Wednesday, December 8, 2010

AIFM Directive

The AIFM Directive – At Last
In April 2009, when EU Commissioner Charlie McCreevy announced the proposal for a Directive on Alternative Investment Fund Managers (the “AIFM Directive”), it was widely viewed as a rushed political response to raging populist anger in France and Germany against alternative investment funds that, due to their perceived excessive leverage and risk-taking, were considered catalysts for the global financial crisis.

The Controversial Debate

The initial draft law, which proposed a broad overhaul of regulation over managers of hedge funds, real estate funds, private equity funds and other collective investment vehicles (save for UCITS1), was roundly criticized by the alternative asset industries of Europe and the US as (i) not achieving any of its legitimate goals, and (ii) not taking into account substantial differences between the business models and asset classes of various types of alternative investment funds, and thus stifling the interests of investors and managers alike.  Nowhere was the draft law more hotly debated than the UK, which is home to more than 80% of European hedge fund managers and where fears of a mass exodus of managers to Switzerland and certain other non-EU financial centres ran rampant.


The Result

Fast-forward 19 months – witness to a record 1,700 proposed amendments to the draft, multiple compromise proposals, impact assessments, and lengthy negotiations – and the mist surrounding alternative investment fund regulation in Europe finally lifted after 11 November 2010, when the European Parliament adopted the AIFM Directive with an overwhelming majority.2  Suddenly, the regulatory picture for the industry looks considerably less ominous than initially anticipated.


The adopted text maintains the core features of the original proposal aimed at achieving better investor protection, enhanced transparency, and effective prudential oversight of systemic risks.  The related provisions include requirements regarding the managers’ future reporting and disclosure towards regulators and investors, their minimum capitalization, remuneration, risk management, liquidity, use of leverage on the fund level, conflicts of interest, fund control positions in portfolio companies, fund portfolio valuation, and marketing/fundraising.


Notwithstanding the broad regulatory scope of the adopted text, it adopts a substantively less draconian and protectionist stance toward industry regulation than that of certain prior versions.  This softening in position is most apparent in the relatively watered-down depositary liability regime and the planned introduction (as of 2015) of a “passport” for the marketing of non-EU funds within the Union.  Even before the extension of the passport to non-EU funds, such funds will, subject to certain minimum conditions, be able to access specific EU markets in compliance with their respective existing private placement regimes.  The adopted text also stops short of proscribing passive, non-solicited investments by EU investors in non-EU funds.

Market Impact of the AIFM Directive

While stakeholders generally view the AIFM Directive as imposing substantial compliance burdens on the alternative asset universe, the consensus view is that neither a fatal blow to the nearly €2 trillion-strong industry, nor a prompt en masse manager exodus from the EU, is forthcoming.  Rather, the expected behavioural consequence of the AIFM Directive is that fund managers will largely self-segregate into one of two groups: those managers with substantial interest in EU-based fund marketing and investment activity, and those focused on fund marketing and investment outside the EU.


Those managers seeking to tap the EU investor base or operate within the EU will need to begin assessing the impending impact of the AIFM Directive on their current and future fund activities and platforms, with a view toward modifying those activities and platforms to ensure compliance.  On the other hand, those managers with little or no connection to the EU markets should conduct a cost-benefit analysis as to the perceived advantages and disadvantages of becoming subject to the AIFM Directive and act accordingly.


Exemptions

In addition to the nationality mix of a manager’s investor base, the size of its fund management operation and its investment strategy will also influence the manager’s assessment of the AIFM Directive, as certain exemptions from the manager authorization and ongoing compliance requirements may be available.  In particular, the agreed text sets forth a “lighter” supervisory regime for a manager whose fund portfolio does not, on aggregate, exceed (i) €100 million, or (ii) €500 million, provided that the fund platform is unleveraged (with leverage being assessed only at the fund level, not at the portfolio company level) and the investors are “locked-in” for a minimum five-year period. 


Managers that are able to avail themselves of one of the foregoing exemptions will still be required to register with their home-state regulator, satisfy certain initial and ongoing disclosure requirements, and comply with any applicable national regulation in their respective Member States.  An exempted manager will be able to largely avoid the compliance costs associated with the AIFM Directive but will be restricted in its marketing efforts due to the non-availability of the EU passport.  As a result, managers with a broad pool of existing EU investors, or those managers seeking to expand their marketing efforts into multiple EU Member States, may elect to voluntarily opt into the AIFM Directive framework, thereby subjecting themselves to the full gamut of compliance requirements.


Interestingly, as the AIFM Directive is concerned exclusively with managers of “funds”, the Euro-denominated thresholds associated with the foregoing exemptions only take into account the value of fund portfolio assets, without regard to assets associated with managed accounts or other non-collective investment management arrangements.  As such, some investment managers will be able to manage large single-investor portfolios without falling under the AIFM Directive umbrella.


UCITS as an Alternative

Another option for the avoidance of future AIFM regulation that may appeal to hedge fund managers with a substantial EU investor base or fund platform is the possibility of migrating to or creating mirror investment vehicles under the UCITS regime.  UCITS III-compliant hedge funds (“NewCITS”) represent a trend that has been gaining momentum since the dawn of the financial crisis and may climax with the advent of the AIFM Directive.  The UCITS framework offers managers a number of benefits, such as new sales channels (to retail and certain institutional investors), broader geographic reach, economies of scale and a recognized global brand, while not substantially curtailing absolute-performance, long-bias strategies.  The “gold-plating”3 associated with the UCITS brand has historically come at a higher compliance cost for managers, but the overall impact of the AIFM Directive, coupled with the added flexibility afforded by the upcoming UCITS IV, may ultimately render this distinction meaningless.


Conclusion

The regulatory implications and consequent market reactions to the advent of the AIFM Directive, together with related developments under the UCITS regime, represent the dawn of a brave new world for the EU alternative asset industry.  Managers within and without the EU will be confronted with a sweeping array of regulatory challenges of first impression, challenges which will call into question the fundamentals of how and where the alternative asset industry structures, sells and locates its products.  The manner in which other leading (offshore) financial centres position themselves to competitively attract elements of the industry and market players also remains to be seen, as does the overall efficacy of the EU’s regulatory initiatives in the face of future economic turmoil, though assuredly we are now witnessing merely the opening act of a several-act play, with more drama to follow.


