The Hedge Fund Law Report

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

Articles By Topic

By Topic: Registration

  • From Vol. 10 No.7 (Feb. 16, 2017)

    Malta’s New Notified AIF Vehicle Facilitates Quick Market Launches Without Requiring Regulatory Pre-Approval or Burdensome Ongoing Oversight

    In 2016, the Malta Financial Services Authority (MFSA) undertook a consolidation of its funds regime. This effort resulted in the addition of the notified alternative investment fund (Notified AIF) to Malta’s extensive range of fund structures. A Notified AIF is unique because it enables the timely launch of an alternative investment fund as long as it meets certain conditions to be “notified” to the MFSA by the AIF’s alternative investment fund manager. Under the Notified AIF framework, the MFSA focuses on regulating the product provider – in this case, the fund manager – rather than the fund product, which is what facilitates the launch of a Notified AIF without requiring pre-authorization by the MFSA. In a guest article, Dr. Yanika Fino, an associate at GANADO Advocates, describes the requirements for forming a Notified AIF, the types of funds that are eligible to use this vehicle and some of the pros and cons associated with pursuing this structure. For more on launching funds in Malta, see “What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta” (Jan. 26, 2017); and “European Alternative Funds: The Alternatives” (Jun. 24, 2009).

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  • From Vol. 9 No.34 (Sep. 1, 2016)

    CFTC Proposes Rule to Clarify Registration Obligations of Foreign CPOs and CTAs

    The Commodity Futures Trading Commission (CFTC) recently proposed to amend its rules to resolve ambiguity regarding whether certain commodity pool operators (CPOs) and commodity trading advisors (CTAs) located outside the United States are required to register. In a guest article, Nathan A. Howell and Joseph E. Schwartz, partner and associate, respectively, at Sidley Austin, review the recent rule proposal by the CFTC, along with the legislative history preceding it, and examine how the proposal would clarify the regulation requirements of foreign CPOs and CTAs. For additional insight from Sidley Austin partners, see “E.U. Market Abuse Scenarios Hedge Fund Managers Must Consider” (Dec. 17, 2015); “Recommended Actions for Hedge Fund Managers in Light of SEC Enforcement Trends” (Oct. 22, 2015); and coverage of Sidley Austin’s private funds event in New York City: Part One (Sep. 25, 2014); and Part Two (Oct. 2, 2014). For discussion of other CFTC regulatory matters, see “Hedge Fund Managers Face Imminent NFA Cybersecurity Deadline” (Feb. 25, 2016); and “CFTC Allows Hedge Fund Managers to Advertise” (Sep. 18, 2014).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    SEC Settlement Order Reignites Concerns Over Whether Private Fund Managers Must Register As Brokers

    One hallmark of being a “broker” is the receipt of transaction-based compensation. In 2013, the SEC’s David W. Blass suggested that a private equity fund manager that receives transaction-based fees in connection with a fund’s acquisition of portfolio companies should register as a broker under the Securities Exchange Act of 1934. Since then, there has not been conclusive guidance from the SEC on the topic. A recent settlement with a private equity fund manager that allegedly received transaction-based compensation and engaged in traditional brokerage activities has brought the issue back into the spotlight. This article summarizes the facts that led up to the SEC’s action, alleged violations and terms of the settlement. For more on the relationship between transaction-based compensation and broker registration, see “SEC No Action Letter Suggests That There May Be Circumstances in Which Recipients of Transaction-Based Compensation Do Not Have to Register As Brokers” (Feb. 21, 2014); and “Do In-House Marketing Activities and Investment Banking Services Performed by Private Fund Managers Require Broker Registration?” (Apr. 18, 2013).

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  • From Vol. 9 No.5 (Feb. 4, 2016)

    Going Private: Mechanical Considerations When Closing a Hedge Fund to Outside Investors (Part Three of Three)

    The decision by a hedge fund manager to transition to a family office or other private investment structure is only the first step in a potentially complicated process. A manager converting its fund faces issues involving notice to and redemption of outside investors; liquidation of significant portions of the fund’s portfolio; and payment of conversion costs. Throughout the process, managers must also ensure that investors are treated fairly. This final article in our three-part series details the mechanics of taking a hedge fund private, including redemption of outside investors and allocation of conversion costs. See “Dechert Global Alternative Funds Symposium Highlights Trends in Hedge Fund Expense Allocations, Fees, Redemptions and Gates” (May 21, 2015). The first article in the series examined the “going private” trend and explored the factors a hedge fund manager should consider when deciding whether to convert its hedge fund, as well as the options available once that decision has been made. The second article examined the operational considerations a hedge fund manager faces when converting its hedge fund, including ongoing regulatory obligations and staffing concerns.

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  • From Vol. 9 No.4 (Jan. 28, 2016)

    Going Private: Operational Considerations When Closing a Hedge Fund to Outside Investors (Part Two of Three)

    Hedge fund managers weigh the decision to return outside capital and transition to a family office or other private investment structure in order to free themselves from investor burdens, gain performance advantages or reduce regulatory obligations. However, taking a hedge fund private may not be the panacea that it first appears, as ongoing regulatory obligations persist despite the lack of outside investors in the converted vehicle. See “Benefits and Burdens for Hedge Fund Managers in Establishing or Converting to a Family Office” (Jun. 6, 2014); and “Staff of SEC Division of Investment Management Clarifies the Scope of the Family Office Rule” (Feb. 9, 2012). This article, the second in a three-part series, examines the operational considerations a hedge fund manager faces when converting its hedge fund, including ongoing regulatory obligations and staffing concerns. The first article explored the “going private” trend and the factors a hedge fund manager should consider when deciding whether to convert a hedge fund, as well as the options available once that decision has been made. The third article will detail the mechanics for taking a hedge fund private, including redemption of outside investors and costs of conversion.

