The Hedge Fund Law Report

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

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By Topic: Regulation

  • From Vol. 10 No.9 (Mar. 2, 2017)

    Ways the Trump Administration’s Policies May Affect Private Fund Advisers

    With a Republican president and Republican-controlled Congress, there is the possibility for comprehensive changes in several areas of concern to private fund managers, including taxation, regulation and enforcement. In his first weeks in office, President Trump issued a series of sweeping, yet sometimes confusing, orders directed at fulfilling some of his campaign promises. A recent seminar presented by the Association for Corporate Growth (ACG) provided insight on the impact of the Trump executive orders regarding the pending fiduciary rule and other regulatory matters; developments at the SEC; the future of the Dodd-Frank Act and other laws that may affect the private fund industry; proposed tax reform; cybersecurity; and political contributions. Scott Gluck, special counsel at Duane Morris, moderated the discussion, which featured Langston Emerson, a managing director at advisory firm The Cypress Group; Basil Godellas, a partner at Winston & Strawn; Ronald M. Jacobs, a partner at Venable; and Michael Pappacena, a managing director at ACA Aponix. This article summarizes their insights. For coverage of other ACG webinars, see “SEC Staff Provides Roadmap to Middle-Market Private Fund Adviser Examinations” (May 16, 2014); and “SEC’s David Blass Expands on the Analysis in Recent No-Action Letter Bearing on the Activities of Hedge Fund Marketers” (Mar. 13, 2014). 

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  • From Vol. 10 No.8 (Feb. 23, 2017)

    Despite the DOL Fiduciary Rule’s Uncertain Future Under the Trump Administration, Managers Should Continue Preparing for Its April 2017 Implementation (Part Two of Two)

    As part of his first 100 days in office, President Donald J. Trump has set his sights on easing some of the existing regulations in the financial sector to ostensibly allow it to flourish. To that end, he issued a presidential memorandum on February 3, 2017 (Presidential Memorandum), ordering the Department of Labor to review the fiduciary duty rule (DOL Fiduciary Rule). This review may lead to a reevaluation of who or what should be officially classified as a fiduciary, with all the legal obligations that classification entails, and may spur a dialogue between regulators and the funds sector. Although legal experts disagree as to the likelihood of the DOL Fiduciary Rule’s ultimate survival, its defeat is far from a fait accompli. Those potentially subject to the DOL Fiduciary Rule can and should continue revising their practices, documents and disclosures where appropriate. This two-part series evaluates the recent orders issued by the Trump administration that target the financial industry, including insights from attorneys specializing in financial regulations, employment and labor law, so that fund managers can respond accordingly. This second article in the series considers the potential ramifications of the proposed changes to the DOL Fiduciary Rule and their impact on hedge fund managers. The first article summarized the Trump administration’s executive order, entitled “Core Principles for Regulating the United States Financial System,” which detailed the financial sector policies of the new administration. For more on how protecting retirement investors has recently been an SEC priority, see “OCIE 2017 Examination Priorities Illustrate Continued Focus on Conflicts of Interest; Branch Offices; Advisers Employing Bad Actors; Oversight of FINRA; Use of Data Analytics; and Cybersecurity” (Jan. 26, 2017); and “SEC Division Heads Enumerate OCIE Priorities, Including Cybersecurity, Fees, Bad Actors and Never-Before Examined Hedge Fund Managers (Part One of Two)” (Apr. 28, 2016).`

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  • From Vol. 10 No.7 (Feb. 16, 2017)

    How the Trump Administration’s Core Principles for Financial Regulation May Benefit the U.S. Funds Industry (Part One of Two)

    On February 3, 2017, the new administration of President Donald J. Trump issued a pair of executive actions with a potentially dramatic impact on the financial sector and the investment funds market in the U.S. and beyond. One is an executive order, entitled “Core Principles for Regulating the United States Financial System” (Core Principles Memorandum), and the other is a presidential memorandum concerning the Department of Labor’s fiduciary duty rule (DOL Fiduciary Rule). Both actions are expressions of a general pro-business and anti-regulation stance on the part of the new President and administration, and they both contain provisions that may help the financial sector generally and the hedge fund industry in particular. The review and reevaluation of portions of the Dodd-Frank Act – as well as the delay and possible redrafting or even rescission of the DOL Fiduciary Rule – could provide huge benefits for a funds sector struggling under onerous regulations in recent years. To help readers understand the content, purpose and potential impact of the Core Principles Memorandum and the DOL Fiduciary Rule memorandum, The Hedge Fund Law Report has prepared this two-part series, summarizing both executive actions and including insights from attorneys specializing in financial regulations and employment and labor law. This first article addresses the Core Principles Memorandum, exploring the basic principles set forth therein and analyzing the action’s goals and the ways it may specifically benefit hedge funds. The second article will analyze the possible impact that the presidential memorandum will have on the DOL’s Fiduciary Rule and what those changes would mean for hedge funds. For additional analysis of actions by the Trump administration, see “How Tax Reforms Proposed by the Trump Administration and House Republications May Affect Private Fund Managers” (Feb. 9, 2017).

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  • From Vol. 9 No.49 (Dec. 15, 2016)

    Recent NY Appeals Court Rulings Clarify How Fund Managers May Pursue Former Employees for Breach of Fiduciary Duty and Improper Use of Performance Record

    In the latest chapter of litigation that began in 2008, the New York State Appellate Court issued two rulings that provide meaningful guidance to industry participants on certain employment-related matters. Specifically, the Appellate Court ruled that a hedge fund manager may pursue two former employees for breach of fiduciary duty, including to recoup certain penalties assessed by the SEC against the firm for violating Rule 105 of Regulation M; misuse of the manager’s performance track record; theft of trade secrets; tortious interference with contract; and defamation. In a guest article, Sean O’Brien, managing partner of O’Brien LLP, along with associates A.J. Monaco and Michael Ahern, provide the litigation history of the case and discuss the claims against the employees and the factual details surrounding such allegations. For additional insights from O’Brien, see “DTSA Provides Hedge Fund Managers With Protection for Proprietary Trading Technology and Other Trade Secrets” (Jun. 23, 2016); and “Can Hedge Fund Managers Contract Out of Default Fiduciary Duties When Drafting Delaware Hedge Fund and Management Company Documents?” (Apr. 4, 2013). For coverage of other employment disputes involving hedge fund managers, see “Quant Fund Manager Moves Aggressively Against Former Employee Who Allegedly Stole Trade Secrets and Other Proprietary Information” (Mar. 21, 2014); and “Highland Capital Management Sues Former Private Equity Chief for Breach of Employment and Buy-Sell Agreements” (May 17, 2012).

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  • From Vol. 9 No.45 (Nov. 17, 2016)

    U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration

    The role of regulators increasingly extends beyond conducting examinations and includes sharing data-driven expertise with their regulatory counterparts domestically or abroad to achieve their common goals of protecting investors, preventing problems (such as risk from hedge funds entering the commercial banking space) and facilitating smooth resolution of known issues. These were prominent themes of a panel at Hedgeopolis New York, the annual conference of the Hedge Fund Association (HFA). Moderated by Martin Cornish, a partner at MJ Hudson, the panel featured Jennifer A. Duggins, co-head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Robert Taylor, head of the Hedge Fund Management Department at the U.K. Financial Conduct Authority (FCA); and Garth Ebanks, deputy head of the Investments and Securities Division of the Cayman Islands Monetary Authority (CIMA). This article presents key takeaways from the panel discussion. For coverage of HFA’s May 2016 Global Regulatory Briefing panel, see our two-part series: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016). For guidance from CIMA, see “CIMA Enumerates Best Practices for Hedge Fund Manager AML Programs” (Mar. 17, 2016). For additional commentary from the FCA, see “FCA Director Emphasizes Regulator’s Focus on Firm’s Culture of Compliance” (Jul. 21, 2016); and “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016). 

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  • From Vol. 9 No.41 (Oct. 20, 2016)

    Seward & Kissel Private Funds Forum Offers Practical Steps for Fund Managers to Address HSR Act Enforcement, Tax Reforms, Brexit Uncertainty, MiFID II, Cybersecurity and Side Letters

    Years after the financial crisis, private funds in the U.S. and Europe continue to be affected by factors as varied as the trends in enforcement of the Hart-Scott-Rodino Antitrust Improvements Act of 1976; reforms to the U.S. tax code; ongoing uncertainty over Brexit, including whether the U.K. will make a “hard” or “soft” departure from the E.U.; cybersecurity risks; and selective disclosure concerns. These issues were the focus of a segment of the second annual Private Funds Forum co-produced by Bloomberg BNA and Seward & Kissel (S&K) on September 15, 2016. The panel was moderated by S&K partner Robert Van Grover and featured James E. Cofer and David R. Mulle, also partners at S&K; Richard Perry, a partner at Simmons & Simmons; Matthew B. Siano, managing director and general counsel of Two Sigma Investments; and Mark Strefling, general counsel and chief operating officer of Whitebox Advisors. This article highlights the salient points made by the panel. For coverage of the first segment of this forum, see our two-part series: “How Managers Can Mitigate Improper Dissemination of Sensitive Information” (Sep. 22, 2016); and “How Managers Can Prevent Conflicts of Interest and Foster an Environment of Compliance to Reduce Whistleblowing and Avoid Insider Trading” (Sep. 29, 2016). On Tuesday, November 1, 2016, at 10:00 a.m. EDT, Mulle and fellow S&K partner Steve Nadel will expand on issues relating to side letters in a complimentary webinar co-produced by The Hedge Fund Law Report and S&K. For more information or to register for the webinar, please send an email to rsvp@hflawreport.com.

