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 InstInv PRESENTS:

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Institutional Investor’s 19th Annual Alpha Hedge East Conference is excited to announce New Orleans’ own James Carville as a keynote speaker. Mr. Carville will present his views on American and international politics, with a focus on the second administration of Barack Obama, the divided Congress, and the challenges facing the major political parties and players.

CarvilleJames Carville
Political Consultant
[BIO]

Join us February 5-7, 2013 in New Orleans as we kick-off the 2013 conference season in style at the most educational and business-driven event on the winter calendar.

Be sure to reference code ‘PWS10‘ to receive 10% discounted rate!*
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Speakers Include:

  • Scott S. Cowen, President of Tulane University, TULANE UNIVERSITY 
  • Chris J. Acito, Chief Executive Officer and Chief Investment Officer, GAPSTOW CAPITAL PARTNERS
  • Fred Brettschneider, President, LIBREMAX CAPITAL, LLC
  • Michael Dieschbourg, Managing Director, BROADMARK ASSET MANAGEMENT
  • Chad Earnst, Assistant Director, U.S. SECURITIES & EXCHANGE COMMISSION
  • Michael Gaviser, Managing Director, KOHLBERG KRAVIS ROBERTS & CO. L.P.
  • Jay Gould, Partner, PILLSBURY WINTHROP SHAW PITTMAN LLP
  • Richard Howard, Global Strategist, HAYMAN CAPITAL MASTER FUND
  • Jason Huemer, President, VISIUM ASSET MANAGEMENT
  • Mark Jurish, President & Chief Executive Officer, LARCH LANE ADVISORS, LLC
  • Steve Kuhn, Partner & Head of Fixed Income Trading, PINE RIVER CAPITAL MANAGEMENT
  • David Kupperman, Managing Director, NEUBERGER BERMAN GROUP, LLC
  • Jon Levin, Strategy and Corporate Development, GROSVENOR CAPITAL MANAGEMENT, L.P.
  • Amin Majidi, Chief Risk Officer, PREMIUM POINT INVESTMENTS
  • Jonathan Wood, President, WHITEBOX ADVISORS
  • Paul Zummo, Chief Investment Officer, J.P. MORGAN ALTERNATIVE ASSET MANAGEMENT

Sessions Include:

  • Credit Investing: Redefining the Credit Universe
  • Pairing the Investment Thesis with the Proper Infrastructure Requirements: Manager Due Diligence
  • Mortgage Investing: A 10 Trillion Dollar Universe in Need of Navigation
  • Risk Management from Institutional Investors’ Perspective
  • Seeding; a “growth” industry

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Recognizing the budgetary restraints in the industry, Institutional Investor is proud to offer a high-quality conference at an affordable rate.

View Early Confirmed Attendees Here

A limited number of complimentary passes are available for qualified Public and Private Pension Funds, Pension Consultants, Foundations, Endowments, Family Offices and High Net Worth Investors. For more information, please contact Rinaldo Crassa at rinaldo.crassa@imn.org or 212.224.3510. All passes are subject to approval.

We look forward to hosting you next month!

Sincerely,

Institutional Investor

*Discount is only valid on registrations after January 9, 2013 and cannot be applied to prior purchases

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Pillsbury will be hosting a Managers Only program on Wednesday, January 23, 2013.  The program entitled “Challenges and Opportunities for Starting a Hedge Fund in 2013” starts at 3:30 p.m. and will be held at Pillsbury’s San Francisco office at Four Embarcadero Center, 22nd Floor.  This event will be divided into two seminars.  Panel 1 seminar – “Organizing and Operating a Startup Fund” will start at 4:00 p.m. to be followed by Panel 2 seminar – “Effective Capital Raising for Emerging Manager” at 5:15 p.m.  For more information about this event and to register, please click HERE.

