Articles Posted in Guest Post

Written by guest contributor, Bruce Frumerman, Frumerman & Nemeth Inc.

This article first appeared in FINAlternatives on February 3, 2014 and is re-printed with permission below.

‘Soft’ manager qualities are often what separates your fund from competitors is a summary finding in the recently reported survey of institutional consultants and gatekeepers by Market Strategies International’s Cogent Reports. Investment consulting firms are now saying they are paying greater attention to ‘soft’, subjective factors in assessing money managers. Firms that place a greater emphasis on increasing and demonstrating transparency in their communications and processes are favored, Cogent noted.

In 2013, assuming you were delivering acceptable risk/return characteristics and met AUM size and track record length requirements, did your firm find itself favored over competitors?

Published on: January 27, 2014

The Volcker Rule–A Suggested Approach for Banking Entities When Analyzing its Impact on Business Models, Activities and Transactions

Written by: Joseph T. Lynyak, III and Anthony H. Schouten

More than three years following the passage of the Dodd-Frank Act, and intense inter-agency negotiations, the federal financial regulatory agencies collectively adopted the final version of the “Volcker Rule,” or “Rule”—which imposes new and potentially severe limitations on domestic and foreign banking entities’ activities in regard to proprietary trading and investments in “covered funds.” The 72-page final Rule is accompanied by over 800 pages of interpretative guidance, to address more than 1,200 questions that the federal agencies asked commenters to address.

This Alert provides an overview of the principal elements of the Rule and identifies several significant concerns that have already been raised by industry participants. Importantly, we provide our thoughts regarding the process by which banking entities might analyze their current business models and transactional structures, with the goal of avoiding an interruption in deal flow and/or business models by identifying possible coverage by the Rule, as well as adopting modifications to comply with the Rule and prevent or minimize adverse business consequences.

Additional client communications will explore in detail categories of activities and transactions impacted by the Rule, as well as interpretative guidance issued by the federal banking agencies.

Read this article and additional publications at pillsburylaw.com/publications-and-presentations.

Published on: December 19, 2013

Canada Imposes Chaperone Requirement for Investment Sub-Advisers

This guest post from Blake, Cassels & Graydon LLP, co-authored by Ross McKee, Partner, Blake, Cassels & Graydon LLP, is reprinted here with permission.

INTRODUCTION

The Canadian Securities Administrators have proposed a new uniform Canadian registration exemption for investment sub-advisers, as part of a package of proposed amendments to Canadian registration rules. The proposed exemption will add a chaperone requirement that does not exist under the current sub-adviser exemptions in Ontario and Quebec. In addition, no adviser registration exemptions (such as sub-adviser or international adviser) could be relied upon by anyone registered as an adviser in any jurisdiction of Canada.

When registration reforms were introduced in 2009, one of the missing elements was a uniform national sub-adviser registration exemption for foreign advisers to a registered Canadian portfolio manager. This can arise when a Canadian portfolio manager seeks specialized investment expertise from a foreign adviser.

Ontario has long had an automatic exemption for sub-advisers under section 7.3 of OSC Rule 35-502 Non-Resident Advisers. Quebec has the similar exemption under Decision No. 2009 PDG-0191. In 2009, other provinces stated they were prepared to grant similar sub-adviser exemptions but only upon application.

Published on: December 9, 2013

Credit Portfolio Management in a Turning Rates Environment

This article was published by Investcorp and is reprinted here with permission.

Executive Summary

This paper analyzes correlations between credit spreads and interest rates across various sectors and credit ratings in the US. Our work was prompted by chairman Bernanke’s announcement this summer of possible tapering of the ongoing quantitative easing program which marked a turning point for interest rates from their historically low levels. We analyze data from 1990 to the present and use a statistically robust multi-factor risk model framework which can be calibrated to draw both long-term and short-terms conclusions. Our findings are relevant for credit portfolio managers contemplating the impact of rising interest rates and steepening Treasury curve on corporate bond portfolios.

Consistent with our earlier studies, we find strong negative correlation between sector spreads and rate shifts and twists. A uniform increase in rates is associated with tighter credit spreads, while a uniform drop in rates leads to wider spreads. In most industries, with the exception of the banking and brokerage and the consumer sector, lower credit quality is associated with stronger negative correlation.