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  • From Vol. 9 No.40 (Oct. 13, 2016)

    How Developments With California’s Pension Plan Disclosure Law, the SEC’s Rules and FINRA’s CAB License May Impact Hedge Fund Managers and Third-Party Marketers

    Hedge fund managers and many service providers have faced a wave of new regulatory requirements since the 2008 global financial crisis. This is particularly true for third-party marketers engaged by hedge fund managers to solicit clients and fund investors, which may be subject to a barrage of regulations at the federal, state and local level depending on the nature of their business. To explore some of the latest regulatory challenges faced by funds and their marketers, The Hedge Fund Law Report recently interviewed Susan E. Bryant, counsel at Verrill Dana LLP, and Richard M. Morris, partner at Herrick, Feinstein LLP. This article sets forth the participants’ thoughts on a host of issues, including new disclosure requirements for state pension plan investors; recent enforcement trends; and new rules adopted by the SEC, FINRA, Municipal Securities Rulemaking Board (MSRB) and state regulators. On Thursday, October 20, 2016, from 10:30 a.m. to 11:30 a.m. EDT, Morris and Bryant will expand on the topics in this article – as well as other issues that affect hedge fund managers and third-party marketers – during a panel moderated by Kara Bingham, Associate Editor of the HFLR, at the Third Party Marketers Association (3PM) 2016 Annual Conference. For more information on the conference, click here. To take advantage of the HFLR’s $300 discount when registering for the conference, click the link available in the article. For prior coverage of a conference sponsored by 3PM, see “Third Party Marketers Association 2011 Annual Conference Focuses on Hedge Fund Capital Raising Strategies, Manager Due Diligence, Structuring Hedge Fund Marketer Compensation and Marketing Regulation” (Dec. 1, 2011).

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  • From Vol. 9 No.39 (Oct. 6, 2016)

    Hedge Funds As Direct Lenders: Regulatory Considerations of Direct Lending and a Review of Fund Investment Terms (Part Three of Three)

    As lending to U.S. companies has increased in popularity as an investment strategy among hedge and private equity funds, some have voiced concerns about the lack of regulation of these alternative corporate lenders as compared to the capital requirements imposed on traditional lenders. This is in stark contrast to the European alternative lending market, where substantial and varied barriers imposed by some jurisdictions create challenges for alternative lenders originating loans on a cross-border basis. Whether U.S. regulators will adopt a European-style regulatory model of alternative lending to U.S. companies remains to be seen. This final article in a three-part series provides an overview of the current regulatory environment surrounding direct lending by alternative lenders and outlines common fee and liquidity terms of direct lending funds. The first article discussed the prevalence of hedge fund lending to U.S. companies and the primary tax considerations to hedge fund investors associated with this strategy. The second article examined how direct lending can constitute engaging in a “U.S. trade or business” and explored structures and strategies available to minimize this risk to investors in an offshore fund. See also “Permanent Capital Structures Offer Managers Funding Stability and Access to Capital While Granting Investors Liquidity and Access to Managers” (Apr. 9, 2015).

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  • From Vol. 9 No.31 (Aug. 4, 2016)

    Best Practices for Hedge Fund Managers to Adopt in Anticipation of Enactment of FinCEN AML Rule Proposal

    After more than a decade in the works, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, released proposed rules in August 2015 that will subject registered investment advisers to anti-money laundering (AML) regulation once adopted. See our two-part series on how hedge fund managers can respond to the AML rules proposed by FinCEN: “Establish an AML Program” (Nov. 5, 2015); and “Operate an AML Program” (Nov. 12, 2015). Cadwalader, Wickersham & Taft recently presented a program examining the current AML regime, the requirements of the proposed rules and how those changes will affect hedge fund managers. The program featured Maureen Dollinger, a vice president of financial crime legal at Barclays; Adam Gehrie, general counsel and chief compliance officer (CCO) of Gresham Investment Management; and Cadwalader partners Dorothy Mehta and Joseph Moreno. This article highlights the portions of the panel’s discussion most relevant to hedge fund managers and other investment advisers. For further insight from Mehta, see our two-part series on SEC remote examinations: “What to Expect” (May 12, 2016); and “How to Prepare” (May 19, 2016); as well as “Practical Guidance for Hedge Fund Managers on Preparing For and Handling NFA Audits” (Oct. 17, 2014).

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  • From Vol. 9 No.27 (Jul. 7, 2016)

    Steps Hedge Fund Managers and Other Investment Advisers Should Take Now to Prepare for FinCEN’s Proposed AML Rule (Part Two of Two)

    Under proposed regulations, SEC-registered investment advisers will not be able to simply rely on their existing anti-money laundering (AML) programs and will have to adopt a more formal approach than the risk-based AML programs many have implemented to date. Even those SEC-registered investment advisers that already have robust AML procedures in place will need to address certain key areas if the regulations are adopted in the form proposed. In a two-part guest series, William P. Barry, Kimberly Versace and Jamie Schafer, partner, counsel and associate, respectively, at Richards Kibbe & Orbe, analyze the anticipated role of investment advisers in the U.S. AML regulatory framework. The first article discussed the genesis and impact of the proposed regulations that would apply to investment advisers. This article recommends steps investment advisers should take now to protect themselves in anticipation of the new regulations and ensure they can meet their AML compliance obligations. For more on the proposed AML regulations, see “How Hedge Fund Managers Can Establish an AML Program Under FinCEN’s Proposed Rule (Part Two of Two)” (Nov. 12, 2015). For additional insight from practitioners at RK&O, see the two-part series entitled “Convertible Preferred Stock: How Preferred Is It?”: Part One (Dec. 19, 2013); and Part Two (Jan. 9, 2014).

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  • From Vol. 9 No.27 (Jul. 7, 2016)

    Growing SEC Enforcement of Hedge Fund Managers Requires Greater Focus on Cybersecurity and Financial Disclosure

    The SEC is broadening its enforcement activities; it filed a record 807 enforcement actions for securities law violations and issued orders for $4.19 billion in penalties and disgorgements in fiscal year 2015, as acknowledged recently by SEC Chair Mary Jo White. A material subset of that activity was in the hedge fund and asset management space. See “SEC Chair’s Testimony Highlights SEC’s Bolstered Presence in Asset Management Space” (Jun. 16, 2016). Accordingly, it is vital for hedge fund managers to understand the practical consequences of the SEC’s enforcement approach, including its effect on market demand and the consequences of SEC action; the regulator’s investigative approach; and areas of scrutiny, including cybersecurity, market integrity and disclosure. These were a few of the topics discussed at the Ninth Annual Advanced Topics in Hedge Fund Practices: Manager and Investor Perspectives conference recently hosted by Morgan, Lewis & Bockius. This article highlights the key insights from several panels featuring partners Jedd Wider, Timothy Levin, Merri Jo Gillette, Amy Greer, Steven Hansen and Jennifer Klass. For additional coverage of the conference, see “How Can Private Fund Managers Grant Preferential Rights? Delaware Chancery Court Decision Stresses Need for Fund Document Integration” (Jun. 30, 2016). For additional insight from Morgan Lewis partners, see “Recent Developments Affect Classifications of Control Groups and Fiduciaries Under ERISA” (Apr. 14, 2016); and “Key Person Provisions in Hedge Fund Documents: Structure, Consequences and Demand From Institutional Investors” (Sep. 17, 2009).

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  • From Vol. 9 No.26 (Jun. 30, 2016)

    How FinCEN’s Proposed AML Rule Will Affect Hedge Fund Managers and Other Investment Advisers (Part One of Two)

    After years of debate, regulators are poised to require registered investment advisers to implement anti-money laundering (AML) programs mirroring those of banks, broker-dealers and other financial institutions. Not since Dodd-Frank have investment advisers faced such meaningful change to the regulatory framework underlying their operations; they will have to create an infrastructure to facilitate formal compliance with AML rules, as well as suspicious activity reporting and information-sharing requirements that may be new to most advisers. In a two-part guest series, William P. Barry, Kimberly Versace and Jamie Schafer, partner, counsel and associate, respectively, at Richards Kibbe & Orbe, analyze the anticipated role of investment advisers in the U.S. AML regulatory framework. This article discusses the genesis and impact of proposed regulations that would apply to investment advisers. The second article will recommend steps investment advisers should take now to protect themselves in anticipation of the new regulations and ensure they can meet their AML compliance obligations. For more on the proposed AML regulations, see “How Hedge Fund Managers Can Establish an AML Program Under FinCEN’s Proposed Rule (Part One of Two)” (Nov. 5, 2015). For additional insight from practitioners at RK&O, see our two-part “Succession Planning Series”: “A Blueprint for Hedge Fund Founders Seeking to Pass Along the Firm to the Next Generation of Leaders” (Nov. 21, 2013); and “Selling a Hedge Fund Founder’s Interest to an Outside Investor” (Jan. 16, 2014).

