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    Jul. 16, 2015

“Interval Alts” Combine Benefits of Alternative Mutual Funds and Traditional Hedge Funds

Following a flurry of interest in “liquid alt” funds (also known as alternative mutual funds), Interval Alts are becoming increasingly popular.  In 2015 alone, there have been ten filings for new Interval Alts.  Interval Alts are non-traded closed-end funds registered under the Investment Company Act of 1940, but they function very much like traditional hedge funds.  In addition to employing alternative strategies, they have terms similar to those of hedge funds, such as monthly subscriptions and quarterly or semi-annual liquidity.  Because of the commonality in offering terms, many Interval Alts also charge fees similar to their sister hedge funds managed by the same manager (e.g., fees of 2 and 20, or some variation thereof).  Unlike hedge funds, however, they may be publicly offered and therefore may be offered in a variety of distribution channels.  In a guest article, George M. Silfen and Ronald M. Feiman of Kramer Levin Naftalis & Frankel examine the regulatory basis for Interval Alts; explore the differences between such structures and liquid alternative funds; and address the marketing advantages of Interval Alts versus traditional hedge funds.  The authors also provide an extensive chart comparing Interval Alts to alternative mutual funds and traditional hedge funds.  For additional insight from Silfen, see “Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013); and “How to Mitigate Conflicts Arising Out of Simultaneous Management of Hedge Funds and Alternative Mutual Funds Following the Same Strategy (Part Three of Three),” Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).  For more from Kramer Levin partners, see “OTC Derivatives Clearing: How Does It Work and What Will Change?,” Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).

Hedge Funds Organized as Delaware LLCs May Be Transparent for U.K. Tax Purposes

A recent U.K. Supreme Court ruling has thrown into question the treatment of Delaware limited liability companies (LLCs) for U.K. tax purposes.  The unanimous final judgment in the case reversed the previous decisions of the Upper Tribunal and the Court of Appeal and upheld the original ruling of the First-tier Tribunal.  The decision addressed the question of whether a member of a Delaware LLC was entitled to double taxation relief on his share of the LLC’s profits, which had been taxed in the U.S. and remitted to the U.K.  This article provides relevant background information; summarizes the Supreme Court’s decision and reasoning; and considers the implications of the judgment for hedge funds organized as Delaware LLCs and investors in such funds.  For more on U.K. taxation, see “U.K. Disguised Fee Rules May Result in Increased U.K. Taxation of Investment Fees to Individuals Affiliated with Hedge Fund Managers (Part Two of Two),” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015); and “Potential Impact on US Hedge Fund Managers of the Reform of the UK Tax Regime Relating to Partnerships and Limited Liability Partnerships,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).

SEC Settlement Suggests that Prime Brokers Have Due Diligence and Disclosure Obligations with Respect to Manager-Provided Hedge Fund Valuations

The SEC recently settled an enforcement action against an investment adviser and two of its principals, who allegedly engaged in a scheme to improperly inflate the value of certain illiquid securities held by the funds they managed.  The respondents allegedly spoon-fed securities valuations to two broker-dealer representatives who then provided those valuations to the funds’ auditor and administrator, both of which believed that the representatives were providing independent price determinations.  The fraudulent valuations allowed the respondents to collect inflated management and performance fees from those funds.  Without admitting or denying the SEC’s charges, the investment adviser and its principals have agreed to a settlement order with the SEC.  In a parallel proceeding, also without admitting or denying the SEC’s allegations, one of the broker-dealer representatives has agreed to entry of a similar settlement order.  This article summarizes the alleged fraudulent valuation scheme and the other facts on which the SEC enforcement actions were based, the SEC’s specific charges and the terms of the settlement orders.  In addition to emphasizing the SEC’s continuing interest in valuation, the settlements indicate certain due diligence and disclosure obligations prime brokers have with respect to manager-provided hedge fund valuations.  See “K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three),” Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).  For coverage of other recent SEC actions involving improper valuation, see “SEC Fraud Charges Against Lynn Tilton, So-Called ‘Diva of Distressed,’ Confirm the Agency’s Focus on Valuation and Conflicts of Interest,” Hedge Fund Law Report, Vol. 8, No. 14 (Apr. 9, 2015); “GLG Partners Settlement Illustrates SEC Views Regarding Valuation Controls at Hedge Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 2 (Jan. 16, 2014); “SEC’s Recent Settlement with a Hedge Fund Manager Highlights the Importance of Documented Internal Controls when Managing Conflicts of Interest Associated with Asset Valuation and Cross Trades,” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014); and “SEC Charges Hedge Fund Manager with Manipulating the Value of Fund Holdings, Paying Excessive Fees to an Interested Brokerage Firm and Making Misrepresentations to Investors,” Hedge Fund Law Report, Vol. 6, No. 16 (Apr. 18, 2013).