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  • From Vol. 9 No.3 (Jan. 21, 2016)

    Going Private: Factors to Consider When Closing a Hedge Fund to Outside Investors (Part One of Three)

    In late 2015, BlueCrest Capital Management announced that it would be returning outside capital and transitioning to a private investment partnership, managing only assets of its partners and employees. In doing so, BlueCrest has joined the growing ranks of hedge fund managers who, for a number of reasons, have decided to close their funds to outside investment and convert into a private structure. Historically, hedge fund managers weary of investor demands; increased regulatory and compliance requirements; and potential publicity issues have typically converted to family office structures. See “Legal Mechanics of Converting a Hedge Fund Manager to a Family Office” (Dec. 1, 2011). However, there are options beyond a family office for taking a hedge fund private. This article, the first in a three-part series, explores the “going private” trend and the factors a hedge fund manager should consider when deciding to convert a hedge fund, as well as the options available once that decision has been made. The second article will examine the operational considerations a hedge fund manager faces when converting its hedge fund, including ongoing regulatory obligations and staffing concerns. The third article will detail the mechanics for taking a hedge fund private, including redemption of outside investors and costs of conversion.

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  • From Vol. 8 No.36 (Sep. 17, 2015)

    CFTC Requires Most Registered Commodity Pool Operators, Commodity Trading Advisors and Introducing Brokers to Join the NFA

    The Dodd-Frank Act requires hedge fund managers that engage in certain swap-related activities to register with the CFTC as either commodity pool operators (CPOs), commodity trading advisors (CTAs) or introducing brokers (IBs).  See “Do You Need to Be a Registered Commodity Pool Operator Now and What Does It Mean If You Do? (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Until now, such CFTC registrants have generally only been required to join the National Futures Association (NFA) if they were also engaged in commodities futures transactions.  To ensure that registrants engaging only in swap-related activities join the NFA – and thereby become “subject to the same level of comprehensive NFA oversight” – the CFTC recently adopted Final Rule 170.17 (Rule), which requires all registered CPOs and IBs, as well as many registered CTAs, to join the NFA.  This article summarizes the Rule, the relevant regulatory background and the CFTC’s rationale for adopting it.  For more on the impact of Dodd-Frank on hedge fund managers, see “How Have Dodd-Frank and European Union Derivatives Trading Reforms Impacted Hedge Fund Managers That Trade Swaps?,” The Hedge Fund Law Report, Vol. 6, No. 40 (Oct. 17, 2013).

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  • From Vol. 8 No.9 (Mar. 5, 2015)

    SEC Order Confirms the Agency’s Focus on Investment Advisers That Improperly Claim the Imprimatur of SEC Registration

    One area of the SEC’s focus in 2015 will be on managers who are ineligible for registration as investment advisers under the Investment Advisers Act but who, through fraudulent inflation of assets under management or other means, nevertheless improperly apply for and maintain such registrations.  As reported in The Hedge Fund Law Report, speaking at the Regulatory Compliance Association’s Compliance, Risk and Enforcement 2014 Symposium, Ken Joseph, associate director in the SEC’s New York Regional Office, stated that the SEC will be examining firms trying to take advantage of marketing or other benefits – perceived or actual – available only to SEC-registered investment advisers, when those firms should not be so registered.  See “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 One of Two),” The Hedge Fund Law Report, Vol. 8, No. 7 (Feb. 19, 2015).  In a recent action against such an improperly registered adviser, the SEC has confirmed this focus.

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  • From Vol. 7 No.47 (Dec. 18, 2014)

    SEC Chair White Describes the SEC’s Game Plan with Respect to the Asset Management Industry

    In a speech at a December 11, 2014 event sponsored by The New York Times DealBook, SEC Chair Mary Jo White laid out her agency’s agenda concerning the asset management industry.  First, White summarized the recent growth of the asset management industry and the SEC’s current tools to address conflicts of interest, registration, reporting and disclosure.  Second, White focused on the SEC’s plan to improve its grasp of portfolio composition risks and operational risks by: requiring better data reporting and risk controls, particularly with respect to derivatives; mandating that investment advisers create transition plans to prepare for major business disruptions; and requiring large investment advisers and funds to submit to annual stress testing.  For additional recent insight on SEC regulatory and enforcement priorities, see “SEC Investment Management Division Director Norm Champ Details Disclosure Challenges Facing Hedge and Alternative Mutual Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 46 (Dec. 11, 2014).

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  • From Vol. 7 No.26 (Jul. 11, 2014)

    SEC Sanctions Fund Adviser for Violation of “Pay to Play” Rule and for Failing to Register

    Rule 206(4)-5 (Rule) under the Investment Advisers Act of 1940, commonly known as the “pay to play” rule, prohibits an investment adviser from providing paid investment advisory services to a government entity for two years after the adviser or certain of its employees or executives make a contribution to an official of the government entity.  See “Key Elements of a Pay-to-Play Compliance Program for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 3, No. 37 (Sep. 24, 2010).  In a recent administrative order, the SEC sanctioned a private fund adviser for violating the Rule.  For an example of SEC leniency for an inadvertent violation of the Rule, see “SEC Excuses a Hedge Fund Manager’s Inadvertent Violation of the Pay to Play Rule,” The Hedge Fund Law Report, Vol. 7, No. 3 (Jan. 23, 2014).