The AIFM Directive is due to be transposed into national law by EU Member States by 2013.  In 2017, the European Commission is required to review the AIFM Directive’s effectiveness in achieving its regulatory goals and market impact.  Immediately after the formal completion of the EU legislative process, the European Commission will begin working with the Committee of European Securities Regulators (“CESR”)4 to promulgate technical advice and undertake rulemaking under the AIFM Directive.  Finally, in 2018, ESMA is due to review the efficacy of the dual marketing system and potentially end the national private placement regimes.



1 Gold-plating refers to the practice of national bodies exceeding the terms of European Community directives when implementing them into national law.

2 CESR will be replaced by the newly established EU Securities and Markets Authority (“ESMA”), which is due to begin its operations on 1 January 2011.

3 Undertakings for Collective Investment in Transferable Securities (“UCITS”) are pan-European open-ended retail funds organized and operated within the UCITS regulatory regime currently consisting of Directive 85/611/EEC, amended, inter alia, by Directives 2001/107/EC and 2001/108/EC (UCITS III), and recast by Directive 2009/65/EC (UCITS IV).

4 The text was approved by 513 votes to 92, with three abstentions.  The Council of the European Union is expected to give its formal approval of the adopted text in the coming weeks.  However, this is widely expected to be a rubber-stamping exercise.

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Thursday, October 21, 2010

Ecofin Council Reaches Agreement on AIFM Directive

At a meeting of the Economic and Financial Affairs Council ("Ecofin") held on October 19, 2010, the Council of the European Union issued a press release setting out its position with a view to concluding negotiations with the European Parliament on the proposed AIFM Directive. The press release indicates the Council's belief that there is a "large degree of convergence" between the Council and the European Parliament, and its hopes to be able to conclude the negotiations in the near future.

In a statement issued following the Ecofin meeting, Michel Barnier, European Commissioner for Internal Markets and Services, stressed the lengthy and difficult negotiations on the subject between Member States, but indicated his belief that a good compromise has been reached. In particular, he highlights that the "essential elements of the initial Commission proposal have been preserved: the broad scope, robust rules, increased transparency, and better protection for the investor."

Neither the Council press release nor Mr. Barnier's statement provides a copy of the text that was agreed at the Ecofin meeting. However, Reuters reports that the agreed text represents a compromise which follows the June 2010 stalemate in negotiations. This compromise is most evident in relation to one of the more contentious aspects of the proposed directive, the so-called "third-country" provisions, which were heavily disputed between France and the UK. While Mr. Barnier's statement confirms that the agreed text does foresee a passport for third-country alternative investment funds and managers, Reuters suggests that in order to reach an agreement, the UK agreed to delay the "start of this new licensing scheme for foreign-based funds until around 2015." It is understood that during the transitional period existing national private placement regimes will co-exist alongside a European passporting scheme.

Andrew Baker, CEO of AIMA, the global representative of the hedge fund industry, indicated that while the agreed text was a "considerable improvement" on the original proposal, “[t]here is still much in the Directive that will be difficult to implement for the industry and there will be a heavy compliance burden that the industry will have to bear. But the impact will be far less severe than if something close to the original proposal had been passed."

The agreed text will now be subject to a trialogue between the Council, the European Parliament and the Commission. If, as expected, it is approved, the agreed text will go to a plenary debate of the European Parliament for approval on November 10, 2010.

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Saturday, September 4, 2010

The Dodd-Frank Act: Implications for Non-U.S. Investment Advisers

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act1 (the “Act”), a comprehensive bill constituting a sweeping overhaul of the regulatory framework of the U.S. financial sector.  In this article we analyze the implications of the Act for non-U.S. advisers to investment funds whose clients include U.S. persons, with a particular focus on Title IV of the Act, the “Private Fund Investment Advisers Registration Act of 2010.”  For such advisers, the most significant change brought about by the Act is the elimination of the current “private adviser” exemption under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).  While the newly enacted Act still provides various exemptions from registration as an investment adviser with the U.S. Securities and Exchange Commission (the “SEC”) under the Advisers Act, including one for certain foreign fund advisers, these exemptions are much more restrictive than the private adviser exemption which is available under current law.


In practice, the Act is likely to require most non-U.S. advisers to private funds who currently have U.S. investors or who intend to raise significant funds in the United States to apply for SEC registration and comply with the substantial regulatory requirements applicable to investment advisers registered under the Advisers Act.

Background

The primary statute regulating the provision of investment advisory services in the United States is the Advisers Act, which requires all investment advisers, unless exempted, to register with the SEC and comply with certain recordkeeping, regulatory reporting and disclosure rules, while also subjecting them to inspection and examination by the SEC staff. 

Thus far, non-U.S. advisers have broadly relied upon the so-called “private adviser” exemption, which currently exempts from registration any adviser who:

  1. has had fewer than 15 U.S. clients in the preceding 12 months;
  2. does not hold itself out generally to the public as an investment adviser; and
  3. does not act as an investment adviser to any “investment company,” as defined in the Investment Company Act of 1940, as amended (the “1940 Act”).

When counting the number of U.S. clients for purposes of qualifying under the private adviser exemption, the adviser is generally able to treat each fund that it advises as a separate client and is not required to “look through” the fund and count the number of individual U.S. investors therein as clients. 

To date, the private adviser exemption has allowed non-U.S. advisers broad flexibility to accept subscriptions from U.S. investors for their funds without being required to register as investment advisers under the Advisers Act. Once implemented, the provisions of the Act are likely to substantially reduce this flexibility.

New Registration Requirements

The Act eliminates the private adviser exemption by striking Section 203(b)(3) from the Advisers Act.  As a result, a large number of private fund advisers who have previously relied on the private adviser exemption will now be required to register as investment advisers with the SEC, unless they qualify for another exemption.

The most relevant exemption for non-U.S. advisers introduced by the Act is the one available to “foreign private advisers.”  The term “foreign private adviser” is defined to include any investment adviser who:

  1. has no place of business in the United States;
  2. has, in total, fewer than 15 clients and investors in the United States in private funds advised by the investment adviser;
  3. has aggregate assets under management (“AUM”) attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25 million (or a higher amount if the SEC deems appropriate); and
  4. neither holds itself out to the public in the United States as an investment adviser, nor acts as an investment adviser to an investment company or business development company. 