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  • From Vol. 9 No.24 (Jun. 16, 2016)

    Marketing and Reporting Considerations for Emerging Hedge Fund Managers

    In order to survive and flourish in a market dominated by large, well-established competitors, emerging hedge fund managers must be well versed in the risks and potential dangers of raising funds and be mindful of regulatory compliance blunders, such as incomplete disclosures, insufficient controls and inadequate policies and procedures. See “How Can Emerging Managers Raise Institutional Capital While Avoiding Regulatory Pitfalls?” (Aug. 22, 2013). Pepper Hamilton recently hosted a symposium focusing on a number of these risks and offering practical solutions. Moderated by partner Irwin Latner, the panel discussion featured Adil Abdulali, senior managing director of risk management for Protégé Partners; Christopher Edgar, managing director, capital solutions, for Convergex Prime Services; Andrew Goodman, a partner at Infusion Global Partners; and Chris Lombardy, a managing director at Duff & Phelps. This article highlights the key points raised by the panel. Other articles addressing issues faced by emerging managers include: “Establishing a Hedge Fund Manager in Seventeen Steps” (Aug. 27, 2015); and “Stars in Transition: A New Generation of Private Fund Managers” (Dec. 10, 2009).

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  • From Vol. 9 No.23 (Jun. 9, 2016)

    SEC Staff Discuss “General Solicitation” and Other Regulation D Issues

    Many hedge fund managers raise capital from investors in private offerings conducted under Regulation D. At its public meeting held on May 18, 2016, the SEC Advisory Committee on Small and Emerging Companies addressed a number of issues regarding the JOBS Act changes to the private offering rules under Regulation D of the Securities Act of 1933, with emphasis on what constitutes “general solicitation”; verification of accredited investor status; the impact of those changes on angel investing; and enforcement of the revised rules. The session featured input from David Fredrickson, Chief Counsel and Associate Director of the SEC Division of Corporation Finance; Sebastian Gomez Abero, of that Division’s Office of Small Business Policy; and Margaret Cain, a microcap specialist in the Office of Market Intelligence of the SEC Division of Enforcement. This article presents the takeaways from the session most valuable to hedge fund managers relying on Regulation D to raise capital. For additional coverage of the SEC’s public meeting, see “SEC Commissioners and Staff Discuss Possible Amendments to Definition of Accredited Investor” (Jun. 2, 2016). For more on general solicitations under Regulation D, see “What Hedge Fund Managers Need to Know About Recent SEC Guidance on Substantive, Pre-Existing Relationships and Internet Use” (Oct. 15, 2015); and “SEC JOBS Act Rulemaking Creates Opportunities and Potential Burdens for Hedge Funds Contemplating General Solicitation and Advertising” (Jul. 18, 2013).

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  • From Vol. 9 No.22 (Jun. 2, 2016)

    SEC Commissioners and Staff Discuss Possible Amendments to Definition of Accredited Investor

    Many hedge fund and other private fund managers rely on the private offering safe harbor set forth in Rule 506 of Regulation D, a fundamental benefit of which is that the issuer may offer securities to an unlimited number of “accredited investors.” Last year, after a staff review and consultation with its Advisory Committee on Small and Emerging Companies (Committee), the SEC issued a “Report on the Review of the Definition of ‘Accredited Investor’” (Report). On May 18, 2016, the SEC broadcast a public meeting of the Committee, at which SEC Chair Mary Jo White and Commissioners Michael Piwowar and Kara M. Stein, along with members of the SEC Office of Small Business Policy (part of the Division of Corporation Finance), discussed the Report with Committee members. This article summarizes the principal points raised during the meeting. For other recommendations regarding the definition of accredited investor, see “What Do the Investor Advisory Committee’s Recommendations Mean for the Future of Marketing of Hedge Funds to Natural Persons?” (Oct. 24, 2014); and “Best Practices for Ensuring That Only Accredited Investors Participate in Publicly Advertised Private Offerings by Hedge Funds (Part Two of Three)” (Oct. 17, 2014).

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  • From Vol. 9 No.20 (May 19, 2016)

    U.S., U.K. and Offshore Regulators Share Views on Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers (Part Two of Two)

    As hedge fund managers find themselves scrutinized by numerous regulators, it is important for them to understand those regulators’ views and priorities with respect to issues including cybersecurity, anti-money laundering, the Alternative Investment Fund Managers Directive, advertising and liquidity. These topics were addressed during a Global Regulatory Briefing presented by the Hedge Fund Association, featuring Emma Bailey, Director of the Investment Supervision and Policy Division of the Guernsey Financial Services Commission; Jennifer A. Duggins, Co-Head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Garth Ebanks, Deputy Head of the Investments and Securities Division of the Cayman Islands Monetary Authority; Ifor Hughes, Assistant Director of Policy in the Policy, Legal and Enforcement department of the Bermuda Monetary Authority; and Robert Taylor, Head of the Investment Management Department at the U.K. Financial Conduct Authority. This second article in a two-part series highlights the panelists’ key insights on these topics. The first article recapped the speakers’ commentary on fund regulation in their respective jurisdictions, cooperation among regulators and whether hedge fund regulation is sufficient to address fraud. For more on the regulatory approach to these issues, see “FCA 2016-2017 Regulatory and Supervisory Priorities Include Focus on AML, Cybersecurity and Governance” (Apr. 14, 2016); and “Luxembourg Financial Regulator Issues Guidance on AIFMD Marketing and Reverse Solicitation” (Sep. 3, 2015).

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  • From Vol. 9 No.19 (May 12, 2016)

    U.S., U.K. and Offshore Regulators Discuss Best Ways for Hedge Fund Managers to Approach Regulation (Part One of Two)

    Hedge fund managers are subject to scrutiny by regulators in numerous jurisdictions – where the manager is based, where the fund is based and where the fund is marketed. In an increasingly global economy, cross-border regulators are cooperating more frequently, sharing information and coordinating efforts to govern the growing hedge fund industry. This month, the Hedge Fund Association presented a Global Regulatory Briefing that featured Emma Bailey, Director of the Investment Supervision and Policy Division of the Guernsey Financial Services Commission; Jennifer A. Duggins, Co-Head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Garth Ebanks, Deputy Head of the Investments and Securities Division of the Cayman Islands Monetary Authority; Ifor Hughes, Assistant Director of Policy in the Policy, Legal and Enforcement department of the Bermuda Monetary Authority; and Robert Taylor, Head of the Investment Management Department at the U.K. Financial Conduct Authority. This first article in a two-part series summarizes the speakers’ commentary on fund regulation in their respective jurisdictions, cooperation among regulators and whether hedge fund regulation is sufficient to address fraud. The second article will highlight the panelists’ insights with respect to cybersecurity, anti-money laundering, the Alternative Investment Fund Managers Directive, advertising and liquidity. For more on cooperation among regulators, see “SEC Chair Emphasizes Enforcement Focus on Strong Remedies and Individual Liability” (Nov. 12, 2015); and “E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers” (Oct. 8, 2015).

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  • From Vol. 9 No.17 (Apr. 28, 2016)

    A Bipartisan Problem for Private Funds: How Revised Regulations Facilitate IRS Audits of Partnerships (Part Two of Two)

    The Bipartisan Budget Act of 2015 (2015 Budget Act) repealed the long-standing “TEFRA” (Tax Equity and Fiscal Responsibility Act of 1982) rules, small partnership exception and electing large partnership rules. In their place, the 2015 Budget Act streamlines the rules governing federal income audits and judicial proceedings involving partnerships into a single set of rules that generally apply at the partnership level, subject to a limited electable exception. This new “streamlined audit approach” is expected to facilitate IRS audits of large partnerships, including hedge funds and other private funds, starting in 2018. In a two-part guest series, David A. Roby, Jr., a partner at Sutherland Asbill & Brennan, explores the streamlined audit approach and its implications for hedge fund and other private fund managers. This second part examines how the revised partnership audit rules will impact hedge funds and other private funds. The first part discussed current partnership tax principles and audit procedures and explored the reasons for revising the applicable rules. For insight from Roby’s colleague Yasho Lahiri, see our two-part series “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule?”: Part One (Dec. 5, 2013); and Part Two (Dec. 12, 2013).

