Articles Posted in Private Funds

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Written by Jay Gould, Ildiko Duckor and Peter Chess

The Commodity Futures Trading Commission (CFTC) released a Final Rule on January 11, 2012, on the Registration of Swaps Dealers (SDs) and Major Swap Participants (MSPs).  The Final Rule establishes the process for the registration of SDs and MSPs and now requires SDs and MSPs to become and remain members of a registered futures association.  Included in the CFTC rulemaking is a definition of an “associated person” of an SD or MSP and an implementation of a prohibition on an SD or MSP permitting an associated person who is statutorily disqualified from registration from effecting or being involved in effecting swaps of behalf of the SD or MSP.

In a companion Notice and Order by the CFTC on the same day, the National Futures Association (NFA) was authorized to perform registration functions under the new rulemaking.  Specifically, the NFA is authorized to perform the following registration functions: 

  • To process and grant applications for registration and withdrawals from registration of SDs and MSPs, and to notify of provisional registration; 
  • In connection with processing and granting applications for registration of SDs and MSPs, to confirm initial compliance with such other related CFTC regulations that may be adopted;  
  • To conduct proceedings to deny, condition, suspend, restrict or revoke the registration of any SD or MSP or any applicant for registration in either category; and 
  • To maintain records regarding SDs and MSPs, and to serve as the official custodian of those CFTC records.

The Final Rule and the Notice and Order released on January 11, 2012, are just a portion of a comprehensive new regulatory framework for swaps and security-based swaps under the Dodd-Frank Act.  The goal of the legislation is to reduce risk, increase transparency, and promote market integrity within the financial system. 

The Dodd-Frank Act further directs the CFTC, under Section 4s of the Commodity Exchange Act, to provide for the regulation of SDs and MSPs with respect to, among others, the following areas: capital and margin, reporting and recordkeeping, daily trading records, business conduct standards, documentation standards, duties, designation of chief compliance officer, and, with respect to uncleared swaps, segregation.

Pillsbury will continue to monitor the CFTC’s rulemaking and will provide further information as it becomes available.

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Written by Jay Gould and Peter Chess

Managed Funds Association (“MFA”) submitted a comment letter (the “Letter”) to the Securities and Exchange Commission (“SEC”) on January 6, 2012 with a rulemaking petition requesting the SEC to amend Rule 502(c) of Regulation D under the Securities Act of 1933.  The Letter urges the SEC to exempt private funds from the ban on general solicitation and advertising under Regulation D.

Under the existing framework, hedge funds generally must avoid engaging in any “general solicitation” or “general advertising” in connection with offers and sales of their securities.  MFA believes that changes in the securities markets and regulations have rendered the restrictions of Regulation D, enacted 30 years ago, unnecessary and increasingly unclear in practice.  The Letter’s suggested changes would enhance the regulation of private fund offerings, promote investment, and enhance economic growth by:

  • Reducing the legal uncertainty resulting from the current regulation of private fund offerings conducted in reliance on Regulation D;
  • Increasing transparency of the hedge fund industry in a manner consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act and recent regulatory initiatives;
  • Facilitating capital formation and reducing administrative costs by allowing investors to more easily obtain information about private funds;
  • Maintaining strong investor protections and ensuring that only sophisticated investors are able to purchase interests in private funds; and
  • Reducing regulatory oversight costs and allowing the SEC staff to reallocate resources to other aspects of investor protection, including products offered and sold to retail investors.

If the MFA proposals were adopted, private funds would be able to engage in public communications and offering activity while remaining in compliance with Regulation D and the Investment Company Act of 1940.  It would also allow a wider audience to learn about the hedge fund industry, and help combat inaccurate information and misperceptions of the industry.  These misperceptions include the view of the industry as secretive, which creates an unwarranted negative inference by investors and regulators.