The Act defines a “private fund” as an issuer that would be an “investment company” under the 1940 Act but for its reliance on the exemptions provided by Sections 3(c)(1) or 3(c)(7) of the 1940 Act.

The foreign private adviser exemption is non-exclusive, however, and a non-U.S. adviser not falling within its scope may still be able to avail itself of other exemptions available under the Act.  These include exemptions for advisers to “venture capital funds” (to be defined by the SEC no later than July 21, 2011), advisers that provide advice solely to private funds and have less than $150 million in aggregate AUM in the United States, advisers that provide advice solely to “small business investment companies”, and commodity trading advisers that manage a private fund and are registered with the Commodity Futures Trading Commission.  Finally, the Act exempts “family offices” from the definition of an “investment adviser”.  While the term is not defined in the Act (nor does the Act set a date by which the SEC is required to set such definition), the Act provides guidelines for the application of this exemption to bring it in line with the SEC’s existing exemptive policy for family offices.

Discussion

Currently, non-U.S. advisers are generally able to avoid SEC registration as investment advisers by, among other things, limiting the number of their U.S. clients to fewer than 15.  Because no look-through provision or AUM test applies to the private adviser exemption, currently a manager can have up to 14 U.S. clients (in addition to non-U.S. clients), and each U.S. “client” can itself be a fund with multiple U.S. investors.  Furthermore, AUM attributable to U.S. investors in such funds is not a factor considered by the private adviser exemption, so a non-U.S. manager is able to manage funds with substantial AUM without thereby being subject to SEC oversight.

Notably, a discussion draft of the Private Fund Investment Adviser Registration Act released by House Representative Paul E. Kanjorski in October 2009 (the “2009 Draft”) essentially maintained the private adviser exemption in its current form for non-U.S. investment advisers.2  The final version of the legislation, however, sharply limits the availability of exemptive relief for non-U.S. investment advisers, thus signaling a radical departure from historical practice.

The Act departs from the current approach by requiring a non-U.S. adviser seeking to avail itself of the foreign private adviser exemption to limit the aggregate number of its U.S. clients and U.S. investors in private funds advised by the adviser to no more than 14 and the aggregate AUM of those U.S. clients and investors to less than $25 million.  In so doing, the Act essentially introduces a “look-through” approach to U.S. investors in private funds which mirrors the client-counting methodology that the SEC previously attempted to adopt by rulemaking but which was overturned by the U.S. Court of Appeals for the District of Columbia Circuit in Goldstein v. SEC.3  Thus, under the new statutory language, investment advisers will be required to look through “private funds” they advise (i.e., funds that rely on the exemptions provided by Sections 3(c)(1) or 3(c)(7) of the 1940 Act) and count U.S. investors therein and their respective AUM against the exemption’s thresholds.

It should also be noted that it is unclear from the language of the Act whether the adviser must count its U.S. clients and investors only during a particular period or whether all its U.S. clients and investors since the beginning of its business must be counted.  Although the 2009 Draft followed the current adviser exemption and applied the counting test over a moving 12-month period, the Act does not include any such specification.  Therefore, it is possible that instead of considering the number of U.S. clients and investors the non-U.S. adviser has from time to time during any 12-month period, the SEC might consider whether the adviser ever had 15 or more U.S. clients and investors since the inception of its business. 

It is also unclear how investors will be counted in the event that a non-U.S. adviser is advising a single investor participating in multiple funds sponsored by the same adviser, a trust with multiple beneficiaries, or an investment made through a joint account.

The Act also leaves largely undefined what it means to have “aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser.”  Since the fundamental regulatory motivation underlying the Act is the protection of U.S. investors and financial markets, it is likely that the SEC will interpret the expression broadly in order to more closely regulate non-U.S. advisers whose business may have a material impact on U.S. investors or markets. 

This and other provisions will likely be clarified through SEC rulemaking required to be completed by July 21, 2011.  Because of the broad authority granted to the SEC, the actual impact of the Act will remain uncertain until the underlying rules and regulations are put into place. 

However, unless another exemption is available, it is now apparent that a non-U.S. adviser will be required to register with the SEC if it meets any of the following criteria:

  1. it has more than 14 clients and investors in the United States in one or more private funds it manages;
  2. $25 million or more of the assets in the private funds it manages consist of assets attributable to one or more clients and investors in the United States; or
  3. it holds itself out to the U.S. public as an investment adviser or acts as an investment adviser to an investment company or business development company.

In practice, unless the SEC significantly increases the $25 million AUM threshold discussed above, the new foreign private adviser exemption will provide extremely limited relief from SEC registration requirements and will severely limit the ability of non-U.S. advisers to raise significant funds in the United States without first registering as investment advisers with the SEC.

Registration with the SEC4

In order to register on a timely basis, a non-U.S. adviser subject to the registration requirement must file Form ADV with the SEC by July 21, 2011, and update the form annually.  In addition, as a registered adviser it must, among other things, maintain books and records, implement compliance programs and maintain a code of ethics and insider trading policies and procedures. 

Further, if the non-U.S. adviser has custody of client funds or securities, it generally must arrange for an independent public accountant registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board (the “PCAOB”), to perform a “surprise” inspection of the custody property at least once each calendar year, unless the fund it manages is subject to an annual financial statement audit prepared in accordance with generally accepted accounting principles by a PCAOB accountant, and the audited financial statements are distributed to the fund’s investors within 120 days of the fund’s fiscal year-end.5

Finally, a registered adviser needs to ensure compliance with the additional reporting requirements introduced by the Act.  Section 404 of the Act entitles the SEC to require a registered investment adviser to maintain records and file reports regarding the private funds it advises, including, at a minimum, for each such private fund: (i) the amount of AUM; (ii) the use of leverage (including off-balance-sheet leverage); (iii) counterparty credit risk exposures; (iv) trading and investment positions; (v) valuation policies and practices; (vi) types of assets held; (vii) side arrangements or side letters; (viii) trading practices; and (ix) any other information the SEC determines is necessary and appropriate for the protection of investors or the assessment of systemic risk.

