Articles By Topic
By Topic: JOBS Act
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From Vol. 6 No.18 (May 2, 2013)
Three Recommendations to Help Hedge Fund Managers Avoid False GIPS Compliance Claims in Marketing Materials
Hedge fund managers engaged in raising capital are increasingly looking to present their performance results in compliance with the Global Investment Performance Standards (GIPS). GIPS provide prospective investors with additional assurances about the integrity of such performance results. At the same time, with the passage of the Jumpstart Our Business Startups Act, the SEC has become increasingly concerned about public advertising by private fund managers and has made it a priority to review performance advertising presentations during presence examinations of hedge fund managers. See “OCIE Director Carlo di Florio and Asset Management Unit Chief Bruce Karpati Address Examination and Enforcement Priorities for Hedge Fund Managers at the RCA’s Compliance, Risk & Enforcement 2012 Symposium,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013); and “How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated with the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?,” The Hedge Fund Law Report, Vol. 6, No. 10 (Mar. 7, 2013). In a development that may foreshadow heightened scrutiny in this area, the SEC has initiated administrative proceedings against an investment adviser and its principal for allegedly falsely claiming that the investment adviser’s performance results complied with advertising guidelines set forth in GIPS. Although compliance with the GIPS standards are voluntary, the SEC has made clear that managers who advertise GIPS compliance, but whose advertisements and marketing materials do not actually provide all of the information required by GIPS, are subject to sanction under the anti-fraud provisions and advertising rules contained in the Investment Advisers Act of 1940. This article summarizes the SEC’s factual and legal allegations in this case and provides three recommendations for hedge fund managers interested in reducing the risk of false GIPS compliance claims. For an article that identifies some of the hedge fund specific issues related to GIPS-compliant performance presentations, see “A Step-By-Step Guide to GIPS Compliance for Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 4, No. 44 (Dec. 8, 2011).
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From Vol. 6 No.12 (Mar. 21, 2013)
How Can Hedge Fund Managers Wishing to Rely on the JOBS Act’s Advertising Relief Enhance Their Accredited Investor Due Diligence Procedures?
The Jumpstart Our Business Startups (JOBS) Act provides relief from the ban on general solicitation and advertising contained in the Rule 506 securities registration safe harbor, as long as all purchasers of an issuer’s securities are accredited investors. While the JOBS Act creates more opportunities for hedge fund managers to market their funds to the public, such opportunities are accompanied by an obligation on the part of managers to take “reasonable steps” to verify that all purchasers of fund securities are accredited investors. However, the SEC has not yet adopted final rules to define when an adviser has taken such “reasonable steps.” For a discussion of the SEC’s proposed rules, see “JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012). Despite the lack of definitive guidance from the SEC, hedge fund managers should nonetheless evaluate their investor due diligence procedures to ascertain whether they are sufficiently robust. In a guest article, Philip Segal, founder of Charles Griffin Intelligence, provides recommendations to assist hedge fund managers in enhancing their investor due diligence practices.
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From Vol. 6 No.10 (Mar. 7, 2013)
How Can Hedge Fund Managers Identify and Navigate Pitfalls Associated with the JOBS Act’s Rollback of the Ban on General Solicitation and Advertising?
The Jumpstart Our Business Startups Act (JOBS Act) provisions allowing general solicitation and general advertising in private offerings (JOBS Act Marketing Provisions), upon becoming effective, will profoundly change how hedge fund managers can market their funds. Before taking advantage of the JOBS Act Marketing Provisions, however, hedge fund managers should be aware of a number of potential pitfalls. First, hedge fund managers may be prohibited from engaging in general solicitation and general advertising if they rely on exemptions from registration under certain Commodity Futures Trading Commission rules, or under certain state and federal investment adviser laws. Second, hedge fund managers that are able to take advantage of the provisions need to be aware of several potential compliance issues under the Investment Advisers Act of 1940, including issues that arise when using social media, publicly available websites and publicly advertised performance history. In a guest article, Adam Gale, a Member in the New York office of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., identifies potential regulatory pitfalls associated with reliance on the JOBS Act Marketing Provisions and provides some recommendations to address compliance issues in connection with reliance on the JOBS Act Marketing Provisions.