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Written by Peter J. Chess

Many fund managers are required to submit reports every month and/or every five years to the Federal Reserve Bank of New York (“FRBNY”).  The Department of the Treasury’s Treasury International Capital (“TIC”) data reporting system has two such upcoming reporting deadlines.    

TIC Form SLT

The Aggregate Holdings of Long-Term Securities by U.S. and Foreign Residents (“TIC Form SLT”) is required to be submitted by entities with consolidated reportable holdings and issuances (positions) with a fair market value of at least $1 billion as of the last day of any month.  These entities may include funds and their investment advisers, and U.S. companies.  The purpose of the TIC Form SLT is to gather information from U.S. resident entities on foreign persons’ holdings of long-term U.S. securities and on U.S. persons’ holdings of long-term foreign securities. 

If required to do so, fund managers and other entities must submit the report to the FRBNY by the 23rd day of each month with regard to the data of the previous month.  The upcoming TIC Form SLT will contain consolidated data as of December 31, 2011 and must be submitted by January 23, 2012. 

TIC Form SHC

The Report of U.S. Ownership of Foreign Securities, Including Selected Money Market Instruments (“TIC Form SHC”) is a mandatory survey of the ownership of foreign securities, including selected money market instruments, by U.S. residents as of December 31, 2011.  The TIC Form SHC is a benchmark survey of all significant U.S. resident custodians and end-investors held every five years. Custodians are all organizations that hold securities in safekeeping for other organizations.  End-investors are organizations that invest in foreign securities for their own portfolios or invest on behalf of others, such as investment managers/fund sponsors.

The TIC Form SHC is divided into three schedules: Schedule 1, Schedule 2, and Schedule 3.  Schedule 1 must be filed by all entities that are notified by the FRBNY that they are required to file the TIC Form SHC, and by all U.S. resident custodians or end-investors that exceed the reporting thresholds of Schedules 2 and 3.  Schedules 2 and 3 must be filed by entities that exceed the reporting threshold of $100 million for the respective specified safekeeping arrangements of foreign securities.

The data for the TIC Form SHC is as of December 31, 2011, and must be submitted by fund managers and other entities required to do so to the FRBNY no later than March 2, 2012.  

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Written by Jay Gould

On October 18, 2011, the SEC released a notice of FINRA’s filing of Proposed Rule 5123 (the “Proposed Rule”) which would require FINRA members and associated persons to: 1) provide to investors disclosure documents in connection with private placements prior to sale and 2) file with FINRA such disclosure documents within 15 days after the date of first sale and any subsequent amendments.  These proposed changes would significantly affect fund managers who offer or sell their funds that are exempt from registration pursuant to Section 3(c)(1) of the Investment Company Act through third party marketers, nearly all of which are required to be registered as broker-dealers.

Pre-sale requirement to provide disclosure documents to investors

The Proposed Rule would require FINRA members and associated persons that offer or sell private placements or participate in the preparation of private placement memoranda (“PPM”), term sheets or other disclosure documents in connection with such private placements, to provide such disclosure documents to investors prior to sale.  The disclosure documents must describe the anticipated use of offering proceeds, the amount and type of offering expenses, and the amount and type of offering compensation.  Much of this information is currently captured in the Form D filing that most fund managers file with the SEC, but under the Proposed Rule, would go directly to investors in connection with the sale of fund interests.

As a practical matter, this likely means increased scrutiny of hedge fund and other private fund offerings by FINRA, as well as the likelihood that third party marketers that sell on behalf of hedge funds may request greater or more enhanced indemnification from fund managers in the placement agency agreement between the third party marketer and the fund manager.  Accordingly, fund managers who use third party marketers to market their funds must keep their fund documents updated, taking into account all changes to fund strategies, material performance issues (to the extent applicable), regulatory changes and management personnel changes, to name a few.      