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  • From Vol. 9 No.16 (Apr. 21, 2016)

    A Bipartisan Problem for Private Funds: How Current Regulations Complicate IRS Audits of Partnerships (Part One of Two)

    The procedural rules governing federal income tax audits and judicial proceedings of partnerships and other entities classified as partnerships for federal income tax purposes were amended last November under the Bipartisan Budget Act of 2015 (2015 Budget Act). Scheduled to take effect in 2018, this new “streamlined audit approach” is expected to make it easier for the Internal Revenue Service to audit large partnerships, including hedge funds and other private funds. In a two-part guest series, David A. Roby, Jr., a partner at Sutherland Asbill & Brennan, explores the new approach and its implications for hedge fund and other private fund managers. This first part discusses current partnership tax principles and audit procedures and explores the reasons for revising the applicable rules. The second article will examine the revised partnership audit rules under the 2015 Budget Act and their impact on hedge funds and other private funds. For more on the streamlined audit approach, see “How to Draft Key Hedge Fund Documents to Take New Partnership Rules Into Account” (Feb. 11, 2016). For insight from Roby’s colleague John Walsh, see “Current and Former Regulators Advise Hedge Fund Managers on How to Prepare for SEC Exams” (Feb. 18, 2016); “Insights on SEC Priorities for 2015” (Apr. 23, 2015); and “Three Steps in Responding to an SEC Examination Deficiency Letter and Other Practical Guidance for Hedge Fund Managers” (Feb. 13, 2014).

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  • From Vol. 9 No.9 (Mar. 3, 2016)

    U.K. National Audit Office Report Questions FCA Effectiveness

    A recent report evaluates whether the U.K. Financial Conduct Authority (FCA) effectively protects consumers in the financial services industry, with potential implications for hedge fund managers and other financial firms. The U.K. National Audit Office (NAO) report provides insight into the FCA’s efforts to combat mis-selling and the effectiveness of those efforts. While commending those efforts, the report also calls for better data to determine whether the FCA’s efforts are providing “value for money.” Although the NAO report addresses consumer concerns, its recommendations could prompt the FCA to increase scrutiny of hedge fund managers and other financial services firms, which could result in stricter compensation and remuneration limitations on managers. This article examines the primary takeaways from the report. For a recent FCA report on hedge fund sales practices, see “FCA Report Enjoins Hedge Fund Managers to Improve Due Diligence“ (Feb. 25, 2016).

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  • From Vol. 9 No.8 (Feb. 25, 2016)

    Hedge Funds Face Increased Trading Costs Under Final Swap Rules (Part Two of Two)

    The new joint final rule adopted by the U.S. prudential regulators – establishing minimum initial and variation margin requirements for certain non-cleared swaps – likely means cost increases for hedge funds and other investment funds trading those swaps. Hedge funds face comparable issues under the substantially similar final rule adopted by the CFTC for margin requirements for non-cleared swaps entered into by registered swap dealers or major swap participants that are not regulated by a U.S. prudential regulator. In a guest two-part series, Fabien Carruzzo and Philip Powers, partner and associate, respectively, at Kramer Levin, discuss these final rules and their impact on hedge funds. This second article explores minimum transfer amounts; eligible collateral and haircuts; netting of exposure; documentation and industry initiatives; compliance obligations; and practical implications of the final rules on hedge funds. The first article focused on calculating a fund’s material swaps exposure, as well as the final rules’ requirements for collecting and posting initial and variation margin with respect to non-cleared swaps. For more from Kramer Levin practitioners, see “Risks Faced by Hedge Fund Managers That Access the Alternative Mutual Fund Market Via Turnkey Platforms” (Mar. 13, 2014); and “Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds” (Apr. 18, 2013).

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  • From Vol. 9 No.7 (Feb. 18, 2016)

    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).

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  • From Vol. 9 No.6 (Feb. 11, 2016)

    How to Draft Key Hedge Fund Documents to Take New Partnership Rules Into Account

    On November 2, 2015, new partnership audit rules were enacted as part of The Bipartisan Budget Act of 2015. The new audit rules could significantly impact partnerships generally and investment partnerships in particular. Although the new rules will only become effective for audits of taxable years beginning after December 31, 2017, existing partnership operating agreements, offering memoranda, subscription agreements and side letters should be revised before then to reflect the new audit rules, and new fund documents should be drafted to comport with these new rules. In a guest article, Philip S. Gross and Matthew Tominey, partner and associate, respectively, at Kleinberg, Kaplan, Wolff & Cohen, compare existing partnership audit rules with the new rules under the Bipartisan Budget Act of 2015; explore election options that the new rules allow; and address issues and questions that the new rules present. They also provide strategies for drafting or updating key fund documents so as to take the new rules into account. For additional insight from Gross, see “Tax Court Decision Upholding ‘Investor Control’ Doctrine May Nullify Tax Benefits for Some Policyholders Investing in Hedge Funds Through Private Placement Life Insurance” (Jul. 23, 2015); and “The Impact of Revenue Ruling 2014-18 on Compensation of Hedge Fund Managers and Employees” (Jun. 19, 2014). For more from KKWC, see “Recent Cases Reduce the Impact of Newman on Insider Trading Enforcement” (May 7, 2015).

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  • From Vol. 9 No.4 (Jan. 28, 2016)

    ESMA Chair Calls for Increased Transparency and Regulatory Convergence As Interest Rates Rise

    In a recent speech delivered at the Asian Financial Forum in Hong Kong, Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), discussed several effects that current low interest rates have had on financial markets, including increasing investor demand for leverage and higher-yield investments, as well as impacting market liquidity. He also explained anticipated developments in the financial sector and recommended strategies to improve transparency for investors. Maijoor’s remarks offer valuable insight for hedge fund managers and other players in the European and Asian markets into ESMA’s focus and priorities, as he stressed the development of the Capital Markets Union and the need for regulatory cooperation. This article summarizes Maijoor’s speech. For additional insight from Maijoor, see “ESMA Chair Highlights Upcoming Focus on Supervisory Convergence” (Oct. 1, 2015).

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  • From Vol. 8 No.44 (Nov. 12, 2015)

    How Hedge Fund Managers Can Operate an AML Program Under FinCEN’s Proposed Rules (Part Two of Two)

    Under the recent proposal by the Financial Crimes Enforcement Network (FinCEN), investment advisers that are registered or required to be registered with the SEC would have to meet the suspicious activity reporting and anti-money laundering (AML) requirements of the Bank Secrecy Act.  To do so, hedge fund managers and other investment advisers would be required to report suspicious activity and retain records relating to certain fund transfers.  During Pepper Hamilton’s seminar, “Investment Management and Hedge Funds: What’s Happening Now?,” partners Gregory Nowak and Timothy McTaggart, as well as Walter Donaldson, managing director of Freeh Group International Solutions, LLC, discussed the proposed rule, including its mandates and anticipated impact on the hedge fund industry.  This article, the second in a two-part series, examines those specific reporting, information sharing and recordkeeping requirements, as well as the adoption and implementation of the rule.  The first article summarized the panelists’ discussion of the proposed rule and the elements of an AML program that it would require.  For more from Nowak, see “Conflicts and Opportunities Offered by Concurrent Management of Employee-Owned Hedge Funds and Outside-Investor Hedge Funds,” The Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).

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  • From Vol. 8 No.43 (Nov. 5, 2015)

    How Hedge Fund Managers Can Establish an AML Program Under FinCEN’s Proposed Rule (Part One of Two)

    The Financial Crimes Enforcement Network recently proposed a rule that would broaden the application of the Bank Secrecy Act’s suspicious activity reporting and anti-money laundering (AML) requirements to include investment advisers that are registered or required to be registered with the SEC.  The proposal would also include investment advisers in the general definition of “financial institution,” which, among other things, would require them to file currency transaction reports and keep records relating to the transmittal of funds.  See “Do Hedge Funds Really Pose a Money Laundering Threat?  A Decade of Regulatory False Starts Raises Questions,” The Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012).  During Pepper Hamilton’s seminar, “Investment Management and Hedge Funds: What’s Happening Now?,” partners Gregory Nowak and Timothy McTaggart, as well as Walter Donaldson, managing director of Freeh Group International Solutions, LLC, outlined the basics of the proposed rule and its impact on the hedge fund industry.  This article, the first in a two-part series, summarizes the panelists’ discussion of the proposed rule and elements of an AML program that it would require.  The second article will discuss requirements with respect to reporting suspicious activity, information sharing and recordkeeping, as well as adoption and implementation of the rule.  For more from Nowak, see “Tax Proposals and Tax Reforms May Affect Rates and Impose Liabilities on Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015).

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  • From Vol. 8 No.40 (Oct. 15, 2015)

    ESMA Work Programme Provides Hedge Fund Managers with Key Guidance About E.U. Financial Services Legislation

    The European Securities and Markets Authority (ESMA) has published its 2016 Work Programme (Program), setting out for hedge fund managers and other market players its key priorities and planned activities in the E.U. financial services arena for next year.  The Program represents the first phase of ESMA’s Strategic Orientation 2016-2020 and sees the supervisory body shift its attention away from rulemaking, toward implementation of the single rulebook and enhancement of supervisory convergence among the various national financial services regulators across Europe.  The Program also highlights for hedge fund managers areas where ESMA will work with international organizations, European regulators and third-country supervisory authorities.  It affords hedge fund managers and other market participants more granular insight into the supervisor’s work plans.  See also “ESMA Chair Highlights Upcoming Focus on Supervisory Convergence,” The Hedge Fund Law Report, Vol. 8, No. 38 (Oct. 1, 2015).  In particular, it identifies specific guidance, advice and measures that will be promulgated in the upcoming year under the European financial markets regime that will affect hedge fund managers’ operations, in areas including reporting requirements, clearing obligations and European investment fund legislation.  This article summarizes the key provisions of the Program.  For more on European supervisory initiatives, see “European Regulator Issues Guidance to Market Participants on Penalties for Settlement Failures,” The Hedge Fund Law Report, Vol. 8, No. 38 (Oct. 1, 2015); and “European Commissioner Calls for Economic and Regulatory Coordination,” The Hedge Fund Law Report, Vol. 8, No. 39 (Oct. 8, 2015).

