In this article we discuss the impact of the financial crisis on the hedge fund industry, and analyze the opportunities and challenges for hedge fund managers considering to launch new products within a more regulated legal framework such as European UCITS (Undertakings for Collective Investment in Transferable Securities).
The full article is available here.
Friday, January 29, 2010
Curtis Client Alert: UCITS – Anchor to the Weakened Hedge Fund Industry?
Tuesday, January 12, 2010
SEC Amends Custody Rules Under Advisers Act
On December 30, 2009, the SEC adopted amendments to strengthen the custody and recordkeeping rules under the Investment Advisers Act of 1940. The rules amendments, which will become effective on March 12, 2010, are intended to prevent fraudulent activity by investment advisers or custodians who have custody over client assets.
The final adopted rules amendments are less burdensome for registered advisers to private funds as those that were originally proposed in May 2009. As originally proposed, the rules amendments would have required that an independent public accountant conduct an annual surprise audit of all client accounts in the actual or constructive custody of a registered investment adviser. However, the final rules contain an exception to this surprise audit requirement for an adviser to a pooled investment vehicle that is subject to an annual financial statement audit by a PCAOB-registered independent public accountant and distributes audited financial statements to its underlying investors within 120 days of fiscal year-end. Such an adviser will also be required to obtain an audit of the pooled investment vehicle upon the pool's liquidation and promptly distribute audited financial statements to investors after the completion of such audit.
Wednesday, November 25, 2009
SEC Inspector General Releases Report on Investment Adviser Examination
On November 19, 2009, the SEC Office of the Inspector General published its final report (the "Report") on the results of the review of the SEC's processes for selecting investment advisers and investment companies for examination. The Report follows an extensive investigative report published in August on the SEC's failure to uncover Bernard Madoff's "ponzi" scheme.
The Report contains 11 recommendations designed to strengthen the SEC's process for selecting investment advisers and investment companies for examination.
Among other things, the Report recommends that:
The OCIE concurred with all 11 recommendations in the Report, while the Office of the SEC Chairman and the SEC Divisions of Enforcement and Investment Management also concurred with the partial recommendations that pertained to them.
The Report provides for a 45-day period for the provision of a written "action plan" designed to address the recommendations.
AIFM Directive Update: The Swedish Compromise and Fund Pay Code
On November 12, 2009, the Swedish Presidency of the Council of the European Union, published an amended draft (the "Compromise Draft") of the proposal for an EU Directive on Alternative Investment Fund Managers (the "Original Proposal"), which was originally published in April 2009.
The Alternative Investment Management Association had voiced concerns about the Original Proposal as being "rushed through" and "subject to undue political pressure" and warned about possible negative consequences. The Compromise Draft has softened the language of the Original Proposal on some of the more contentious issues. However, the most significant change introduced by the Compromise Draft is a proposal to regulate the compensation of fund managers to ensure that it is consistent with and promotes sound risk management, and does not encourage excessive risk-taking.
Particular emphasis is given to performance-related compensation (such as performance fees and bonuses), where some of the applicable principles include the following:
While the proposed compensation restrictions in the Compromise Draft have been characterized as controversial, other proposed amendments can be seen as progressive. This is particularly true for the removal of general leverage restrictions that the European Commission could impose on all funds covered by the Directive under the Original Proposal. Under the Compromise Draft, the use of leverage by a fund manager may only be restricted by the national competent authorities of a particular fund manager (in most cases this will be the UK FSA), on a temporary basis, and only when such measure is required in order "to ensure the stability and integrity of the financial system." In addition, the Compromise Draft allows EU fund managers to market, within the Community, third-country funds managed by such managers, under applicable national laws in each country of distribution. Further, specific requirements of closed-ended funds (such as private equity funds) have been taken into account, and the requirement for the appointment of an independent valuator for each fund has been removed.
The Directive is currently being considered by a subcommittee within the European Parliament, which is expected to produce a revised draft itself. A combined compromise proposal will then be submitted to the European Parliament for a vote, which is expected to occur in mid-2010.
Monday, November 16, 2009
Senator Proposes "Comprehensive Financial Reform"
On November 10, 2009, Senate Banking Committee Chairman Chris Dodd (D-CT) unveiled the discussion draft of the "Restoring American Financial Stability Act of 2009" (the "Bill"). The Bill proposes a comprehensive reform of the financial system and aims to "eliminate regulatory gaps that allow risky practices to fly beneath the radar" including hedge funds. The investment adviser registration provisions in the Bill essentially mirror the Private Fund Registration Act that was introduced in the House in October, and would require advisers to hedge funds and other private funds to register with the SEC and comply with certain reporting requirements that will allow the SEC to assess systemic risk. The Bill also raises the threshold for federal regulation of investment advisers from $25,000,000 to $100,000,000, which is expected to increase the number of advisers subject to state supervision by 28%. While the Bill includes an exemption from registration as an investment adviser with the SEC for venture capital fund advisers (similar to the one proposed by the Private Fund Registration Act), it would also exempt advisers to private equity funds from SEC registration. The SEC would be required to define the meaning of the term "private equity fund" for the purposes of the exemption. Finally, the Bill would exempt any "family office", as defined by the SEC, from the definition of an "investment adviser" pursuant to Section 202(a)(11) of the Investment Advisers Act of 1940.