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  • From Vol. 6 No.43 (Nov. 8, 2013)

    KPMG/AIMA/MFA Survey Quantifies the Impact of the AIFMD, FATCA, Form PF and Adviser/CPO Registration on Hedge Fund Manager Compliance Budgets

    KPMG International, in cooperation with the Alternative Investment Management Association and the Managed Funds Association, recently published a report detailing findings from its survey of 200 hedge fund managers around the world who have, in the aggregate, approximately $910 billion in assets under management.  The survey generally covered the impact of recent regulatory changes on managers’ compliance expenditures, operations and product offerings.  Specifically, the survey analyzed how size and geography impact manager compliance costs; key regulatory drivers of recent increases in manager compliance expenditures; manager projections for expenditures on outside service providers; impact of regulatory developments on manager operations (including whether regulatory changes would cause a manager to stop doing business or move from a jurisdiction); and manager predictions about future offerings of registered products such as funds organized pursuant to the EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, or funds registered pursuant to the U.S. Investment Company Act of 1940 (mutual funds).  See “Are Alternative Investment Strategies Within the Spirit of UCITS?,” The Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012); “Citi Prime Finance Report on Liquid Alternatives Describes a Massive Capital Raising Opportunity for Hedge Fund Managers Willing to Go Retail (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 21 (May 23, 2013).  This article summarizes key findings of the survey.

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  • From Vol. 5 No.9 (Mar. 1, 2012)

    Registration, Reporting, Disclosure and Operational Consequences for Hedge Fund Managers of the SEC’s New “Regulatory Assets Under Management” Calculation

    The SEC’s newly-adopted assets under management (AUM) calculation, known as an investment adviser’s “regulatory assets under management” (Regulatory AUM), will have numerous important regulatory implications for hedge fund managers.  Among other things, the calculation will govern whether the manager must or may register with the SEC as an investment adviser; whether the manager must file Form ADV; and which parts, if any, of Form PF the manager must complete and file.  See “Former SEC Commissioner Paul Atkins Discusses the Big Issues Raised by Form PF: Law, Operations, Confidentiality, Risk Management, Disclosure, Enforcement and Policy,” The Hedge Fund Law Report, Vol. 5, No. 8 (Feb. 23, 2012).  Unfortunately for many hedge fund managers, the calculation of a firm’s Regulatory AUM is quite different from the calculation of the firm’s traditional AUM.  Also, in certain circumstances, large hedge fund managers may need to calculate their Regulatory AUM for each month.  Therefore, hedge fund managers must understand their Regulatory AUM and arrange to have it calculated in a timely fashion to ensure that they will comply with applicable registration and reporting requirements.  This article begins by defining Regulatory AUM and discussing how to calculate it.  The article then discusses the applicability of a firm’s Regulatory AUM with respect to the hedge fund adviser registration regime; the various exemptions from adviser registration; and the various new reporting obligations imposed on hedge fund advisers, including those relating to Form PF.  The article concludes with an analysis of some of the challenges associated with Regulatory AUM and specific guidance on navigating such challenges.

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  • From Vol. 5 No.7 (Feb. 16, 2012)

    How Should Hedge Fund Managers Determine Which of Their Advisory Affiliates Should Register with the SEC?

    On January 18, 2012, the SEC’s Division of Investment Management (Staff) issued a no-action letter in response to a request for guidance from the ABA Subcommittee on Hedge Funds seeking confirmation as to whether certain affiliates of an investment adviser must separately register with the SEC.  This article discusses the Staff guidance in detail and outlines the implications of the guidance for hedge fund managers.

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  • From Vol. 4 No.24 (Jul. 14, 2011)

    Will Hedge Fund Managers That Do Not Have To Register with the SEC until March 30, 2012 Nonetheless Have To Register in New York, Connecticut, California or Other States by July 21, 2011?

    Historically, many hedge fund managers have avoided registering with the SEC as investment advisers in reliance on Section 203(b)(3) of the Investment Advisers Act of 1940, as amended (Advisers Act).  That section – often referred to as the “private adviser exemption” – provided that an investment adviser would not have to register with the SEC if it (1) had fewer than 15 clients in the preceding 12 months, (2) did not hold itself out generally to the public as an investment adviser and (3) did not act as an investment adviser to a registered investment company or business development company.  The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010 (Dodd-Frank Act) repealed Section 203(b)(3) of the Advisers Act, effective as of the July 21, 2011 anniversary of the effective date of the Dodd-Frank Act.  However, the Dodd-Frank Act also authorized the SEC to delay (beyond July 21, 2011) the registration deadline for hedge fund managers that (1) previously avoided registration based on the private adviser exemption and (2) were not eligible for another registration exception.  On June 22, 2011, the SEC exercised this authority and delayed until March 30, 2012 the date by which hedge fund managers that are no longer eligible for a federal registration exemption (as of July 21, 2011) will have to register with the SEC.  The majority of hedge fund industry participants greeted the federal registration deadline delay with a sigh of relief (although a vocal minority noted that the delay penalized managers that scrambled to prepare).  However, the federal registration relief created a state registration headache for many hedge fund managers.  Specifically, the investment adviser registration laws or rules of various states effectively incorporate the federal private adviser exemption by reference.  The federal private adviser exemption will be repealed as of July 21, 2011.  Therefore, as of July 21, 2011, states with laws or rules that incorporate the federal private adviser exemption by reference will no longer have effective registration exemptions.  Absent state-level registration deadline delays or other state-level exemptions, hedge fund managers face the prospect of required registration in various states.  What should hedge fund managers do?

