Monday, September 19, 2011

Paris seminar explores impact of new FATCA rules on Investment Funds in Europe

Around 40 fund managers, hedge funds, trust companies and lawyers attended Curtis's Paris seminar last Tuesday, 13 September. The seminar, entitled “Investment Funds: Recent Tax Developments, Understanding FATCA, FBAR and Key Regulations in Europe” brought the European audience up to date with latest developments in the FATCA rules (some of which had taken place within the previous 48 hours). Many of the audience were in Paris for the International Fiscal Association's annual congress, which took place the same week.

New York partners Alan S. Berlin and William L. Bricker, Jr joined Paris based partner Marco A. Blanco for a panel presentation on recent developments in US international taxation. Frankfurt based partner Christian Fingerhut and Milan based partner Fabrizio Vismara drew out the impact of the new rules on investment funds in the European regulations, particularly in Germany and Italy.

Download the presentation materials: http://www.curtis.com/siteFiles/SitePages/Curtis Presentation on US tax and investment funds.pdf
Download Curtis speakers' profiles and team information: http://www.curtis.com/siteFiles/SitePages/Curtis investment funds and tax seminar - speakers and information.pdf

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Friday, September 9, 2011

TIC Form SLT imposes new reporting obligations for cross-border investments that may apply to private funds and private fund managers

The Department of the Treasury and the Federal Reserve Bank recently implemented new Form SLT, which will be part of the Treasury International Capital (TIC) reporting system designed to provide timely information on international capital movements. Form SLT will be used to collect monthly data on cross-border ownership by U.S. and foreign residents of long-term securities for portfolio investment purposes. The reporting panel for the Form SLT consists of all U.S. persons who are U.S.-resident custodians, U.S.-resident issuers of U.S. securities or U.S.-resident end-investors in foreign securities, where for each reporting entity, the consolidated total of all reportable long-term U.S. and foreign securities on the last business day of the reporting month has a total fair market value equal to or more than the exemption level, which is set at $1 billion. All U.S. persons who are U.S.-resident custodians, U.S.-resident issuers or U.S.-resident end-investors and who meet or exceed the reporting threshold must file the Form SLT. Accordingly, certain private funds and private fund managers may be required to filed Form SLT if they satisfy these conditions.

The obligation to report on Form SLT becomes effective on September 30, 2011 with the first filing due by October 23, 2011. The following filing is due by January 23, 2012. Thereafter, Form SLT is required to be filed on a monthly basis.

Link to the Form SLT: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/fslt.pdf

Link to the Form SLT Instructions: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/fslt.pdf

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Monday, July 18, 2011

SEC Adopts Final Rules Implementing New Reporting, Recordkeeping and Custody Obligations

On June 22, 2011, the Securities and Exchange Commission (the “SEC”) adopted final rules to implement certain provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).1 Among other things, the final rules (i) amend Form ADV to require additional disclosure by advisors; (ii) modify the definition of “hedge fund” to narrow the use of the term in the categorization of funds; (iii) implement a new uniform method for calculating assets under management (“AUM”); and (iv) amend the custody and disclosure requirements for advisers registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Title IV of the Dodd-Frank Act (“Title IV”) introduces various new reporting requirements for registered investment advisers. Currently, an investment adviser registered with the SEC must (i) submit registration forms – Form ADV Parts 1 and 2 – with the SEC; (ii) submit to each advisory client and prospective client a written disclosure statement that complies with Form ADV Part 2; (iii) comply with various detailed policies and maintain certain detailed records; and (iv) appoint an individual responsible for administering the adviser’s policies and procedures.

A. Form ADV

Under Title IV, Form ADV has been amended to require additional disclosure by advisers about their advisory and business relationships as well as their portfolios. Of particular note, Item 7.B.(1) of Schedule D requires detailed information about individual funds advised by the investment adviser to be disclosed, which would be made publicly available. The final rules expand the information that advisers must report to the SEC about the funds they advise. An adviser must complete a separate Schedule D for each “private fund” that the adviser manages.2 Information an adviser is required to report in Section 7.B.(1) will include (i) the name of the fund; (ii) the state or country in which the fund is organized; (iii) whether the fund is a master fund or a fund of funds; (iv) the regulatory status of the fund, such as exemptions from the Investment Company Act on which the fund relies; (v) the type of investment strategy the fund employs;3 (vi) whether the fund invests in securities of registered investment companies; (vii) the gross asset value of the fund; (viii) the minimum amount that investors are required to invest; (ix) the approximate number of beneficial owners of the fund (including related persons); (x) information about the fund’s gatekeepers, including administrators and auditors; and (xi) the extent to which clients of the adviser are solicited to invest, and have invested, in the fund.

The final rules also make modifications to clarify the definition of the term “hedge fund” in order to narrow the broad use of the term in an effort to more appropriately categorize funds. The definition of “hedge fund” no longer includes funds categorized as “securitized asset funds,” and the definition of “securitized asset fund” is no longer used in reference to “hedge funds.” Clause (a) of the “hedge fund” definition also was modified to relate only to fees or allocations that may be paid to an investment adviser (or its related persons) rather than accrued or allocated to them. Clause (a) was modified further so that hedge funds, in calculating performance fees or allocations, may not take into account unrealized gains solely for the purpose of reducing such fees or allocations to reflect net unrealized gain. Lastly, clause (c) was modified to provide an exception for short selling that hedges currency exposure or manages duration.

