Feb. 18, 2016

Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams

A panel of current and former regulators at PLI’s Hedge and Private Fund Enforcement & Regulatory Developments 2015 event discussed the use of “big data” by the SEC; explored the risk of CCO liability; and offered advice on preparing for SEC examinations. The program, entitled “SEC Inspections and Examinations of Private Equity and Hedge Funds,” was moderated by Barry R. Goldsmith, a partner at Gibson Dunn, and featured Lindi Beaudreault, an attorney at Murphy & McGonigle; Marc E. Elovitz, a partner at Schulte Roth & Zabel; Igor Rozenblit, a co-leader of the Private Funds Unit of the SEC Office of Compliance Inspections and Examinations (OCIE); and John H. Walsh, a partner at Sutherland Asbill & Brennan and former OCIE acting director. This article summarizes the principal takeaways from the presentation. For more on SEC inspections, see “Hedge Fund Managers Advised to Prepare for Imminent SEC Examination” (Jan. 28, 2016).

Regulatory Considerations Hedge Fund Managers Must Address When Redomiciling Their Hedge Funds (Part One of Two)

Hedge fund managers in search of marketing or other advantages may consider redomiciling their hedge funds to a more favorable jurisdiction. However, such managers must consider the implications of the move, including potential increased regulatory burdens and conflicts of interest created by the transition. In a recent interview with the Hedge Fund Law Report, Jonathan Law and Donnacha O’Connor, partners at Dillon Eustace, discussed the prime reasons hedge fund managers consider redomiciliation of their hedge funds, along with the legal and operational considerations that attend that decision. This article, the first in a two-part series, addresses the regulatory implications of, and potential conflicts of interest inherent in, the decision to redomicile. The second article will detail the potential drawbacks and operational considerations of redomiciliation. For more on redomiciliation, see “Benefits and Burdens of Redomiciling a Hedge Fund to an E.U. Jurisdiction” (Oct. 27, 2011). For additional insight from Dillon Eustace, see “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014).

Hedge Funds Face Increased Margin Requirements Under Final Swap Rules (Part One of Two)

The U.S. prudential regulators recently adopted a joint final rule establishing minimum initial and variation margin requirements for certain non-cleared swaps. The CFTC adopted a substantially similar final rule for swaps not regulated by a U.S. prudential regulator. Hedge funds and other investment funds trading non-cleared swaps with registered swap dealers supervised by either the U.S. prudential regulators or the CFTC will be impacted by these final rules and will likely face increased costs of trading non-cleared swaps. In a two-part guest series, Fabien Carruzzo and Philip Powers – partner and associate, respectively, at Kramer Levin – discuss these final rules and analyze their impact on hedge funds. This first article addresses the calculation of a fund’s material swaps exposure, as well as the requirements under the final rules for covered swap dealers to collect and post initial and variation margin with respect to non-cleared swaps with their counterparties. The second article will address minimum transfer amounts; eligible collateral and haircuts; netting of exposure; documentation and industry initiatives; compliance obligations under the final rules; and the practical implications of the final rules on hedge funds. For additional insight from Carruzzo, see “OTC Derivatives Clearing: How Does It Work and What Will Change?” (Jul. 14, 2011). For more from Kramer Levin practitioners, see “‘Interval Alts’ Combine Benefits of Alternative Mutual Funds and Traditional Hedge Funds” (Jul. 16, 2015).

FCA Policy Statement Fine-Tunes Rules to Implement UCITS V As Deadline Looms

In July 2014, the E.U. adopted changes to its Directive on Undertakings for Collective Investment in Transferable Securities (UCITS), commonly referred to as “UCITS V.” Member states must implement UCITS V by March 18, 2016. In September 2015, the U.K. Financial Conduct Authority (FCA) issued a Consultation Paper seeking comment on its proposed rules to implement UCITS V. See “FCA Consults on Implementation of UCITS V Provisions Applicable to Managers” (Sep. 17, 2015); and “FCA Proposes Changes to Authorized Investment Funds Regulation” (Sep. 24, 2015). The responses the FCA received on the Consultation Paper were generally muted and concerned remuneration and disclosure requirements, as well as depositary rules. The FCA recently issued a Policy Statement which addresses those comments and makes final changes to its implementing regulations. This article examines the main provisions of the Policy Statement, including the transitional measures and operational difficulties that may impact UCITS managers and other regulated firms. For more on UCITS V, see “U.K. Government Proposes to Implement UCITS V Measures Applicable to Fund Managers” (Nov. 26, 2015). For more on UCITS, see “Are Alternative Investment Strategies Within the Spirit of UCITS?” (Jun. 8, 2012); and “The Implications of UCITS IV Requirements for Asset Management Functions” (Oct. 13, 2011).

