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Investment managers, particularly high priority cybercrime targets, such as hedge funds and quantitative strategy managers, are encouraged to consider the government-industry information sharing option and liability protection afforded by the new legislation.  For more information, please contact the Investment Fund and Investment Management group.

On Tuesday, October 27, the U.S. Senate approved legislation, strongly supported by business groups, that would facilitate information sharing between government and industry and provide liability protection to companies that participate. The Cybersecurity Information Sharing Act of 2015 (CISA) passed the Senate by a bipartisan vote of 74-21, setting the stage for a House-Senate conference committee that will work to resolve differences between CISA and similar legislation passed by the House in April and to prepare a final bill to be considered by both chambers of Congress for potential enactment into law.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

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The regulatory environment for SEC-registered advisers has become more complex as the result of a more aggressive and interconnected Securities and Exchange Commission (SEC). The connecting hub within the SEC is the Office of Compliance Inspection and Examination (OCIE), which serves as the “eyes and ears” of the SEC. The OCIE often is the first line of contact between an investment adviser and a potential referral to the SEC Enforcement Division’s Asset Management Unit (AMU), which is devoted exclusively to investigations involving investment advisers, investment companies, hedge funds and private equity funds.

The OCIE’s three main areas of focus for their 2015 exam priorities are (i) protecting retail investors, (ii) issues related to market-wide risks, and (iii) data analysis as a tool to identify registrants engaging in illegal activity.

Overlapping with the OCIE’s frontline examination role is the Compliance Program Initiative, which began in 2013 by sanctioning three investment advisers for ignoring problems within their compliance programs. The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems. As such, any issues raised in a deficiency letter resulting from an examination are ripe for follow-up as the starting point of a subsequent examination. In the current regulatory environment—where violations of compliance policies and procedures can serve as the basis of enforcement actions—investment advisers and their compliance professionals need to pay close attention to the implementation, follow-through and updating of every aspect of their compliance program.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

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The SEC’s final crowdfunding rules, which are largely consistent with the proposed rules, provide broader access to capital for startups and small businesses, though concerns over cumbersome disclosure and regulatory requirements persist.

On October 30, 2015, the Securities and Exchange Commission (SEC) voted to adopt final rules implementing Title III of the Jumpstart Our Business Startups Act (JOBS Act), known as “crowdfunding”. The final rules, to be codified as “Regulation Crowdfunding” in furtherance of Section 4(a)(6) of the Securities Act of 1933, are expected to become effective in May 2016. A copy of the final rules can be found here.

Regulation Crowdfunding will allow smaller, non-public U.S. companies to raise up to $1 million in any 12-month period by selling securities over the Internet (including through apps and other technologies) to individual investors who are not required to meet any sophistication or wealth standards, but will be subject to relatively small investment limits.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert.

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On November 3, 2015, the Securities and Exchange Commission (SEC) announced that Fenway Partners, LLC (Fenway Partners), a private equity fund adviser, agreed to pay more than $10 million to settle charges that it failed to disclose conflicts of interest to a fund client and omitted material facts to investors.

SEC Findings

Fenway Partner’s current and former principals as well as the chief financial officer did not:

  • Disclose to Fenway Capital Partners Fund III, L.P. (the Fund) or its investors that Fenway Partners caused certain portfolio companies of the Fund to cancel management services agreements—subject to management fee offsets—between Fenway Partners and portfolio companies.
  • Disclose to the Fund or its investors the creation of the affiliated entity Fenway Consulting Partners, LLC (Fenway Consulting).
  • Disclose to the Fund or its investors that Fenway Consulting received $5.74 million for providing services to portfolio companies similar to those previously provided by Fenway Partners and often using the same employees—without a management fee offset against the fees paid to Fenway Partners.
  • Disclose in its capital call notice to investors in connection with a portfolio company investment that $1 million of the $4 million total capital call would be used to pay Fenway Consulting fees.
  • Disclose to the advisory board or the investors the conflict of interest concerning cash incentive plan payments to current and former Fenway Partner principals.
  • Disclose, as related party transactions, in the financial statements provided to investors, those payments received by Fenway Consulting for its services to portfolio companies.

The press release is available HERE.

A full copy of the SEC order is available HERE.