We compare our current estimates with the results of a similar analysis we conducted in 2003 and find many similarities but also some notable differences. The long-term models estimated currently and 10 years ago show similar patterns. However, the short-term versions are quite different. The short-term correlation estimates in 2013 are much weaker than those from 2003 – likely a result of the Fed’s ongoing quantitative easing program which has weakened the normal relationships between the economic recovery (represented by spreads) and monetary policy (represented by rates). Moreover, correlation patterns in the banking and brokerage sector have changed prior and post the financial crisis. These results have important implications for risk management as well as for identifying relative value opportunities across sectors with different
rate sensitivities.

Published on: October 17, 2013

Here’s Why The Canadian Hedge Fund Industry Is So Small

This article was published by Business in Canada and is reprinted here with permission.

Business in Canada recently had the opportunity to interview Richard Taglianetti, a giant in the hedge fund universe who has raised millions of dollars for start-up managers over the course of his career. At present, Richard serves as the senior managing director of hedge funds at Corinthian Partners, where he connects institutional investors on both sides of the Atlantic with emerging managers who have logical, scalable processes and strong track records, to boot.

During the interview, we discussed the challenges facing the Canadian hedge fund industry and why its size pales in comparison to the United States and the United Kingdom. Consider this: the population of United States is roughly ten times that of Canada, but its hedge fund managers oversee roughly 45 times the assets. At the end of 2012, Canadian hedge funds managed about $35 billion while their counterparts in the United States had a cumulative AUM of over $1.5 trillion. In light of this vast discrepancy, Richard concluded that “there’s definitely something holding the Canadian hedge fund industry back.”

Shortly thereafter, Richard was kind enough to follow up with Business in Canada, sending an email in which he outlined a few things that are inhibiting the growth of hedge funds in the Great White North.

Underperformance

As Richard previously told us, “Performance is a magnet for assets.” Unfortunately, in 2012, Canadian hedge funds did more to repel than attract investors. As a whole, the industry gave back 5 percent last year, far underperforming the TSX, which advanced by 4 percent.

The End Of The Commodities Supercycle

Before ‘tapering’ became part of Wall Street’s lexicon, investors were rebalancing their portfolios in accordance with the notion that the commodities supercycle was drawing to a close. Richard believes this development had a particularly deleterious effect on resource-focused managers in Canada.

The Cost Of Accessing FundSERV

FundSERV is an online hub that connects and facilitates transactions between funds, distributors, and intermediaries. Membership in this network doesn’t come cheap. According to Richard, these costs unduly burden smaller managers, which reduces the size of the pool of managers in Canada. In addition, this restricts a hedge fund’s access to high net worth investors, who provide the vital money needed for expansion.

Richard is quite open to working with Canadian managers, saying, “If there was a team in Canada that is performing, I would love to talk to them.” But after 13 years of putting out global searches for managers, only a handful of Canadians have answered his call.

Author: BiC Editorial Board

Published on: September 16, 2013

Minimizing Anti-Corruption Deal Risk While Maximizing Returns on Venture Capital Investments

This article was published by The FCPA Report and is reprinted here with permission.

More and more, venture capital firms are investing in start-ups seeking to expand internationally or with nascent cross-border operations in place. Such investments offer opportunities for lucrative returns but also carry significant anti-corruption risk that VC firms are often ill-equipped to manage. For many businesses, managing anti-corruption risk is a necessary cost center. But VC firms are uniquely positioned to use that risk to drive a better deal and gain greater control over management and direction of the business.

The overlapping and increasingly aggressive anti-corruption regimes, including the FCPA, the U.K. Bribery Act, the anti-bribery laws in China, Germany and the newly enacted law in Brazil, coupled with the heightened risk of corruption in emerging economies, can quickly derail an otherwise strong investment. Not only are VC firms subject to fines, penalties and reputational harm through the conduct of the start-up, but the conduct itself may have occurred before the VC firm even considered taking a stake.

This article offers an assessment of the opportunities and risks that VC firms should consider, and concludes with four strategies for maximizing returns while limiting anti-corruption risks.