Basel III Raises Prime Brokerage Costs for Hedge Fund Managers

Prime brokerage relationships are a critical source of financing and other services for hedge fund managers. See “Factors to Be Considered by a Hedge Fund Manager When Selecting a Prime Broker” (Dec. 4, 2014). However, as revealed by a recent survey conducted by the Alternative Investment Management Association (AIMA) and data and analytics firm S3 Partners (S3), regulatory requirements – particularly those around capital and leverage – are causing prime brokers to raise financing fees and to be more selective in choosing clients. As a result, hedge fund managers may have to think more strategically about the value they offer to prime brokers; opening an account and depositing assets may no longer be sufficient. In their survey of 78 asset managers, AIMA and S3 explored the effect of Basel III and other new regulations on prime brokerage relationships with hedge fund managers. This article captures their key findings. See also “Barclays Predicts Increased Financing Costs for Hedge Funds Due to Regulatory Changes Affecting Prime Broker Financing” (Oct. 18, 2012).

FCA Acting Chief Calls for Hedge Fund Managers to Take Greater Responsibility for Implementing MiFID II

In a recent speech delivered at Bloomberg’s offices in the City of London, Tracey McDermott, Acting Chief Executive of the U.K. Financial Conduct Authority (FCA), discussed several critical developments and initiatives that involve the FCA and that may affect hedge fund managers; outlined the FCA’s approach to wholesale market policy; and detailed the benefits and challenges of implementing MiFID II. Throughout her speech, McDermott emphasized the need for financial services firms, such as hedge fund managers, to take greater responsibility for the overall functioning of the industry and implementation of MiFID II. This article provides an overview of the points raised by McDermott. For insight from McDermott’s colleagues, see “Hedge Fund Managers Must Prepare for Benchmark Regulation” (Feb. 11, 2016); “FCA Director Summarizes 2015 Regulatory Initiatives Applicable to Hedge Fund Managers and Financial Markets” (Jan. 7, 2016); and “FCA Urges Hedge Fund Managers to Prepare for MiFID II” (Oct. 29, 2015).

Ropes & Gray Strengthens Private Investment Funds Practice

On February 16, 2016, Ropes & Gray announced that it has added Catherine Skulan as counsel to the firm’s private investment funds practice. Her arrival follows the recent addition of Edward Baer, who joined the firm’s investment management practice as counsel in San Francisco. Skulan has substantial experience in the formation of private investment funds, including pan-Asia and China-focused private equity funds; real estate funds; special situations and distressed investment funds; and co-investment and side-car vehicles. Baer’s 20-year career includes 11 years of in-house registered funds experience, during which he was involved with exchange-traded fund product development; fund distribution and marketing; acquisitions; and other strategic business matters. For insight from firm partners, see “Ropes & Gray Attorneys Discuss Implications for U.S. Hedge Fund Managers of the European Market Infrastructure Regulation” (Jul. 18, 2014); “Estate Planning Tips for Hedge Fund Managers” (Jun. 2, 2014); and “Ropes & Gray Attorneys Discuss the Impact on Private Fund Managers of Final Regulations Under the Volcker Rule” (Mar. 13, 2014).

Maarten Schellingerhout Joins Hogan Lovells Global Investment Funds Practice

Hogan Lovells has appointed Maarten Schellingerhout into its global investment funds practice. He will advise managers and institutional investors on investment management including fund formation, primary and secondary fund investments, co-investments and restructurings with a particular focus on private equity, infrastructure and private real estate. For more on co-investments, see our three-part series on “Co-Investments in the Hedge Fund Context”: “Pursuing Illiquid Opportunities While Avoiding Style Drift” (Feb. 21, 2014); “Structuring Considerations and Material Terms” (Feb. 28, 2014); and “Fiduciary Concerns, Conflicts and Regulatory Risks” (Mar. 7, 2014).