The final rules also include a new uniform method for calculating AUM that would be used to determine eligibility for exemptions and registration thresholds. In general, the adopted amendments eliminate adviser discretion that would have enabled advisers to opt in or out of federal or state regulation. Under the new method, advisers must count several classes of assets that currently may be excluded, such as proprietary assets, assets managed without receiving compensation, and assets of foreign clients. As such, Part 1A of Form ADV is amended to refer to an adviser’s AUM as “regulatory AUM.”4 Advisers also must include accrued but unpaid liabilities, uncalled capital commitments and the value of any private fund over which continuous and regular supervisory or management services are exercised, regardless of the nature of the assets held by the fund.5 Additionally, advisers must value all assets at fair value, rather than on a cost basis.

B. Custody, Recordkeeping, and Disclosure

The final rules amend Item 9 of Form ADV to require each registered adviser to indicate “the total number of persons that act as qualified custodians for the adviser’s clients in connection with the advisory services the adviser provides to its clients” to provide a more complete view of an adviser’s custodial practices. Advisers with custody of client funds must maintain those assets with a qualified custodian, and must know both the identity and number of qualified custodians that maintain said assets. The final rules also correct a drafting error in Item 9.A., which now requires advisers to exclude from Item 9.A., and to report in Item 9.B., client assets for which custody is attributed to the adviser as a result of custody by a related person. The client assets reported in Item 9.A. should only be those over which the adviser has physical, rather than constructive, custody.

Title IV requires the SEC to conduct periodic inspections of records of private funds maintained by registered investment advisers. Furthermore, Title IV grants the SEC broad power to conduct additional examinations at any time and from time to time as necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk. Registered investment advisers must make available to the SEC “any copies or extracts from such records as may be prepared without undue effort, expense, or delay, as the [SEC] or its representatives may reasonably request.” The SEC is required to make these documents available to the Financial Stability Oversight Council, and to report annually to Congress on its use of the information collected. The costs incurred by the maintenance and reporting of such documents could prove significant for investment advisers.

Title IV further dilutes the ability of investment advisers to keep client information confidential by amending the disclosure requirements of Section 210 of the Advisers Act. Prior to the Dodd-Frank Act, Section 210(c) stated that no provision of the Advisers Act could be construed to require or authorize the SEC to require an investment adviser to disclose the identity, investments, or affairs of its clients unless such disclosure was “necessary or appropriate in a particular proceeding or investigation having as its object the enforcement of a provision or provisions of [the Advisers Act].” Title IV expands that carve-out to enable the SEC to require disclosure of such information “for the purposes of assessment of potential systemic risk.” Exempt reporting advisers also will be subject to the public disclosure requirements of Section 210.


  • The full text of the Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, is available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf.



  • In the event there are multiple advisers to a single fund, only one adviser must report the information for the fund. Further, an adviser managing a master-feeder arrangement may submit a single Section 7.B.(1) on behalf of the master fund and all feeder funds if each fund would report substantially similar information.



  • The adviser may select from seven broad categories, including: (i) hedge fund; (ii) liquidity fund; (iii) private equity fund; (iv) real estate fund; (v) securitized asset fund; (vi) venture capital fund; and (vii) other private fund.



  • This amendment is meant to distinguish between Part 1A and Part 2 of Form ADV.



  • Calculating AUM on a gross, rather than a net, basis is designed to prevent advisers from utilizing highly leveraged positions to avoid federal registration and systematic risk reporting.



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    Tuesday, July 12, 2011

    SEC Adopts Final Rules Implementing Certain Provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act

    On June 22, 2011, the Securities and Exchange Commission (the “SEC”) adopted final rules to implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The final rules, which were adopted substantially as proposed, generally will require advisers to hedge funds and other private funds to register with either the SEC under the Investment Advisers Act of 1940 (the “Advisers Act”) or state securities authorities unless such advisers qualify for one of three new exemptions. Implemented in lieu of the now eliminated “private adviser” exemption of Section 203(b)(3) of the Advisers Act, the new exemptions apply to (i) advisers solely to “venture capital funds”; (ii) advisers solely to private funds with less than $150 million in assets under management (“AUM”) in the United States; and (iii) foreign private advisers. Although all three categories of advisers will be exempt from registration, the SEC will require advisers relying on the first two of these exemptions (“exempt reporting advisers”) to file certain reports with the SEC. Additionally, the final rules exclude “family offices” from the definition of investment adviser, thereby excluding these advisers from the registration requirements under the Advisers Act. The final rules also (i) reallocate regulatory responsibility for certain mid-size advisers from the SEC to the states and (ii) provide for certain new reporting requirements applicable to registered advisers and exempt reporting advisers.

    In order to provide those advisers who relied on the “private adviser” exemption and may now be required to register with sufficient time to meet their obligations, the SEC has decided to delay the registration deadline until March 30, 2012.1

    Background

    Section 203 of the Advisers Act makes it unlawful to make use of any instrumentality of interstate commerce in connection with the provision of investment advice unless registered as an investment adviser under the Advisers Act or otherwise exempt from registration. Subject to certain specific exclusions, the Advisers Act defines an “investment adviser” broadly to include any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. Advisers who fall within the scope of the definition of “investment adviser” are not required to register with the SEC if they satisfy an available exemption from registration.