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From Vol. 6 No.9 (Feb. 28, 2013)
RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part Two of Two)
On December 18, 2012, the Regulatory Compliance Association held its Compliance, Risk & Enforcement Symposium at the Pierre Hotel in New York City. Participants at the event included leading hedge fund industry professionals, and panels focused on topics including insider trading, compliance programs and reviews, SEC examination priorities, hedge fund governance, Form PF and marketing and advertising issues. This article – the second installment in a two-part series covering the Symposium – discusses SEC examination priorities (and practical guidance for addressing areas of concern); recent trends in hedge fund governance; lessons learned from initial Form PF filings and strategies for completing Form PF; and marketing and advertising issues, including a discussion of the JOBS Act and related topics. The first installment covered, among other things: insider trading (including a discussion of manager cooperation, the elements of insider trading, the continuing viability of the mosaic theory, insider trading investigative techniques and the use of expert networks and paid consultants); and compliance programs and reviews (including a discussion of the approach to and framework for hedge fund compliance programs and reviews, and specific policies and procedures designed to address trading risks). See “RCA Symposium Identifies Best Practices for Hedge Fund Managers on Topics Including Insider Trading, Compliance Reviews, SEC Examinations, Fund Governance, Form PF and Marketing and Advertising (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013).
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From Vol. 6 No.4 (Jan. 24, 2013)
K&L Gates Investment Management Seminar Provides Guidance for Hedge Fund Managers on Social Media, Pay to Play Rules, ERISA Rule Changes, AIFMD, SEC Examination and Enforcement Priorities, Form PF, the JOBS Act, CPO Regulation and FATCA
On December 5, 2012, international law firm K&L Gates held its 2012 Investment Management Conference in New York. Speakers at the conference provided guidance on various regulatory developments impacting hedge funds, including: the use of social media; pay to play rules; rule changes under the Employee Retirement Income Security Act of 1974 (ERISA) impacting managers of plan assets; the E.U. Alternative Investment Fund Managers Directive (AIFMD); SEC examination and enforcement priorities; Form PF; the JOBS Act; regulation of commodity pool operators (CPOs); and the Foreign Account Tax Compliance Act (FATCA). This article highlights the key points discussed at the conference on each of the foregoing topics.
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From Vol. 5 No.46 (Dec. 6, 2012)
Benefits and Burdens to Hedge Fund Managers of Speaking to the Media (Part Two of Two)
After decades of reluctance, hedge fund managers are starting to talk to the media – a trend fueled by legal and business changes. On the legal side, final rules under the Jumpstart Our Business Startups (JOBS) Act will implement the repeal of the ban on general solicitation and advertising for hedge funds that rely on Regulation D. On the business side, the enhanced negotiating clout of investors has required managers to distinguish their product and service offerings. There are at least six distinct benefits to hedge fund managers of talking to the media, as catalogued in the first article in this series. See “Benefits and Burdens to Hedge Fund Managers of Speaking to the Media (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 45 (Nov. 29, 2012). However, talking to the media can also involve a range of regulatory, business, reputational and other risks. This is the second article in our two-part series designed to help hedge fund managers decide whether to talk to the media and, if they do, how to identify and manage the attendant risks. In particular, this article discusses the various downsides of speaking with the media; situations in which fund managers should avoid speaking to the media; and six best practices for minimizing the range of risks posed by communications between hedge fund manager principals and employees and the media.
