Last year, the president signed FIRRMA into law, clarifying how CFIUS will treat investments made by private equity funds subject to future regulations, and simultaneously expanding CFIUS' jurisdiction to encompass non-controlling investments in "critical infrastructure" and "critical technology" companies, as well as companies that maintain or collect sensitive data of U.S. citizens (collectively "Sensitive U.S. Businesses"). This expanded jurisdiction will have a significant impact on foreign investors generally, as well as U.S. private equity funds with foreign general or limited partners.
Disclosure of charges is regulated and standardised for retail investors, but is currently less so for institutional investors. Consequently, institutional investors are finding it difficult to obtain and analyse cost data from asset managers or accurately compare costs across the market.
This was one of the findings of the FCA’s Asset Management Market Study in 2017, which prompted the creation of the Institutional Disclosure Working Group (IDWG). Off the back of the IDWG’s recommendations, the ‘Cost Transparency Initiative’ (CTI), a partnership initiative between the Pensions and Lifetime Savings Association, the Investment Association (IA), and the Local government Pension Scheme Advisory Board (LGPS), was launched in November 2018.
An increasingly sophisticated and active OCIE division, innovative market disruptors, a maturing credit cycle, and a philosophical change in how the private fund industry views and utilizes litigation are likely to lead to increased regulatory scrutiny and litigation risk for advisers (and their funds) in 2019. With that backdrop, we are pleased to present our Top Ten Regulatory and Litigation Risks for Private Funds in 2019.
The United States recently enacted the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which both expands jurisdiction and codifies recent practices of the Committee on Foreign Investment in the United States (“CFIUS”). As a result, CFIUS may now review the national security implications of acquisitions of control by foreign investors of U.S. businesses, certain minority investments and real estate acquisitions.
In the past year, the U.S. Securities Exchange Commission (SEC) and Chairman Jay Clayton have repeatedly cautioned the cryptocurrency and initial coin offering (ICO) industries about the securities law implications for digital assets. On February 6, 2018, in testimony before the Senate Banking Committee, Chairman Clayton notably asserted that “[e]very ICO I’ve seen is ‘a security.’”
Issuing an initial coin offering (ICO) is a new and innovative way for companies to infuse capital into their enterprise. However, several regulatory agencies have increased their scrutiny of ICOs, including the U.S. Securities and Exchange Commission (SEC).
As technology removes physical borders from the securities industry, international financial institutions must remain vigilant to ensure their business activities do not violate US regulations.
On May 24, following passage in both the House and Senate earlier this year, President Trump signed into law a financial services reform bill relaxing certain elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). The bill, titled the “Economic Growth, Regulatory Relief, and Consumer Protection Act" (the “Act”), limits the application of various provisions of Dodd-Frank to small and mid-sized banks and raises asset thresholds above which larger banks are subject to increased oversight and regulation. The Act also amends certain other provisions of the federal securities laws. Unlike earlier proposed legislation seeking a comprehensive re-working of Dodd-Frank, such as the Financial CHOICE Act (see memorandum on the proposed legislation here), the Act preserves the basic structure of Dodd-Frank while making various targeted adjustments.
Recent federal tax legislation introduced "Opportunity Zones," a new community reinvestment tool designed to use tax incentives to drive long-term investment to rural and low-income urban communities throughout the nation. The Opportunity Zone program is the first new national community investment program in over 15 years and has the potential to be the largest economic development program in the U.S. This broad legislation will benefit many stakeholders from individual taxpayers to developers and fund sponsors.
This tax brief discusses those aspects of the US tax reform which have most relevance to Australian corporate and international taxation, both from a tax policy perspective and for inbound and outbound investment to and from the US.
On December 15, 2017, a Conference Committee established by the House of Representatives and the Senate released a unified agreement on the “Tax Cuts and Jobs Act” (the “Conference Agreement”) in the wake of the passages of the House version of the Tax Cuts and Jobs Act on November 16, 2017, and the Senate version on December 2, 2017.
The Tax Cuts and Jobs Act (the New Tax Law), signed into law in late December by President Donald Trump, makes major permanent and temporary changes to the US federal tax system. The changes will have a significant impact on the structuring of US and foreign investments.