 

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The NFA recently issued a notice entitled “Guidance on the Annual Affirmation Requirement for those Entities that are currently operating under an exemption or exclusion from CPO or CTA registration.”  As of February 2012, each person claiming an exemption or exclusion from CPO registration under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) or an exemption from CTA registration under 4.14(a)(8) is required to annually affirm the exemption or exclusion upon which it relies.  The annual notice affirming the exemption or exclusion is due within 60 days of the calendar year end.  The first notice is due for the calendar year ending December 31, 2012.  The required affirmation must be filed electronically on the NFA’s Exemption System.  A full version of the NFA notice along with FAQs regarding the annual affirmation requirement is available here.

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Written by:  Jay Gould

The Securities and Exchange Commission (the “SEC”) recently charged and entered into consent decrees with four India-based brokerage firms for providing brokerage services to U.S. investors without being registered as broker dealers under the U.S. securities laws.  This otherwise mildly interesting enforcement action by the SEC should serve as a cautionary tale to hedge fund managers based outside the U.S. that seek to raise capital from U.S. investors, as well as U.S. fund managers that seek to sell their fund shares in foreign countries.

Many non-U.S.-based fund managers seek to raise money from U.S. investors due to the large amounts of available capital in this country and the relative willingness of U.S. investors to consider managers from foreign jurisdictions.  However, visiting potential U.S. investors or sending fund marketing materials into the U.S. without complying with the U.S. broker dealer rules could result in a fate similar to that suffered by the four Indian brokerage firms that were sanctioned and fined by the SEC. In order to avoid an enforcement proceeding, non-U.S. fund managers should retain a properly registered U.S. brokerage firm to sell the fund’s securities, enter into a “chaperoning” arrangement with a U.S. broker or register a subsidiary as a broker-dealer in the U.S.  

Whether prudent or not, most U.S.-based fund managers rely on Rule 3a4-1, the so-called “issuers exemption,” under the Securities Exchange Act of 1934 (the “1934 Act”) in order to avoid either registering the general partner or an affiliate of the fund as a broker, or retaining an unrelated broker to sell the fund’s interests.  But when U.S. fund managers travel outside the U.S. to gauge interest or solicit potential investors, the U.S. rules are not applicable.  Each country has its own regulatory scheme, and fund managers are well advised to understand what is permitted and prohibited in each country before visiting each country at the risk of being the subject of a new episode of “Locked Up Abroad.”  Indeed, certain countries impose criminal sanctions for offering securities if the offeror is not properly authorized to do so.

The Investment Fund Law Blog boldly predicts that the SEC will one day soon re-visit the industry’s expansive interpretation of the “issuer’s exemption” and the result will not be pleasant for the private funds industry.

So what did these Indian brokerage firms do to incur the wrath of the SEC?  The activities that these firms engaged in included:

  • Buying and selling Indian securities on Indian stock exchanges on behalf of U.S. investors;
  • Managing public offerings for Indian issuers in which shares were sold to U.S. investors;
  • Soliciting U.S. investors by email, phone calls, and in-person meetings between Indian issuers and U.S. investors;
  • Engaging in commission sharing agreements with U.S. registered broker-dealers, in which the firms provided research to U.S. investors in exchange for commission income;
  • Organizing and sponsoring conferences in the U.S. bringing together representatives of Indian issuers and U.S. investors; and
  • Sending firm employees to the U.S. to meet with U.S. investors and attend corporate road shows.

Many of these activities no doubt sound hauntingly familiar to U.S.-based fund managers that travel abroad for the purpose of raising capital.  All four firms were censured and ordered to pay a combined total of more than $1.8 million in disgorgements and prejudgment interest, but no civil penalties were imposed due to the firms’ cooperation with the SEC.  The firms have all submitted settlement offers, without admitting or denying any wrongdoing.

The SEC’s press release on the matter can be found here. 