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  • From Vol. 4 No.23 (Jul. 8, 2011)

    Recent No-Action Letter Suggests That the SEC Will Not Require Registration by a U.S. “Captive” Investment Advisory Subsidiary of a Foreign Insurance Company

    In a letter dated June 30, 2011, the SEC’s Division of Investment Management (Division) confirmed that it would not recommend enforcement action to the SEC if the wholly-owned U.S. asset management subsidiary of a Japanese insurance company did not register with the SEC as an investment adviser.  For hedge fund managers, there are two potentially interesting aspects of this no-action letter, and one aspect of the no-action letter that limits its application.  The two potentially interesting aspects of the no-action letter are: First, it is one of the few pieces of authority, outside of rule releases, dealing with the real world implications of the elimination of the private adviser exemption by the Dodd-Frank Act.  (This elimination will happen automatically as of July 21, 2011, though the registration due date has been delayed to March 30, 2012.)  Second, at a broad level, it deals with registration questions in the context of global affiliate relationships – an area fraught with ambiguity, and one on which hedge fund industry participants are eager for more SEC guidance.  See “Impact of the Foreign Private Adviser Exemption and the Private Fund Adviser Exemption on the U.S. Activities of Non-U.S. Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 16 (May 13, 2011).  However, unfortunately for those seeking guidance, the SEC did not focus on either of the foregoing two topics in its analysis.  Rather, the primary basis for the SEC’s grant of no-action relief, and the focus of its analysis, was more straightforward and less generalizable.

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  • From Vol. 4 No.21 (Jun. 23, 2011)

    SEC Delays Registration Deadline for Hedge Fund Advisers, and Clarifies the Scope and Limits of Registration Exemptions for Private Fund Advisers, Foreign Private Advisers and Family Offices

    At an open meeting held on June 22, 2011, the Securities and Exchange Commission adopted and amended rules that will directly affect the registration, reporting and disclosure obligations of U.S. and non-U.S. hedge fund managers.  While the texts of most of those rules or rule amendments remain to be published as of this writing, comments by SEC commissioners at the open meeting outlined the general scope of the final rules and amendments.  Of particular relevance to hedge fund managers, the SEC addressed the following topics at the open meeting: delay of registration and reporting deadlines; who may and must register with the SEC and the states based on assets under management; the private fund adviser exemption; the foreign private adviser exemption; continuing relevance of the Unibanco no-action letter for global hedge fund sub-­advisory relationships; filing, recordkeeping and examination obligations of exempt reporting advisers; and the exemption from registration for family offices.  This article offers more detail on the SEC’s statements on each of the foregoing topics at the open meeting.

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  • From Vol. 4 No.16 (May 13, 2011)

    Impact of the Foreign Private Adviser Exemption and the Private Fund Adviser Exemption on the U.S. Activities of Non-U.S. Hedge Fund Managers

    Passage of the Dodd-Frank Act and relevant SEC rulemaking has changed the regulatory landscape for non-U.S. hedge fund managers that have or plan to establish an advisory presence in the U.S. or that have or plan to target U.S. investors.  Generally – and despite references to “international comity” in one of the relevant proposed rule releases – the Dodd-Frank Act has increased the regulatory burden on non-U.S. hedge fund managers wishing to access the U.S. market.  Or, put another way, Dodd-Frank has narrowed considerably the range of conduct in which non-U.S. managers may engage without getting caught in the purview of U.S. investment adviser registration, or many of its substantive burdens.  This article provides detailed synopses of the relevant provisions of the foreign private adviser exemption and the private fund adviser exemption, focusing in particular on: rules relating to counting clients and investors; measuring “regulatory assets under management”; definitions of “place of business,” “in the United States” and other relevant terms; and recordkeeping and reporting obligations and examination exposure of “exempt reporting advisers.”  This article concludes by discussing how the exemptions may impact U.S. activities typically engaged in by non-U.S. hedge fund managers, such as marketing to U.S. tax-exempt entities and sourcing U.S. investment opportunities.

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  • From Vol. 4 No.16 (May 13, 2011)

    Two Recent Statements from SEC Chairman Mary Schapiro Suggest That Hedge Fund Adviser Registration and Compliance Date Will Be Extended Until the First Quarter of 2012

    In a letter dated April 8, 2011 to the President of the North American Securities Administrators Association, Robert Plaze, Associate Director of the SEC’s Division of Investment Management (Division), indicated that the Division expects “that the Commission will consider extending the date by which [covered hedge fund advisers] must register and come into compliance with the obligations of a registered adviser until the first quarter of 2012.”  See “SEC Anticipates Extension of Compliance Dates for Hedge Fund Adviser Registration and Mid-Sized Adviser Deregistration,” The Hedge Fund Law Report, Vol. 4, No. 12 (Apr. 11, 2011).  While the Plaze letter did not constitute formal SEC action, two recent statements from SEC Chairman Mary Schapiro indicate an increased likelihood of formal action delaying the date by which hedge fund advisers must register and comply with the obligations of registered investment advisers.