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  • From Vol. 8 No.39 (Oct. 8, 2015)

    E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers

    On September 30, 2015, the European Commission (Commission) launched an Action Plan on Building a Capital Markets Union (Action Plan).  At their core, these measures are designed to stimulate long-term investment and growth in the European economy by improving debt and equity market functioning throughout Europe.  The Action Plan is divided into six sections, embodying the priority action areas identified by the Commission to achieve Capital Markets Union (CMU) in Europe.  This article focuses on the areas relevant to hedge fund managers and others undertaking investment activity in Europe, specifically addressing the Action Plan’s approach to long-term investment, infrastructure and sustainable development; fostering retail and institutional investment; and facilitating cross-border investing.  These sections bring hedge fund managers valuable insight regarding the Commission’s priorities in order to assess their impact and evaluate potential opportunities.  The remaining sections of the Action Plan deal with initiatives in financing for innovation, start-ups and non-listed companies; facilitating capital raising on public markets; and leveraging banking capacity to support the wider economy.  For more on the CMU, see “European Commissioner Calls for Economic and Regulatory Coordination,” in this issue.  For more from the Commission, see “E.U. Commission Publishes Regulations Setting Forth Clearing Obligations for Hedge Funds and Other Counterparties,” The Hedge Fund Law Report, Vol. 8, No. 32 (Aug. 13, 2015).

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  • From Vol. 8 No.39 (Oct. 8, 2015)

    European Commissioner Calls for Economic and Regulatory Coordination

    In his keynote speech at the Eurofi Financial Forum 2015, European Commissioner Jonathan Hill described the Commission’s promotion of the Capital Markets Union and the CMU’s essential role in developing the European economy.  The speech provided valuable insight for hedge fund managers and other players in the European markets into the goals and work-streams identified by the Commission for the upcoming year, in particular with regard to the development of the CMU.  Specifically, the Commissioner highlighted areas for in-depth review and regulatory development and summarized the proposals to be promoted by the Commission regarding securitizations.  In subsequent remarks at the launch of the CMU Action Plan, he expanded on the mix of legislative and non-legislative measures to be adopted in the initial phase.  This article summarizes the Commissioner’s remarks at both venues. For an in-depth review of key areas of the CMU Action Plan, see “E.U. Action Plan to Unify Capital Markets May Affect Hedge Fund Managers,” in this issue.  For more on upcoming European initiatives, see “ESMA Chair Highlights Upcoming Focus on Supervisory Convergence,” The Hedge Fund Law Report, Vol. 8, No. 38 (Oct. 1, 2015). 

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  • From Vol. 8 No.38 (Oct. 1, 2015)

    ESMA Chair Highlights Upcoming Focus on Supervisory Convergence

    In his annual statement to the members of the Economic & Monetary Affairs Committee of the European Parliament, Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA), highlighted ESMA’s achievements over the past twelve months and set out its goals for the upcoming year, giving hedge fund managers and other industry participants valuable insight into the ongoing focus of the European regulator.  Maijoor emphasized ESMA’s founding objectives and described an expected shift in attention for the upcoming year.  This article identifies the key observations and themes embodied by Maijoor’s statement.  For more on ESMA activities, see “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions,” The Hedge Fund Law Report, Vol. 8, No. 31 (Aug. 6, 2015); and “ESMA Releases Final Report on MiFID II Technical Standards for Hedge Fund Management Firms,” The Hedge Fund Law Report, Vol. 8, No. 28 (Jul. 16, 2015).

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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. 3 No.16 (Apr. 23, 2010)

    Impact of Regulatory Reforms on Hedge Funds is Key Focus of PLI’s Hedge Fund Registration and Compliance 2010 Seminar

    As the government and the Securities and Exchange Commission (SEC) push for a number of reforms in the financial markets, the impact on hedge funds is expected to be significant, particularly with the Private Fund Investment Advisers Registration Act of 2009 (House bill) and the Wall Street Reform and Consumer Protection Act of 2009 (Dodd bill) both calling for the mandatory registration of hedge fund managers who meet certain assets under management (AUM) thresholds.  On April 9, 2010, the Practising Law Institute hosted the Hedge Fund Registration and Compliance 2010 seminar in New York City.  Among the key topics discussed during the conference were: fund manager registration; likely changes to the definition of accredited investor; proposed resolution authority; the Volcker Rule; key issues regarding hedge fund marketing; side letters; strategy drift; and soft dollars.  This article offers a comprehensive summary of the key points raised and discussed at the conference.

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  • From Vol. 3 No.15 (Apr. 16, 2010)

    White & Case Hosts Program on “Financial Regulatory Reform: Current Status and Developments,” Highlighting Key Legislative Proposals Impacting Hedge Fund Managers, Broker-Dealers and Derivatives Industry Participants

    As previously reported in the Hedge Fund Law Report, on March 26, 2009, the U.S. Department of the Treasury outlined a new framework for financial regulatory reform, including a proposal to require advisers to hedge funds (and other private pools of capital) with assets under management above a certain threshold to register with the SEC, along with certain other regulatory reforms.  See “Treasury Calls for Registration of Hedge Fund Managers with Assets Under Management Above a Certain Threshold and Outlines Framework for Other Regulatory Reforms Aimed at Limiting Systemic Risk,” The Hedge Fund Law Report, Vol. 2, No. 13 (Apr. 2, 2009).  Some of these reforms have been incorporated into current and pending legislation, including, most notably, the Private Fund Investment Advisers Registration Act of 2009, which was incorporated into Title V of the Wall Street Reform and Consumer Protection Act of 2009 and was passed by the House of Representatives on December 11, 2009 (House bill), and the Restoring American Financial Stability Act of 2009, which was introduced by Banking Committee Chairman Senator Christopher Dodd on November 10, 2009 (Dodd bill).  For more on the Dodd bill, see “Does the IOSCO Hedge Fund Disclosure Template Foreshadow the Content of Hedge Fund and Hedge Fund Adviser Disclosures to be Required by the SEC?,” above, in this issue of the Hedge Fund Law Report.  Also on March 26, 2009, the Obama Administration issued details on proposed legislation for a “resolution authority” that would give the President sweeping powers to dismantle or reorganize failing companies that pose a threat to the country’s financial system.  On April 8, 2010, White & Case LLP held a seminar entitled “Financial Regulatory Reform: Current Status and Developments,” with the goal of outlining and analyzing some of the more significant pieces of the pending financial regulatory reform legislation referenced above, and the ways in which various market participants may be impacted by such reforms.  This article outlines the most relevant topics discussed at the seminar, including: legislation relating to creation of a “resolution authority” to deal with pending failures of large, interconnected financial companies; ipso facto clauses in derivatives contracts; proposed central clearing requirements for derivatives; comparisons of the relevant provisions of the House and Dodd bills with respect to hedge fund manager registration; the issue of self-custody by hedge fund managers in light of the recent amendments to the custody rule; the proposed fiduciary standard for broker-dealers providing investment advice incidental to their brokerage activities; and the treatment of proprietary trading activities of broker-dealers under the Volcker Rule.

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  • From Vol. 3 No.5 (Feb. 4, 2010)

    Senate Banking Committee Holds Hearing on “Volcker Rule” Designed to Limit Banks’ Ability to Own, Invest In or Sponsor Hedge or Private Equity Funds

    On February 2, 2010, Former Federal Reserve Chairman Paul Volcker testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs on a key effort of the Obama Administration: to restrict commercial banking organizations from certain proprietary and speculative activities.  On January 21, 2010, the White House issued a press release endorsing the so-called Volcker Rule, which would seek to restrict the size and scope of financial institutions with the goals of reining in excessive risk-taking and protecting taxpayers.  With respect to scope, the proposal would seek to “ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.”  And with respect to size, the proposal would seek to “place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.”  At the hearing, Senate Banking Committee Chairman Christopher Dodd (D-CT) announced his support for the proposal, saying that the proposal was “borne out of fear that a failure to act would leave us vulnerable to another crisis, and of frustration at the refusal of financial firms to rein in their reckless behavior.”  We detail the key points from testimony at the hearing.