The European Securities and Markets Authority (ESMA) published on 19 July 2016 its final advice to the European Commission (the Commission) on the extension of the marketing passport under the Alternative Investment Fund Managers Directive (AIFMD) to 12 non-EEA countries, including the United States. This note is intended to highlight ESMA’s advice to the Commission and set out the steps firms would need to consider when applying for a third country passport.
On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (the ’FAST Act’). The legislation primarily related to the federal transportation matters, but lurking toward its end is an amendment to the Securities Act of 1933 (the ‘Securities Act’) establishing a new registration exemption for private resales of securities. The exemption is embodied in new §4(a)(7) of the Securities Act. It is largely based on (but does not replace) the so-called ‘Section 4(a)(1-½) exemption’ that securities lawyers have developed over time under the SEC’s eye.
On August 25, 2015, the Financial Crimes Enforcement Network (FinCEN) proposed rulemaking that would require registered investment advisers, including certain hedge funds and asset managers, to establish antimony laundering (AML) programs and monitor and report suspicious activity. In 2003, a similar rule was proposed and later withdrawn, and this new proposal comes amid an increasing focus on criminal and regulatory enforcement actions for AML, Office of Foreign Assets Control (OFAC), and Foreign Account Tax Compliance Act (FATCA) violations.
On July 23, 2015, the Internal Revenue Service (IRS) issued long-awaited proposed regulations discussing the taxation of management fee arrangements commonly used by private equity funds and their management. The proposed regulations address the tax treatment of disguised payments for services under Section 707(a)(2)(A) of the Internal Revenue Code (the Code) where a partner has rendered services to a partnership in a capacity as other than a partner. By specifically classifying certain fee arrangements, including particular carried interest mechanisms, as disguised payments for services, the proposed regulations target purportedly abusive situations where private equity funds use management fee waivers to convert services income, taxable at the ordinary rates, into income items meriting capital gain treatment.
The SEC signals continued scrutiny of asset management firms for all manner of violations — including technical violations first identified in exams. On February 26, Julie Riewe, the Co-Chief of the SEC’s Asset Management Unit (AMU), delivered a speech to the IA Watch 17th Annual IA Compliance Conference that could fairly be described a “state of the unit” address. Titled “Conflicts, Conflicts Everywhere,” Riewe’s speech highlights the AMU’s focus on what the SEC views as conflicts of interest in all shapes and sizes.
Last year at about this time in December, we were still working our way through the final Volcker Rule. A year has passed and we are still attempting to understand the exceptions that may be available in connection with hedging of exposures arising in connection with the issuance of structured products. We anticipate that there will be additional regulatory guidance on the Volcker Rule. In fact, in their public statements, Federal Reserve representatives have alluded to possible changes relating to the metrics and compliance policy requirements.
“It is difficult to overstate how much the regulatory landscape for hedge fund managers has changed over the past four years.” So said Norm Champ, director of the Securities and Exchange Commission’s Division of Investment Management, in a recent speech wherein he outlined how the SEC has built on its newfound authority to regulate private fund advisers, including by taking advantage of its increased access to information and new analytical tools. As we’ve previously discussed in this newsletter, since Dodd-Frank, most investment advisers to private funds, such as hedge funds, now have to register with the SEC, thus subjecting them to SEC oversight and regulatory requirements.
North American hedge funds continued to record excellent growth for 2014 year-to-date, keeping up with the strong gains seen in 2013 which has raised the region’s share of assets under management (AUM) to approximately two-thirds of the global hedge fund industry. As at August 2014, the total AUM of the North American hedge fund industry has breached the US$1.4 trillion mark to stand at US$1.43 trillion managed by a total of 5,093 hedge funds.
It’s probably fair to speculate that there were significant numbers of tax aficionados (including the author of this article) among the audience for Ken Burns’ recent public television extravaganza on the Roosevelt dynasty. Unfortunately for this segment of the audience, the intersection of tax and FDR was not highlighted, with the passage of the Social Security Act receiving only scant mention. Social security taxes have risen dramatically since the enactment of the law.
In a recent speech to the Practising Law Institute’s Private Equity Forum, Norm Champ, Director of the SEC’s Division of Investment Management, discussed the SEC’s increasing attention to the growth in ‘alternative mutual funds’, or open-end mutual funds that feature investment strategies more typically seen in private funds. Similar to recent speeches and discussions related to the SEC’s oversight of hedge funds, previously discussed in this newsletter last November, Champ’s speech contained useful guidance about the types of risks the SEC is monitoring in the alternative mutual fund space, but it also conveyed that the SEC will be ramping up inspection into whether investment advisers to these funds are fully complying with their duties.