    Elimination of “Private Adviser” Exemption

    As noted above, advisers to private funds historically have not been required to register with the SEC by virtue of the private adviser exemption, which exempted from registration any adviser that had fewer than 15 clients over the course of the preceding 12 months, did not hold itself out generally to the public as an adviser and did not act as an adviser to a registered investment company or business development company. For purposes of calculating whether an adviser had fewer than 15 clients, the adviser was allowed to count each private fund as a separate client. The Dodd Frank Act defines a “private fund” as any issuer that would be an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) but for the exception provided by either Section 3(c)(1) or 3(c)(7) of the Investment Company Act. These exceptions require a fund to either limit itself to 100 total investors (Section 3(c)(1)) or permit only “qualified purchasers” to invest (Section 3(c)(7)). Most hedge funds, private equity funds, venture capital funds and other alternative investment funds rely on these exceptions to remain unregistered.

    Title IV of the Dodd Frank Act (“Title IV”) accomplishes the SEC’s goal of increasing oversight of private fund advisers by eliminating the private adviser exemption entirely. Accordingly, many investment advisers that currently rely on the exemption, including advisers that do not advise private funds, will be required to register with the SEC unless they can meet another available exemption.

    New Exemptions and Exclusions

    Although Title IV eliminates the private adviser exemption, it includes new exemptions for certain categories of investment advisers.

    A. Exempt Reporting Advisers

    Advisers relying on new exemptions under either Section 203(l) (the “venture capital exemption”) or Section 203(m) of the Advisers Act (the “private fund adviser exemption”) are referred to as “exempt reporting advisers.” While exempt reporting advisers are exempt from registering with the SEC as investment advisers, they still must file certain portions of Form ADV with the SEC.2 An exempt reporting adviser must submit its initial Form ADV electronically through the Investment Adviser Registration Depository (the “IARD”) within 60 days of relying on the exemption from registration under either Section 203(l) or Section 203(m) of the Advisers Act. The filing must be submitted by March 30, 2012. Additionally, such advisers may be required to register with the states in which they perform advisory services. Advisers qualifying for either the venture capital exemption or the private fund adviser exemption may decline to avail themselves of the exemption and instead choose to register with either the SEC or the appropriate state securities authorities depending on eligibility.

    i. Advisers that Solely Advise “Venture Capital Funds”

    Title IV exempts from SEC registration any investment adviser that advises solely “venture capital funds.” Because of the many similarities between venture capital funds and private equity funds, the SEC has issued a new rule defining venture capital funds narrowly in order to limit the number of advisers that can avail themselves of the venture capital exemption. Unlike advisers relying on the private fund adviser exemption, an adviser relying on the venture capital exemption may have an unlimited amount of AUM without having to register with the SEC.

    Under the SEC’s new rules, a venture capital fund is a private fund that: (i) invests in equity securities of private companies in order to provide operating and business expansion capital, with at least 80% of each company’s securities owned by the fund having been acquired directly from the qualifying portfolio company;3 (ii) does not borrow or otherwise incur leverage (other than limited short-term borrowing); (iii) does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; (iv) represents itself as a venture capital fund to investors; and (v) is not registered under the Investment Company Act and has not elected to be treated as a business development company.

    ii. Private Fund Advisers with Less Than $150 Million of U.S. AUM

    Any investment adviser that advises solely private funds and has AUM in the United States of less than $150 million is exempt from registration under the Advisers Act. For advisers with a principal office and place of business in the United States, all private fund assets of the adviser are considered to be “in the United States.” For non-U.S. advisers, only private fund assets that the adviser manages from a place of business in the United States4will count towards the $150 million threshold.

    B. “Foreign Private Advisers”

    Another new exemption created by Title IV is an exemption for “foreign private advisers.” Title IV defines a “foreign private adviser” as any investment adviser that (i) has no place of business in the United States; (ii) has, in total, fewer than 15 clients and investors in the United States in private funds advised by the investment adviser; (iii) has aggregate AUM attributable to U.S. clients and U.S. investors in private funds advised by the adviser of less than $25 million; (iv) does not hold itself out generally to the public as an investment adviser; and (v) does not act as a company that has elected to be a business development company or as an investment adviser to an investment company.

    Note that in counting the number of “investors” the foreign private adviser has in the United States, Title IV requires the adviser to “look through” any private fund it advises and count the number of individual U.S. investors in any such private fund during the preceding 12 months. While Title IV requires advisers to “look through” for purposes of determining applicability of this exemption, it does not require a foreign private adviser to count investors in private funds managed by the advisor as “clients”5 under the Advisers Act.

    Exclusion for “Family Offices”

    Many family offices took advantage of the private adviser exemption, which is eliminated under the Dodd-Frank Act. Title IV amends the definition of investment adviser under the Advisers Act to exclude any “family office,” thus exempting many such advisers from regulation. Section 202(a)(11)(G)-(1) of the Advisers Act defines an exempt family office as one that (i) provides advice about securities only to family clients of a single family; (ii) is wholly owned and controlled by family members; and (iii) does not hold itself out to the public as an investment adviser. The rule also includes grandfathering provisions intended to cover certain advisers that were not previously required to be registered under the Advisers Act.

