Feb. 26, 2015

Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filing (Part Two of Two)

Many hedge fund managers made their first AIFMD Annex IV filing in January 2015.  That process generated actionable lessons for hedge fund managers that can be grouped into three disciplines: regulation, data and logistics.  On February 18, 2015, the Hedge Fund Law Report and Advise Technologies sponsored a panel discussion addressing lessons from the January 2015 filing in each of these three disciplines.  Simon Whiteside, a partner at Simmons & Simmons LLP, addressed regulation; Stefanie Kirchheimer, a director at PricewaterhouseCoopers, discussed data; and Jeanette Turner, Managing Director and General Counsel for Advise, focused on logistics; HFLR Publisher Mike Pereira moderated.  This article conveys insights from the panel on Annex IV filing logistics, technical issues and clarifications from regulators.  A prior article covered reporting obligations, data, calculations and interpretations.  See also “Seven Tips and Lessons Learned from January 2015 AIFMD Filers,” Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).

Interest Rate Swap Compression for Hedge Fund Managers: Mechanics, Fee Savings, Risk Consequences and Regulatory Context

Hedge funds with exposure to interest rate swaps and other derivatives pay considerable fees to clearing brokers and futures commission merchants to clear such derivatives.  Further, changes in the relevant regulatory environment – including Basel III, MiFID 2 and the U.S. and U.K. clearing mandates – may result in significant fee increases.  In an effort to minimize such fees, hedge funds are exploring strategies such as netting and compression of interest rate swaps.  The Hedge Fund Law Report recently interviewed Tom Lodge, Partner at London-based Catalyst Development Ltd., on the impact of regulatory changes on clearing broker and futures commission merchant fees and the benefits and costs of netting and compression strategies.  See also “CFTC Issues Guidance for Completing Annual CCO Reports of Swaps and Futures Firms,” Hedge Fund Law Report, Vol. 8, No. 1 (Jan. 8, 2015).

Cayman Court of Appeal Overturns Decision Holding Weavering Fund Directors Personally Liable

Governance of Cayman hedge funds in general, and the duties and qualifications of their directors in particular, have been hot topics in the industry for several years.  See “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); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  One important source of that concern arose out of the 2009 collapse of Weavering Capital.  In a landmark decision following that collapse, the Cayman Grand Court held the fund’s independent directors personally liable for the fund’s losses by reason of their “wilful neglect” of their duties.  See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations ,” Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  The Cayman Court of Appeal has recently overturned that ruling on the ground that, although the directors had breached their duties to the fund, their conduct did not rise to the level of “wilful neglect or default.”  This article summarizes the Court of Appeal’s analysis.

Regulatory and Practitioner Perspectives on Alternative Mutual Fund Compliance Risk

Alternative mutual funds offer hedge fund managers a way to increase their assets by reaching a retail investor audience.  In the U.S., such funds are governed by the Investment Company Act of 1940 and, as such, must meet a broad array of regulatory and compliance requirements – requirements that are new to many hedge fund managers.  See “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).  At a recent program, two private sector practitioners and an SEC official considered the compliance challenges faced by hedge fund managers that launch, advise or sub-advise alternative mutual funds.  This article summarizes the main points from the program.

RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part Two of Two)

Hedge funds are subject to regulatory scrutiny, and enforcement actions against managers have been increasing in frequency and sophistication.  Hedge fund managers therefore need to ensure compliance with the ever-growing range of regulations to which they are subject; and registered managers need to prepare for routine and other examinations by regulators.  In order to assist managers with these aims, the Regulatory Compliance Association held its Compliance, Risk and Enforcement 2014 Symposium (RCA Symposium) in New York City.  This article, the second in a two-part series, summarizes the Symposium participants’ insights on risks associated with regulatory reporting and emerging AIFMD issues.  The first article in the series covered the NFA’s and SEC’s risk-focused tools and technologies; the SEC’s 2015 examination and enforcement priorities; and preparing for SEC examinations.  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.  For a discussion of another RCA program, see “Four Pay to Play Traps for Hedge Fund Managers, and How to Avoid Them,” Hedge Fund Law Report, Vol. 8, No. 5 (Feb. 5, 2015).

Alternative Mutual Fund Managers Have Two Custody Rules to Worry About

A recent SEC administrative order serves as a stark reminder that, while the investment strategies of hedge funds and alternative mutual funds are similar, the legal regimes applicable to both are quite different.  Registered hedge fund advisers need to comply with Rule 206(4)-2 under the Investment Advisers Act of 1940, the so-called custody rule.  See “Implications for Private Fund Managers of the SEC’s Recent Custody Rule Guidance and Relief Relating to ‘Privately Offered Securities’,” Hedge Fund Law Report, Vol. 6, No. 32 (Aug. 15, 2013).  Registered advisers to alternative mutual funds also need to comply with the Advisers Act custody rule, but in addition, need to comply with the custody provisions of the Investment Company Act of 1940.  A portfolio manager might reasonably expect the custody provisions to be mirror images of one another, but they are not.  For example, the Advisers Act custody rule would allow a hedge fund to post cash collateral to a broker-dealer, but the Investment Company Act custody provisions may only permit the posting of cash collateral to a bank – which could be problematic for an alternative mutual fund that wants to enter into a swap with a prime broker.  This article provides a detailed discussion of the order, then highlights the four most important lessons for alternative mutual fund managers arising out of the order.  See also “SEC Investment Management Division Director Norm Champ Details Disclosure Challenges Facing Hedge and Alternative Mutual Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 46 (Dec. 11, 2014).

Bryan Cave Welcomes Richard B. Levin as Partner

On February 19, 2015, Bryan Cave announced that Richard B. Levin joined the firm as a partner, resident in its Denver office.  Levin’s practice focuses on the representation of early stage and publicly-traded companies in the financial services industry, including broker-dealers, hedge funds, alternative trading systems and exchanges.

Boutique Law Firm Moves Financial Services Practice into Greenberg Traurig’s Investment Management Group

On February 20, 2015, Greenberg Traurig announced that lawyers from boutique firm Henderson Law LLP have moved their financial services practice to the Investment Management Group in Greenberg’s Chicago office.  For insight from Greenberg, 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).