Further information on the Act is available at: http://curtis-ifg.blogspot.com/.

Conclusions

In sum, the Act is expected to have a profound impact on many non-U.S. advisers that advise U.S. or non-U.S. private funds with U.S. investors or raise capital in the United States.  Unless such advisers are able to qualify for the narrow foreign private adviser exemption or avail themselves of another exemption, they will be required to register with the SEC as investment advisers and comply with the regulatory requirements of the Advisers Act.

Registration as an investment adviser is likely to result in additional administrative and compliance costs for the adviser which, by some estimates, could exceed several hundred thousand dollars for complex hedge fund structures.

A non-U.S. adviser newly subject to registration with the SEC as an investment adviser under the Advisers Act must comply with the new requirements by July 21, 2011.  To achieve registration by the deadline, advisers will likely have to file their applications significantly in advance.

1The Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong. (2010).  Available at: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf.

2The Act includes large portions of the 2009 Draft.  For further detail, please see: http://curtis-ifg.blogspot.com/2009/10/congressman-proposes-private-fund.html.

3Goldstein v. S.E.C., 451 F.3d 873, Fed. Sec. L. Rep. (CCH) P 93890 (D.C. Cir. 2006).  In Goldstein, the D.C. Circuit rejected the SEC’s attempt to treat each investor in a private fund, rather than the fund itself, as an adviser’s “client” for purposes of the Advisers Act.

4For a detailed discussion on the procedure for registration as an investment adviser with the SEC and the requirements applicable to registered advisers please contact Carl A. Ruggiero or Victor L. Zimmermann.

5For a detailed discussion regarding the current SEC custody rules please see “Amended Custody And Recordkeeping Rules To Become Effective On March 12, 2010” at: http://curtis-ifg.blogspot.com/2010/03/curtis-client-alert-amended-custody-and.html.

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Friday, August 27, 2010

Partner Victor Zimmermann to speak at the HedgeWorld Seminar on September 16

Partner Victor Zimmermann will speak at the HedgeWorld Seminar "Is Your Story Strong Enough?" on September 16 at the Harvard Club in New York.

Mr. Zimmermann will participate in a panel discussion entitled "Compliance: From Product Marketing Collateral to Knowing Who You're Working With." The group will discuss compliance in the post-Madoff world and the due diligence an investor has to perform now to be convinced to invest in any fund.

Visit the event website.

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Monday, August 9, 2010

FSA to Expand UK Compensation Rules to Cover Fund Managers

On July 29, 2010, the United Kingdom Financial Services Authority (the "FSA") announced in a consultation paper its plans to revise its Remuneration Code in accordance with the Financial Services Act 2010 and the amendments (the "CRD 3") to the Capital Requirements Directive (2006/48/EC and 2006/49/EC) approved by the European Parliament on July 7, 2010 following agreement with the Council. The Remuneration Code, which has been in effect since January 1, 2010, is set out in part 19 of the Senior Management Arrangement, Systems and Controls ("SYSC") sourcebook. SYSC is one of 7 sourcebooks comprising the FSA Handbook "High Level Standards" which set out the standards by which FSA authorised firms and approved persons are expected to conduct themselves and the core regulatory obligations that apply to them. The Remuneration Code requires firms to establish, implement and maintain remuneration policies consistent with effective risk management and provides specific rules to ensure compliance with this general requirement.

The FSA consultation paper is relevant to a wide range of FSA-regulated firms and their advisers, as it proposes to substantially expand the scope of the Remuneration Code, which currently applies only to the largest UK banks, building societies and broker dealers. The FSA estimates that bringing the Remuneration Code in line with the CRD 3 will expand its application from a current estimate of about 26 firms to over 2,500 firms with effect from January 1, 2011, including "all banks and building societies, asset managers, hedge fund managers, UCITS investment firms as well as some firms that engage in corporate finance, venture capital, the provision of financial advice and stockbrokers".

The proposed amendments to the Remuneration Code would enhance the existing rules in a number of areas including:

  • Scope: In light of the expanded scope of the Remuneration Code, the FSA is committed to applying a proportionate approach to its implementation to ensure that "institutions shall comply with the principles in a way and to the extent that is appropriate to their size, internal organisation and the nature, the scope and the complexity of their activities";

  • Code staff: The Remuneration Code will apply to a specific group of employees within a covered firm including senior management and anyone whose professional activities could have a material impact on a firm’s risk profile ("Code staff"). Firms will be required to submit a list of Code staff which will be subject to review and challenge by the FSA;

  • Variable Remuneration (Bonuses):

    1. Deferral: at least 40% (60% for amounts exceeding £500,000) of all bonuses must be deferred with vesting over a period of at least three years for all Code staff and be correctly aligned with the nature of the business, its risk and the activities of the individual in question. Remuneration payable under deferral arrangements must vest no faster than on a pro-rata basis, with the first vesting no sooner than one year after the award,

    2. Cash/Shares: at least 50% of any bonus, taken as a whole, must be made in shares, share-linked instruments, or other equivalent non-cash instruments of the firm, which are subject to deferral or a minimum retention policy,

    3. Guaranteed Bonuses: Guaranteed bonuses are exceptional, may only occur when hiring new staff and are limited to the first year of service,

    4. Performance Adjustments: After bonuses have been announced and paid, firms will be required to make further adjustments to take account of subsequent crystallized risks and developments of an adverse nature. Such adjustment will be possible only on the deferred unvested portion of the bonus and can be achieved through "malus" or "clawbacks",

  • Severance Pay: Payments related to the early termination of a contract will be subject to new restrictions to reflect performance over time and prevent the reward of failure;

  • Pensions: Discretionary pension benefits will be required to take the form of shares or share-like instruments that must be held for at least five years (i) by the firm, in the case of an employee leaving before retirement; and (ii) by the employee, when it reaches retirement.
Remuneration policies similar to the ones included in the CRD 3 and the proposed amendments to the Remuneration Code are also part of the draft EU AIFM directive which will apply to managers of most private investment funds such as hedge funds and private equity funds. However, negotiations on the AIFM directive are continuing, and the current expectation is that it may come into force only towards the end of 2012 or early 2013. In the meantime, certain fund managers will be subject to remuneration restrictions included in the CRD 3 and the Remuneration Code before they come under the remit of the AIFM directive. UCITS are currently not subject to any specific remuneration policies.