    Increased State Oversight of “Mid-Sized Advisers”

    Title IV generally broadens the number of advisers subject to state regulation to encompass “mid-sized advisers.” Prior to the Dodd-Frank Act, Section 203A of the Advisers Act prohibited an investment adviser regulated by the state in which it maintained its principal office and place of business from registering with the SEC unless the adviser had AUM of at least $25 million or advised a registered investment company. Further, an adviser having between $25 million and $30 million of AUM had the option to register with the SEC, while an adviser with over $30 million of AUM was required to register with the SEC unless it was eligible for an exemption.

    Under the Dodd-Frank Act, “mid-sized advisers” with AUM of between $25 million and $100 million would generally be subject to supervision at the state level, rather than with the SEC.6 If an investment adviser with AUM of $25 million to $100 million (i) is required to register with a state and (ii) would be subject to examination by the state authorities as a result of such registration,7 then the adviser must register in the state(s) in which it operates, although the adviser may register with the SEC if it would otherwise be required to register with 15 or more states. If the adviser is not required to register or is not subject to examination at the state level, the threshold for SEC registration remains $25 million. Thus, many investment advisers that were previously exempt from registration under Section 203(b)(3) now will find themselves categorized as “mid-sized advisers.”

    The SEC amended Item 2 of Part 1A on Form ADV to reflect the new $100 million statutory threshold. Item 2.A requires each adviser registered with the SEC (and each applicant for registration) to identify whether it is eligible to register with the SEC because it (i) is a large adviser that has $100 million or more of regulatory AUM (or $90 million or more if an adviser is filing its most recent annual updating amendment and is already registered with the SEC); (ii) is a mid-sized adviser that does not meet the criteria for state registration or is not subject to examination; (iii) has its principal office and place of business in Wyoming (which does not regulate advisors) or outside the United States; (iv) meets the requirements for one or more of the revised exemptive rules under Section 203A of the Advisers Act; (v) is an adviser (or subadviser) to a registered investment company; (vi) is an adviser to a business development company and has at least $25 million of regulatory AUM; or (vii) received an order permitting it to register with the SEC.

    Each registered investment adviser will have to file an amended Form ADV using a new uniform method for calculating AUM in order to determine eligibility for federal registration and any potential exemptions. In brief, an adviser’s regulatory AUM is calculated, on a gross basis, as the market value of the “securities portfolios” for which the adviser provides “continuous and regular supervisory or management services.” An adviser that provides these services to a private fund must count all of the private fund’s assets as a securities portfolio, regardless of whether those assets actually qualify as “securities.” This determination must be made within 90 days of filing the amended Form ADV. Each adviser registered with the SEC on January 1, 2012 must file an amendment to its Form ADV no later than March 30, 2011. In addition to being required to file an amended Form ADV no later than March 30, 2012, advisers that are no longer eligible for federal registration will be required to withdraw by filing Form ADV-W and register with the appropriate state(s) within 90 days of filing the amended Form ADV but no later than June 28, 2012.

    Exemptions from the Prohibition on Registration with the Commission

    Section 203A(c) of the Advisers Act authorizes the SEC to permit advisers to register with the SEC even if they would otherwise be prohibited from doing so. Pursuant to this authority, the SEC issued has permitted six types of investment advisers to register with the SEC under Rule 203A-2: (i) nationally recognized statistical rating organizations (“NRSROs”); (ii) certain pension consultants; (iii) certain investment advisers affiliated with an adviser registered with the Commission; (iv) investment advisers expecting to be eligible for Commission registration within 120 days of filing Form ADV; (v) certain multi-state investment advisers; and (vi) certain internet advisers. The final rules amend these exemptions by removing the exemption for NRSROs (now excluded from the definition of “investment adviser” under the Advisers Act), raising the minimum value of plan assets required to be managed by pension consultants from $50 million to $200 million, and lowering from 30 to 15 the number of states in which a multi-state investment adviser would be required to register before it is eligible to register with the SEC.

    Transition Period

    While new Rule 203A-5 becomes effective on July 21, 2011, an investment adviser may, at its own discretion, register with the SEC under the Investment Advisers Act prior to that date. Mid-sized advisers applying for registration with the SEC may register either with the SEC or the appropriate state authorities. Mid-sized advisers registered with the SEC as of July 21, 2011 must remain registered with the SEC (unless an exemption is available) until January 1, 2012. Thereafter, the adviser may transition to state registration. After July 21, 2011, newly registering mid-sized advisers must register with the appropriate state authorities. The SEC is only exempting those mid-sized advisers that are already registered with the SEC by July 21, 2011 if they have at least $25 million AUM. Each adviser registered with the SEC on January 1, 2012 must file an amendment to its Form ADV by March 30, 2012. Those mid-sized advisers who are no longer eligible for SEC registration must withdraw their registrations no later than June 28, 2012.


  • The proposed rule would have allowed for a 90-day transitional period with two “grace periods.” Advisers would have had to first determine by August 20, 2011 whether they were eligible for SEC registration and file an amended Form ADV. Then, advisers would have had to register with state authorities and withdraw registration from the SEC by October 19, 2011. However, under the final rules all investment advisers, including exempt reporting advisers, must submit Form ADV to the SEC by March 30, 2012.