Post-sale requirement to notice file with FINRA

The Proposed Rule would also require each FINRA member and associated person to notice file with FINRA by filing the PPM, term sheet or other disclosure documents no later than 15 days after the date of first sale.  In addition, any amendments to such disclosure documents or disclosures required by the Proposed Rule would have to be filed no later than 15 days after such documents are provided to any investor or prospective investor.  To the extent these documents are provided to investors, they would also be subject to the strict liability standard of Rule 206(4)-8 under the Investment Advisers Act to which all fund managers are already subject.  Accordingly, fund managers must be careful to keep all of their documents current under the materiality standards of state and Federal securities laws.

Offerings Exempted from the Proposed Rule

The Proposed Rule would exempt several types of private placements including offerings sold only to any one or more of the following purchasers: 

  •  institutional accounts, as defined in NASD Rule 3110(c)(4);
  • qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act;  (Accordingly, 3(c)(7) funds would be exempt from the Proposed Rule.)
  • qualified institutional buyers, as defined in Securities Act Rule 144A;
  • investment companies, as defined in Section 3 of the Investment Company Act;
  • an entity composed exclusively of qualified institutional buyers, as defined in Securities Act Rule 144A;
  • banks, as defined in Section 3(a)(2) of the Securities Act; and
  • employees and affiliates of the issuer.

In addition, the Rule would exempt the following types of offerings:

  • offerings of exempted securities, as defined by Section 3(a)(12) of the Exchange Act;
  • offerings made pursuant to Securities Act Rule 144A or SEC Regulation S;
  • offerings of exempt securities with short term maturities under Section 3(a)(3) of the Securities Act;
  • offerings of subordinated loans under Exchange Act Rule 15c3-1, Appendix D;
  • offerings of “variable contracts” as defined in Rule 2320(b)(2);
  • offerings of modified guaranteed annuity contracts and modified guaranteed life insurance policies, as referenced in Rule 5110(b)(8)(E);
  • offerings of non-convertible debt or preferred securities by issuers that meet the eligibility criteria for incorporation by reference in Forms S-3 and F-3;
  • offerings of securities issued in conversions, stock splits and restructuring transactions that are executed by an already existing investor without the need for additional consideration or investments on the part of the investor;
  • offerings of securities of a commodity pool operated by a commodity pool operator as defined under Section 1a(11) of the Commodity Exchange Act; and
  • offerings filed with FINRA under Rules 2310, 5110, 5121 and 5122.

Confidential treatment

Documents and information filed with FINRA pursuant to the Proposed Rule would be given confidential treatment.  FINRA would use such documents and information solely for the purpose of determining compliance with FINRA rules or other applicable regulatory purposes.  In addition, FINRA would afford confidential treatment to any comment or similar letters by FINRA and thus could not be discoverable by a litigant through a legal action.

A full text of the SEC Notice and Proposed Rule is available here.

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Date & Time
11/10/2011
12:30 pm – 7:00 pm PT

12:30 pm – 5:30 pm PT
Workshop
5:30 pm – 6:30 pm PT
Panel and Q&A
6:30 pm PT
Cocktails

Location
Pillsbury’s SF office
50 Fremont Street
San Francisco, CA 94105

Join us for an interactive, instructional workshop to learn step-by-step how to create unique and individualized marketing material to attract and engage investors and raise capital.

Who Should Attend:

  • Emerging Funds Managers
  • Established Funds Managers
  • Hedge Fund Marketers
  • Pre-Launch Managers
  • Fund of Funds Managers

This one day hedge fund marketing event will cover:

  • How to uncover or rebrand your fund identity
  • Defining your marketing message and how to tell it
  • Understanding who your potential investors are
  • How to avoid compliance pitfalls
  • Discovering opportunities that raise capital
  • What investors look for in marketing collateral

and much more…

Presented by
Maital S. Rasmussen,Founder & CEO, Rasmussen Communications, Inc.

