Aug. 11, 2016

Causes of ESMA’s Recommended Delay to Extend AIFMD Passport and Its Impact on Non-E.U. Fund Managers (Part Two of Two)

The European Securities and Markets Authority (ESMA) is responsible for advising the E.U. on whether to extend the marketing passport under the Alternative Investment Fund Managers Directive (AIFMD) and which jurisdictions should receive this opportunity. While ESMA positively recommended several countries in its latest advice (Advice), it ultimately cautioned the E.U. not to extend the passport at this time. ESMA’s Advice and the looming prospect of another postponement of the highly-anticipated AIFMD passport has prompted questions about what caused this delay, as well as how non-E.U. alternative investment fund managers (AIFMs) desiring to market in the E.U. should proceed. Additionally, the Advice has raised doubts about how prominently the passport will factor into those non-E.U. AIFMs’ efforts when it becomes more broadly available, or whether they will continue to rely on national private placement regimes to market in individual E.U. member states. This second article in our two-part series provides industry commentary on issues that likely factored into ESMA’s Advice and discusses the potential implications of the Advice on hedge fund managers. The first article summarized the criteria ESMA used to evaluate the candidates and details the obstacles it identified for the seven jurisdictions for which it did not recommend extending the passport. See “AIFMD Has Increased Compliance Burden on Hedge Fund Managers (Part One of Two)” (Apr. 28, 2016); “AIFMD Is Easier for Non-E.U. Hedge Fund Managers Than Commonly Anticipated” (Oct. 22, 2015); and “Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD” (Jan. 8, 2015).

Perspectives From In-House and Private Practice: Cadwalader Special Counsel Garret Filler Discusses Hedge Fund Culture, Law Firm Selection and Counterparty Risk (Part One of Two)

Garret Filler recently rejoined Cadwalader, Wickersham & Taft as special counsel in the firm’s New York office, where he represents both start-up and established hedge funds and private equity funds, as well as family offices, banks and broker-dealers. The Hedge Fund Law Report recently interviewed Filler in connection with his return to Cadwalader, during which he discussed numerous topics of import to hedge fund managers. This article, the first in a two-part series, sets forth Filler’s thoughts on the cultures of private fund managers; selection of outside counsel, including law firm relationships with regulators and their willingness to enter into alternative fee arrangements; and counterparty risk. In the second installment, Filler will discuss family office transitions into asset managers; broker-dealer registration issues for fund managers; considerations when negotiating counterparty agreements; the implications to hedge funds of increased capital and liquidity requirements for banks and broker-dealers; and the impact of new margin requirements for uncleared derivatives. For additional insight from Cadwalader partners, see “Best Practices for Hedge Fund Managers to Adopt in Anticipation of Enactment of FinCEN AML Rule Proposal” (Aug. 4, 2016).

How Promoting Internal Reporting Can Reduce Risk of Regulatory Intervention for Hedge Fund Managers

In an effort to stop financial frauds before they occur or, at the very least, minimize the extent of the fraud, Congress, through the Dodd-Frank Act, established a program that requires the SEC to pay monetary awards to whistleblowers in certain circumstances. The SEC’s whistleblower program, codified in Section 21F of the Securities Exchange Act of 1934 and rules and regulations adopted by the SEC (Whistleblower Rules), not only offers generous financial bounties to individuals who report violations, but also provides strong protections to whistleblowers from workplace retaliation. In a guest article, Mike Delikat and Renee Phillips, partners at Orrick, review the relevant aspects of the Whistleblower Rules and provide practical advice to investment managers about how they can encourage whistleblowers to report suspected violations internally, which may enable an investment manager to remedy a violation prior to or without regulatory intervention. For more on the SEC’s whistleblower program, see “SEC Chair’s Testimony Highlights SEC’s Bolstered Presence in Asset Management Space” (Jun. 16, 2016); and “Current and Former SEC, DOJ and NY State Attorney General Practitioners Discuss Regulatory and Enforcement Priorities” (Jan. 14, 2016).

A “Clear” Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans (Part Three of Four)

This is the third article in our four-part serialization of a treatise chapter by Steven W. Rabitz, partner at Stroock & Stroock & Lavan, and Andrew L. Oringer, partner at Dechert. The chapter describes the substantive considerations – as well as potential penalties for missteps – associated with employing swap transactions for employee benefit plans, certain other similar plans and “plan assets” entities subject to the fiduciary provisions of the Employee Retirement Income Security Act of 1974 (ERISA) or the corresponding provisions of Section 4975 of the Internal Revenue Code of 1986, and includes references to a wide range of relevant authority. This third article in the serialization describes implications of funds reaching the 25% threshold of plan investment; considerations for fund managers when facing governmental plans; and credit-related issues. The second article discussed exemptions that could keep swaps from being considered prohibited transactions and explored the extent to which swap counterparties and others would be considered fiduciaries under ERISA, as well as the potential implications of that consideration. The first article explored fiduciary responsibility and prohibited transactions generally.