Published on: September 12, 2013

Recent Regulation FD Enforcement Action Provides Lessons for Closed-End Funds

Written by: Kimberly V. Mann

The Security and Exchange Commission’s recent enforcement action against Lawrence D. Polizzotto serves as a reminder to all issuers that Regulation FD enforcement is alive and well.

The Polizzotto Case

Polizzotto, the former vice president of investor relations at First Solar, Inc. (and, ironically, a member of the company’s Disclosure Committee, which is responsible for ensuring the company’s compliance with Regulation FD), was found by the SEC to have violated Section 13(a) of the Exchange Act of 1934 (the “Exchange Act”) and Regulation FD by selectively disclosing material nonpublic information to certain analysts and investors before the information was publicly disclosed. The selective disclosures were made to reassure certain analysts and investors about the company’s prospects of obtaining two loan guarantees and to correct information that was previously disclosed about another loan guarantee. Polizzotto knew that First Solar had not yet issued a press release containing information about the status of the guarantees, but went forward with the selective disclosures in any event to counter adverse research reports about the company and stem substantial declines in the company’s stock price. The SEC also determined that Polizzotto directed a subordinate to make similar selective disclosures in advance of the public announcement. First Solar did not publicly disclose the information about the guarantees until the morning after the selective disclosures were made and the company’s stock price declined by 6% on the news.

Polizzotto’s selective disclosure caused First Solar to violate Section 13(a) and Regulation FD. Because First Solar provided what the SEC described as “extraordinary cooperation,” and because the company demonstrated a culture of compliance, it was not charged with any violations. The SEC’s order can be found at www.sec.gov/litigation/admin/2013/34-70337.pdf.

Regulation FD Basics

Under Regulation FD, an issuer or any person acting on its behalf that intentionally discloses material nonpublic information to (i) broker-dealers or their associated persons, (ii) investment advisers or their associated persons,
(iii) investment companies or entities such as hedge funds that would be investment companies but for their reliance on exceptions available under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 or their affiliated persons or (iv) any of the holders of the issuer’s securities, where it is foreseeable that the recipient of the information would purchase or sell the issuer’s securities on the basis of the information disclosed is required to make simultaneous public disclosure of the information. Disclosure is intentional if the disclosing person knows or is reckless in not knowing that the information being disclosed is material and nonpublic.
If selective disclosure is unintentional, public disclosure is required to be made promptly following the selective disclosure. Public disclosure is made promptly by a fund if it is made as soon as reasonably practicable after a senior official of the fund or of the fund’s investment adviser learns that there has been unintentional disclosure of material nonpublic information. In no event will public disclosure be deemed promptly made if it is made after the later of (i) 24 hours after the senior official learns of the unintentional disclosure and
(ii) commencement of trading on the New York Stock Exchange on the trading day after the senior official learns of the unintentional disclosure.
In the context of an investment fund, the term “issuer” means a closed-end fund that (i) has a class of securities registered under Section 12 of the Exchange Act (for example, a fund that has more than $10 million in assets and at least 2000 record holders of any class of its equity securities, or has at least 500 record holders of such securities that are not accredited investors) or (ii) is required to file reports under Section 15(d) of the Exchange Act. Open-end and other types of investment companies are not issuers for purposes of Regulation FD. Foreign private issuers also are not subject to Regulation FD.
A “person acting on behalf of a closed-end fund” would include a senior official of the fund or of the fund’s investment adviser or any other officer, employee or agent of the fund that regularly communicates with any person to whom selective disclosure of material nonpublic information is prohibited. An agent of a closed-end fund would include a director, officer or employee of the fund’s adviser or another service provider that is acting as an agent of the fund.
The requirements of Regulation FD do not apply to disclosures made by a fund (i) to its attorneys or any other person that owes a duty of trust or confidence to the fund, (ii) to any person that is subject to an obligation to keep the disclosed information confidential, or (iii) in connection with most primary registered offerings of securities under the Securities Act of 1933. The requirements of Regulation FD apply to disclosures made in connection with unregistered private offerings; however, information may be disclosed privately to select recipients if the recipients are bound by a confidentiality agreement.
Public disclosure may be made by way of public filings under the Exchange Act, such as on Form 8-K, or by using any other method reasonably designed to provide broad, nonexclusionary public distribution (such as press releases through wire services with wide circulation, news conferences that are open to the public or publication on the issuer’s website). In 2008, the SEC issued guidance on public disclosure through company websites, which can be found at http://www.sec.gov/rules/interp/2008/34-58288.pdf.
On April 2, 2013, the SEC issued guidance indicating that social media outlets are permitted to be used to disseminate material information publicly in compliance with Regulation FD. The principles outlined in the 2008 guidance on company websites should be used to determine whether a particular social media outlet is an appropriate channel of distribution for purposes of Regulation FD. In order to use a company website or social media to disclose information publicly, investors must be notified of the specific website or social media channel to be used to provide information to the public. The SEC’s investigative report on social media and Regulation FD can be found at http://www.sec.gov/litigation/investreport/34-69279.pdf.