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From Vol. 5 No.45 (Nov. 29, 2012)
Benefits and Burdens to Hedge Fund Managers of Speaking to the Media (Part One of Two)
The historical reticence of hedge fund managers was, in large part, a function of the very statutes and regulations that made the precipitous growth of the hedge fund industry possible. The safe harbor that allowed hedge funds to avoid the public offering rules also prohibited managers from generally soliciting or advertising. The rule that exempted hedge fund managers from investment adviser registration also prohibited managers from holding themselves out to the public as advisers. And the laws that permitted hedge funds to avoid registering as investment companies prohibited the same hedge funds from engaging in a public offering. But law and regulation were not the only factors that historically kept managers quiet. In addition, in many periods before the credit crisis, the capital raising advantage was generally on the side of managers, at least the decent performing ones. Hedge funds retained an air of exclusivity and manager reticence enhanced that aura. Much has changed since the crisis, of course. On the regulatory side, most hedge fund managers now have to register, and doing so allows – in effect, requires – a manager to hold itself out to the public as such. And the Jumpstart Our Business Startups (JOBS) Act has effectively eliminated the ban on general solicitation. For a deeper discussion of the contours and consequences of the proposed JOBS Act rules, see “JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012). On the business side, the post-crisis capital raising advantage has generally tipped towards institutional (and, increasingly, retail) investors. As a result, managers have been able, as a legal matter, and have been required, as a business matter, to make their cases and pitch their products. Most such efforts at persuasion have been undertaken in one-on-one meetings or at small events. But to an increasing degree, hedge fund managers are talking to the financial and general press, appearing on television and otherwise interacting with mass media. Doing so in a structured, thoughtful and well-advised way offers numerous benefits to managers. But various legal and business risks continue to loom large. This article is the first in a two-part series weighing the benefits and burdens to hedge fund managers of speaking to the press, and outlining best practices and compliance recommendations for interactions between managers and the media. In particular, this article discusses the historical reluctance on the part of managers to speak to the press; how the JOBS Act and other legal and regulatory changes have relaxed that reluctance; and six discrete benefits to hedge fund managers of speaking with the press. The second installment in the series will discuss the risks to managers of speaking with the press; situations where managers should avoid speaking to the press; and best practices and compliance recommendations for communications between principals and employees of hedge fund managers and the media.
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From Vol. 5 No.42 (Nov. 9, 2012)
Annual Thompson Hine Hedge Fund Seminar Focuses on Implications for Hedge Fund Managers of the JOBS Act, Form PF and Form CPO-PQR
On October 4, 2012, Thompson Hine LLP hosted its annual Hedge Fund Seminar, which this year was entitled, “The JOBS Act and Dodd-Frank – Two Years Later.” Speakers at the event addressed the impact of Form PF and Form CPO-PQR as well as the anticipated impact of the Jumpstart Our Business Startups (JOBS) Act on hedge fund managers. In addition, the speakers discussed the building blocks of a culture of compliance at hedge fund management companies. This article summarizes the most salient points raised at the seminar.
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From Vol. 5 No.39 (Oct. 11, 2012)
Sixth Annual Hedge Fund General Counsel Summit Highlights SEC Enforcement Priorities, Side Letters, Investment Allocations, Expense Allocations, Trade Errors, Record Retention, Fund Marketing, Secondaries, JOBS Act and STOCK Act (Part One of Two)
On September 18 and 19, 2012, ALM Events hosted its Sixth Annual Hedge Fund General Counsel Summit (GC Hedge Summit) at the University Club in New York City. Panelists, including regulators, in-house practitioners and law firm professionals, discussed topics of significant relevance for hedge fund general counsels, including: SEC enforcement priorities relating to hedge funds; the nuts and bolts of a successful hedge fund compliance program (including a discussion of side letters, investment allocations, expense allocations, trade errors and record retention); marketing of hedge funds (including a discussion of compensation of marketing professionals and the Jumpstart Our Business Startups (JOBS) Act); secondary market transactions in fund shares; and the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act) and its implications for the gathering of political intelligence. Our coverage of the GC Hedge Summit is provided in two installments. This first installment covers the session addressing the nuts and bolts of a successful compliance program and the session addressing marketing of hedge funds and secondary market transactions in hedge fund shares. The second article will cover the session discussing the SEC’s enforcement priorities and the session discussing the implications of the STOCK Act for the gathering of political intelligence by hedge fund managers. See also “Political Intelligence Firms and the STOCK Act: How Hedge Fund Managers Can Avoid Potential Pitfalls,” The Hedge Fund Law Report, Vol. 5, No. 14 (Apr. 5, 2012).