Foreign Account Tax Compliance Act of 2009: Impact on Funds
On October 27, 2009, Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, and Congressman Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, introduced the Foreign Account Tax Compliance Act of 2009 (the “Bill”). The Bill, which was immediately backed by President Obama and Treasury Secretary Timothy Geithner, among other things, would significantly modify the U.S. withholding and information reporting rules applicable to cross-border transactions, and as such would have a direct impact on many private investment funds and their investors. Further information on the Bill and its impact is available on the Curtis Tax Updates blog.
Wednesday, November 4, 2009
Update: Private Fund Registration Act Advances
On October 27, the U.S. House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act (the "Bill"), introduced by Congressman Paul E. Kanjorski (D-Pa.). The Bill, which would require advisers to hedge funds and other private funds to register with the SEC and would impose certain recordkeeping and regulatory disclosure requirements, received almost unanimous support in the Committee as it was passed with a 67-1 vote.
If enacted, the Bill would remove the "private client" exemption of section 203(b) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), which exempts advisers from registration if they have had fewer than 15 clients during the preceding 12 months. The version of the Bill cleared by the Committee includes several amendments to the original proposal which alter the potential registration obligations of advisers.
According to Rep. Kanjorski, the newly introduced reporting costs are expected to be in the range of $5,000 to $15,000 for most hedge funds, while they could exceed several hundred thousand dollars for more complicated hedge funds.
The bill is expected to go to a full House vote in November.
Tuesday, October 27, 2009
FSA Publishes Report on Impact of AIFM Directive
On October 15, 2009, the UK Financial Services Authority published a report (the "Report") prepared by Charles River Associates assessing multiple aspects of the proposed EU directive on Alternative Investment Fund Managers, which we covered extensively since it was published in April. The Report looks at the proposed directive's impact on the alternative funds industry (in particular the cost implications), investor choice and returns, and employment and economic growth in the EU.
The Report, which is based on data gathered from a cost survey and interviews with market participants including professional investors, trade associations and companies involved in the provision of different fund types, estimates that significant new compliance costs would arise for fund managers. In particular, one-off costs are expected to amount to €3.2 billion, while an additional €311 million is expected to be spent on ongoing compliance with the directive. Additional costs are expected to arise in connection with the envisaged depositary duties and their liabilities. The Report forecasts the biggest impact will be felt by private equity funds due to the inconsistency of their business model with the proposed compliance requirements. For example, because private equity funds invest in unlisted companies to which the fund managers often provide ongoing management assistance, the funds typically rely on internal teams familiar with a company's operations to establish the value of the fund's investment. By requiring that private equity funds appoint an independent valuator to undertake the complex valuations associated with such investments, the directive is likely to increase private equity fund operational costs significantly. The interviewees expect these added costs to be passed on to the investors leading to significantly smaller investment returns.
While the Report does not establish what percentage, if any, of non-EU funds will relocate to the EU as a result of the proposed directive, it does suggest that the high compliance costs associated with the directive may present too high of a burden for some non-EU funds, which will instead decline to market their funds within the EU, leading to reduced choice for EU investors. In its conclusion, the Report states that the proposed directive "will cause a fundamental reorganisation in the business model of global fund mangers (with significant one-off costs) and may lead to costly changes of legal structures and domicile", and concludes that its burdens outweigh its benefits.
Monday, October 19, 2009
Singapore to Abolish "Private Manager" Exemption
As reported by Bloomberg, hedge fund managers in Singapore will likely need to be licensed as a result of anticipated Singapore central bank regulation. Hedge fund managers in Singapore have been able to avail themselves of an exemption from holding a capital-markets services license as long as they managed funds on behalf of no more than 30 "qualified" investors, as defined by local laws. The new regulation would remove the current exemption in line with guidelines by the G20 and IOSCO.
While the new regulation is expected to raise the operational costs of hedge funds in Singapore, it is expected that "the potential cost burden will be modest and won’t damage the industry."
Monday, October 5, 2009
Congressman Proposes Private Fund Registration Act
On October 1, 2009, House Representative Paul E. Kanjorski, Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released a discussion draft of legislation to regulate private advisers to hedge funds and other private pools of capital. The draft bill, called the "Private Fund Investment Advisers Registration Act of 2009" (the "Bill"), substantially mirrors the fund adviser legislation, introduced by the Obama Administration in July.
However, in contrast to the Obama Administration proposal, the Bill would exempt "venture capital fund" advisers from registration with the SEC under the Investment Advisers Act of 1940. The SEC would then be required to identify and define what constitutes a "venture capital fund" for purposes of the exemption.
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