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  • From Vol. 4 No.15 (May 6, 2011)

    PerTrac’s Eighth Annual “Sizing the Hedge Fund Universe” Study Identifies Trends Regarding AUM, Domicile, Currency and Performance Information Reporting for Single Manager Hedge Funds, Funds of Funds and Commodity Trading Advisors

    In its recently released study entitled “Sizing the 2010 Hedge Fund Universe” (Study), software and services provider PerTrac analyzed information from ten leading global hedge fund databases to identify trends with respect to assets under management, domicile, currency and performance information reporting by single manager hedge funds, funds of funds and commodity trading advisors.  The Study generally found that the overall number of entities that existed and reported performance information to databases increased during 2010 over 2009, but that the growth was unevenly distributed among the types of entities under analysis.  Moreover, the Study highlighted the significant number of small managers, and thus, from a regulatory perspective, implicitly emphasized the increased importance of state-level hedge fund adviser registration.  See “Connecticut Welcomes You! Federal Financial Regulatory Reform Restores Connecticut’s Authority over Hedge Fund Advisers,” The Hedge Fund Law Report, Vol. 3, No. 30 (Jul. 30, 2010).  This article summarizes the key findings of the Study.  Also, where relevant, this article includes links to other articles in The Hedge Fund Law Report offering concrete guidance to managers on the legal and regulatory implications of the business trends identified by the Study.  See, e.g., “Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).

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  • From Vol. 4 No.12 (Apr. 11, 2011)

    SEC Anticipates Extension of Compliance Dates for Hedge Fund Adviser Registration and Mid-Sized Adviser Deregistration

    In a letter dated April 8, 2011 to the President of the North American Securities Administrators Association, Robert Plaze, Associate Director of the SEC’s Division of Investment Management (Division), indicated that the SEC “will consider providing additional time” for hedge fund managers affected by two key registration provisions to comply with those provisions.  The letter does not constitute formal SEC action and the conservative course for hedge fund managers is to proceed with preparations for relevant registration requirements until the SEC issues formal guidance.  However, the letter appears to indicate a recognition on the part of the Division that the increasingly imminent July 21, 2011 compliance date threatens to yield unintended consequences for hedge fund managers and investors, and the SEC itself.

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  • From Vol. 4 No.7 (Feb. 25, 2011)

    Who Should Newly Registered Hedge Fund Managers Designate as the Chief Compliance Officer and How Much Are Chief Compliance Officers Paid?

    The Dodd-Frank Act (Dodd-Frank) will require hedge fund managers to appoint a chief compliance officer (CCO) for two reasons – an explicit reason and an implicit reason.  Explicitly, Dodd-Frank will require registration (by July 21, 2011) by hedge fund managers with assets under management in the U.S.: (1) of at least $150 million that manage solely private funds; or (2) between $100 million and $150 million that manage at least one private fund and at least one other type of investment vehicle (for example, a managed account).  Registered hedge fund managers will be subject to SEC Rule 206(4)-7, which requires, among other things, registered investment advisers to “designate” (note: not “hire”) a CCO to administer their compliance policies and procedures.  Implicitly, Dodd-Frank is not only the cause of major regulatory change, but also the effect of a changed regulatory mindset.  Post-Dodd-Frank, there is more regulation – considerably more – and more vigorous enforcement of new and existing regulation.  Much of that regulation applies with equal force to registered and unregistered hedge fund managers.  Most notably, insider trading and anti-fraud rules apply to hedge fund managers regardless of their registration status.  See “How Can Hedge Fund Managers Avoid Insider Trading Violations When Using Expert Networks?  (Part One of Three),” The Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  Recognizing this, even hedge fund managers beneath the relevant AUM thresholds are considering the appointment of a CCO (if they do not already have one).  For hedge fund managers considering the appointment of a CCO – and even for managers that currently have a CCO but are reevaluating how they staff the role – there are three basic approaches: (1) hire a new internal person to serve exclusively as CCO; (2) add the CCO title and duties to the existing portfolio of a current internal person, such as the general counsel (GC), chief operating officer (COO) or chief financial officer (CFO); or (3) outsource the role to a third-party compliance consulting or similar firm.  Which of these approaches makes sense, individually or in combination, depends on the size, strategy, complexity, resources, history and culture of the management company, among other factors.  In short, deciding who to designate as your CCO is a complex decision, and an increasingly important one.  The CCO is often the last bastion before a major compliance or operational failure, and as recent events demonstrate, those sorts of failures typically pose more franchise risk than bad investment calls.  See “Can the Chief Compliance Officer of a Hedge Fund Manager be Terminated for Investigating a Potential Compliance Violation by the Manager's Principal, CEO or CIO?,” The Hedge Fund Law Report, Vol. 4, No. 2 (Jan. 14, 2011).  The basic purpose of this article is to identify the pros and cons of each of the three foregoing approaches to designating a CCO.  To do so, this article discusses: what Rule 206(4)-7 specifically requires and does not require; the relative benefits and burdens of hiring a dedicated CCO, assigning the role to an existing person and outsourcing the role; hybrid approaches that incorporate the best elements of outsourcing and internal work; counterintuitive insights with respect to the demand for compliance professionals in the current environment; and – perhaps most importantly to anyone in, considering or hiring for a CCO role – specific compensation numbers for compliance professionals at hedge fund managers, employees at hedge fund managers who add a CCO role to other roles and dedicated CCOs, and the “market” for fees payable to outsourced CCO firms.  (We thank David Claypoole, Founder and President of Parks Legal Placement LLC, for providing this detailed insight on CCO compensation numbers.)