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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.38 (Sep. 24, 2009)

    SEC Recommends More Hedge Fund Oversight in Audit on Its Failure to Uncover Madoff Fraud; House Oversight and Government Reform Committee Chairman Questions SEC Competence

    On September 4, 2009, the Securities and Exchange Commission (SEC) published the report of its Office of the Inspector General (OIG) chronicling the failure of its enforcement and examinations staff to uncover Bernard Madoff’s fraud despite numerous red flags dating as far back as 1992.  In an accompanying statement, SEC Chairwoman Mary Schapiro pledged her agency’s continuing and careful review of the report to “learn every lesson we can to help build upon the many reforms we have already put into place.”  Meanwhile, in a letter dated September 3, 2009 to Chairwoman Schapiro, House Oversight and Government Reform Committee Chairman Edolphus Towns (D-N.Y.), asked whether the level of experience of the SEC’s employees has improved since Congress authorized the SEC to increase compensation in 2002.  He also pledged to hold a hearing on the subject.  Then, on September 10, 2009, SEC Inspector General H. David Kotz testified before the Senate Banking Committee regarding the audit of the agency’s failed oversight of Bernard Madoff.  He told the committee to expect more reports, more revelations of missteps, and more recommendations aimed at improving nearly every aspect of operations within the Office of Compliance Inspections and Examinations (OCIE), and of procedures within the Division of Enforcement (DoE).  This article summarizes the major findings of the OIG report, the concerns expressed in Chairman Towns’ letter, and the pertinent details of Inspector General Kotz’ testimony before the Senate Banking Committee.

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  • From Vol. 2 No.34 (Aug. 27, 2009)

    Greenwich Associates Issues Report Finding that Private Sector Signals Strong, Albeit Cautious, Support for Financial Regulatory Reform

    According to an August 2009 report issued by Greenwich Associates, corporations and financial institutions around the world have expressed strong levels of support for many of the key components of financial regulation reform proposed by governments in the United States and Europe.  Greenwich Associates surveyed 458 large corporations and financial institutions in North America, Europe and Asia about their opinions on various reform proposals and their assessments of how governments and regulators have performed since the start of the global financial crisis.  The results reveal strong support for regulatory proposals including: the establishment of systemic risk regulators, the mandatory separation of investment banking and commercial banking activities, the tightening of hedge fund regulations and derivatives markets reform.  Still, many survey participants pointed out that they are cautiously watching the progress of regulatory reform, even as they broadly support the specific regulatory proposals in question.  We offer a detailed review of the report.

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  • From Vol. 2 No.33 (Aug. 19, 2009)

    New Hedge Fund Transparency and Investors’ Rights – The Times They Are A Changin’

    So far in this century, hedge funds have raised and invested billions with minimal regulation and very little disclosure about their activities.  An investor turns over his money to the fund and goes along for the ride, usually without knowing what investments the fund manager has made, with little understanding of the strategies being employed and without access to information about where the fund is headed.  If an investor becomes dissatisfied, its only remedy is to withdraw from the fund.  Even that has strings attached to it.  Still, total hedge fund assets under management are estimated to have soared from approximately $450 billion in 1999 to over $2.5 trillion in June 2008, according to The Alternative Investment Management Association Limited.  During the fall of 2008, hedge fund returns plummeted, redemption requests poured in and many funds halted redemptions.  Several closed their doors; others sold their assets or have announced plans to do so.  Others are satisfying redemption requests with interests in newly formed pools of illiquid securities.  Add to this the fallout from Bernard Madoff and a few other high-profile hedge fund stories, and the stage is set for revisiting and rethinking the rights of investors in hedge funds.  The change has started even if, for the moment, it is still a trickle rather than a flood.  In a guest article, Robert L. Bodansky and E. Ann Gill, Partners at Seyfarth Shaw LLP, and Laura Zinanni, an Associate at the firm, discuss adopting private equity concepts in the hedge fund business model; advisory committees; charging performance fees only on realized gains; standards of conduct and fiduciary duty; most favored nations clauses and disclosure of side letters; investor reporting; indemnification carve outs; minimum levels of insurance; regulatory proposals in the United States and in Europe; pay to play regulation; due diligence; in-kind distribution issues; and more.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    Investors’ Working Group Recommends Delayed Disclosure of Holdings to Regulators and Registration of Hedge Fund Advisers

    As the calls for additional regulation of the hedge fund industry continue to mount, the Investors’ Working Group (IWG) has added its recommendations to the growing list of proposals to oversee the industry.  The IWG is an independent task force sponsored by the CFA Institute Centre for Financial Market Integrity and the Council of Institutional Investors.  On July 15, 2009, the IWG issued a report (Report) recommending that investment managers, including managers of hedge funds and private equity funds, be required to make regular disclosures to regulators on a real-time basis to protect against systemic risk.  The IWG also advocated requiring hedge fund managers to register as investment advisers with the SEC, a proposal that has been echoed by various legislators and the U.S. Treasury.  We offer a detailed description of the parts of the Report most relevant to hedge funds, and include industry responses to the Report.

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  • From Vol. 2 No.29 (Jul. 23, 2009)

    AIMA Welcomes UK Release of White Paper for Further Reform of Financial Markets and Hedge Funds

    On July 8, 2009, the United Kingdom (UK) Treasury released proposed reforms designed to ensure that banks and financial markets will be more resilient to future shocks to the global financial system.  The recommendations set out in the UK White Paper include tougher regulations of individual firms, better monitoring and management of systemic risk, the creation of a Council for Financial Stability, measures to deal with potential institutional failures, and greater protection for depositors.  Most significantly, the White Paper recommends granting more power to the UK Financial Services Authority (FSA).  These powers would include enforcing new disclosure requirements for hedge funds in order to gather information regarding their funding, leverage and investment strategies.  In a speech to launch the White Paper, Chancellor of the Exchequer Alistair Darling said that the UK government would be tasked with taking “account of new developments in the financial sector – including expanding regulation where necessary – for example of systemically important hedge funds.”  The UK government plans to introduce legislation recommended by the White Paper in the 2009-2010 parliamentary session.  We detail the new disclosure requirements for hedge funds outlined in the White Paper and the AIMA’s reaction.

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  • From Vol. 2 No.27 (Jul. 8, 2009)

    SEC Commissioner Aguilar Recommends Tougher Regulation of Hedge Funds and Investment Advisers

    On June 18, 2009, Commissioner Luis A. Aguilar of the Securities and Exchange Commission spoke at the Spring 2009 Hedgeworld Fund Services Conference in New York, New York.  In his speech, Aguilar discussed the causes of the renewed calls to regulate the hedge fund industry, including lack of transparency, the imbalance of power between investors and managers and the potential for impact on the entire capital market.  On June 23, 2009, Commissioner Aguilar also spoke at the International Institute for the Regulation and Inspection of Investment Advisers in Washington, D.C., and announced the SEC’s intention to improve its regulatory regime.  We provide detailed coverage of both speeches.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    IOSCO Report Suggests Mandatory Registration for Hedge Fund Managers and Prime Brokers

    On June 22, 2009, the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a report endorsing mandatory registration for hedge funds and their managers/advisers and for the prime brokers and banks that financially support hedge funds.  The report called for hedge fund regulation based on six core principles.  We describe those principles, and detail what the IOSCO report had to say about them.

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  • From Vol. 2 No.25 (Jun. 24, 2009)

    European Alternative Funds: The Alternatives

    The alternative investment funds industry is currently facing significant regulatory and legal challenges and, particularly for fund promoters seeking access to European investors, 2009 may well prove to be a watershed. Traditionally, the European (and U.S.) alternative investment funds industry has embraced the offshore jurisdictions as providers of tax-efficient and regulatory “light-touch” domiciles for fund and management structures. The Cayman Islands, in particular, has become the “path of least resistance.”  However, alternative investment funds have recently become subject to hitherto-unseen levels of scrutiny from regulators, politicians, tax authorities and investors, even though much of the resulting criticism has been unwarranted (other than in terms of underperformance). Few participants in the financial services industry seriously believe that the global financial crisis was caused by hedge funds, and this scepticism has been endorsed by more than one regulator. Nevertheless, certain axes are now being held firmly to the grindstone. In this political climate, the future of the “unregulated” offshore jurisdictions is far from certain, and their role as significant financial centers may be substantially altered by forthcoming legislation and regulation, as well as investor demand.  In a guest article, Simon Thomas and Samuel T. Brooks, Partner and Associate, respectively, at Akin Gump Strauss Hauer & Feld LLP, provide a detailed examination of how hedge fund structures are evolving in response to regulatory change, in particular in the European Union.  In particular, Thomas and Brooks examine: the implications for structuring and operations of the Alternative Investment Fund Managers Directive; considerations in connection with an Undertaking for Collective Investment in Transferable Securities (UCITS) structure; incentives for organizing single-strategy hedge funds in various EU jurisdictions; and listings and permanent capital vehicles.

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  • From Vol. 2 No.25 (Jun. 24, 2009)

    The Obama Administration Outlines Major Financial Rules Overhaul, Announces Greater Scrutiny for Hedge Funds and Derivatives

    On June 17, 2009, the Obama administration released its proposed “rules of the road” for the nation’s regulation of the financial industry.  The proposal aims to restore confidence in the nation’s financial system after last year’s collapses of The Bear Stearns Cos. and Lehman Brothers Holdings Inc., which caused a credit-market seizure, froze bank lending and paralyzed consumer spending.  The proposal generally tightens regulations on many existing institutions already subject to government scrutiny, and brings many products and companies that had operated outside of the banking system under federal control.  The proposed reforms target almost every facet of the financial system, including hedge funds and derivatives.  We provide a comprehensive summary of the proposals, focusing especially on those sections that are most relevant to hedge funds and hedge fund managers.