The FSA consultation paper is open for comments until October 8, 2010. The FSA intends to publish its policy statement and final rules by mid-November, and the new Handbook text is expected to come in effect on January 1, 2011.

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Friday, July 9, 2010

SEC Adopts New "Pay to Play" Rule

On June 30, 2010, the SEC unanimously approved new Rule 206(4)-5 (the "Rule") under the Investment Advisers Act of 1940, designed to restrict "pay to play" practices by investment advisers.

Pay to play is a practice in which an investment adviser seeks to influence a government official’s award of a potentially lucrative investment advisory contract by making or soliciting political contributions to that official. The motivation behind the Rule, as noted in the SEC press release, is the notion that "selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors."

The Rule attempts to diminish pay to play practices through three important prohibitions:

  1. If an investment adviser makes a contribution to a government official or candidate who is or will be able to influence the selection of advisory work for a government entity, that investment adviser may not, within the following two-year period, receive compensation -- either directly or through a pooled fund -- for providing advisory services to that government entity.

  2. An investment adviser may not pay third parties to solicit advisory work from government entities unless the third parties are registered with the SEC as investment advisers or broker-dealers and are subject to similar pay to play restrictions.

  3. An investment adviser and certain executives or employees of an investment adviser may not solicit or coordinate either (i) contributions to an official of a government entity to which the investment adviser is seeking to provide investment advisory services; or (ii) payments to a political party of a state or locality where the investment adviser is providing or seeking to provide investment advisory services to a government entity.
The Rule also prohibits an investment adviser from doing anything indirectly which, if done directly, would violate the Rule. This prohibition attempts to prevent investment advisers and government officials from circumventing the explicit prohibitions of the Rule.

The Rule does contain an exception for de minimis contributions by executives or employees of the investment adviser. This exception allows, per election, contributions of up to $350 to an official or candidate for whom the individual can vote and up to $150 to an official or candidate for whom the individual cannot vote.

The Rule will be effective 60 days after publication in the Federal Register. Investment advisers generally will be required to comply with the Rule within six months of the effective date.

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Monday, June 28, 2010

Update: U.S. Financial Reform Progresses

On Friday, June 25, 2010, a conference of the Senate and House of Representatives reached an agreement on the Financial Reform legislation (the "Bill") previously endorsed by the House and Senate in December 2009 and March 2010, respectively.

As previously reported, the Bill eliminates the "private adviser" exemption from registration with the SEC currently available under the Investment Advisers Act of 1940. The version of the Bill agreed upon at the conference maintains an exemption from registration as an investment adviser for venture capital advisers and small advisers (an adviser to private funds with assets under management in the United States of less than $150,000,000), but the exemption for private equity fund advisers, included in the Senate version of the Bill, has been omitted.

The Bill also maintains a milder version of the so-called Volcker Rule, under which banks and their subsidiaries will only be allowed to invest in or sponsor a hedge fund or private equity fund if their investment in such fund (i) amounts to no more than 3 percent of the total ownership interests of the fund not later than 1 year after the date of establishment of the fund; and (ii) is immaterial (as defined in the Bill) to the banking entity, but in no case may the aggregate of all of the interests of the banking entity in all such funds exceed 3 percent of the Tier 1 capital (core capital) of the banking entity.

One of the co-sponsors of the bill, Senator C. Dodd (D-CT) welcomed the conference as having "produced a strong Wall Street reform bill that will fundamentally change the way our financial services sector is regulated." The version of the Bill agreed upon at the conference must now be approved by both the Senate and the House before it can be signed into law by President Obama.

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Friday, June 25, 2010

Update: AIFM Directive Negotiations Stall

According to Reuters, discussions over the proposed EU Directive on Alternative Investment Fund Managers (the "AIFM Directive") have reached a standstill.

As previously reported here, the ECON Committee of the European Parliament and the Council of European Ministers endorsed diverging versions of the AIFM Directive on May 17 and May 18, 2010, respectively. The Council of Ministers and the European Parliament have since been discussing a compromise version of the AIFM Directive with a view to it being adopted by the European Parliament at a plenary session at first reading in July 2010.

However, on June 24, 2010, Jean-Paul Gauzes, the European Parliament Rapporteur on the AIFM Directive, brought negotiations to a halt after "[t]he Spanish presidency (of the European Union) informed [him] it would not be possible to reach a deal before the end of June." Gauzes indicated his intention to "delay the vote until the second parliamentary session in September".

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Tuesday, May 18, 2010

Update: AIFM Directive Advances

On May 17, 2010, a revised version of the Directive on Alternative Investment Fund Managers (the "AIFMD"), originally proposed by the Commission in April 2009, passed the Economic and Monetary Affairs Committee of the European Parliament (the "ECON") with a vote of 33 to 11, with 3 abstentions. As stressed in the ECON press release, the main changes proposed by the European Parliament are intended to "increase investor protection and transparency while reducing the potentially protectionist dimension" of the Commission's proposal.

The European Parliament move was followed today, May 18, 2010, by a similar endorsement of the proposed AIFMD by EU finance ministers. As reported by the Financial Times, there are several discrepancies between the Council and the European Parliament versions of the AIFMD, in particular with regard to so called "third-country" provisions regulating the ability of non-European managers to market their funds within the EU.

Before the AIFMD becomes law, the Council of Ministers and the European Parliament must reach an agreement on a compromise version, and negotiations are expected to begin on May 31, ahead of the first-reading vote by the full Parliament, scheduled for July. We will continue to monitor future developments on the subject and report on any progress.

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Wednesday, April 21, 2010

SEC Proposes "Large Trader" Reporting System

On April 14, 2010, the SEC proposed a new Rule 13h-1 (the "Rule") and Form 13H under Section 13(h) of the U.S. Securities Exchange Act of 1934, which would enable the SEC to identify and obtain certain information about "large traders", i.e. traders that conduct a substantial amount of trading activity, as measured by volume or market value, in the U.S. securities markets.