Private Equity Firms From Across the Industry Spectrum Advise on Trends and Terms in the Current Co-Investment Market

Co-investments can offer investors additional exposure to a specific investment and flexibility in regard to fees and liquidity; they provide additional capital to managers and allow them to make larger investments without running afoul of fund concentration limits. See “Co-Investments Enable Hedge Fund Managers to Pursue Illiquid Opportunities While Avoiding Style Drift (Part One of Three)” (Feb. 21, 2014). A recent program sponsored by Katten Muchin Rosenman offered a look at co-investing from the perspectives of advisers participating frequently in co-investments. Katten partner Noah J. Leichtling moderated the discussion, which featured David McCoy, a managing director and portfolio manager at fund-of-funds manager RCP Advisors (RCP); Christopher S. McCrory, a vice president at 50 South Capital (50 South), the alternative investment arm of Northern Trust Corporation; and Andy Unanue, a managing partner of AUA Private Equity Partners (AUA). The panelists focused on the sourcing and allocation of co-investment opportunities; fees, expenses and other deal terms; characteristics co-investors desire when seeking out investment opportunities; and the outlook for the co-investment market. This article summarizes their insights on these and other topics. For more on co-investments, see “ How and Why Hedge Fund Managers Are Capitalizing on Co-Investment Opportunities” (Dec. 11, 2014); and “Co-Investments in the Hedge Fund Context: Fiduciary Duty Concerns, Conflicts and Regulatory Risks (Part Three of Three)” (Mar. 7, 2014).

European Commission Issues “Largely Positive” Assessment of Remuneration Rules Applicable to E.U. Investment Firms and Other Financial Institutions

On July 28, 2016, the European Commission (EC) issued its report (Report) to the European Parliament and the Council of the E.U. on the remuneration rules that were adopted in June 2013 for credit institutions and investment firms (Rules). The Report finds that the Rules – which impose limits on variable remuneration, require deferral of a portion of variable pay and mandate payment of a portion of variable compensation in non-cash instruments – have generally been well-received. However, the Report noted that it is too early to judge whether the limits on variable remuneration imposed by the Rules are having the intended effect of aligning individual and business interests and reducing risk. This article highlights the key provisions of the Report, with a focus on the provisions applicable to hedge and other private fund managers. For more on principal or employee compensation, see “Use by Hedge Fund Managers of Profits Interests and Other Equity Stakes for Incentive Compensation” (Apr. 18, 2014); and “How Can Hedge Fund Managers Use Profits Interests, Capital Interests, Options and Phantom Income to Incentivize Top Portfolio Management and Other Talent?” (Aug. 22, 2013).

Gibson Dunn Lures Former CFTC Official to Its New York Office 

Gibson Dunn & Crutcher has expanded its financial institutions regulatory practice in New York City with the hiring of Carl Kennedy to serve as of counsel. Kennedy comes to Gibson Dunn with extensive expertise in domestic and cross-border regulatory and legislative matters affecting commodities, derivatives and investment funds. For insight from Gibson Dunn attorneys, see “Top SEC Officials, Law Firm Partners and In-House Counsel Discuss Private Fund Enforcement Priorities, Tender Offer Rules Applicable to Activist Investing, Valuation Challenges, Personal Trade Monitoring and Compliance Testing (Part Four of Four)” (Jan. 22, 2015); and “Gibson Dunn Trial Attorneys Discuss the Trial Victory of Hedge Fund Manager Nelson Obus, the ‘Lamest Insider Trader in History’” (Aug. 1, 2014).

Private Equity Fund Formation Partner Joins Greenberg Traurig in New York

Greenberg Traurig has expanded its investment funds practice in New York with the hiring of Sherri Caplan, who specializes in private equity fund formation and advises sponsors of buyout, energy, infrastructure and real estate funds. For commentary from Greenberg attorneys, see “OTC Options on Major Currencies May Be Marked-to-Market for Tax Purposes” (Jul. 16, 2015); “Cybersecurity and Outsourcing Remain Key and Potentially Costly Operational Issues for Hedge Fund Managers” (May 5, 2016); as well as our two-part series on Section 871(m) regulations: “Withholding Law Applicable to Non-U.S. Hedge Funds” (Jan. 21, 2016); and “Issues With the Expanding Scope of Withholding Law” (Jan. 28, 2016).

The HFLR Will Not Publish Next Week and Will Resume Its Regular Publication Schedule the Following Week

Please note that the HFLR will not publish an issue during the week beginning August 15, 2016, and will resume its normal weekly publication schedule the following week starting August 22, 2016.