Founded in 2006, Quantedge is a quantitative global macro hedge fund with offices in Singapore and New York.
Loans secured by interests in hedge funds and, to a lesser extent, private equity funds have been a staple of many banks’ credit offerings for years. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173) (Dodd-Frank) in general, and the part thereof known as ‘the Volcker Rule’ in particular, have raised a basic question: “Can a banking institution subject to the Volcker Rule (which is virtually every banking institution in the U.S.) continue to make and enforce hedge fund and private equity fund secured loans?”
Over the last few years, we all have become fairly adept at expecting and addressing the unexpected; however, it still remains useful at year-end to consider what’s on the horizon. Here are our thoughts on what to expect in the structured products area in 2014.
In a recent speech before the Managed Funds Association, U.S. Securities & Exchange Commission (SEC) Chair Mary Jo White discussed what she called a “new era of transparency and openness” for the private funds industry, including hedge funds. Her address largely provided an overview of two significant pieces of legislation, namely, the Dodd-Frank Act, which among other things requires most hedge fund advisers to register with the SEC, and the JOBS Act, which lifted the longstanding ban on solicitation in connection with certain private securities offerings.
On October 23, 2013 the Securities and Exchange Commission (the ‘SEC’) proposed Regulation Crowdfunding (Regulation CF) to implement the Crowdfunding provisions of Title III of the Jumpstart Our Business Startups Act of 2012 (the ‘JOBS Act’). The new rules mirror the provisions of Title III, expand the scope and requirements of the exemption in several key respects and establish the guidelines for issuers, intermediaries and investors in the Crowdfunding space. To be clear, Regulation CF addresses the on-line based issuance of securities to the general public without registration and represents a sea-change in the past 80 years of securities regulation.
On August 12, 2013, the Commodity Futures Trading Commission (the “Commission” or “CFTC”) issued final rules (the “Final Rules”) with respect to certain compliance obligations for commodity pool operators (“CPOs”) of investment companies registered under the Investment Company Act of 1940 (the “Investment Company Act”) that are required to register with the CFTC due to the recent amendments to section 4.5 of the regulations under the Commodity Exchange Act (the “Regulations”).
A typical “master-feeder” private investment funds structure uses a combination of corporate entities, including companies, limited partnerships and/or limited liability companies. Investment managers should consider the consequences associated with choosing one form instead of another early in the structuring process.
In March, the SEC settled two enforcement actions involving private equity. The two actions are just the latest indicators of the SEC’s wide ranging and close scrutiny of the private equity industry, which has been ongoing for some time. We are hearing multiple speeches by SEC Staff focused on perceived compliance problems in the private equity industry. Focusing on both registered and unregistered investment advisers, the SEC has expressed concern with virtually every type of violation, large and small, of which a private equity investment adviser is capable. From the manner in which the offering is conducted to violations of fiduciary duties - improper valuations of portfolio assets, conflicts of interest, favouring some clients over others, improper use of unregistered broker-dealers and finders, general solicitation in private placements, inaccurate disclosures – nothing is being overlooked.
On January 17, 2013, the Internal Revenue Service issued final regulations that provide guidance on the ‘Foreign Account Tax Compliance Act’ (FATCA) provisions contained in sections 1471-1474 of the Internal Revenue Code.
This edition of our update on the pan-European short selling Regulation focuses on the implications of the Regulation for market participants in the United States (US). In particular, we focus on market participants whose trading activities are conducted in the US in financial instruments that have a nexus with the European Union (EU), such as a parallel EU listing of a financial instrument or an EU listing of the underlying financial instrument. Such activities, which may subject the market participant not only to the US short selling regime, but also to the Regulation,3 include short sales of (i) certain American Depositary Receipts (ADRs) of EU-listed issuers, and (ii) dual listed securities of issuers that are concurrently listed on one of the EU and US trading venues.