Regulation FD Compliance Measures

The following is a partial list of measures that funds and their advisers might implement to assist with Regulation FD compliance.

Review existing Regulation FD policies with counsel and update them from time to time as appropriate. Indicate in the Regulation FD compliance policy the names and titles of those persons that are authorized to speak to investors on behalf of the fund.
- Establish procedures for responding to inquiries from investors and market professionals.
- Develop a definition of “material information” and incorporate it in the Regulation FD policy.
- Establish procedures for handling one-on-one discussions with investors and market professionals.
- Develop policies and procedures for the use of a website or social media to disseminate information to the public.
- Maintain records of prior disclosures of material information.
Conduct periodic Regulation FD training for persons acting on behalf of the fund.
Conduct periodic Regulation FD compliance audits.
Establish accountability for Regulation FD compliance at top management levels.

Establishing effective policies and procedures designed to ensure compliance with Section 13(a) and Regulation FD may, in addition to reducing the risk of violations, have the effect of reducing the risk of liability in the event a violation occurs.

Published on: July 15, 2013

What Fund Managers Sometimes Forget About Cayman Funds

Written by: Kimberly Mann

Private investment fund structures frequently include one or more vehicles that are organized under the laws of the Cayman Islands. The Cayman Islands is a preferred jurisdiction because there is no tax on income, profits or capital gains, nor is there withholding tax. In addition, at the time of its formation, an entity may purchase a tax exemption certificate which will preserve its tax-free status for several years. Formation in the Cayman Islands is relatively efficient and inexpensive and a number of different types of business organizational structures that offer limited liability for investors may be used. Advisors to Cayman funds also may avoid licensing requirements if they fall within an available exemption.

Cayman entities likely will become even more attractive to fund managers, sponsors and investors as a result of recent changes to Cayman law pertaining to fiduciary duties, third party beneficiaries of indemnification provisions, the manner in which fund documents may be executed, the use of foreign partnerships as general partners of Cayman limited partnerships and the adoption of a limited liability company statute, all of which help to bring Cayman law in line with Delaware law. However, fund managers are advised to remember important anti-money laundering obligations that apply to investment funds under Cayman law.

Anti-money Laundering Requirements

Notwithstanding the recent liberalization of certain laws and the absence of registration or licensing requirements in many cases, managers of Cayman vehicles are subject to strict anti-money laundering compliance requirements under the Proceeds of Crime Law (“PCL”) and the Money Laundering Regulations promulgated under the PCL. In addition, the Cayman Islands Monetary Authority Guidance Notes on Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (“Guidance Notes”) provide important guidelines for anti-money laundering compliance. Under the Cayman anti-money laundering regime, fund managers must
(i) establish client identification procedures, (ii) implement suspicious transaction reporting procedures, (iii) maintain know-your-client information and suspicious transaction records, (iv) develop internal controls, policies and procedures that are appropriate to prevent money laundering, (v) implement an anti-money laundering training program for staff members and (vi) designate a compliance officer at the management level with the requisite skills and experience to manage the compliance program and report to the board of directors or its equivalent.