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  • From Vol. 3 No.39 (Oct. 8, 2010)

    Does Dodd-Frank Enable Certain Hedge Fund Managers to Elect Between Registration with the SEC and CFTC?

    The working consensus in the hedge fund industry appears to be that Dodd-Frank will materially expand the range of hedge fund managers required to register with the SEC as investment advisers.  A less-frequently told story, if it has been told at all, is that the plain language of Dodd-Frank may, subject to rulemaking, enable certain hedge fund managers to elect between registration with the SEC and CFTC – a sort of regulatory franchise previously reserved for banking institutions.  Put slightly differently, Dodd-Frank may contain an expansive but as yet under-examined exemption from SEC registration for certain hedge fund managers – an exemption, moreover, that is not based on assets under management.  That exemption – if indeed it is one – is contained in Section 403 of Dodd-Frank.  Here’s how it would work.

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  • From Vol. 3 No.36 (Sep. 17, 2010)

    Three Significant Legal Pitfalls for Hedge Fund Marketers, and How to Avoid Them

    Until recently, the generally held perception was that the worst a hedge fund marketer could do is fail to raise money.  But then came the credit crisis, a raft of new regulations, a newly enlarged and invigorated SEC and a tectonic shift in the hedge fund investor base in favor of more public and private pension funds and other retirement plans.  In this fraught new operating environment, hedge fund marketers can do more than fail to benefit the fund: they can affirmatively harm the fund and manager.  In particular, marketers can, in different contexts: jeopardize fees; render ideal investors off-limits; subject a manager to complex regulatory schemes from which the manager would otherwise be exempt; and give investors the right to rescind their investments.  This article details three significant legal pitfalls that can give rise to these and other harms, and suggests ways to avoid them.

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  • From Vol. 3 No.15 (Apr. 16, 2010)

    Does the IOSCO Hedge Fund Disclosure Template Foreshadow the Content of Hedge Fund and Hedge Fund Adviser Disclosures to be Required by the SEC?

    On February 25, 2010, the International Organization of Securities Commissions’ (IOSCO) Technical Committee published a global template (IOSCO Template) listing suggested categories of information to be collected from hedge funds and hedge fund managers by national securities regulators.  According to Kathleen Casey, Chairman of the IOSCO Technical Committee and a Commissioner of the U.S. Securities and Exchange Commission (SEC), the IOSCO Template seeks to: (1) enable the collection of comparable data by regulators in different jurisdictions; (2) facilitate sharing of that data among regulators; (3) facilitate monitoring of systemic risk; (4) prevent gaps in regulatory reporting requirements; and (5) inform the legislative processes in jurisdictions considering hedge fund adviser registration bills, such as the U.S.  See “U.S. House of Representatives Holds Hearing on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009).  Broadly, the IOSCO Template seeks to effectuate these goals by collecting data in four categories: (1) hedge fund trading activities; (2) the markets in which hedge funds operate; (3) hedge fund credit and funding information; and (4) hedge fund counterparty data.  The IOSCO Template builds on the principles embodied in the IOSCO Technical Committee’s June 2009 report endorsing mandatory registration for hedge fund managers.  See “IOSCO Report Suggests Mandatory Registration for Hedge Fund Managers and Prime Brokers,” The Hedge Fund Law Report, Vol. 2, No. 26 (Jul. 2, 2009).  IOSCO is an international organization whose members include national securities regulators.  Generally, its pronouncements have persuasive, but not legal, force.  See “Will Hedge Fund Industry Self-Regulatory Codes, Such as the ‘Standards’ Promulgated by The Hedge Fund Standards Board, Preempt Additional Hedge Fund Regulation or Complement It?,” The Hedge Fund Law Report, Vol. 2, No. 16 (Apr. 23, 2009). In parallel, on March 15, 2010, Senate Banking Committee Chairman Christopher Dodd (D-CT) released a Chairman’s Mark of the comprehensive financial reform bill (Dodd Bill) that he introduced as a Discussion Draft in November 2009.  A week later, the Senate Banking Committee passed Chairman Dodd’s bill on a party line vote, thereby sending the bill to the Senate floor for debate, and approved a package of technical amendments to the bill.  Notably, the Dodd Bill would rescind the “private adviser exemption” of Section 203(b)(3) of the Investment Advisers Act of 1940, thus requiring most hedge fund managers to register with the SEC as investment advisers.  Also, the Dodd Bill would require hedge fund advisers to maintain, and potentially to file with the SEC, records and reports pertaining to assets under management, leverage, counterparty exposure, other trading and operational matters and “such other information as the SEC determines is necessary and appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”  Importantly, the Dodd Bill includes provisions requiring the SEC, a to-be-created Financial Stability Oversight Council (FSOC) and any department, agency or self-regulatory organization that receives reports or information from the SEC (which the SEC in turn received from a hedge fund manager) to maintain the confidentiality of those reports and that information.  The IOSCO Template contains no analogous confidentiality provision. In short, the Dodd Bill lists categories of information required to be disclosed by registered hedge fund advisers and delegates considerable rulemaking authority to the SEC to expand those categories or add additional categories.  Generally, the IOSCO Template calls for a broader range of disclosures from hedge fund advisers than the Dodd Bill.  Especially given SEC Commissioner Casey’s role as Chairman of the IOSCO Technical Committee, hedge fund industry participants are wondering whether the SEC will look to the IOSCO Template when proposing rules relating to required disclosures by registered hedge fund advisers.  (This presumes, of course, that the hedge fund adviser registration provision in the Dodd Bill or a similar provision in another bill will become law, and the broad industry consensus is that such a provision will become law.)  Sources interviewed by The Hedge Fund Law Report suggested that SEC-required hedge fund adviser disclosures are likely to include more than what is included in the Dodd Bill but less than what is included in the IOSCO Template.  In an effort to assist hedge fund managers in preparing for an imminent registration requirement, and the concomitant disclosures it may require, this article: provides a chart comparing the categories of disclosure called for by the IOSCO Template and the Dodd Bill, showing precisely what is included in each and where they differ; discusses the confidentiality provisions in the Dodd Bill; and analyzes the potential downsides of such disclosures, as well as the potential upsides of such disclosures.  (Counterintuitive though it may sound, there may be practical benefits associated with the required disclosures.)

