Mutual Fund Business (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 24 (Jun. 19, 2014); “Three Pillars of an Effective Hedge Fund Valuation Process,” Hedge Fund Law Report, Vol. 7, No. 24 (Jun. 19, 2014); and “Marketing Hedge Funds to European Union Investors in the Post-AIFMD Era,” Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012).

Bruno Bertrand-Delfau Joins Proskauer’s Private Investment Funds Practice in London

Proskauer recently announced that Bruno Bertrand-Delfau has joined the firm’s London office as a partner in its private investment funds practice.  He counsels private equity funds and institutional investors, including sovereign wealth funds and pension funds, regarding their private equity transactions.  For more from firm partners, 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); “Proskauer Partner and SEC Enforcement Division Veteran Ronald Wood Explains the Implications for Hedge Fund Managers of Structure and Staffing Changes at the SEC,” Hedge Fund Law Report, Vol. 6, No. 11 (Mar. 14, 2013); and “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters,” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

Fried Frank Adds Asset Management Regulatory Attorney Gregg Beechey in London

Fried Frank has announced that Gregg Beechey will join as a partner in its asset management practice, resident in the firm’s London office.  Beechey is a regulatory attorney who focuses on alternative investment funds and the AIFMD.  For insight from Fried Frank, see “The SEC’s Proposed Custody Rule Changes: An Analysis of the Impact on Hedge Fund Managers,” Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009).