  • Exempt reporting advisers must complete and file the following items of Part 1A of Form ADV: Items 1 (Identifying Information), 2.B. (SEC Reporting by Exempt Reporting Advisers), 3 (Form of Organization), 6 (Other Business Activities), 7 (Financial Industry Affiliations and Private Fund Reporting), 10 (Control Persons), and 11 (Disclosure Information). Exempt reporting advisers also must complete the corresponding sections of Schedules A, B, C and D.



  • A “qualifying portfolio company” is a company that is not publicly traded, does not incur leverage in connection with the fund’s investment, uses the fund’s capital for operating or business expansion purposes rather than to buy out other investors, and is not itself a fund.



  • A “place of business in the United States” is defined as any office where the investment adviser regularly provides advisory services, solicits, meets with, or otherwise communicates with clients, and any location held out to the public as a place where the adviser conducts any such activities that is located in the United States. To determine if a place of business is “in the United States” or if an investor is a U.S. Person, SEC Rule 202(a)(30)-1 defines the terms generally by incorporating the definitions of a “U.S. person” and “United States” from Regulation S under the Securities Act of 1933.




  • A “client” generally means (i) a natural person, their minor children, family members of the same household and related accounts and (ii) a legal organization, but not its owners.



  • The SEC further increased this threshold to $110 million under Rule 203A-1. The amended rules provide a buffer for mid-sized advisers with AUM close to $100 million to determine whether and when to switch between state and SEC registration. An adviser must register with the SEC once AUM reach the $110 million threshold, but does not need to withdraw registration until it has less than $90 million of AUM. The buffer is intended to prevent constant registering and withdrawing of registration because of fluctuations of AUM above and below the $100 million threshold due to market fluctuation or the departure or addition of clients.



  • New York, Minnesota and Wyoming advised the SEC that they will not subject investment advisers to examination at the state level. Advisers registered with all other states are subject to state examination.


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    Monday, July 11, 2011

    Will Private Equity Firms Investing in Africa Be Affected by Violations by Portfolio Companies of the New UK Bribery Act?



    The UK Bribery Act (the “UK Act”) is possibly the broadest internationally relevant anti-bribery law worldwide. The UK Act, which took effect on July 1, makes it unlawful to bribe a person, to accept a bribe, to bribe a foreign public official in his capacity as such and, for commercial organizations, to fail to prevent bribery by associated persons. The UK Act includes no limit on the fines that may be imposed for violations and provides for imprisonment of up to 10 years for individuals. This paper addresses the specific implications for private equity firms, especially those who do business in Africa or have African companies in their investment portfolios.

    Associated persons. Section 8 of the UK Act defines an associated person to be an entity or individual who performs services for or on behalf of a commercial organization in any capacity, including as employee, agent, contractor or subsidiary. Thus, an employee of a portfolio company or a joint venture partner may be considered an “associated person” under the UK Act whose actions can create direct liability for a private equity firm. Pursuant to Section 8(4) whether one is an associated person “is to be determined by reference to all the relevant circumstances and not merely by reference to the nature [or title] of the relationship”. Indications are that the degree of involvement the private equity firm has in the management of the portfolio company will be a factor in determining whether the portfolio company actor is an “associated person.”1 Clearly, a firm member who serves as an officer of a portfolio company or as an executive director is an associated person. However, because of the law’s recent vintage, there are still no test cases, rulings or specific guidance clarifying the precise level of control or management required to cause a portfolio company actor to be considered an associated person. Thus, private equity firms would be well advised to be careful in structuring relationships.

    Incentive schemes. One feature of the UK Act that could prove problematic for private e equity firms is its application to the bribery of private actors. Under the UK Act, a payment to a private actor that induces that actor to perform his duties improperly can trigger a violation. Private equity firms are typically very involved in the structuring of management and incentive plans at their portfolio companies. Such plans, if structured improperly or carelessly have the potential to violate the UK Act. For example, placement agent or brokering fees may present a particular risk. While a typical and rational incentive or management plan should not ordinarily be an issue, an overly complex web of corporate and employment or contractor relationships could appear to be a way of making third party bribes. Arrangements should therefore be commercial in nature and rational in structure, and responsibility should be taken by senior fund personnel to ensure that any monies are paid for a proper purpose.

    Valuation. Among the most important issues to buyers and sellers is the effect UK Act violations will have on ultimate portfolio company valuation and exit. The diligence conducted by prospective purchasers will certainly be looking at potential UK Act violations. Ongoing warranties may be requested from sellers, and if issues are discovered in diligence, purchase price holdbacks would make sense, if a deal can be had at all in the context of potentially unlimited fines.
    Investors. As a result of the issues described above, one can expect that investors in private equity funds may begin to condition investments on the implementation of procedures to ensure compliance with the UK Act and even require firms to agree to invest only in companies that are UK Act and FCPA compliant. The consequences of the later discovery of bribery or corruption issues in that case could seriously damage a fund manager’s business and prospects.