The purpose of the Guidance Notes is to assist funds and other financial services providers to comply with applicable Cayman Islands Money Laundering Regulations. The Guidance Notes describe the types of documentation that should be used as evidence of the identity of investors and their beneficial owners and signatories. The type of documentation required depends, in large measure, upon the nature of the investor or beneficial owner. For example, identification documents for natural persons would include a current valid passport, a recent utility bill and a reference letter from a lawyer, accountant or other respected professional. Appropriate documentation for a corporate investor would include a certificate of incorporation, a copy of recent financial statements of the company, identification evidence of each of the principal beneficial owners holding a 10% or greater interest in the company or otherwise exercising control over the company and copies of the resolutions of the board of directors authorizing the investment in the fund. If copies of identifying documents are submitted, they should be certified by a lawyer, accountant, notary public, member of the judiciary or other suitable certifier. The Guidance Notes are not required to be followed slavishly; rather, the Cayman Islands Monetary Authority expects financial services providers to exercise prudent judgment and take the Guidance Notes into account when devising their anti-money laundering policies and procedures.

A Pragmatic Approach – Using an Intermediary

Under the Money Laundering Regulations, evidence of identity is satisfactory if it is reasonably capable of establishing that the investor is who it claims to be. There are circumstances under which it may be duplicative, onerous or unhelpful for a fund manager to obtain and verify identification evidence about a prospective investor. In those cases, it may be appropriate to rely on the due diligence of a third party intermediary that will serve as an “eligible introducer.” An eligible introducer is, among other things, (i) a lawyer or certified or chartered accountant or firm of lawyers or certified or chartered accountants, conducting business in a country with legislation equivalent to the Money Laundering Regulations, (ii) a member of a professional body in a country listed in Schedule 3 of the Money Laundering Regulations that is subject to disciplinary action for failure to comply with guidelines similar to the Guidance Notes or (iii) a financial institution in a country listed in Schedule 3 of the Money Laundering Regulations that has regulations equivalent to the Money Laundering Regulations, if the financial institution is subject to the jurisdiction of a regulatory authority outside the Cayman Islands that is the functional equivalent of the Cayman Islands Monetary Authority. Use of an eligible introducer may be pragmatic in order to create efficiencies in cases where the introducer would have already conducted procedures to verify the identity of the prospective investor. An eligible introducer must ensure that its documentation is accurate and up-to-date. The nature of the relationship between the introducer and the fund manager and between the introducer and the prospective investor, as well as the bona fides of the introducer, will determine whether it is appropriate to use the introducer as an intermediary for anti-money laundering purposes.

Required Due Diligence on the Intermediary

It is important for a fund manager to keep in mind that it is responsible for ensuring that the procedures utilized by the introducer are substantially in accordance with the Guidance Notes and that documentary evidence of the introducer upon which the manager will rely is satisfactory. Evidence is satisfactory if it complies with the requirements of the anti-money laundering regime of the country from which the introduction is made. Fund managers or administrators typically require an eligible introducer to provide a comfort letter or eligible introducer form providing assurances that (i) the intermediary qualifies as an eligible introducer, (ii) the introducer’s due diligence procedures are satisfactory, (iii) the introducer has information that clearly establishes the identity of the investor or the investor’s beneficial owner, (iv) the introducer will make available upon request copies of documentation that it has obtained regarding the identity of the prospective investor or the prospective investor’s beneficial owner and (v) due diligence and other identification documentation will be retained by the introducer for the time period required by the regulations to which the introducer is subject. In addition to the comfort letter or eligible introducer form, the fund manager should obtain independent evidence of the eligibility of the introducer, such as confirmation that the introducer is a regulated entity or a member in good standing of a professional body. It is also advisable to test, from time to time, the introducer’s ability to furnish requested identifying documentation promptly. If it turns out that reliance should not have been placed on an introducer, the fund manager must carry out its own due diligence procedures on the prospective investor or beneficial owner.

Exemptions for Certain Types of Investors

Documentary evidence of identity is not required under all circumstances. For example, evidence of identity is not typically required where the investor is a governmental entity, agency of government or a statutory body. In addition, financial institutions in countries listed in Schedule 3 of the Money Laundering Regulations, companies with securities that are listed on exchanges or other markets approved by the Cayman Islands Monetary Authority and pension funds are examples of entities for which exemptions exist. For pension funds, evidence that the investor is a pension fund may consist of a copy of a certificate of registration or an order, approval or regulation of a governmental, regulatory or fiscal authority in the jurisdiction in which the pension fund was established. In the absence of any such evidence, the fund manager should obtain the names and addresses of the trustees or other persons authorized to make investment decisions on behalf of the pension fund.