Under the proposed Rule, any firm or individual whose direct or indirect transactions in "NMS securities" -- i.e. exchange-listed securities, including equities and options -- equal or exceed (i) 2 million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month (such firm or individual, a "large trader") would be required to identify itself to the SEC and make certain disclosure on proposed Form 13H. The SEC would then issue a unique Large Trader Identification Number (“LTID”) for the large trader, who would be required to disclose its LTID to each of its registered broker-dealers and identify all of the accounts used for its trading.

The proposed Rule would also impose recordkeeping and reporting requirements on registered broker-dealers, and would require registered broker-dealers to provide large trader transaction data to the SEC upon request.

As indicated in the SEC press release, the proposed Rule "is designed to strengthen [SEC] oversight of the markets and protect investors in the process," by giving the SEC "prompt access to trading information from large traders so [it] can better analyze the data and investigate potentially illegal trading activity."

The proposed Rule is subject to a 60-day comment period.

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Wednesday, March 17, 2010

Senator Dodd Unveils Financial Reform Legislation: Implications for Investment Funds

A revised version of the "Restoring American Financial Stability Act" (the "Bill"), originally presented in November 2009, was unveiled by Senate Banking Committee Chairman Chris Dodd (D-CT) on March 15, 2010. The investment adviser registration provisions of the Bill are essentially unchanged in from the November version of the Bill. As previously reported, the Bill would require advisers to hedge funds and other private funds who manage more than $100 million to register with the SEC and comply with certain reporting requirements that will allow the SEC to assess systemic risk. Advisers that fall beneath this threshold would be subject to State regulation.

In contrast with its House counterpart, the Bill maintains an exemption from registration as an investment adviser with the SEC for both venture capital and private equity fund advisers. Both terms remain to be defined by the SEC for the purposes of the exemption. In addition, the Bill continues to exempt "family offices", 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.

An important departure from the November version of the Bill is the inclusion of the so called "Volcker Rule". The rule would prohibit banks and their subsidiaries from engaging in proprietary trading or investing in or sponsoring a hedge fund or private equity fund. The Bill defines the term "sponsoring" in this regard as (i) serving as a general partner, managing member, or trustee of the fund; (ii) in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the fund; or (iii) sharing with the fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name.

Finally, the Bill directs the SEC to increase the financial threshold applicable for an investor to be considered "accredited" under the Securities Act of 1933 to reflect the price inflation since the currently applicable figures were determined. The Bill would require the SEC to adjust such figures at least every 5 years, while also requiring the U.S. Comptroller General to conduct a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds.

According to Dodd's statement released ahead of the Bill, a full markup of the Bill should begin in the Banking Committee next week.

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Friday, March 12, 2010

Curtis Client Alert: Amended Custody and Recordkeeping Rules Effective March 12, 2010

As of today, all investment advisers registered with the SEC must comply with amended rules 206(4)-2 (the “Custody Rule”) and 204-2 (the “Recordkeeping Rule” and, together with the Custody Rule, the “Rules”) under the Investment Advisers Act of 1940. The amendments, which were adopted on December 30, 2009, are designed to provide additional safeguards when a registered adviser has custody of client funds or securities. In this Client Alert we discuss the newly introduced requirements under the amended Rules and applicable exceptions, with a particular focus on their implications for advisers to investment funds.

In related news, on March 10, 2010, the SEC updated its Division of Investment Management staff responses to questions about the Custody Rule.

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Monday, March 1, 2010

Connecticut Introduces Bill to Regulate Private Funds

On February 8, 2010, Raised Bill No. 5053 entitled "An Act Concerning Transparency and Disclosure" was referred to the Connecticut Joint Committee on Banks. The stated purpose of the Raised Bill is to ensure transparency by requiring investment advisers to a hedge fund to disclose any potential conflicts of interest or interests that are likely to impair the investment adviser's duties and responsibilities to the fund or its investors.

As proposed, the Raised Bill requires any investment adviser to a hedge fund to disclose to each investor or prospective investor in the fund, not later than 30 days before any such investment, any financial or other interests the investment adviser may have that conflict with or are likely to impair the investment adviser's duties and responsibilities to the fund or its investors. As used in the Raised Bill, a "hedge fund" means any investment company located in Connecticut that (i) claims an exemption under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940, (ii) whose offering of securities is exempt under the private offering safe harbor criteria in Rule 506 of Regulation D of the Securities Act of 1933, and (iii) meets any other criteria as may be established by the Banking Commissioner. A hedge fund is located in Connecticut if it has an office in Connecticut where employees regularly conduct business on its behalf. As proposed, the current definition of hedge fund would also encompass other types of private investment vehicles, including private equity funds.

If enacted, the Raised Bill would take effect on October 1, 2010. A public hearing on the merits of the Raised Bill was held on February 25, 2010. The testimony of Connecticut Attorney General Richard Blumenthal and Susan C. Winkler, Executive Director of the Connecticut Insurance & Financial Services Cluster, can be read here and here.

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Thursday, February 18, 2010

SEC Announces New Specialized Enforcement Unit Targeting Asset Management

On January 13, 2010, the U.S. Securities and Exchange Commission (SEC) announced the establishment of five new specialized enforcement divisions as part of what it called its "most significant reorganization since its establishment in 1972." The areas targeted by the new specialized units are: Asset Management, Market Abuse, Structured and New Products, Foreign Corrupt Practices, and Municipal Securities and Public Pensions.

The Asset Management unit will be led by Co-Chiefs Bruce Karpati and Robert B. Kaplan and will focus on investigations involving investment advisors, investment companies, hedge funds and private equity funds. In a speech given on February 5, 2010, SEC Commissioner Elisse B. Walter declared these areas "high-priority areas of enforcement" and announced that the staff will dedicate resources and redeploy some of its most talented personnel to combat fraud and misconduct in these specialized areas.

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Friday, February 12, 2010

House Passes Private Fund Investment Adviser Registration Act: Implications for non-U.S. Managers

At the close of 2009, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009 (the "House Bill"), a broad financial reform bill that includes an amended version of the Private Fund Investment Adviser Registration Act of 2009 introduced in October 2009 as H.R. 3818. If enacted, the House Bill would require advisers to hedge funds and other private funds to register with the U.S. Securities and Exchange Commission (the “SEC”) and impose certain recordkeeping and regulatory disclosure requirements.