    Adequate procedures. The failure to prevent language of the UK Act is one of strict liability. In other words, lack of knowledge of the bribing act is not a defense. The only defense a private equity firm may have in the case of a closely managed portfolio company that is found to have violated the UK Act is that the company had in place adequate procedures designed to prevent associated persons from bribing. Unfortunately, but understandably, however, the UK Act does not include a precise definition for “adequate procedures.” As such, until there are a number of test cases, it will be unclear to companies whether they have satisfied the adequate procedures requirement. The UK government has provided some guidance as to what constitutes ‘adequate procedures.’ The criteria are based on six principals which are:

    (1) whether the company has instituted procedures that are “proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organization’s activities”;
    (2) whether “top-level management are committed to preventing bribery”… and foster an associated culture;
    (3) whether the company performs periodic, informed and documented internal and external bribery risk assessments;
    (4) whether the company uses appropriate due diligence procedures with respect to associated persons;
    (5) whether the company communicates and trains with respect to its bribery policies; and
    (6) whether the company “monitors and reviews procedures designed to prevent bribery by persons associated with it and makes improvements where necessary.”

    Notwithstanding this guidance, without more specific rules defining adequate procedures, companies will still find themselves guessing whether they are indeed UK Act compliant. In addition, in certain circumstances, adequate procedures may all together preclude doing business in some jurisdictions.2

    Jurisdictional reach. One must also bear in mind that the expansive reach of the UK Act could make private equity firms acting or formed outside of the UK liable under the UK Act. Not only is where the bribery act occurred not relevant in the case of an individual or entity with a close connection to the UK, in the case of failing to prevent a bribe, organizations that do any business in the UK can be liable under the UK Act regardless of where the bribe occurred and whether the bribing individual has a close connection with the UK. As a result of this broad reach, it will soon be necessary for private equity firms with any ties to the UK with operations in Africa to ensure they have undertaken appropriate and thorough due diligence in order to ensure that their portfolio companies are UK Act compliant. This will be very important for companies that do or wish to do business in African countries known for so-called “gratuities” and the like. In countries where such payments would be considered necessary and not be prohibited locally, these types of payments will be difficult to prevent, and some firms may thus simply be forced to do business elsewhere and even consider divestitures. Private equity firms who are already doing business in Africa and wish to continue to do so may have to augment their due diligence efforts. Firms considering the African market need to pay special attention to diligence efforts to ensure not only current UK Act compliance, but also that procedures are in place (whether they are adequate is to be determined) to prevent bribery. Where companies do have procedures in place to prevent bribery, they need to make sure that all employees, agents or other associated persons are aware of such procedures and trained accordingly. In addition, companies need pay close attention to how court proceedings play out as the definition of what constitutes adequate procedures becomes clearer.


  • 22 June 2011 speech by Richard Alderman, the director of the UK Serious Fraud Office. See http://www.sfo.gov.uk/about-us/our-views/director's-speeches/speeches-2011/private-equity-and-the-uk-bribery-act,-hosted-by-debevoise--plimpton-llp.aspx.




  • See also, the UK Ministry of Justice, The Bribery Act 2010 – Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing (section 9 of the Bribery Act 2010), March 2011.


  • DaMina Advisors LLP and
    Curtis, Mallet-Prevost, Colt & Mosle LLP Research Paper

    By: Nicole Elise Kearse, Esq., Deputy Managing Director, DaMina Advisors and
    Peter F. Stewart, Esq., Partner, Curtis Mallet Prevost Colt & Mosle LLP

    Read More...

    Friday, June 24, 2011

    SEC Releases Final Rules Implementing Dodd Frank Provisions Affecting Investment Advisers

    On June 22, 2011, the Securities and Exchange Commission (the "SEC") adopted final rules to implement certain provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

    The final rules, which were adopted substantially as proposed, will generally require advisers to hedge funds and other private funds to register with the SEC under the Investment Advisers Act of 1940 (the "Advisers Act") unless they qualify for one of three new exemptions. The exemptions apply to (1) advisers solely to "venture capital funds", (2) advisers solely to private funds with less than $150 million in private fund assets under management in the United States, and (3) foreign private advisers. Although all three categories of advisers would be exempt from registration, the SEC will require advisers relying on the first two of these exemptions ("exempt reporting advisers") to file certain reports with the SEC. In addition to these exemptions, the final rules exclude "family offices" from the definition of investment adviser, thereby excluding these advisers from regulation under the Advisers Act. Lastly, the final rules reallocate regulatory responsibility for certain mid-size advisers from the SEC to the states and provide for certain new reporting requirements applicable to registered advisers and exempt reporting advisers. In order to allow those advisers who may now be required to register sufficient time in which to meet their obligations, the SEC has decided to delay their registration deadline until March 30, 2012.

    We will be examining in more detail the implementation of the final rules and the various specific exemptions in subsequent client alerts. Please check back for further updates.

    For the full text of the final rules, please visit the following hyperlinks:

    Implementation Release:
    http://sec.gov/rules/final/2011/ia-3221.pdf

    Exemptions Release:
    http://sec.gov/rules/final/2011/ia-3222.pdf

    Family Offices Release:
    http://sec.gov/rules/final/2011/ia-3220.pdf

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    Thursday, June 16, 2011

    Master Fund Registration Requirement Proposed in Cayman Islands

    On June 10, 2011, Cayman Islands Premier and Finance Minister McKeeva Bush proposed a revenue-generating measure to require certain Cayman-domiciled "master funds" to register with the Cayman Islands Monetary Authority (CIMA). These funds would be required to pay an annual fee of CI$1,500 (~US$1,850). Currently, such funds do not pay any fees and are not regulated by CIMA. Premier Bush's proposal will be subject to consideration by the Cayman Islands legislature. Please check back for further updates.