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Written by:  Jay Gould

When can private fund managers start posting performance numbers on their websites and sponsoring the Super Bowl?  Not yet, according to Senator Carl Levin (D-MI) in letters dated October 5,2012 and October 12, 2012, (the “Levin Letters”) rebuking the SEC for having missed the point of the legislation in the SEC rulemaking process.  As you recall, on August 29, 2012, the SEC proposed rules pursuant to Section 201 of the Jumpstart our Business Startups Act (“JOBS Act”) that, if adopted in final form, would allow private issuers, including private funds, to generally solicit and advertise as long as the investors are all “accredited investors.” 

Of most importance to hedge fund and private equity fund managers that have been anticipating a more relaxed and flexible approach of communicating with the public and soliciting new investors, the Levin Letters flatly accuse the SEC of failing to grasp the scope of the JOBS Act in applying it to private investment vehicles.  According to Levin, the SEC should “distinguish between issuers that engage in operational businesses and those that are merely investment vehicles.”  The October 12 letter further advises the SEC that  “[c]ongress did not contemplate removing the general solicitation ban – without retaining any limitations on forms of solicitation – for private investment vehicles.  Indeed, no argument was made during the debate of the bill that the objective was to ease the capital aggregation process for private investment vehicles.  The words “hedge fund,” “private fund,” or “investment vehicle” were not used either during the committee or floor debate in the House of Representatives. Nor did the Senate engage in any debate relating to removing these advertising and marketing restrictions completely from private investment vehicles.” 

According to the Levin staffer who is responsible for this area of the Senator’s legislative initiatives, we should no longer expect that the SEC will adopt the rules as proposed.  The SEC must propose new rules that more accurately reflect the intent of Congress and not simply abdicate regulatory authority over the use of general advertising and solicitation by private funds, the Investment Fund Law Blog was told by Levin’s office.    

This SEC mulligan may very well put back into play many of the criticisms of the JOBS Act that were expressed in the comment period after the JOBS Act was first signed into law.  As you may recall, on May 21, 2012, the Investment Company Institute (the “ICI”) submitted a comment letter to the SEC regarding Section 201 of the JOBS Act in which the ICI encouraged the SEC to, among other things, adopt advertising rules for private funds that are at least as restrictive as those that apply to registered mutual funds, raise the income and net worth standards in the definition of “accredited investor,” and prohibit or limit performance advertising by hedge funds until the SEC has studied the implications of such advertising for 60 years.  In a follow up letter to the SEC on August 17, 2012, the ICI, citing press reports and rumors, implored the SEC to not adopt “interim rules” pursuant to Section 201.  Rather, the ICI suggested, full notice and comment should be employed in this rulemaking process so that the SEC might fully observe its fundamental mandate to protect investors.  It should be noted that the SEC began accepting public comments on all aspects of the JOBS Act shortly after the legislation became law on April 5, 2012.  The law itself requires the SEC to adopt rules pursuant to Section 201 within 90 days of the signing of the legislation, a time frame that, quite obviously, was not met. 

The Levin Letters further admonished the SEC to establish “methods” for determining whether an investor meets the “accredited investor” standard.  The rule proposal provided only that an  issuer must take “reasonable steps” to determine accredited status, and provided significant flexibility for issuers to determine the appropriate level of due diligence in order to verify status.  The Levin Letters requested that the SEC go back to the drafting table and come up with a new proposal that requires “common sense” documentation and/or verification practices and procedures.  If, as Levin’s office suggests, the SEC does re-propose rules as a result of this criticism, it could result in issuers being required to follow definitive verification standards, such as obtaining an income statement, balance sheet, or bank or brokerage statements from investors. 

It is possible that the last chapter of the JOBS Act rules regarding general solicitation may not yet be written.  In the meantime, private fund managers should continue observing the current ban on general solicitation and advertising and put on hold those plans to post their performance returns on the back of Serena Williams’ tennis togs.