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  • From Vol. 2 No.47 (Nov. 25, 2009)

    How Will Registration and Reporting Impact Hedge Fund Managers? An Interview with Todd Groome, Non-Executive Chairman of the Alternative Investment Management Association (Part 2)

    On November 3, 2009, the Alternative Investment Management Association (AIMA) reiterated its support for the registration of hedge fund managers operating in the U.S. and for the reporting of systemically relevant information by larger managers to national authorities in the interest of financial stability.  The following day, the Financial Services Committee of the U.S. House of Representatives, by a vote of 41 to 28, approved a bill that would impose a registration mandate, The Private Fund Investment Advisers Act of 2009, sponsored by Rep. Paul Kanjorski (D-PA).  See “U.S. House of Representatives Holds Hearings on Hedge Fund Adviser Registration,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009); “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  The Hedge Fund Law Report recently interviewed Todd Groome, who since December 2008 has served as Non-Executive Chairman of the AIMA.  (Before assuming his current role, Groome was an Advisor in the Monetary and Capital Markets Department of the International Monetary Fund.)  Our interview focused on topics including: the range of appropriate information for financial reports to national authorities; the capacity of administrators to analyze and act on that information; the disproportionate costs of compliance with reporting requirements for smaller managers; the need to preserve the confidentiality of the information (in its pre-aggregated form) that may be reported by managers; the sources of systemic risk and how to mitigate it; the sharing of information among national authorities; the development of an official multi-national information template; the threat of a tax-driven flight of talent and capital from London; sound practices for hedge fund administrators; the continued viability of an in-house administration option; and the policy or politics behind last year’s bans on short selling in the financial services industry in both the U.S. and the U.K.  The first half of the full transcript of that interview appeared in last week’s issue of The Hedge Fund Law Report.  The remainder of the full transcript is included herein.

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  • From Vol. 2 No.42 (Oct. 21, 2009)

    U.S. House of Representatives Holds Hearing on Hedge Fund Adviser Registration

    On October 6, 2009, the U.S. House of Representatives, Financial Services Committee held a hearing on three legislative proposals regarding: (1) investor protection; (2) private fund adviser registration; and (3) insurance information.  The proposals, introduced by Rep. Paul Kanjorski (D-Pa.), Chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, are aimed at reforming the regulatory structure of the financial services industry and largely mirror proposals released by the Senate and the Obama administration.  See also “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  At the sparsely-attended hearing, regulators and industry advocates largely expressed support for the proposals.  Rep. Spencer Bachus (R-Al.), for example, called private funds, including hedge funds, “a valuable cog in our economy.”  (Notably, however, the hearings took place before charges against Raj Rajaratnam of the Galleon Group were made public.  See “Billionaire Founder of Hedge Fund Manager Galleon Group, Raj Rajaratnam, Charged in Alleged Insider Trading Conspiracy,” above, in this issue of The Hedge Fund Law Report.  While the charges against Rajaratnam and others have more to do with a group of allegedly bad actors, and less to do with hedge funds per se, press reports already have begun to conflate the hedge fund structure with the alleged insider trading.)  Despite the overall productive tone of the hearing, a major question remains: how quickly will Congress move with the proposed hedge fund adviser registration legislation?  This article summarizes the most relevant topics of discussion at the hearing, including commentary from members of Congress on the three bills, and concludes with a discussion of likely timing of legislative action.

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  • From Vol. 2 No.42 (Oct. 21, 2009)

    Hedge Fund Association Hosts Capitol Hill Symposium Focused on Hedge Fund Adviser Registration and Hedge Fund Industry Regulation

    On October 5, 2009, the Hedge Fund Association (HFA) held its third annual Capitol Hill Symposium in Washington, DC.  This year’s symposium addressed many of the regulatory proposals pending before Congress that would affect the global hedge fund industry.  Although there are numerous bills currently pending, the symposium focused on two recent proposals in the House of Representatives: (1) the Investor Protection Act, which would hold broker-dealers that provide investment advice to the same fiduciary duty standard as investment advisers; and (2) the Private Fund Adviser Registration Act, which would require most hedge fund managers to register with the Securities Exchange Commission as investment advisers.  See “U.S. House of Representatives Holds Hearing on Hedge Fund Adviser Registration,” above, in this issue of The Hedge Fund Law Report.  See also “House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009).  Rep. Paul Kanjorski (D-Penn.), the sponsor of the bills, spoke at the symposium, offering his thoughts on the need for and timing of the legislation.  We discuss the more noteworthy ideas raised at the symposium, including: The Hedge Fund Association’s position on hedge fund regulation and the rationale for its position; Rep. Kanjorski’s keynote address; credit ratings reform; international coordination of regulatory efforts; industry reactions to the Investor Protection Act and Private Fund Adviser Registration Act; and the practical risks inherent in increased regulation of the hedge fund industry.