    For the full text of Premier Bush’s speech, please click
    here.

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    Tuesday, May 31, 2011

    Council of the EU Adopts AIFM Directive

    On May 27, 2011, the Council of the EU finally announced [http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/122250.pdf] its adoption of the text of the AIFM Directive [http://register.consilium.europa.eu/pdf/en/10/pe00/pe00060.en10.pdf], following an agreement reached with the European Parliament at first reading. As previously reported [http://curtis-ifg.blogspot.com/2010/12/aifm-directive.html], the European Parliament adopted the text of the AIFM Directive on November 11, 2010.

    The official text of the AIFM Directive will now be published in the Official Journal of the EU and the directive will enter into force on the 20th day following publication. EU Member States will have two years to implement the provisions of the AIFM Directive into national law.

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    Monday, April 4, 2011

    Curtis Client Alert: FINRA Rule 5131 Effective May 27, 2011

    FINRA Rule 5131, which will take effect on May 27, 2011, seeks to prevent certain abuses in the allocation and distribution of new issues. One of the abuses that Rule 5131 targets is the allocation of new issues to executive officers and directors of companies for which the FINRA member provides investment banking services, a practice commonly referred to as "spinning." In this Client Alert, we discuss the requirements and prohibitions under the Rule and applicable exceptions, with a particular focus on the Rule's implication for private investment funds.

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    Friday, February 11, 2011

    SEC Proposes Form PF to Facilitate Increased Private Fund Disclosure

    Introduction
    On January 26, 2011, the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) (collectively, the “Commissions”) jointly proposed new rules designed to monitor systemic risk to the financial system.1 The proposed rules create Form PF, which would require registered investment advisers to private funds2 to file information about the advisers’ operations and the private funds they advise, such as the amount of assets under management, use of leverage, counterparty credit risk exposure and trading and investment positions for each private fund advised by the adviser. The amount of information reported and the frequency of reporting would depend upon the size of the private fund advised. This client alert summarizes the reporting requirements and types of disclosure required for proposed Form PF.

    Overview of Systemic Risk Monitoring
    On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). While Dodd-Frank provides for wide-ranging reform of financial regulation, one stated focus of this legislation is to “promote the financial stability of the United States” by, among other measures, establishing better monitoring of emerging risks using a system-wide perspective. Title I of the Dodd-Frank Act establishes the Financial Stability Oversight Council (the “FSOC”), which is comprised of the leaders of various financial regulators (including the Commissions’ Chairmen) and other participants.

    To further the monitoring of systemic risk, Sections 404 and 406 of Dodd-Frank amend Sections 204(b) and 211, respectively, of the Investment Advisers Act of 1940, as amended, to require private fund advisers to file reports containing information for the assessment of systemic risk by the FSOC. The records and reports must include a description of certain information about private funds, such as the amount of assets under management, use of leverage, counterparty credit risk exposure and trading and investment positions for each private fund advised by the adviser. Information reported on Form PF would not be available to the public, but Form PF information may be used by the SEC in an enforcement action or by FSOC as a basis for ordering further investigation by the Office of Financial Research.

    Reporting Requirements
    Beginning December 15, 2011, SEC-registered investment advisers that advise one or more private funds would be required to file Form PF. The form consists of 4 main sections.3 Section 1 must be completed by all private fund advisers. Sections 2-4 relate to private fund advisers of private funds in specific categories meeting certain assets under management thresholds.
    Smaller private fund advisers (those advising private funds with total assets under management of less than $1 billion in specific classes)4 would be required to complete and file Section 1 of Form PF annually no later than the last day on which the adviser may timely file its updating amendment to Form ADV (currently, 90 days after the end of the adviser’s fiscal year).

    Large private fund advisers (those advising private funds with total assets under management of $1 billion or more in specific classes), on the other hand, face more frequent filing obligations and additional reporting requirements. Large private fund advisers would be required to complete and file Form PF quarterly, rather than annually, due no later than 15 days after the end of each calendar quarter. In addition to Section 1, a large private fund adviser with more than $1 billion of hedge fund5 assets under management as of the close of business on any of the days during the reporting period would be required to complete Section 2. A large private fund adviser with more than $1 billion of combined liquidity fund6 assets and registered money market fund assets under management as of the close of business on any of the days during the reporting period would be required to complete Section 3. Finally, a large private fund adviser with more than $1 billion of private equity fund7 assets under management as of the last day of the quarterly reporting period would be required to complete Section 4.

    The Commissions expect to implement an electronic filing system for Form PF, but have yet to propose a specific solution8. Fees have also not yet been proposed.

    Form PF Disclosure Requirements
    The specific information requested in each Section of Form PF is outlined in more detail below.

    Section 1
    Section 1 must be filed by all private fund advisers.