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From Vol. 5 No.34 (Sep. 6, 2012)
JOBS Act: Proposed SEC Rules Would Dramatically Change Marketing Landscape for Hedge Funds
When the JOBS Act (formally the Jumpstart Our Business Startups Act) was signed by President Obama in April, it directed that one of its most transformational provisions – the relaxation of decades-long limits on public offerings of unregistered securities – not go into effect until the Securities and Exchange Commission (SEC) set rules to implement the changes. Though the SEC was given 90 days, or until July 5, the agency did not act until almost two months after the deadline. As summer wound down, emotions surrounding the law flared, with a spate of increasingly strident public comment letters filed with the SEC. Some letters attacked the entire premise of the JOBS Act and urged all manner of burdensome add-ons, while others demanded that the SEC implement the Act without delay and with a minimum of new obligations. The proposed rules emerged on August 29, with nods to both sides of the debate. In a guest article, Nathan Greene, a partner and Deputy Practice Group Leader in the Asset Management Group at Shearman & Sterling LLP, discusses the background of the JOBS Act; the proposed rules; special regulatory considerations for investment funds (including considerations under the Investment Advisers Act, Investment Company Act, Commodity Futures Trading Commission rules and Regulation S); factors that may be relevant in assessing the reasonableness of steps taken by investment managers to verify the accredited status of investors; the political debate surrounding the JOBS Act and the rules thereunder; and adjacent regulation that investment managers would do well to keep in mind when adjusting their approaches to marketing in light of the JOBS Act rules.
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From Vol. 5 No.34 (Sep. 6, 2012)
Grant Thornton Broker-Dealer Industry Symposium Focuses on Capital Requirements, Fiduciary Standards, the JOBS Act, the Volcker Rule and Use of Social Media
On June 19, 2012, Grant Thornton hosted a symposium that highlighted recent regulatory developments impacting brokerage firms, including brokers that have hedge funds as clients. The aim of the symposium was to arm broker-dealers with valuable information and tools to help them do business in an increasingly regulated industry. The panelists addressed a number of current issues facing the broker-dealer industry, including: capital requirements for broker-dealers; new fiduciary standards for broker-dealers; the impact of the Jumpstart Our Business Startups (JOBS) Act; regulatory uncertainty surrounding the Volcker Rule; new rule changes impacting broker-dealers; best execution; and the use of social media. This article summarizes highlights from the symposium on the foregoing topics. For hedge fund managers, this discussion is relevant for at least two reasons. First, hedge fund managers routinely interact with broker-dealers in connection with prime brokerage activities, obtaining leverage, borrowing shares to sell short, custody, derivatives transactions and a wide range of other activities. Second, some hedge fund managers have affiliated broker-dealers. See “Is the In-House Marketing Department of a Hedge Fund Manager Required to Register as a Broker?,” The Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011).
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From Vol. 5 No.32 (Aug. 16, 2012)
Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part Two of Two)
Over the past several years, U.S. investors have broadened their alternative investment horizons by exploring investment opportunities with Asia-based fund managers. Asia-based fund managers provide a unique perspective on alternatives which translates to differing investment strategies that appeal to U.S. investors seeking uncorrelated returns or “alpha.” Nonetheless, Asia-based fund managers that seek to attract U.S. investor capital must recognize the intricate regulations that govern investment manager and fund operations in the U.S. and other jurisdictions, such as the Cayman Islands where many funds are organized to attract U.S. investors. This is the second article in a two-part series designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. investors. The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP. This article describes in detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers are concerned with or should consider when soliciting U.S. taxable and U.S. tax-exempt investors. The first article described the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers. See “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).