In anticipation of the SEC’s final rulemaking on the JOBS Act, the hedge fund industry is preparing for what are expected to be landmark changes. With the elimination of the prohibition against general solicitation and advertising, hedge funds will now have the ability to openly communicate with investors and the broader public. But to what extent will these changes affect the way hedge funds currently do business? And who will these changes benefit? The industry seems to have taken a wait-and-see approach since the President signed the Act into law in April.
Hedge funds are increasingly subject to international and local data protection regulations. The amount of personal data held by hedge funds and service providers continues to grow. As obligations to collect data increases with new regulations such as the U.S. Foreign Account Tax Compliance Act (FATCA), hedge fund managers and other service providers must pay attention to data protection laws and regulations.
Creating a hedge fund to protect and manage your assets or the assets of others for a fee is a practical way to earn a living. Successful hedge funds continue to attract the wealthy, the working not-so-wealthy, businesses, and pension funds looking for better investment options. Despite recent law changes, the United States still offers a favourable environment for smaller hedge fund startups. The purpose of this article is to highlight key U.S. hedge fund development and planning issues of interest to hedge fund sponsors worldwide.
The USD-INR exchange rate is an important indicator of investor sentiment and can significantly impact not only the fortunes of individual firms and sectors but also the government. While this exchange rate has been very stable overall for the last five years, there have been periods of significant volatility. For example, USD-INR moved from 40.0 to 51.5 from March 2008 to March 2009. We believe there is a significant downside risk to USD-INR exchange rate and will explore some of the risk factors here.
As the Shariah addresses human activity generally, so does Islamic finance – in principle particularly – go beyond mere technicalities and legalities, urging a concern for all of creation as service to the divine Islamic tenets, for example, promote honesty, transparency and fairness, express concern for the well-being of employees, partners and counterparties, and place certain limits on monopoly and wealth concentration.
Japanese interest in US-based hedge funds is projected to increase in the years ahead as Japanese institutional investors and pension managers, in particular, seek to achieve more robust portfolio returns. Japan's aging population, pressured by a low domestic interest rate environment and the need to meet obligations, will be among the main drivers of the pensions' investment activity.
Driven by the prevailing threat of an AIFM regulatory clampdown, many European hedge funds are now looking westwards to access the rich institutional investor pickings in the US. But does the land of plenty have enough to go around?
Europeans could learn a lot from their counterparts in the US on how to run a hedge fund business. It is no surprise that the vast majority of the 8,000 hedge funds worldwide operate from the US and of those, most can be found in New York.
A fund without a fund is an oxymoron – but not in the increasingly crowded world of private equity (PE) and venture capitalism.
Financiers are using so-called fundless structures as their calling card to enter India, where an estimated 350-400 PE funds are already jostling for space.
Jaganath Swamy, a former McKinsey and Company consultant and a Wharton MBA, has used one such structure when he headed back to India after a short stint with a large PE fund in New York. He chose to launch a pledge fund after he saw that a number of limited partners (LPs) in the US were unhappy with India-focused funds.
After a decade of steady growth, Central America is weathering the global financial downturn comparatively well and continues to offer regional opportunities for private equity. Historically, this small, diversified region has suffered from armed conflict, political instability, weak institutions and a lack of legal frameworks and enforcement. However, stable democratic governments allied with disciplined fiscal policies brought an unprecedented period of growth in the past decade with steady growth rates on average above 5%.
Socially responsible investing (SRI) is an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. Social investors include individuals, businesses, universities, hospitals, foundations, pension funds, corporations, religious institutions and other non-profit organisations that consciously put their money to work in ways designed to achieve specific financial goals, while pursuing a future based on sustainability and the needs of multiple stakeholders, including employees, their families and communities.
Although the bulk of activity and growth in Islamic finance lies in the Muslim world, the US remains an important market for many Islamic investors because of its depth and diversity. Many foreign-based institutions that have long invested in the US continue to do so, and many new, significant entries have been made over the last few years. As Islamic finance has grown both quantitatively and qualitatively worldwide, so have the number and sophistication of its participants.
Despite the reported US$276 billion in assets that Islamic finance holds globally (according to a recent KPMG study), the industry has only recently broken the billion dollar mark in the wealthiest and most diverse nation in the world, which although predominantly Christian, has the largest Muslim population outside the Muslim nations. While the size of the Muslim population in the US and Canada is not known because government statistics, including census data, by law cannot collect religious affiliations to prevent discrimination on the basis of religion, it is estimated by researchers to be nearly 10 million strong.