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  • From Vol. 2 No.24 (Jun. 17, 2009)

    AIFM Directive: Loosening the Regulatory Noose

    On April 29, 2009, the European Commission published the text of its proposed Alternative Investment Fund Managers (AIFM) Directive as part of the Commission’s wider strategy to reduce systemic risk to the economy, and to strengthen transparency and harmonisation of applicable laws for hedge and private equity funds.  This is the first attempt in any jurisdiction to control the management of AIFs, the Directive’s definition of which also includes commodity, real estate and infrastructure funds.  The draft is now being considered by the European Parliament and Council and could be in force in Member States in 2012.  It is clear that certain aspects of the Directive, such as transparency for investors and some limits on leverage, are to be welcomed.  Indeed some provisions like increased disclosure are already UK industry practice.  Other provisions in the draft, however, are of genuine concern to the hedge fund industry.  In a guest article, Davina Garrod and Lawrence Grabau, Partner and Trainee Solicitor, respectively, in the London office of McDermott Will & Emery UK LLP, offer a detailed discussion of those more disquieting provisions, and provide a summary of the complex process for adoption of the Directive.

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  • From Vol. 2 No.23 (Jun. 10, 2009)

    Representative Michael Capuano Discusses Hedge Fund Regulation with The Hedge Fund Law Report – Expresses More Support for Enhanced Disclosure than for Increased Substantive Regulation

    On January 27, 2009, Representatives Michael E. Capuano (D-Mass.) and Michael Castle (R-Del.) introduced the Hedge Fund Adviser Registration Act of 2009 (HFARA).  The HFARA (H.R. 711) would remove Section 203(b)(3) from the Investment Advisers Act of 1940.  The removal of Section 203(b)(3) would effectively require many currently unregistered hedge fund managers to register with the SEC as investment advisers, thereby subjecting them to the various obligations of registered investment advisers, including annual disclosure requirements, advertising and marketing restrictions and recordkeeping requirements.  In February of this year, The Hedge Fund Law Report talked to Rep. Capuano about his rationale for proposing the HFARA.  At that time, he told us: “No one can look me in the eye and tell me they know how many hedge funds there are or how many assets they manage.”  Last week, we talked in greater depth with Rep. Capuano about the rationale behind his proposal to eliminate the private adviser exemption, and his views on hedge fund regulation generally.  His comments offer deeper insight into the intent of the HFARA, and the scope and focus of any law that may result from the bill or others that seek to regulate hedge funds or their managers.

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  • From Vol. 2 No.22 (Jun. 3, 2009)

    Bill Requiring Hedge Fund Managers to Disclose “Material Conflicts of Interest” Passes Connecticut State Senate

    On May 26, 2009, Connecticut’s Senate passed a bill that, if passed by the House and signed into law by the Governor, would require investment advisers to hedge funds and other private investment funds, whether or not registered with the Securities and Exchange Commission (SEC), to disclose “material conflicts of interest.”  The heart of Connecticut Senate Bill No. 953, “An Act Concerning Hedge Funds,” is Subsection 1(b), which provides: “Any investment adviser to a private investment fund, regardless of whether such investment adviser is registered with the United States Securities and Exchange Commission, shall comply with the disclosure requirements of Rule 204-3 under the Investment Advisers Act of 1940 . . . provided nothing in this subsection shall require the disclosure of any information other than material conflicts of interest of the investment adviser.”  We explore the bill’s legislative history, likelihood of passage, interaction with federal bills covering substantially similar substantive areas, the role of the Connecticut Banking Commissioner and the operation of Advisers Act Rule 204-3.

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  • From Vol. 2 No.19 (May 13, 2009)

    Consensus in Financial Services Committee Hearing on Castle and Capuano Bill (Hedge Fund Adviser Registration Act of 2009) Suggests Support for Comprehensive Overhaul, Increased Transparency and Exemption from Registration for Smaller Advisers

    On May 7, 2009, the Subcommittee on Capital Markets of the House Committee on Financial Services conducted a hearing on the Hedge Fund Adviser Registration Act of 2009 (HFAR), a bill proposed on January 27, 2009 by Reps. Michael Castle (R-Del.) and Michael E. Capuano (D-Mass.).  The HFAR (H.R. 711) would remove Section 203(b) from the Investment Advisers Act of 1940.  The removal of Section 203(b)(3) would effectively require many currently unregistered hedge fund managers to register with the SEC as investment advisers, thereby subjecting them to the various obligations of registered investment advisers, including annual disclosure requirements, advertising and marketing restrictions and recordkeeping requirements.  (Under current law, hedge fund managers generally would have to register with the SEC as investment advisers but for the “private adviser” exemption in Section 203(b)(3), which exempts an adviser from the obligation to register if it: (1) had fewer than 15 clients during the preceding 12 months; (2) does not hold itself out generally to the public as an investment adviser; and (3) does not advise any registered investment companies.)  As Rep. Capuano previously explained to The Hedge Fund Law Report, in discussing his rationale for proposing the change: “No one can look me in the eye and tell me they know how many hedge funds there are or how many assets they manage.”  The consensus among both the members of Congress and the witnesses at the hearing was summed up by the Chairman of the Subcommittee, Paul E. Kanjorski (D-Pa.), who said that he considers it important to “put in place a system to obtain greater transparency for the hedge fund industry” and to make  decisions “about who will monitor them and how.”  We offer details of testimony from representatives of the Government Accountability Office, Managed Funds Association, Alternative Investment Management Association, Coalition of Private Investment Companies and Teacher Retirement System of Texas, relate the details of a lively exchange and offer insights from industry participants on the substance of the testimony.

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  • From Vol. 2 No.19 (May 13, 2009)

    Directive on Alternative Investment Fund Managers Likely to Occasion Substantial Ongoing Debate Over the Appropriate Scope of Regulation of European Hedge Fund Managers

    On April 29, 2009, the European Commission (EC) issued the Directive on Alternative Investment Fund Managers (AIFM Directive), which includes draft rules for more thorough regulation of a broad range of alternative investment managers, including hedge fund and private equity fund managers.  In doing so, it has initiated a new plan to resolve a long-running feud over the shape of Europe’s common regulation of the financial system.  Market participants who spoke to The Hedge Fund Law Report agreed that more burdensome regulations are likely to result, though the particulars are very much open for negotiation.  The negotiation process is all but certain to prove contentious.  This article reviews the points that the contending sides are likely to make as they work to implement or re-work AIFM Directive.

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  • From Vol. 2 No.18 (May 7, 2009)

    Future Regulation of Private Funds: How the Draft EU Directive & US Legislative Proposals Compare

    The new world order for private funds is beginning to take shape, from a regulatory perspective at least.  We now have legislative proposals to apply additional regulation to private funds – hedge funds and private equity funds – on both sides of the Atlantic: legislation introduced in the U.S. Congress and, last week, a draft EU Directive on Alternative Investment Fund Managers.  Both sets of proposals will potentially add significant additional regulatory obligations and cost.  However, as the proposals stand to date, the changes seem likely to add greater additional burden for those managing private funds from an EU jurisdiction than their U.S. competitors.  Some of the proposed changes on both sides of the Atlantic are welcome – but some, particularly in the EU proposals, are of doubtful benefit and have the potential to add significant additional cost for the industry.  In a guest article, Richard Horowitz, a Partner at Clifford Chance US LLP, compares the likely shape of future regulation of private funds in the U.S. and the EU.

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  • From Vol. 2 No.17 (Apr. 30, 2009)

    The Hedge Fund Industry in Transition

    With the completion of the G20 summit and the continued coverage of economic woes by the media, it leaves the reader to ponder how we arrived at this point in our history.  In a comprehensive guest article, Ernest Edward Badway and Lauren Lezak, Partner and Associate, respectively, at Fox Rothschild LLP, explore the foundation for and the potential changes in store for the hedge fund industry.

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  • From Vol. 2 No.13 (Apr. 2, 2009)

    Treasury Calls for Registration of Hedge Fund Managers with Assets Under Management Above a Certain Threshold and Outlines Framework for Other Regulatory Reforms Aimed at Limiting Systemic Risk

    On March 26, 2009, the U.S. Department of the Treasury outlined a new framework for regulatory reform, including a proposal to require advisers to hedge funds (and other private pools of capital) with assets under management above a certain threshold to register with the SEC, along with certain other regulatory reforms.  As Secretary Geithner observed in written testimony before the House Financial Services Committee that day, addressing “critical gaps and weaknesses” exposed in our financial regulatory system over the past 18 months “will require comprehensive reform – not modest repairs at the margin, but new rules of the road.”  The Treasury framework for regulatory reform includes four broad components: (1) addressing systemic risk; (2) protecting investors and consumers; (3) eliminating gaps in the regulatory structure; and (4) fostering international coordination.  To address the first category – systemic risk – the Treasury proposes, among other things: (1) registration of all hedge fund advisers with assets under management above a certain threshold; (2) formation of a comprehensive oversight framework for the Over-The-Counter (OTC) derivatives market; (3) creation of a single independent regulator responsible for “systemically important firms” and critical payment and settlement systems; and (4) imposition of higher standards on capital and risk management for “systemically important firms.”  We provide a detailed summary of the proposed framework.

