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    Apr. 14, 2016

Steps That Alternative Investment Fund Managers Need to Consider to Comply With the Global Trend Toward Tax Transparency (Part Two of Two)

In response to increased demand for transparency and reporting, alternative investment funds (AIFs) and other financial institutions can improve their positions in a competitive market by proactively addressing reporting and planning issues arising from recent global initiatives. In a two-part guest series, Dmitri Semenov, Jun Li, Lucas Rachuba and Carter Vinson of Ernst & Young (EY) highlight challenges and steps that AIFs should consider taking to address the global planning and reporting issues associated with increased transparency demands arising from global initiatives. This second article discusses the planning considerations and other long-term issues for hedge funds and other AIFs to consider. The first article addressed global reporting considerations and areas on which AIFs should immediately focus. For more on tax transparency, see “A Checklist for Updating Hedge Fund and Service Provider Documents for FATCA Compliance” (Feb. 21, 2014). For analysis from other EY professionals, see “Eight Key Elements of an Integrated, Efficient and Accurate Hedge Fund Reporting Solution” (Nov. 13, 2014); and “Daniel New, Executive Director of EY’s Asset Management Advisory Practice, Discusses Best Practices on ‘Hot Button’ Hedge Fund Compliance Issues” (Oct. 17, 2013).

How Do Hedge Fund Managers Legally Penalize Employee Wrongdoing? (Part Two of Two)

Hedge fund managers may seek to recoup regulatory fines by imposing penalties on employees responsible for violations. However, when imposing such punishments on their employees, managers must take care to ensure they remain in compliance with labor law, while still incentivizing personnel to avoid violations of law, regulation or firm policies and procedures. In an effort to determine industry best practice with respect to imposing fines on employees, the Hedge Fund Law Report spoke with employment counsel and also surveyed 15 general counsels and other “C-level” decision-makers at leading hedge fund managers. We are presenting our findings in a two-part article series. The first part explored the options available to hedge fund managers for imposing penalties on their employees for regulatory violations and examined the limits of those options under employment law. This second part examines how hedge fund managers actually put these options into practice, addressing the prevalence of these remedies in the industry and best practices for hedge fund managers to deploy them. For more on hedge fund manager employment issues, see “Employees of Hedge Fund Managers May Be Liable for Failing to Prevent Fraud” (Jul. 30, 2015); and “Recent Decision Holds That Hedge Fund Managers Have Some Recourse Against Firm Employees That Engage in Insider Trading and Deceive Their Employers Pursuant to the Mandatory Victims Restitution Act” (Apr. 5, 2012).

Recent Developments Affect Classifications of Control Groups and Fiduciaries Under ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) imposes a complex regulatory regime onto hedge fund and other private fund managers managing “plan assets.” Two recent developments carry implications for managers under ERISA: the ruling by the U.S. Court of Appeals for the First Circuit about whether a private equity (PE) fund can be treated as a “trade or business” for purposes of the pension funding rules and withdrawal liability under ERISA; and the release of the DOL’s final rule revising the definition of “fiduciary” under ERISA. These were among the ERISA-related topics discussed during a recent segment of the Practising Law Institute’s “Pension Plan Investments 2016: Current Perspectives” seminar. The program was moderated by Arthur H. Kohn, a partner at Cleary Gottlieb Steen & Hamilton; and featured Jeanie Cogill, a partner at Morgan, Lewis & Bockius; David M. Cohen, a partner at Schulte Roth & Zabel; and Steven W. Rabitz, a partner at Stroock & Stroock & Lavan. This article summarizes the key takeaways from the program with respect to the foregoing matters. For more on ERISA, see our three-part series on ERISA Considerations for European hedge fund managers: “Liability and Incentive Fee Considerations” (Sep. 24, 2015); “Prohibited Transaction, Reporting and Side Letter Considerations” (Oct. 1, 2015); and “Indicia of Ownership and Bond Documentation Considerations” (Oct. 8, 2015). 