The number of offshore hedge funds has increased due to the ability of these funds to operate outside the scope of government regulation and disclosure requirements. Hedge funds are set up as offshore or onshore funds to allow for different groups of investors. US-based hedge fund managers who have significant potential investors outside the United States and/or US tax-exempt investors typically create offshore funds. Many hedge fund managers use offshore hedge funds to provide privacy to investors. In those cases where complete investor confidentiality and privacy are necessary, an offshore fund should not accept US investors and the fund manager should not be based in the United States.
In 1972, the ‘Reserve Fund’ was established as the first money market fund, enabling investors to invest cash balances in an efficient and effective manner. Fidelity and Scudder, Stevens and Clark were also putting the final touches on their own funds and quickly revolutionised the mutual fund world. Today, there are more than 1,300 money funds in the United States alone, and money market funds are offered in all the major currencies throughout the world.
On October 26, 2004, the US Securities and Exchange Commission (the "SEC") adopted new rule 203(b)(3)-2 and conforming and transitional amendments to other rules (collectively, the "Rules") under the Investment Advisers Act of 1940 (the "Act") that will require most hedge fund advisers to register with the SEC. The SEC also amended the form required to effect registration, Form ADV. Most unregistered US and non-US advisers of hedge funds currently rely on the "private adviser" exemption from registration under the Act for an investment adviser that has had fewer than 15 clients during the preceding 12 months.
Given the ongoing stock market downdraft since March 2000, U.S. mutual fund inflows have dramatically slowed down while hedge fund investing has exploded. As a matter of fact according to Galbraith and Viviano (2002) of Morgan Stanley, net hedge fund inflows grew to the same size as net mutual fund inflows in 2001.
Let us assume for sake of argument that you are an Asian based start-up looking to raise money in the West.
The first decision to make is the route you want to take: the seeder/feeder/dribbler route or simply going it alone.
The seeder route means finding a friendly provider of capital for the fund, who in return will expect a percentage of the management company, low or no fees on money invested and possibly all sorts of other incentives such as capacity rights, transparency and some interesting buyback provisions. With no "normal terms" for such deals, very much depends on the respective bargaining strengths of the two sides; anecdotal evidence shows that a US$20m investment in the fund for 30% of the management company is in the ball park.
This chapter presents a general overview of the principal U.S. regulatory requirements that are applicable to private investment funds and their managers.
The U.S. Treasury has recently given notice of a proposed set of new rules, to be promulgated under the Banking Secrecy Act, that will directly and very shortly affect many offshore hedge funds. The new rules form a part of the new USA PATRIOT Act regulatory regime and are intended to promote the prevention, detection and prosecution of international money laundering connected with terrorism. They will require "financial institutions" (which will, practically speaking, include many offshore hedge funds - see below) to make a short filing with the U.S. Treasury containing basic information about the fund and its manager. In addition the rules will require an offshore fund to adopt an anti-money laundering program that, at a minimum, includes: (i) the development of internal policies, procedures and controls; (ii) the designation of an internal compliance officer; (iii) ongoing employee anti-money laundering training; and (iv) an independent review to test the sufficiency
The U.S. Treasury has recently given notice of a proposed set of new rules, to be promulgated under the Banking Secrecy Act, that will directly and very shortly affect most offshore hedge funds. The new rules form a part of the new USA PATRIOT Act regulatory regime and are intended to promote the prevention, detection and prosecution of international money laundering connected with terrorism. They will require "financial institutions" (which will, practically speaking, include a great number of offshore hedge funds - see below) to make a short filing with the U.S. Treasury which is to contain basic information about the fund and its manager. In addition the rules will require an offshore fund to adopt an anti-money laundering program that, at a minimum, includes: (i) the development of internal policies, procedures and controls; (ii) the designation of an internal compliance officer; (iii) ongoing employee anti-money laundering training; and (iv) an independent review test the sufficie
We asked 16 managers, based around the world and overseeing absolute return Asia Pacific strategies, their views of where is the best location to establish a hedge fund. We gave each of them the same 12 questions (reproduced below), which centered on the investment process and capital raising. Their answers were remarkably similar, suggesting that there may be a clear formula which new, and arguably some established, managers should follow.