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  • From Vol. 2 No.10 (Mar. 11, 2009)

    AIMA Announces New Policy Platform Calling for Increased Transparency, Aggregated Short Position Disclosure, Reduction of Settlement Failures, Manager Supervision Template and Unified Global Standards

    On February 24, 2009, the Alternative Investment Management Association (AIMA) announced its new policy platform, consisting of five new policies: (1) regular reporting and increased transparency of systemically significant positions and risk exposures by managers of large hedge funds to their national regulators (the regulator of the jurisdiction in which the manager is authorized and registered to operate); (2) an aggregated short position disclosure regime to national regulators; (3) support for new policies to reduce settlement failure (including in the area of naked short selling); (4) support for a global manager-authorization and supervision template based on the model of the UK Financial Services Authority (FSA); and (5) a call for unified global standards for the industry based on the convergence of existing industry standards work, such as that authored by AIMA, the Hedge Fund Standards Board, the International Organization of Securities Commissions, the President’s Working Group on Financial Markets and Managed Funds Association (MFA).  In an extensive interview with The Hedge Fund Law Report, Andrew Baker, CEO of AIMA, offered additional detail on each of these policies.  We offer salient points from that interview, and in addition discuss recent testimony by MFA head Richard Baker supporting the establishment of a systemic risk regulator.

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  • From Vol. 2 No.9 (Mar. 4, 2009)

    Trio of Bills Proposed in Connecticut Legislature Would Introduce Substantial State Regulation of Hedge Funds

    In the January 2009 Session of the Connecticut General Assembly, Connecticut lawmakers proposed three bills that would increase the state’s role in the regulation of private investments funds, including hedge funds, with various types of connections to Connecticut.  In particular, lawmakers proposed the following: (1) Connecticut Senate Bill No. 953, “An Act Concerning Hedge Funds,” which generally would raise qualifications for investors in private funds that have offices in Connecticut where employees regularly conduct business on behalf of the funds, and expand disclosure requirements applicable to such funds; (2) Connecticut House Bill No. 6477, “An Act Concerning the Licensing of Hedge Funds and Private Capital Funds,” which generally would require hedge funds established or conducting business in Connecticut to obtain a license from the Connecticut Banking Commissioner; and (3) Connecticut House Bill No. 6480, “An Act Requiring the Disclosure of Financial Information to Prospective Investors in Hedge Funds and Private Capital Funds,” which generally would require hedge funds domiciled in Connecticut and receiving money from Connecticut pension funds to disclose to prospective pension fund investors, upon request, certain financial information.  All three bills have been referred to the Banks Committee of the Connecticut General Assembly.  In addition, at a public hearing held by the Banks Committee on February 24, 2009, Connecticut Attorney General Richard Blumenthal proposed an alternative scheme of state hedge fund regulation.  We provide a detailed analysis of each of the three bills as well as Attorney General Blumenthal’s proposal, including a discussion of industry responses from some of the leading authorities on federal and Connecticut hedge fund regulation.

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  • From Vol. 2 No.7 (Feb. 19, 2009)

    Representatives Castle and Capuano Propose Bill on Hedge Fund Adviser Registration, and Representative Castle Proposes Bills on Pension Investments in Hedge Funds and Study of the Hedge Fund Industry

    On January 27, 2009, Representatives Michael Castle (R-Delaware) and Michael E. Capuano (D-Massachusetts) introduced the Hedge Fund Adviser Registration Act of 2009 (HFAR).  The same day, Rep. Castle also introduced the Pension Security Act of 2009 (PSA) as well as of the Hedge Fund Study Act (HFS).  Generally, the HFAR would eliminate the exemption on which many hedge and other private fund managers rely to avoid registration as investment advisers; the PSA would require disclosure by pension funds of their investments in hedge funds; and the HFS would require the President’s Working Group on Financial Markets to conduct a study of the hedge fund industry.  We offer a detailed explanation of each bill, and include insight from an interview we conducted with Rep. Capuano.

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  • From Vol. 2 No.7 (Feb. 19, 2009)

    “Oversight of Private Pools of Capital” Is Firmly on the Reform Agenda – What It Might Mean for U.S. Fund Managers

    At Mary Schapiro’s January confirmation hearing for her nomination as Chair of the Securities and Exchange Commission, she called for registration of hedge funds.  Members of the Senate Banking Committee promptly pledged to help with legislation, and bills to that effect were put forward before the month was out.  At about the same time, the “Group of 30” – an international committee of current and former senior regulators and bankers – released 18 recommendations for reform of financial market oversight.  Recommendation #4 is titled “Oversight of Private Pools of Capital” and calls for registration and regulation of managers of leveraged investment pools.  With that background it should be clear that the consensus in Washington, DC is that regulation of hedge funds – and likely private equity funds as well – should be part of the overhaul of US financial markets.  In a guest article, Shearman & Sterling partner Nathan Greene fleshes out what that consensus might mean by outlining potential new obligations for fund managers.

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  • From Vol. 2 No.2 (Jan. 15, 2009)

    The Shape of Hedge Fund Regulation to Come: Whistleblower Programs, Capital Requirements and Restructured Regulators

    On the heels of the worst year of hedge fund performance in recent memory, capped by lurid and still unfolding scandals, hedge fund managers are bracing for the near inevitability of new regulations for the industry. We discuss in detail two potential categories of new regulations – strengthened whistleblower programs for hedge funds and capital requirements for hedge funds similar to those applicable to mutual funds. Specifically, we address the mechanics of such potential regulations, the precedents and some of the practical obstacles to implementing such regulations. Also, we explore other potential new regulations, and the contemplated restructuring (and consolidation) of financial market regulators.

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  • From Vol. 2 No.2 (Jan. 15, 2009)

    The Hedge Fund Law Report Adds Innovative Features to its Regulatory & Legislative Chart

    Recently, we added innovative new features to our Regulatory & Legislative Chart to enhance its utility and relevance for subscribers.  Those new features include the following:

    ·        “Sort Chart” – enables subscribers to (1) filter the Chart by jurisdiction or (2) sort the Chart by Entity, Topic, Action or Publication Date.

    ·        “Track This Item” – enables subscribers, for each item listed in the Chart, to receive immediate e-mail updates any time an item in the Chart is updated.

    ·        “Search Chart” – enables subscribers to search the full Chart by key word.

    ·        “Maximize Chart” – enables subscribers to view the Chart in a larger format, for easier reading and navigation.

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  • From Vol. 2 No.1 (Jan. 8, 2009)

    The Hedge Fund Law Report Adds Innovative Features to its Regulatory & Legislative Chart

    Recently, we added innovative new features to our Regulatory & Legislative Chart to enhance its utility and relevance for subscribers.  Those new features include the following:

    ·        A “Sort Chart” function, which enables subscribers to (1) filter the Chart by jurisdiction or (2) sort the Chart by Entity, Topic, Action or Publication Date.

    ·        A “Maximize Chart” function, which enables subscribers to view the Chart in a larger format, for easier reading and navigation.

    ·        A “Search Chart” function, which enables subscribers to search the full Chart by key word.

    ·        A “Track This Item” function for each item listed in the Chart, which enables subscribers to receive immediate e-mail updates any time an item in the Chart is updated.

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  • From Vol. 1 No.29 (Dec. 24, 2008)

    The Hedge Fund Law Report Launches Interactive Regulatory & Legislative Chart

    The response to the international financial crisis has included an unprecedented volume and complexity of new law and regulation – a trend likely to continue and even increase in the U.S. when the next Congress convenes and the new administration takes office.  Much of that new authority will affect hedge funds and their managers, directly or indirectly.  To help our subscribers navigate the shifting regulatory landscape as efficiently as possible, we at The Hedge Fund Law Report are proud to announce the launch of our new Regulatory & Legislative Chart.

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  • From Vol. 1 No.27 (Dec. 9, 2008)

    The Hedge Fund Law Report Launches Interactive Regulatory & Legislative Chart

    The response to the international financial crisis has included an unprecedented volume and complexity of new law and regulation – a trend likely to continue and even increase in the U.S. when the next Congress convenes and the new administration takes office.  Much of that new authority will affect hedge funds and their managers, directly or indirectly.  To help our subscribers navigate the shifting regulatory landscape as efficiently as possible, we at The Hedge Fund Law Report are proud to announce the launch of our new Regulatory & Legislative Chart.

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  • From Vol. 1 No.10 (May 6, 2008)

    To Regulate, or Not to Regulate

    • At Future of Financial Regulation Conference on May 1 in New York, leading industry participants discussed status of hedge fund regulation.
    • One of key take-aways is that investors are less concerned with whether or not a hedge fund adviser is registered, and more concerned with a firm's "tone at the top" and its compliance with best industry practices (for example, the practices embodied in the recent PWG private sector committee reports).
    Read Full Article …