    Section 1a seeks information about the adviser, including:

    • identifying information, such as its name and the name of any of its related persons whose information is also reported on the adviser’s Form PF; and
    • basic aggregate information about the private funds managed by the adviser, such as total and net assets under management and the amount of those assets that are attributable to certain types of private funds.
      Section 1b requests information about each private fund advised by the investment adviser. The adviser would need to complete a separate section 1b for each private fund it advises9, covering:
    • identifying and other basic information about each private fund;
    • each private fund’s gross and net assets and the aggregate notional value of its derivative positions;
    • basic information about the fund’s borrowings, including a breakdown based on whether the creditor is a U.S. financial institution, foreign financial institution or non-financial institution as well as the identity of, and amount owed to, each creditor to which the fund owed an amount equal to or greater than 5% of the fund’s net asset value as of the reporting date;
    • basic information about how concentrated the fund’s investor base is, such as the number of beneficial owners of the fund’s equity and the percentage of the fund’s equity held by the five largest equity holders; and
    • monthly and quarterly performance data for each fund.
    Section 1c would require information about hedge funds managed by the adviser. The adviser would need to complete a separate section 1c for each hedge fund it advised, disclosing: investment strategies;
    • percentage of the fund’s assets managed using computer-driven trading algorithms;
    • significant trading counterparty exposures (including identity of counterparties); and detailed trading and clearing practices.
    Section 2 Section 2 would apply to private fund advisers advising hedge funds with total assets under management of more than $1 billion. Section 2a seeks information about the adviser’s hedge funds in the aggregate:
    • exposure / market value of assets invested in different types of securities and commodities (on both short and long bases);
    • duration of fixed income portfolio holdings;
    • interest rate sensitivity;
    • turnover rate of portfolios (to provide an indication of the adviser’s frequency of trading); and
    • geographic breakdown of investments.

    Section 2b relates to each hedge fund advised by the investment adviser with at least $500 million assets under management. The adviser would need to complete section 2b for each such fund, disclosing:
    • exposure / market value of assets invested in different types of securities and commodities (on both short and long bases);
    • portfolio liquidity;
    • concentration of positions;
    • collateral practices with significant counterparties;
    • identity of, and clearing relationships with, the three central clearing counterparties to which the fund has the greatest net counterparty credit exposure;
    • certain hedge fund risk metrics;
    • financing information;
    • investor information;
    • impact on the fund’s portfolio from specified changes to certain identified market factors, (if regularly considered in the funds’ risk management), broken down by long and short components of the portfolio;
    • monthly breakdowns of secured and unsecured borrowing, derivatives exposures, information about the value of collateral and letters of credit supporting secured borrowing and derivates exposures and the types of creditors;
    • breakdown of the term of the funds’ committed financing;
    • investor composition and liquidity, such as side pocket, gating arrangements, and breakdowns of the percentage of the funds’ net asset value that is locked in for different periods of time.
    Section 3 Section 3 relates to private fund advisers advising liquidity funds and registered money market funds having combined assets under management of at least $1 billion. Such advisers must disclose:
    • pricing method for computer net asset value per share;
    • compliance with Rule 2a-7 of the Investment Company Act of 1940;
    • information regarding the fund’s portfolio, such as - net asset value; - net asset value per share; - market-based net asset value per share; - weighted average maturity, weighted average life; and - 7-day gross yield, amount of daily and weekly liquid assets, amount of assets with a maturity grater than 397 days;
    • amount of assets invested in different types of instruments, broken down by maturity, as well as information for each open position that represents 5% or more of the fund’s net asset value;
    • secured or unsecured borrowing of the fund, broken down by creditor type and maturity profile of that borrowing;
    • whether the fund has in place a committed liquidity facility;
    • concentration of the investor base;
    • gating and redemption policies;
    • investor liquidity; and
    • percentage of the fund purchased using securities lending collateral.
    Section 4 Section 4 covers private fund advisers advising private equity funds having assets under management of at least $1 billion. Such advisers must disclose:
    • information about borrowings and guarantees of the fund;
    • leverage of the portfolio companies in which the fund invests;
    • weighted average debt-to-equity ratio of controlled portfolio companies in which the fund invests and the range of debt to equity among those portfolio companies;
    • maturity profile of portfolio companies’ debt;
    • whether fund or any portfolio companies experienced an event of default;
    • identity of institutions providing bridge financing; and
    • breakdown of the funds’ investments by industry and by geography.


    1. Release No. IA-3145, Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, available at  http://sec.gov/rules/proposed/2011/ia-3145.pdf

    2. A “private fund” is an issuer that would be an investment company under the Investment Company Act of 1940 but for the exemptions provided by section 3(c)(1) or 3(c)(7).

    3. Section 5 is contemplated, but has not yet been proposed, as a hardship exemption form.

    4. For purposes of calculating assets under management, each adviser would have to aggregate all parallel managed accounts and any assets advised by related persons. If the investment adviser’s principal office and place of business is outside the United States, it may disregard for Form PF purposes the assets of any private fund that is neither a U.S. person nor is offered to, or beneficially owned by, a U.S. person during the previous year.

    5. Proposed Form PF would define “hedge fund” as any private fund that (1) has a performance fee or allocation calculated by taking into account unrealized gains; (2) may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); or (3) may sell securities or other assets short.

    6. A “liquidity fund” would be defined as any private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors. This includes, for example, treasury securities, municipal bonds, unsecured commercial paper, and certificates of deposit.

    7. A “private equity fund” would be defined as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course.

    8. The most likely solution for electronic filings is expansion of the existing IARD system, owing to efficiencies “such as the possible interconnectivity of Form ADV filings and Form PF filings, and possible ease of filing with one password.”

    9. Funds that are part of a master-feeder arrangement would be filed together in order to avoid duplicative reporting.

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