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From Vol. 5 No.24 (Jun. 14, 2012)
How Can Hedge Fund Managers Both Advertise and Accept Investments from Non-Accredited Employees, Friends and Family Members?
The Jumpstart Our Business Startups (JOBS) Act has been received by the hedge fund industry with cautious optimism. Most notably, the JOBS Act eliminates the long-standing and hard-to-justify gag order prohibiting hedge fund managers from “generally soliciting,” or, in plain English, advertising. The business benefits of advertising are obvious: communicating a value proposition; solidifying a brand; correcting misperceptions; etc. However, the JOBS Act does not give something for nothing. In exchange for the ability to advertise, hedge fund managers may only accept accredited investors into their funds. See “Implications for Hedge Fund Managers of the Rule Amendments Recently Adopted by the SEC to Raise Accredited Investor Standards,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012). In the majority of circumstances, this is not an issue because the majority of investors are accredited. But in an important minority of cases, this regime appears to require hedge fund managers to elect between advertising, on the one hand, and accepting non-accredited investors into their funds, on the other hand. (Under Rule 506 of Regulation D, hedge fund managers may offer fund interests in a “private offering” – faster, cheaper and otherwise preferable to a “public offering” – to up to 35 non-accredited investors; and the JOBS Act does not change this part of the Rule.) In turn, this matters because hedge fund managers sometimes have occasion to accept investments in their funds from non-accredited investors – persons such as family members, friends and lower-level employees. While such “tickets” are typically small relative to institutional investments, they can be strategically important and even connected to institutional investments. For example, many institutional investors like manager employees to have “skin in the game”; and this preference applies across the pecking order, to investments by star portfolio managers, operations and accounting professionals, compliance personnel, etc. See “Investments by Hedge Fund Managers in Their Own Funds: Rationale, Amounts, Terms, Disclosure, Duty to Update and Verification,” The Hedge Fund Law Report, Vol. 3, No. 21 (May 28, 2010). From the perspective of institutional investors focused on operational due diligence, there are no unimportant employees at a hedge fund manager. Everyone should be invested, figuratively and, ideally, literally. See “Legal and Operational Due Diligence Best Practices for Hedge Fund Investors,” The Hedge Fund Law Report, Vol. 5, No. 1 (Jan. 5, 2012). So, the good news is that hedge fund managers can advertise. The bad news appears to be that if managers advertise, they cannot accept investments from non-accredited friends, family members, employees and others, which can constitute a strategic impairment. But hedge fund managers are not lawyers. When confronted with two alternative options, lawyers – at least good ones – will do a thorough analysis and choose the better option. Hedge fund managers will choose both. Accordingly, to enable our hedge fund manager subscribers to get the best of both worlds, and to arm our attorney subscribers for conversations with managers, we have worked with sources to identify eight strategies for simultaneously advertising and accepting non-accredited investments. Those strategies are detailed toward the end of this article. To provide context for those strategies, this article also describes: Rule 506 and the mechanics of the JOBS Act; the impact of the JOBS Act on hedge funds and managers; the current accredited investor requirement; integration of securities offerings; and the status of SEC rulemaking under the JOBS Act.
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From Vol. 5 No.14 (Apr. 5, 2012)
Implications of the JOBS Act for Hedge Fund Managers
The President is expected to sign into law today the Jumpstart Our Business Startups (JOBS) Act, which could represent a positive development for many small businesses, including hedge funds, that generally seek to raise their profile within the capital markets and specifically seek to raise capital. While it may still be premature to prognosticate the impact that the JOBS Act will have on hedge fund marketing and advertising because the SEC has not provided details regarding its anticipated rulemaking, hedge fund managers and their compliance staff should nonetheless be cognizant of the potential implications of this legislation on their businesses. This article surveys some of these potential implications.
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