Speakers
Ildiko Duckor

Guest Speakers
Rikke Jorgensen, Copywriter, Rasmussen Communications, Inc.
Seavan Sternheim, COO, CMO, QM Capital, LLC

Investor Panel and Q&A Session
Kermit Claytor, Fund of Funds Manager, Skyline Partners
Paul Perez, CFA, Springcreek Advisors, LLC
Ildiko Duckor, Counsel, Pillsbury
T. Jon Williams, Ph.D., CFA, South Avenue Investment Partners

Early Bird$675 for one participant
$975 for two participants
Early Registration ends October 27th, 2011

Regular Price$750 for one participant
$1,050 for two participants

To register, please visit Rasmussen Communications.

Event Contact
Jessica Slater

Sponsors
100 Women in Hedge Funds
California Hedge Fund Association
Rasmussen Communications

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Written by Jay Gould

The Pillsbury Investment Funds Team has over the past month reviewed several new Due Diligence Questionnaire (“DDQ”) forms on behalf of fund manager clients from institutional investors and family offices that contain a new inquiry that is potentially problematic for certain fund managers. Generally, this new inquiry requests information regarding any dispute over fees that the manager has had over a specific time period with certain service providers for the fund and the general partner of the fund. In its typical form, the question asks:

During the past three years, have you [the fund manager] or a controlled affiliate, had any amounts in dispute with or refused payment to any third party marketer or sales agent, any public relations firm or individual conducting a similar function, or any law firm or legal representative?

The DDQ goes on to request additional information about each disputed payment and requests permission from the fund manager for the potential investor to contact the service provider named with respect to the disputed fees. The Pillsbury Investment Funds Team found this question interesting and potentially troublesome and contacted one of the institutional investors with respect to this inquiry. We were informed that this particular investor was concerned that fund managers that do not honor their obligations to service providers are often the same ones that take a broad view regarding the services can be “soft dollared,” manager expenses that are chargeable to the fund, and creative calculations of management and performance fees. We were informed that these particular service providers to fund managers are often not in a position to pursue fees in dispute due to the potential public relations disaster such an action would cause to the allegedly aggrieved party. Or put another way, if a third party marketer brought an action against a fund manager for fees due on assets raised on behalf of a fund, what fund manager would ever retain that marketer again? Institutional investors are also concerned about the continuity of service providers and any pattern related to why high or constant service provider turnover. It is worth noting that auditors are not generally included in this type of question because changing auditors and the reason for it is covered in a separate inquiry. It is our understanding that this addition to the DDQ is gaining popularity among institutional investors and family offices and that follow up on the information provided in response to the inquiry is being conducted.

This development raises several potential issues for fund managers that are asked to respond to this inquiry. First, all responses to DDQs and other “marketing” materials are subject to the fiduciary standard set forth in Investment Advisers Act Rule 206(4)-8 which was adopted in 2007 in response to the Goldstein decision. Rule 206(4)-8 applies to every investment adviser, whether or not registered, and imposes a strict liability fiduciary standard on information that is provided to investors and potential investors. Accordingly, to the extent a fund manager refuses to answer the DDQ or does not answer the question fully and truthfully, such manager faces a potential violation of Section 206 of the Investment Advisers Act, which is a very serious offense. Additionally, to the extent a potential investor seeks to obtain information regarding legal fees in dispute, fund managers should be aware that they are being asked to waive the attorney client privilege with respect to this aspect of the relationship with their attorneys. Fund managers should seek to condition disclosure of this information on confidentiality, however, it is likely that such information could still be obtained from the investor by way of a subpoena from the Securities and Exchange Commission, a state regulator, or even a third party litigant.

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Written by Jay Gould

On October 26, 2011, the SEC adopted a new rule requiring SEC-registered advisers to hedge funds and other private funds with at least $150 million in private fund assets under management to report information to the Financial Stability Oversight Council (“FSOC”) to enable it to monitor risk to the U.S. financial system.  The information which must be reported to the FSOC on Form PF will remain confidential, and not accessible to the general public.

