The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Current Issue Headlines

Vol. 8, No. 46 (Nov. 26, 2015) Print IssuePrint This Issue

  • Five Essential Articles for European Hedge Fund Managers from the HFLR 2015 Archive

    Over the course of 2015, the HFLR has substantially increased the scope and depth of our European content, as well as added editorial staff in London.  In light of the Thanksgiving holiday in the United States today, this issue of the HFLR features the five most read articles from 2015 focused on legal issues relevant to European hedge fund managers.  Next week (the week starting November 30, 2015), the HFLR will resume regular publication, that is, publication of new content focused on regulatory and related considerations applicable to hedge fund managers in the U.S., the U.K. and other jurisdictions.

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  • Liability and Incentive Fee Considerations Under ERISA for European Hedge Fund Managers (Part One of Three)

    As European hedge fund managers recognize the increasing concentration of investment capital in U.S. pension funds subject to the Employee Retirement Income Security Act of 1974 (ERISA), their appetite for unlocking access to such capital has grown.  This has led a number of European managers to actively seek investment from ERISA plans, notwithstanding the heightened compliance obligations which have traditionally deterred them from accepting ERISA plan assets into their funds.  This article, the first in a three-part series, discusses recent trends in ERISA fundraising by hedge fund managers based in the U.K. and other European jurisdictions and looks at the pertinent issues affecting those managers.  Specifically, it examines key difficulties relating to liability standards and incentive fees and analyzes various approaches to overcoming those issues.  The second article explores issues relating to prohibited transactions, reporting requirements and side letters under the ERISA regime, and the final article addresses concerns relating to indicia of ownership requirements, bond documentation and other overarching issues.  For more on ERISA, see “Structuring Hedge Funds to Avoid ERISA While Accommodating Benefit Plan Investors (Part Two of Two),” The Hedge Fund Law Report, Vol. 8, No. 6 (Feb. 12, 2015); and “What Should Hedge Fund Managers Expect When ERISA Plans Conduct Due Diligence On and Negotiate For Investments in Their Funds?,” The Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).

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  • How Hedge Fund Managers Should Respond to Tax Regulator Attacks on “Disguised Management Fees” (Part Two of Two)

    In an effort to limit arrangements in which hedge fund managers and other private fund managers receive interests in funds in exchange for waiving management fees (thereby deferring recognition of income and changing its character), tax regulators in the United States recently proposed regulations to treat some investment fund management fee waivers and other payments in lieu of management fees as “disguised payments for services,” with immediate income tax consequences.  The U.S. tax authorities are not the only ones trying to strip the disguises from management fees.  In the United Kingdom, the Finance Act 2015 introduced disguised management fee rules to combat creative strategies to convert what is in economic substance a management fee – calculated by reference to funds under management and taxed as income at the rate of 45% – to capital gains taxable at 28%.  A new bill will also change the taxation of “good carry.”  In a guest article, the second in a two-part series, George J. Schutzer and Timothy Jarvis of Squire Patton Boggs outline proposed actions in the U.K. and suggest steps for hedge fund managers and others to take in response to the rules in place and the proposed new rules in the U.S. and the U.K.  The first article describes common management fee waiver provisions and explains how the U.S. proposals would limit fee waivers that would be respected for tax purposes.  For more on proposals that could affect the taxation of hedge fund managers and their employees, 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),” The Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015); and “Potential Impact on U.S. Hedge Fund Managers of the Reform of the U.K. Tax Regime Relating to Partnerships and Limited Liability Partnerships,” The Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).

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  • U.K. Imposes New Statutory Duty of Responsibility on Hedge Fund Senior Managers

    The U.K. government issued a policy paper on October 15, 2015, announcing that it will extend a new Senior Managers and Certification Regime (Senior Managers Regime) to all sectors of the financial services industry, including hedge fund managers and other asset managers.  The Senior Managers Regime will increase the personal responsibility imposed on senior management personnel within hedge fund managers and other financial services firms and will be supported by robust enforcement powers for U.K. regulatory authorities.  It will create a new approval regime for senior managerial staff; include a statutory requirement for senior managers to take reasonable care to prevent regulatory breaches; introduce a new certification regime for certain junior staff; and provide new rules of conduct for senior managers, certified persons and other employees of hedge fund managers and other firms operating within the financial services industry.  This article summarizes the policy paper, setting out the background to and rationale for extending the Senior Managers Regime to hedge fund managers and other financial services firms; outlining the regime’s main features as they will apply to hedge fund managers; and noting the likely impact of the new regime on hedge fund managers.  For more on hedge fund manager employee liability, see “Employees of Hedge Fund Managers May Be Liable for Failing to Prevent Fraud,” The Hedge Fund Law Report, Vol. 8, No. 30 (Jul. 30, 2015); and “U.K. Appellate Court Holds That Hedge Fund Manager Employees May Be Personally Liable,” The Hedge Fund Law Report, Vol. 6, No. 9 (Feb. 28, 2013). 

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  • Changing Regulations May Restrict Hedge Fund Managers’ Use of Soft Dollars in Europe

    Up until relatively recently, the regulatory landscape surrounding soft dollars – or “soft commissions” – had been generally settled in both the U.S. and Europe.  The SEC last gave comprehensive guidance in this area in 2006, while the various European regulatory regimes likewise followed separate approaches with long histories, but in general concordance with the U.S. approach.  The practice, both in Europe and the U.S., had generally been for hedge fund managers to obtain investment research and other brokerage services with client commissions.  However, with the onset of the various Markets in Financial Instruments Directives (known as “MiFID I” and “MiFID II”) and other European initiatives in the past several years, particularly in the United Kingdom, the prognosis for trading and research activities across Europe is in upheaval.  In a guest article, Gerald T. Lins, general counsel of Voya Investment Management, examines the U.S. and U.K. practices for using soft dollars/commissions.  The article then explores the changes under MiFID I and MiFID II to the use of soft commissions in the E.U. and next steps in this area.  For more on soft dollars, see “U.K. Financial Conduct Authority Issues Feedback Statement Supporting Proposed E.U. Limits on Soft Dollars,” The Hedge Fund Law Report, Vol. 8, No. 9 (Mar. 5, 2015).

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  • U.K. Government Proposes to Implement UCITS V Measures Applicable to Fund Managers

    The Undertakings for Collective Investment in Transferable Securities (UCITS) Directive has played a key role in the development of the European investment funds industry, creating a harmonized European framework to regulate investment funds that raise capital from the public.  Commonly known as “UCITS V,” the latest update of the UCITS Directive enacted in July 2014 will introduce reforms in three main areas: depositaries, remuneration and national sanction regimes.  The UCITS V Directive must be implemented by March 18, 2016.  In the U.K., while the Financial Conduct Authority is responsible for implementing changes to its rules pertaining to the more technical elements of the UCITS V Directive, the U.K. government’s economic and finance ministry – HM Treasury (HMT) – is responsible for transposing the more structural elements of the UCITS V Directive into national law.  This article outlines HMT’s proposals for transposing UCITS V into U.K. law and discusses the likely impact on the industry arising from compliance with the relevant provisions, as set out in a consultation paper published by HMT on October 23, 2015.  The proposals are directly applicable to fund managers currently managing UCITS funds or contemplating the launch of UCITS products in the future.  For more, see “FCA Consults on Implementation of UCITS V Provisions Applicable to Managers,” The Hedge Fund Law Report, Vol. 8, No. 36 (Sep. 17, 2015); and “The Implications of UCITS IV Requirements for Asset Management Functions,” The Hedge Fund Law Report, Vol. 4, No. 36 (Oct. 13, 2011).

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