In this article we analyze the implications of the House Bill for non-U.S. fund managers whose clients include U.S. persons. We suggest that while the House Bill provides various exemptions from registration, including one for certain foreign fund managers, these exemptions are much more restrictive than the currently available “private adviser” exemption. In practice, the House Bill is likely to force most non-U.S. managers with U.S. investors to apply for SEC registration and comply with the regulatory requirements for registered investment advisers.

Background
The primary statute regulating the provision of investment advisory services in the United States is the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which requires all investment advisers, unless exempted, to register with the SEC and comply with certain recordkeeping, regulatory reporting and disclosure rules, while also subjecting them to inspection and examination by the SEC staff.

Thus far, non-U.S. managers have broadly relied upon the so-called “private adviser exemption” which exempts from registration any adviser who (i) has had fewer than 15 U.S. clients in the preceding 12 months; (ii) does not hold itself out generally to the public as an investment adviser; and (iii) does not act as an investment adviser to any “investment company,” as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). When counting the number of U.S. clients, the adviser was generally able to treat each fund that it advised as a separate client, and was not required to "look through" the fund and count the number of U.S. investors in that fund as the adviser's clients. The private adviser exemption allows non-U.S. managers broad flexibility to accept subscriptions from U.S. investors for their funds without subjecting such managers to the Advisers Act requirements. Under the House Bill, this flexibility would be substantially reduced.

New Registration Requirements
The House Bill would amend Section 203 of the Advisers Act to remove the private adviser exemption. As a result, many private fund advisers, such as hedge fund and private equity fund managers, would be required to register as investment advisers with the SEC unless they qualify for another exemption.

The House Bill introduces a new exemption from registration for “foreign private fund advisers”. The term “foreign private fund adviser” would be defined to include any investment adviser who: (i) has no place of business in the United States; (ii) during the preceding 12 months has had (x) fewer than 15 clients and investors in the United States in private funds advised by the investment adviser, and (y) assets under management (“AUM”) attributable to clients and investors in the United States in private funds advised by the investment adviser of less than $25 million (or a higher amount if the SEC deems appropriate); and (iii) does not hold itself out to the public in the United States as an investment adviser, or act as an investment adviser to an investment company or business development company.

Additional exemptions would be provided for advisers to “venture capital funds” (as that term may be defined by the SEC) and advisers that provide advice solely to “private funds” and have less than $150 million in aggregate AUM in the United States (the “small private adviser exemption”). A private fund would be defined as a fund which would be considered an investment company but for its reliance on the exemptions provided by Sections 3(c)(1) or 3(c)(7) of the 1940 Act.

Discussion,
Currently, non-U.S. managers are able to avoid SEC registration as investment advisers by limiting the number of their U.S. clients to fewer than 15. Since no look-through provisions or AUM test applies, a manager can currently have up to 14 U.S. clients (in addition to any non-U.S. clients), and these clients can themselves be funds with multiple U.S. investors. Because AUM attributable to U.S. investors in such funds are currently not considered, a non-U.S. manager is able to manage very large funds which have U.S. investors without being subject to SEC oversight.

The foreign private fund exemption, as envisaged by the October 2009 version of the Private Fund Investment Adviser Registration Act of 2009, essentially mirrored the current private adviser exemption with regard to non-U.S. advisers. The House Bill departs from this approach by including "investors in the United States in private funds advised by such investment adviser" for the purpose of determining whether the 15-client or $25 million thresholds are met, effectively introducing a "look-through" approach to this test. As a result, unless another exemption is available, a non-U.S. adviser would be required to register with the SEC (i) if it has more than 14 investors in the United States in one or more non-U.S. private funds it manages; (ii) if $25 million or more of the assets in non-U.S. private funds it manages consist of assets attributable to one or more investors in the United States; or (iii) if it holds itself out to the U.S. public as an investment adviser or acts as an investment adviser to an investment company or business development company.

Following the amended definition of a foreign private fund adviser, the House Bill also contemplates “looking through” to the underlying investors of a private fund for the purpose of determining whether a non-U.S. adviser qualifies as a small private adviser; the exemption refers to AUM in the United States and not to “clients”. Consequently, non-U.S. advisers who manage private funds with AUM in the United States of $150 million or more would be required to register under the House Bill.

Registration with the SEC
In order to register, a non-U.S. manager must file Form ADV with the SEC and update the form annually. In addition, as a registered adviser it must maintain books and records in accordance with SEC rules. Further, if the non-U.S. manager has custody of client funds or securities it must arrange for an independent public accountant registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board (the “PCAOB”), to perform a "surprise" inspection of the custody property at some time during the calendar year, unless the fund it manages is subject to an annual financial statement audit prepared in accordance with generally accepted accounting principles (“GAAP”) by a PCAOB Accountant, and the audited financial statements are distributed to the fund’s investors within 120 days of the fund’s fiscal year-end. Finally, the non-U.S. manager would need to ensure compliance with the additional reporting requirements introduced by the House Bill, as described below.

Additional Reporting Requirements
Under the House Bill, the SEC would be entitled to require a registered investment adviser to maintain records and file reports regarding the private funds it advises, including, for each such private fund: (i) the amount of AUM; (ii) the use of leverage (including off-balance sheet leverage); (iii) counterparty credit risk exposures; (iv) trading and investment positions; (v) trading practices; and (vi) any other information the SEC determines necessary or appropriate.

Although they will be exempt from Advisers Act registration, small private advisers and venture capital fund advisers will nevertheless be required to maintain records and provide the SEC with annual reports or other data the SEC deems necessary or appropriate.

Conclusions
The House Bill, if enacted in its current form, would have a profound impact on many non-U.S. managers that advise U.S. clients (including non-U.S. funds with U.S. investors). Unless they are able to qualify for the narrow foreign private fund adviser exemption or another available exemption, such managers would be required to register with the SEC as investment advisers and comply with the regulatory requirements of the Advisers Act. Registration as an investment adviser would likely result in additional administrative and compliance costs. According to Rep. Kanjorski (D-PA), the sponsor of H.R. 3818, the newly introduced reporting costs alone are expected to be in the range of $5,000 to $15,000 for most hedge funds. By some estimates, these costs could exceed several hundred thousand dollars for more complicated hedge funds.