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Written by:  Jay Gould and Peter Chess

While you were touring the Champagne region or sipping umbrella drinks at the beach this summer, the California Department of Corporations (the “DOC”) was busy overhauling the rules applicable to investment advisers.  On August 27, 2012, the DOC adopted final rules, available here, that provide for an exemption from registration for certain private fund managers pursuant to specific conditions.  This exemption, along with the rules previously adopted by the Securities and Exchange Commission (the “SEC”), now permits certain investment advisers that provide advice only to private funds to operate without being fully registered with either the SEC or the State of California. 

Unlike the SEC rules, this exemption does not prohibit a fund manager from registering with the DOC—it simply allows the fund manager to decide whether it would like to register or rely on the exemption.  To rely upon this exemption, a California based adviser must complete and file the Form ADV (required under Rule 204-4 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”)) with the DOC that is required of an adviser that files for “exempt reporting adviser” status with the SEC.  But why would any adviser that is eligible to take advantage of the exemption decide to register? 

If a fund manager intends only to seek capital from “friends and family,” subjecting itself to the full registration requirements and the more complete compliance rules that are expected soon from the DOC could represent a significant expense to the manager.  Or, if a manager is leaving another organization and must quickly get to market, the three to four month process associated with the DOC review of an investment adviser application may be viewed as too long to wait.  But if a fund manager expects to target more institutional capital, or other investors that would have a reasonable expectation that the manager is subject to some regulatory oversight, the manager may very well decide that a California investment adviser registration is not so burdensome.  After all, a manager that seeks to rely on the exemption must still file the Form ADV, prepare a private placement memorandum, and have the fund audited, among other requirements discussed below.  The analysis that each fund manager must undertake in order to make this decision is multi-faceted and is ultimately one that is unique to each adviser and its own circumstance.

To briefly summarize the results of the DOC rulemaking, an investment adviser located in California may conduct its business without being a fully registered and regulated investment adviser under the DOC regulations so long as:

  • the adviser only advises private funds that rely on either Section 3(c)(1) or Section 3(c)(5) of the Investment Company Act of 1940, as amended, (which the DOC defines as “Retail Buyer Funds”) the investors of which are all “accredited investors”;
  • the adviser is not subject to any statutory disqualifications;
  • the adviser files certain periodic reports and notices; and
  • the adviser pays the annual registration fee of $125.  

Additionally, with respect to Retail Buyer Funds:

  • the adviser may only charge performance fees to investors that meet the Advisers Act definition of a “qualified client”;
  • the Retail Buyer Fund must be audited annually by a Public Company Accounting Oversight Board (“PCAOB”) registered accounting firm and deliver a copy of the audited financial statements to each beneficial owner; and
  • the adviser must provide “material disclosures” to fund investors that adequately and accurately describe the investment program of the fund and the relationship of the adviser to the fund (e.g., the type of disclosures that competent counsel drafts on behalf of fund managers now).

When an adviser that is eligible for the California exemption reaches $100 million in assets, it would become an exempt reporting adviser with the SEC and would need to switch its status over to the SEC.  And when it reaches $150 million it must become a fully registered investment adviser with the SEC; accordingly, investment advisers can operate without being fully registered with the SEC or the State of California so long as they have less than $150 million in assets and satisfy the conditions discussed above.

The California exemption contains a “grandfathering” provision for Retail Buyer Funds formed prior to the release of the exemption, as the additional requirements listed above are deemed satisfied if the Retail Buyer Fund: (i) distributes annual audited financial statements; (ii) pre-existing investors receive the “material disclosures” discussed above; (iii) from August 27, 2012 on, the Fund only sells interests to “accredited investors”; and (iv) the adviser receives performance-based compensation only from pre-existing investors or “qualified clients.”