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  • From Vol. 2 No.41 (Oct. 15, 2009)

    House Subcommittee Considers Bill Requiring U.S. Hedge Fund Advisers with Over $30 Million in Assets Under Management to Register with SEC

    On October 1, 2009, in an effort to ensure that “everyone who swims in our capital markets has an annual pool pass,” Representative Paul E. Kanjorski (D-PA) released a “discussion draft” of a bill that would amend the Investment Advisers Act of 1940 (IAA) by requiring advisers to certain unregistered investment companies, including hedge funds, to register with and provide information to the Securities and Exchange Commission (SEC).  The proposed “Private Fund Investment Advisers Registration Act of 2009” (Draft) was released just prior to a House Financial Services Subcommittee on Capital Markets hearing held on October 6, 2009.  The bill generally would require U.S. hedge fund advisers with assets under management collectively across their funds of over $30 million to register with the SEC, even if the adviser has fewer than 15 “clients.”  Kanjorski’s draft essentially mirrors the U.S. Treasury Department’s bill by the same name which was released in July 2009 (Treasury Bill).  See “U.S. Treasury Department Proposes Legislation Requiring Registration of Hedge Fund Advisers,” The Hedge Fund Law Report, Vol. 2, No. 29 (Jul. 23, 2009).  This article analyzes the Draft and the Treasury bill, detailing the mechanics of each and noting how they are similar and different on points such as the collection of systemic risk data, information required to be reported, a registration exemption for venture capital fund advisers and expansion of the SEC’s authority to obtain information on the identity, investments or affairs of any client of a hedge fund adviser.  This article also details industry reactions to the Draft as embodied in testimony by representative of the Managed Funds Association, the Private Equity Council, the Coalition of Private Investment Companies and the National Venture Capital Association at the October 6 hearing before the House Financial Services Subcommittee on Capital Markets.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    U.S. Treasury Department Proposes Legislation Requiring Registration of Hedge Fund Advisers

    On July 15, 2009, the United States Treasury Department published its proposed Private Fund Investment Advisers Registration Act of 2009 (Act).  The Act reflects proposals contained in the Obama Administration’s recent White Paper on financial reform.  (For more on the White Paper, see “The Obama Administration Outlines Major Financial Rules Overhaul, Announces Greater Scrutiny for Hedge Funds and Derivatives,” The Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009)).  If passed, the Act would amend the Investment Advisers Act of 1940 (Advisers Act) and require registration with the SEC of nearly all advisers to hedge funds and other large private investment funds.  The Act would not require the funds to register directly, but their advisers would have to report, albeit confidentially, on the funds they advise.  This article summarizes the Act’s most salient provisions and its implications for the hedge fund community.

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  • From Vol. 2 No.5 (Feb. 4, 2009)

    Levin and Grassley Introduce Bill that would Require Hedge and Other Private Funds to Register to Avoid Regulation as Investment Companies

    On January 29, 2009, Senators Carl Levin (D-Michigan) and Charles Grassley (R-Iowa) introduced a bill that would, if enacted, require certain hedge and other private funds to register with the SEC, file an annual disclosure document, maintain books and records in accordance with SEC rules and co-operate with SEC information or examination requests.  The Hedge Fund Transparency Act (HFTA), as the bill is titled, would apply to funds currently excluded from the definition of “investment company” under Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, and that have at least $50 million in assets under management.  That is, it would apply to many hedge funds, and also to many private equity, venture capital and other private funds (and thus the words “hedge fund” in the title of the act suggest that the bill is more limited than it in fact is).  In exchange for registering and performing the other required actions, covered funds would remain exempt from regulation as investment companies.  In addition, the HFTA would require hedge funds to establish anti-money laundering programs and report suspicious transactions.  We provide a comprehensive overview of the mechanics of the bill, discuss whether it includes or presages a hedge fund adviser registration requirement and report on responses to the bill from hedge fund industry participants and Washington insiders.

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  • From Vol. 2 No.3 (Jan. 21, 2009)

    How Hedge Fund Managers Can Prepare for the Virtual Inevitability of Registration

    Despite the fact that the origins of the present economic crisis can be traced largely to subprime mortgage lending and repackaging, that the most severe blow ups with the most wide-ranging ramifications occurred at the most highly regulated institutions, that Bernard Madoff did not manage hedge funds, as such – despite all this, increased hedge fund regulation during the coming year has come to be understood in the industry as a virtual inevitability.  Among the chief anticipated components of any forthcoming regulatory package is likely to be a delegation from Congress to the SEC to require registration of hedge fund advisers.  And most hedge fund law watchers expect any registration rule proposed by the SEC to be crafted with the 2006 Goldstein decision firmly in mind, so that the rule hews closely enough to any mandate from Congress to be entitled to Chevron deference.  (By the same token, any delegation from Congress on this point is likely to be broad enough to accommodate even relatively expansive rulemaking by the SEC.)  In a rule finalized in December 2004, the SEC required certain hedge fund advisers to register with the agency, and in June 2006, the D.C. Circuit Court of Appeals vacated the rule.  After some background on the 2004 rule and registration in general, we offer practical insight on what hedge fund managers can do to prepare for a registration requirement.

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