The Senate's version of the Private Fund Investment Adviser Registration Act of 2009 was introduced by Senate Banking Committee Chairman Christopher Dodd (D-CT) in November 2009 as Title IV of the Restoring American Financial Services Act of 2009 (the "Senate Bill"). The investment adviser registration provisions in the Senate Bill essentially mirror those of the House Bill discussed above. Certain differences exist, however, including (i) an exemption for “private equity” fund advisers, as defined by the SEC; (ii) an exemption for single family offices, as defined by the SEC; and (iii) the exclusion of an offshore fund from the definition of a “private fund”. Additionally, the Senate Bill also provides that advisers with less than $100 million in AUM need not register with the SEC, but do need to register with state authorities in the state where the adviser maintains its principal office. Finally, the House Bill sets forth special considerations for advisers to mid-sized private funds, whereas the Senate Bill does not.

The Senate Banking Committee is likely to continue portions of its markup of the draft bills in early 2010. However, with the Senate focusing its debate on healthcare, it is unlikely that the full Senate will vote on the House Bill or Senate Bill until well into 2010.

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Thursday, February 11, 2010

House Bill May Impose Prudential Standards on Investment Funds

On December 11, 2009, the House of Representatives passed bill H.R. 4173, the Wall Street Reform and Consumer Protection Act (the “Bill”), which sets forth, among other things, systemic regulation provisions that could significantly affect the private funds industry. The Bill was referred to the Senate on January 20, 2010, and is currently being considered by the Senate’s Committee on Banking, Housing and Urban Affairs.

Apart from the incorporation of the Private Fund Investment Adviser Registration Act introduced in October 2009 as H.R. 3818, the most notable aspects of the Bill for investment funds are the “prudential safeguards” imposed on any firm that is deemed to engage, directly or indirectly, in “financial activities” (a term which is not defined in the Bill) where regulators determine that either (i) financial distress suffered by the firm could present a threat to financial stability or the economy, or (ii) the nature, scope, size, scale, concentration, interconnectedness or mix of the firm’s activities could present such a threat. The generalized wording of the Bill strongly suggests that investment funds, including private equity and hedge funds, could be subject to the bank-like prudential safeguards introduced by the Bill, which could impose the following consequences:

  • capital requirements and liquidity standards (thereby in effect limiting permissible leverage);
  • a cap on investments in voting securities of non-financial companies (capped at 5% of any class of such securities);
  • a 15-to-1 debt-to-equity ratio;
  • limits of short-term borrowings and other bridge financings;
  • restrictions on concentrations of counter-party credit exposure; and
  • quarterly stress testing requirements.
Given the intent of the Bill sponsors to limit systemic risks posed by certain major firms, it is expected that the risk to small funds of being subject to the Bill's prudential standards is limited, as it is unlikely that regulators would deem them to present a systemic risk to the economy. However, the Bill does not preclude such regulation, and the risk of being covered by this prudential regulation and its attendant burdens is particularly acute in the case of funds with large amounts of assets under management and/or highly leveraged investment strategies. Finally, since the Bill does not restrict the definition of a "financial company" subject to its prudential safeguards only to domestic firms, even non-U.S. funds may be covered so long as they have significant operations in the United States through a U.S. affiliate or U.S. operating entity.

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Wednesday, February 10, 2010

AIFM Directive Update: UK Regulators Express Concern over Commission Proposal; The Spanish Compromise Text

Two separate analyses of the European Commission's proposed Directive on Alternative Investment Fund Managers (the "Directive"), introduced in April 2009, have recently been published in the United Kingdom.

The first appears in a letter the House of Lords Select Committee on the European Union sent to the Financial Services Secretary in December 2009. The letter expresses the committee's concern over certain aspects of the Commission's proposed Directive, such as the unnecessary level of protection it provides to institutional investors, the one-size-fits-all approach, the restrictions on the marketing of non-EU funds and possible restrictions on non-EU managers marketing in the EU. The committee warned that unless the Directive's regulatory approach was coordinated with global arrangements, particularly those in the United States, the EU alternative investment fund industry's global competitiveness could suffer, dealing a serious blow to the EU and UK economies.

The second analysis of the Commission's proposed Directive appears in a January 2010 report published by the Bank of England Financial Markets Law Committee. The report highlights numerous fundamental issues which could, unless appropriately addressed, "create significant legal uncertainty" and lead to "systemic failure and widespread market disruption." According to the report, the most acute issue in the proposed Directive is its uncertain scope, as the meaning of core concepts such as "alternative investment fund" and "alternative investment fund manager" remain unclear. Further issues include the stringent liability regime for depositaries and their obligation to verify that funds have obtained ownership of all other assets in which they invest, which might prove impractical, time-consuming and costly for investors. In addition, the definition of "leverage," a key element of the Directive, should be clarified, particularly in order to effectuate the threshold exemption which the Directive envisages. Finally, the report calls for a revision of the Directive's third-country provisions to enable EU fund managers to manage non-EU funds, and allow non-EU funds to market to EU investors. The report concludes that in order for the Directive to be successful, there should be "no doubt as to its scope in order to avoid uneven implementation and the possibility of regulatory arbitrage across EU Member States."

After the Commission published its proposed Directive in April 2009, the Swedish presidency of the Council of the European Union (the "Council") published its compromise texts in November and December 2009. On February 4, 2010, the Spanish presidency of the Council published its own compromise text of the Directive. A major departure from the Swedish compromise introduced by the Spanish compromise text relates to the ability of non-EU funds to be marketed to EU investors. The amended proposal would only allow such marketing where there are appropriate cooperation arrangements in place between the relevant authorities of the fund's home state and the EU Member State in which the fund's units are proposed to be sold. In addition, the manager of the non-EU fund would be required to comply, at a minimum, with the provisions of the Directive relating to annual reports, disclosure to investors, and reporting to regulators, as well as those which apply to managers that acquire control of non-listed and listed companies.

Before the Directive can become law, both the European Parliament and the Council of Ministers will have to agree on its final terms. As the Directive continues to be the subject of intense political discussions, the full extent of the Directive's requirements remain to be seen.

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Friday, January 29, 2010

Curtis Client Alert: UCITS – Anchor to the Weakened Hedge Fund Industry?

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.

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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.

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