These private fund advisers are divided into (1) large private fund advisers and (2) smaller private fund advisers.  Large private fund advisers are advisers with at least $1.5 billion in hedge fund, $1 billion in liquidity fund, and $2 billion in private equity fund assets under management.  All other advisers are regarded as smaller private fund advisers.  The SEC anticipates that most advisers will be smaller private fund advisers, but that the large private fund advisers represent a significant portion of private fund assets. 

Smaller private fund advisers must file Form PF once a year within 120 days of the end of the fiscal year, and report only basic information about their hedge funds, private equity funds and/or other private funds, such as information regarding size, leverage, investor types and concentration, liquidity, fund performance, fund strategy, counterparty credit risk and the use of trading and clearing mechanisms.

Large private fund advisers must provide more detailed information than smaller advisers.  The focus and frequency of the reporting depends on the type of private fund the adviser manages.

  • Large advisers to hedge funds must report on Form PF within 60 days of the end of each fiscal quarter, on an aggregated basis, information regarding exposures by asset class, geographical concentration and turnover.  If a hedge fund has a net asset value of at least $500 million, the adviser must report information regarding the fund’s exposures, leverage, risk profile, and liquidity.
  • Large advisers to liquidity funds must report on Form PF within 15 days of the end of each fiscal quarter, the types of assets in their liquidity funds, information relevant to the risks of the funds, and the extent to which the liquidity funds comply with Rule 2a-7 of the Investment Company Act of 1940, as amended.
  • Large advisers to private equity funds must file Form PF annually within 120 days of the end of the fiscal year and respond to questions regarding the extent of leverage incurred by their funds’ portfolio companies, the use of bridge financing and their funds’ investments in financial institutions.

Two-stage phase-in compliance with Form PF filing requirements:

  1. Advisers with at least $5 billion in hedge fund, liquidity fund, and private equity fund assets under management must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012.
  2. Other private fund advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012.

Form PF Filing Fees:  $150 for initial, quarter or annual filing.

A full text of the SEC release is available here. 

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Written by Michael Ouimette

On October 11, 2011, the Federal Financial Regulators published for public comment a jointly proposed regulation implementing the so-called “Volcker Rule” requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule generally contains two prohibitions, both of which are subject to certain exemptions. First, it generally prohibits insured depository institutions, bank holding companies, and their subsidiaries or affiliates (“Banking Entities”) from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for their own accounts. Second, it generally prohibits Banking Entities from owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund.

CONTINUE READING…

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A MANAGERS-ONLY EVENT

RSVP NOW ! 

Thursday, October 27, 2011
3:30 – 4:00pm Registration
4:00 – 5:30pm Presentation
5:30 – 6:30pm Reception

Pillsbury’s San Francisco office
50 Fremont Street
San Francisco, CA 94105

How can hedge fund managers that seek more efficient methods for raising capital avail themselves of the public markets?

Now, many private fund managers are finding that a registered fund product can address the needs of certain investors, and with turnkey solutions available, the complexity that has traditionally been associated with registered funds may no longer be a deterrent.

Please join the California Hedge Fund Association, Pillsbury, and JD Clark & Company for a panel discussion on solutions for registered funds. All the questions you have regarding how to organize and operate a registered fund will be addressed at this Managers-Only Event, including:

  • What is the process for registering an alternative investment product?
  • What are the tax, regulatory and operational issues for a registered fund?
  • Interval funds, closed-end funds and open-end funds—why choose one over the other?
  • Who are the investors I will reach with a registered fund?
  • Can I run both hedge funds and registered funds at the same time?
  • How do I minimize regulatory scrutiny and outsource the back office?

SPEAKERS

Tony Fischer, UMB Fund Services
Paul Kangail, Ernst & Young
Vic Fontana, Registered Fund Solutions
Rachel Minard, Minard Capital
Jay Gould, Pillsbury Winthrop Shaw Pittman LLP