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Written by:  Jay Gould and Peter Chess

On October 9, 2012, the Securities and Exchange Commission (SEC) announced the launch of an initiative to conduct focused, risk-based examinations of investment advisers to private funds that recently registered with the SEC.  These “Presence Exams” are part of a two year initiative with three primary phases: engagement, examination and reporting.  During the examination phase, staff from the National Exam Program (NEP) will review one or more of five areas identified by the SEC as “high-risk” areas for the business and operations of advisers:

  • Marketing.  NEP staff will conduct evaluations of marketing materials to ascertain, for example, whether the adviser has made false or misleading statements about its business or performance record.
  • Portfolio Management.  NEP staff will review and evaluate an adviser’s portfolio decision-making practices.
  • Conflicts of Interest.  NEP staff will review the procedures and controls that advisers use to identify, mitigate and manage conflicts of interest within their firm.
  • Safety of Client Assets.  NEP staff will review advisers deemed to have “custody” of client assets for compliance with provisions of the Investment Advisers Act of 1940, as amended (the Advisers Act), and related rules designed to prevent theft or loss of client assets.
  • Valuation.  NEP staff will review advisers’ valuation policies and procedures.

Investment advisers should note that access to any advisory books and records will also need to be provided upon request during a Presence Exam.  Prior to the examination phase, NEP staff will engage in a nationwide outreach to inform newly registered investment advisers about their obligations under the Advisers Act and related rules during the engagement phase.  At the conclusion of the examination phase, the NEP will report its observations to the SEC and the public.

The NEP is administered by the Office of Compliance Inspections and Examinations within the SEC.  The letter outlining the NEP’s initiative, available here, was distributed to certain executives and principals of newly registered investment advisers and posted on the SEC’s website.  NEP staff will contact advisers separately if their firm is selected for an examination, and receipt of the letter announcing the launch of the initiative does not ensure that a Presence Exam will necessarily follow.

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Written by: Jay Gould and Peter Chess

Effective December 3, 2012, hedge funds and other private funds that rely on Section 3(c)(1) of the Investment Company Act (“3(c)(1) Funds”) and which sell their interests through third party marketers, must ensure that their private placement memoranda (“PPM”) are filed with FINRA, the Financial Industry Regulatory Authority.  The Securities and Exchange Commission recently approved new FINRA Rule 5123, Private Placements of Securities, which is part of an ongoing approach by FINRA to enhance oversight and investor protection in private placements.  Under Rule 5123, each firm that sells a security in a private placement, subject to certain exemptions, must file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale.  If a firm sells a private placement without using any offering documents, then the firm must indicate that it did not use an offering document.  The rule also requires firms to file any materially amended versions of the documents originally filed.  Rule 5123 exempts some private placements sold solely to qualified purchasers, institutional purchasers and other sophisticated investors.

For hedge funds and other  private funds that have hired a third party marketer, the fund manager must make sure that the agreement with the marketer, which is required to be a registered broker dealer, obligates the marketer to file the PPM with FINRA and amend the filing if the PPM is materially revised.  The marketing agreement, or “placement agency agreement” as it is sometimes called, should indemnify the fund manager for the failure of the marketer to make these filings.      

Rule 5123 will become effective December 3, 2012, and the full text of the FINRA regulatory notice regarding Rule 5123 is available here.

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The 3rd Annual Excellence In Investing: San Francisco, in partnership with The Sohn Conference Foundation, will be held on October 24, 2012 at the Merchants Exchange, Julia Morgan Ballroom.   Excellence In Investing: San Francisco is the premiere Bay Area investor conference benefiting local and national education and other children’s causes.  

For more information and to register, please visit www.excellencesf.org or click here.

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On August 30, 2012, Ildi Duckor and Michael Wu, members of Pillsbury’s Investment Funds and Investment Management practice, met with executives and staff of the California Department of Corporations at the Department’s invitation.  The purpose of the meeting was to provide the Department’s investment adviser and broker dealer divisions (live in San Francisco and via teleconference in the Sacramento and Los Angeles offices) with a broad overview of the hedge fund industry.  “We hope that a better understanding of the industry will help balance hedge fund managers’ business needs with the regulators’ need for investor and market protection, and will streamline both the adviser registration and the examination process” said Ildi Duckor.  The Investment Funds and Investment Management team will continue to cooperate with the Department in an effort to provide industry insight with respect to future California regulation of hedge funds and their advisers.