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Pillsbury will be hosting back-to-back programs this month on compliance and regulatory challenges facing Chief Compliance Officers.  The first program will be held on February 27, 2013 at Pillsbury’s San Francisco office.  The second program will be held on February 28, 2013 at Pillsbury’s Los Angeles office.  Each program will begin with a brief overview of the recent trend involving the SEC’s referral of enforcement matters against fund managers to the U.S. Department of Justice for criminal prosecution, which will be followed by a panel discussion on the following topics:

  • Common compliance deficiencies and other “hot button” issues for SEC examiners
  • The use of technology and service providers to simplify Chief Compliance Officers’ obligations and minimize liability
  • Best practices in implementing a Code of Ethics (COE), including what should be in the COE and how employee activity should be monitored
  • The implications of the U.S. Jumpstart Our Business Startups Act (JOBS Act) on compliance procedures and policies

We hope you can join us.

To register for the San Francisco office event, please click HERE.

To register for the Los Angeles office event, please click HERE.

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This article was published by Wolters Kluwer in its February 2013 Special Report.   

The Treasury and IRS have adopted final regulations implementing the Foreign Account Tax Compliance Act (FATCA). The regulations provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions, other foreign entities, and U.S. withholding agents.

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San Francisco Corporate & Securities partner Jay Gould is quoted in Compliance Week on new investor accreditation practices associated with the JOBS Act.

JOBS Act Puts Spotlight on Investor Accreditation Practices

Compliance Week
January 23, 2013

When the Jumpstart Our Business Startups Act, known as the JOBS Act, was enacted last year, a key piece was eliminating solicitation and advertising restrictions on hedge funds and private securities offerings.

Jay Gould, a partner with the law firm Pillsbury Winthrop Shaw Pittman, says the renewed focus on investor accreditation follows years of the private fund industry sliding into a mere cursory “check-the-box” approach. While 20-30 years ago, thorough pre-evaluation of clients or targeting only those with pre-existing relationships was the norm, more recent years have seen evaluation standards decline. “When hedge funds really proliferated in the last 15 years or so, a lot of that stuff just didn’t get done any more,” he says.

Instead, funds began to rely primarily on the representations in subscription agreements. “You sent out a questionnaire, people answered the questions, and unless the guy was pushing a Safeway cart down skid row there was really no reason to think he or she was not an accredited person or a qualified client.”

The requirement of having a pre-existing substantial relationship with the investor similarly fell by the wayside or became loosely interpreted, all under the blinking eyes of regulators. Brazen fund managers even began to brag openly that “nobody checks this stuff any way” and “nobody really knows if anyone is accredited.”

A few years ago, such talk began to wake up regulators, who then began to once again pay more attention to procedures for verification, Gould says. By the time the JOBS Act was enacted last April it became clear that these laissez faire approaches were coming to an end.

At the time, Gould expected that the Commission would go back to some of these old standards of requiring a balance sheet or income statement, or some kind of independent verification. “But they really didn’t do that in the rule,” he says. “They just said it is mushy, so if somebody has a job where it is obvious they make $200,000 a year then you can rely on that, or you can outsource it, or rely on third parties. You just have to come up with something that makes sense for you.”

This has led to considerable debate about whether a principle-based approach is preferable to having hard-and-fast rules. Some contend that issuers want clear-cut rules “so they know how to avoid them,” says Gould.

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By:  Jennifer Jordan McCall, Ellen Harrison, Elizabeth Fry, Kim Schoknecht, Hiram Powers-Heaven

On New Year’s Day 2013, to avoid the so-called “fiscal cliff,” Congress passed the American Taxpayer Relief Act of 2012 (“2012 Act”). The 2012 Act raises taxes on some taxpayers while retaining most of the provisions enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA,” generally referred to as the “Bush tax cuts”) and the two-year extension of EGTRRA enacted at the end of 2010. Most of the changes introduced by the 2012 Act relate to income tax; however, there are important changes to the gift, estate, and generation-skipping transfer tax provisions as well.

Under the 2012 Act, the gift, estate, and generation-skipping transfer tax provisions of Internal Revenue Code are now “permanent,” meaning that the sunset provisions of EGTRRA have been repealed. The current law has no expiration date. The $5 million exemptions for the gift tax, estate tax and the generation-skipping transfer tax (collectively, the “transfer taxes”) are still provided and are to be indexed for inflation. The exemptions are indexed to $5.25 million this year, so that taxpayers who gave away the full $5.12M in 2012 can still give an additional $130,000 this year sheltered by the gift tax and/or generation-skipping transfer tax exemptions. To the extent that gift tax or estate tax is incurred under the 2012 Act, the top marginal rate was increased from 35% to 40%. In addition, “portability,” which permits a surviving spouse to use any unused estate tax exemption of the deceased spouse, has been made permanent.

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By Joseph T. Lynyak III and Rodney R. Peck

This Alert analyzes steps that officers and directors of bank and non-bank financial companies and their holding companies and affiliates can take to address personal liability for alleged breaches of duty to manage and supervise a financial company’s operations, allegations which are being made in an increasing number by federal and state regulatory agencies, including the federal banking agencies and the U.S. Consumer Financial Protection Bureau (CFPB).

On December 10, 2012, a California jury returned a verdict of $169 million in a case brought by the FDIC against three former IndyMac Bancorp Inc. executives after determining that those officers were negligent in making loans to homebuilders by continuing to push for growth in loan production without proper regard for creditworthiness and market conditions. Soon thereafter, the former CEO of IndyMac Bank agreed to pay $1 million from his personal assets in addition to available insurance proceeds to settle another FDIC claim related to the failure of IndyMac Bank. In an unrelated yet problematic series of developments, the newly formed CFPB recently assessed civil money penalties against three holding companies for aggressive marketing practices in an aggregate amount exceeding $500 million.

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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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Written by: Jeffrey Stern and Anthony H. Schouten

The Commodity Futures Trading Commission has issued new “know your customer” and external business conduct rules to give effect to certain provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under these rules, major dealers in swaps and derivatives (“Swap Dealers”) will be required to, among other things, conduct diligence on counterparties, verify their status as “eligible contract participants” and ensure that swap recommendations are suitable for them. In addition, these rules impose heightened duties on Swap Dealers that trade with employee benefit plans subject to Title I of the Employee Retirement Income Security Act of 1974, governmental plans as defined in ERISA Section 3, endowments, state and federal agencies, and other protected counterparties (“Special Entities”).

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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.