Summary

The failure to take the Guidance Notes into account could result in sanctions under Cayman law. The Guidance Notes make clear that fund managers should consider money laundering and terrorist financing prevention as part of their risk management strategies and not as a stand-alone requirement. Policies should be tailored to the nature and scope of the fund’s business. Prior to accepting subscribers, a fund manager or its administrator should ensure that documentary evidence of the identity of each prospective investor has been provided and reviewed. Where there are questions, or if insufficient information has been provided by a prospective investor, the manager or administrator should follow up until the prospective investor and its beneficial owners have been adequately identified and determined to be suitable from an anti-money laundering perspective. Subscription materials should be reviewed and modified, if necessary, to include anti-money laundering attestations and documentary requests. Fund managers that are U.S. persons also should check the names of prospective investors and their beneficial owners to determine whether they are on the list of specially designated nationals published by the Office of Foreign Assets Control. Managers that are registered with the U.S. Securities and Exchange Commission as investment advisors likely have an anti-money laundering system in place that meets the requirements of the Guidance Notes. Managers that are not registered investment advisors may not have such policies and procedures in place and may benefit from assistance from counsel or a consultant in establishing and maintaining a satisfactory system.

Published on: June 25, 2013

Admit It! SEC May Seek Admissions of Wrongdoing in Settlements

Written by: G. Derek Andreson

The U.S. Securities and Exchange Commission (“SEC”) is poised to modify its “no-admit, no-deny” policy to seek more admissions of wrongdoing from defendants as a condition of settlement in enforcement cases. The change comes on the heels of recent criticism of the policy from two federal judges and a U.S. Senator and would result in potentially far-reaching consequences for companies, their directors, officers, and employees.

The Proposed Policy Change
At the Wall Street Journal CFO Network’s Annual Meeting on Tuesday, June 18, SEC Chairman Mary Jo White announced her intention to require more admissions of wrongdoing from defendants in the settlement of enforcement actions. Prior to this announcement, the SEC only required such admissions in a narrow sub-set of cases in which parties admitted certain facts as part of a guilty plea or other criminal or regulatory agreement. Such an approach would represent a radical departure from the SEC’s longstanding no-admit, no-deny policy, under which defendants settle cases without admitting or denying wrongdoing. Chairman White emphasized that the no-admit, no-deny policy will still be used in the “majority” of cases and that “having ‘no-admit, no-deny’ settlement protocols in your arsenal as a civil enforcement agency [is] critically important to maintain.”¹

Details are still forthcoming on the scope of the proposed changes to the SEC policy, which will require approval from a majority of the five SEC commissioners. However, Chairman White presumably would not have announced her intention to depart from tradition and require admissions of wrongdoing in certain settlements if such a change lacked majority support from the other Commissioners. In a memo written to the Enforcement Division staff, the Division’s Co-Directors, George Canellos and Andrew Ceresney, have suggested that the SEC would only require admissions of wrongdoing where it would be in the public interest. According to the memo, this may include “misconduct that harmed large numbers of investors or placed investors or the market at risk of potentially serious harm; where admissions might safeguard against risks posed by the defendant to the investing public, particularly when the defendant engaged in egregious intentional misconduct; or when the defendant engaged in unlawful obstruction of the Commission’s investigative processes.”²

Best Laid Plans Gone Awry: Practices for Rule 10b5-1 Trading Plans

Written by Cindy V. Schlaefer, Gabriella A. Lombardi and Laura C. Hurtado

Rule 10b5-1 trading plans are in the limelight due to investigations initiated by U.S. Attorney’s Offices and the SEC into possible abuses by corporate executives of such plans. Now, more than ever, companies and their boards of directors should review and strengthen their insider trading policies concerning Rule 10b5-1 trading plans.

Rule 10b5-1 trading plans are no stranger to controversy. First introduced in 2000 by the Securities and Exchange Commission (SEC), Rule 10b5-1 trading plans permit a corporate insider to adopt a plan of acquisition or disposition of his or her company’s stock when not in possession of material nonpublic information so that trades may be executed by a broker at predetermined times regardless of whether the insider then possesses material nonpublic information.