DOJ Lawsuit May Limit Ability of Activist Hedge Funds to Rely on “Investment Only” Exemption From Hart-Scott-Rodino Filing Requirements

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) requires an acquirer to disclose to the FTC and DOJ purchases of assets or voting securities of a target company when the acquisition will result in the acquirer owning assets or securities in excess of specified thresholds. Activist funds have recently come under regulatory scrutiny for relying on the so-called “investment only” exemption from these filing requirements. See “In Third Point Settlement, FTC Takes Narrow View of ‘Investment Only’ Exemption to Hart-Scott-Rodino Premerger Notification Requirements” (Sep. 3, 2015). The DOJ has filed a civil complaint against activist manager ValueAct Capital and two of its funds for failing to file HSR Act notifications when those funds exceeded the applicable ownership thresholds in certain companies. The suit is important to activist and other managers because it explores the questions of when a manager or fund is entitled to rely on the investment only exemption from HSR Act filing requirements and what constitutes an intent to influence a company’s business. This article summarizes the relevant provisions of the HSR Act and related regulations, the circumstances giving rise to the suit and the DOJ’s claims. For a general look at activist investing, see “Seward & Kissel Private Funds Forum Highlights Key Trends in Fund Structures (Part Two of Two)” (Jul. 30, 2015); “Structures and Characteristics of Activist Alternative Investment Funds” (Mar. 12, 2015); and “Practitioners Discuss U.S. and Canadian Shareholder Activism and Activist Tools” (Dec. 4, 2014).

FCA 2016-2017 Regulatory and Supervisory Priorities Include Focus on AML, Cybersecurity and Governance

As hedge funds and other financial firms are faced with evolving issues, including new legislation, accountability and the risks of technology, regulatory authorities must also allocate their resources to address these challenges. In its recent Business Plan 2016/17 (Business Plan), the U.K. Financial Conduct Authority (FCA) set forth its plan for addressing challenges in the changing marketplace and outlined seven priorities for the year ahead. The Business Plan also explains the FCA’s approach to regulation and managing priority risks. This article highlights the FCA priorities most relevant to hedge fund managers, including the FCA’s focus on financial crime and anti-money laundering; innovation and technology; and firm culture and governance, as well as the regulator’s position on supervision and enforcement of regulated firms. For additional insight on FCA priorities, see “FCA Expects Hedge Fund Managers to Focus on Liquidity Risk” (Mar. 3, 2016); “FCA Report Enjoins Hedge Fund Managers to Improve Due Diligence” (Feb. 25, 2016); and “FCA Director Summarizes 2015 Regulatory Initiatives Applicable to Hedge Fund Managers and Financial Markets” (Jan. 7, 2016).

RCA Session Spotlights Risks With Investment Allocation, Trade Execution, Soft Dollars, Client Solicitation and Valuation

Hedge fund managers face numerous areas of potential risk, including allocation of investment opportunities; best execution of trades; soft dollars and related conflicts of interest; marketing and third-party solicitors; and valuation and performance representations. As part of the first session of the Regulatory Compliance Association’s (RCA) Compliance Program Transparency Series, panelists discussed these and other relevant topics. Moderated by Jane Stafford, RCA’s general counsel, the session featured James G. Jones, a founder and portfolio manager of Sterling Investment Advisors; Michelle Clayman, managing partner and chief investment officer of New Amsterdam Partners; Gerald Lins, general counsel at Voya Investment Management; and Tanya Kerrigan, general counsel and chief compliance officer of Boston Advisors. This article outlines the substance of the panel’s discussion on the foregoing issues. For additional commentary from the RCA Compliance Program Transparency Series, see “RCA Session Highlights Issues Pertaining to the Custody Rule, ERISA, Client Agreements, Fees, Codes of Ethics and Confidentiality” (Apr. 7, 2016). See also our coverage of the RCA Enforcement, Compliance and Operations Symposium: “Keys for Hedge Fund Managers to Implement a Comprehensive Cybersecurity Program” (Jun. 18, 2015); “Conflicts of Interest Affecting Fund Managers” (Jul. 2, 2015); and “Pay to Play Rules, GIPS Compliance, Disclosures, Risk Assessments and ERISA Proposals” (Jul. 9, 2015).

Hughes Hubbard Welcomes Former SEC Commissioner Roel Campos

Hughes Hubbard & Reed recently announced that Roel Campos has joined the firm as a partner in its Washington, D.C. office. He will lead the firm’s securities enforcement practice group as chair. Campos regularly advises corporate management teams, boards of directors, private funds and individuals on a variety of regulatory and enforcement issues. For insight from Campos, see “Former SEC Commissioner Roel Campos Discusses Hedge Fund Governance With Hedge Fund Law Report” (Mar. 8, 2012). For more on SEC enforcement, see “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016); and our two-part series on “The SEC’s Broken Windows Approach”: “Conflicts of Interest and Expense Allocation Concerns” (Sep. 24, 2015); and “Compliance Resources, CCO Liability and Technology Concerns” (Oct. 1, 2015).

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