How to Structure a Singapore-Based Hedge Fund Manager (Part One of Two)

In recent years, Singapore has begun to attract hedge fund managers looking to establish a presence in Asia.  In its first presentation in its “Going Global” series on the formation and operation of hedge fund management companies outside the U.S., Morgan Lewis offered an overview of the relevant corporate, employment and tax laws in Singapore; its regulation of managers and fund distribution; and how other countries’ regulatory regimes affect hedge fund managers established in Singapore.  Moderated by Morgan Lewis partner Timothy W. Levin, the discussion featured partners Joo Khin Ng, Wai Ming Yap, Daniel Yong and William Yonge.  This article, the first in a two-part series, summarizes the main points raised during the presentation with respect to Singapore corporate structures, employment laws, tax laws and regulation of financial services activities.  Part two will address Singapore licensing requirements, “dual-hatting” arrangements, product distribution and the impact of U.S. and U.K. regulatory regimes on Singapore-based managers.  For more on the tax and regulatory issues involved in establishing a Singapore-based manager, see “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).  For a discussion of the factors to consider in deciding between Hong Kong and Singapore as the location for an Asia-based office, see “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part One of Four),” Hedge Fund Law Report, Vol. 4, No. 43 (Dec. 1, 2011).  For an overview of the process of opening an office in Singapore, see “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Two of Four),” Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011). 

ESMA Releases Final Report on MiFID II Technical Standards for Hedge Fund Management Firms

The European Securities and Markets Authority (ESMA) has published its Final Report proposing rules for the authorization of investment firms under the recast Markets in Financial Instruments Directive (MiFID II) and related regulations (MiFIR).  The Final Report, dated June 29, 2015, covers draft technical standards on authorization, passporting, registration of third-country firms and cooperation between competent authorities.  It analyzes responses to ESMA’s consultation paper released in December 2014; explains the resulting changes to the proposed technical standards; and includes the text of the final draft regulations as well as a cost-benefit analysis of the proposals.  It is important for hedge fund managers and other investment firms to understand, and prepare for, the new rules because MiFID II will apply to firms with regulated offices in the E.U. and have indirect effects on all asset managers that trade on E.U. markets or that contract with E.U. counterparties.  This article highlights the key issues arising from the consultation and the consequential modifications to the draft technical standards.  For more on MiFID II, see “Simmons & Simmons and Advise Technologies Provide Comprehensive Overview of MiFID II (Part One of Two),” Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015); and Part Two of Two, Vol. 8, No. 25 (Jun. 25, 2015).  See also “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); and “Changing Regulations May Restrict Hedge Fund Managers’ Use of Soft Dollars in Europe,” Hedge Fund Law Report, Vol. 8, No. 24 (Jun. 18, 2015).

SEC Commissioner Issues Statement Supporting Hedge Fund Manager Chief Compliance Officers

SEC Commissioner Luis A. Aguilar recently issued a statement in response to the remarks by SEC Commissioner Daniel M. Gallagher regarding liability of chief compliance officers (CCOs).  See “SEC Commissioner Speaks Out Against Trend Toward Strict Liability for Compliance Personnel,” Hedge Fund Law Report, Vol. 8, No. 25 (Jun. 25, 2015).  In his remarks, Aguilar attempted to dispel the impression held by the CCO community that the SEC has taken too harsh an enforcement stance against CCOs.  Toward that end, Aguilar examined SEC actions against CCOs; discussed the function and enforcement of Rule 206(4)-7 under the Investment Advisers Act of 1940; and advocated for robust support of compliance programs by companies’ senior leadership.  This article summarizes Aguilar’s statement.  For additional insight from SEC officials, 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); and “Conflicts Remain an Overarching Concern for the SEC’s Asset Management Unit,” Hedge Fund Law Report, Vol. 8, No. 10 (Mar. 12, 2015).

Kate Westcott Joins the Hedge Fund Law Report as Associate Editor, U.K.

Kate Westcott recently joined the Hedge Fund Law Report as Associate Editor, U.K.  She joins from systematic hedge fund manager Callisto Asset Management, where she served as sole legal counsel and relations manager. 

Tax Specialist John Kaufmann Joins Greenberg Traurig in New York

On July 10, 2015, Greenberg Traurig welcomed John Kaufmann as of counsel in the firm’s New York tax 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).  Experienced in financial instrument taxation, Kaufmann will focus his practice on international tax; trade structuring and tax risk management; and debt and equity derivatives.  See “Interest Rate Swap Compression for Hedge Fund Managers: Mechanics, Fee Savings, Risk Consequences and Regulatory Context,” Hedge Fund Law Report, Vol. 8, No. 8 (Feb. 26, 2015); and “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. 44 (Nov. 20, 2014).

Marie D. Carter Joins Hirschler Fleischer’s Investment Management Practice Group

Hirschler Fleischer’s investment management practice group recently announced the addition of Marie D. Carter as of counsel.  Carter advises public, private, tax-exempt and governmental entities on a range of legal issues related to tax-qualified retirement plans, health and welfare plans, annual and long-term incentive programs and executive compensation arrangements.  For insight from the firm, see “‘Best Ideas’ Conference Presentations: Challenges Faced by Hedge Fund Managers Under Federal Securities Law (Part One of Two),” Hedge Fund Law Report, Vol. 7, No. 30 (Aug. 7, 2014); and Part Two of Two, Vol. 7, No. 31 (Aug. 21, 2014).

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