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On October 30, 2015, the Securities and Exchange Commission (SEC) adopted Regulation Crowdfunding. The final rule permits companies to offer and sell securities through crowdfunding. The “Regulation Crowdfunding Exemption” is created under Section 4(a)(6), Title III of the JOBS Act.

The key features of the final rules

  1. Permit individuals to purchase securities in crowdfunding offerings subject to certain limits:
    • A company is permitted to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
    • Individuals are permitted, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
      • The greater of $2,000 or 5% of the lesser of their annual income or net worth, if either their annual income or net worth is less than $100,000.
      • 10% of the lesser of their annual income or net worth, if both their annual income and net worth are equal to or more than $100,000.
    • The aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
  1. Require companies to disclose certain information about their business and securities offering and to file an annual report with the SEC and provide it to investors.
  2. Create regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions. A funding portal is required to register with the SEC and become a FINRA member. A company relying on the Regulation Crowdfunding Exemption is required to conduct its offering exclusively through one intermediary platform at a time.

In addition, the SEC is proposing to amend the existing Securities Act Rule 147 and Rule 504. Rule 147 would be amended to, among other things, permit companies to raise money from investors within their state (intrastate offering) without registering the offers and sales with the SEC. Rule 504 would be amended to increase the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million. Bad actor disqualification would also apply in Rule 504 offerings.

A full copy of the final rules is available HERE.

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This is a reminder that the 2016 IARD account renewal obligation for investment advisers (including exempt reporting advisers) starts this November. An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 16, 2015 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 18, 2015 – Deadline for full payment of Preliminary Renewal Statements. In order for the payment to be posted to its IARD Renewal account by the December 18 deadline, an investment adviser should submit its preliminary renewal fee to FINRA through the IARD system by December 14, 2015.

December 29, 2015 – January 2, 2016 – IARD system shut down. The system is generally unavailable during this period.

January 4, 2016 – Final Renewal Statements are available for printing. Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 15, 2016 – Deadline for full payment of Final Renewal Statements.

For more information about the 2016 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

Please contact us if you have questions.

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In the summer the European Securities and Markets Authority (ESMA) published its advice and opinion on the proposal to extend the marketing passport to non-EU alternative investment fund managers (AIFM) and non-EU funds.  The passport would enable non-EU AIFMs to market their funds across the EU under the single AIFMD regime, rather than seeking investors using the individual countries’ national private placement regimes (NPPR).

As part of the review, ESMA assessed six countries’ regulatory regimes in the context of investor protection, market disruption, competition and monitoring systemic risk.  The outcome of the investigations was mixed.  Whilst Guernsey, Jersey and Switzerland were identified as jurisdictions to which the passport could be extended, it was not such good news for Hong Kong, Singapore and the United States.

For the US, ESMA identified obstacles to the extension.  Chief among these are the absence of remuneration rules for US investment managers and the “unlevel playing field” of the restrictions on EU funds to access US retail investors.  At present, in order for the passport to be extended to the US substantive changes would need to be made to US federal securities laws and regulations regarding the marketing of private funds in the US.  Whilst the SEC does focus on inadequate disclosures of fees, costs and expenses (see our posts here and here), it is highly unlikely that the legislative changes necessary to satisfy ESMA will be forthcoming in the near future.  Consequently US managers will need to continue accessing European investors either by way of the NPPR or reverse solicitation for the foreseeable future.  Each of those approaches continue to bring their own challenges, especially in the absence of guidance regarding the reverse solicitation exemption.

And what of the Cayman Islands?  As you may have noted from the list above, the Cayman Islands was not included as part of ESMA’s first assessments.  This a further blow to US investment managers and the inclusion of the territory on ESMA’s list of relevant jurisdictions will offer little comfort given the time required to conduct an assessment.

All in all, not a great deal has changed for the US firms.

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Pillsbury has been named Best Onshore Law Firm – Client Service at the HFM US Hedge Fund Services Awards 2015.

Ildiko Duckor, co-head of Pillsbury’s Investment Funds & Investment Management practice, thanked all those clients who have “so eloquently praised our services and contributions to their businesses.”

HFMUS_Winners2015

The annual Awards recognize “those hedge fund service providers that have demonstrated exceptional customer service and innovative product development over the past 12 months.”

This marks the fourth time Pillsbury has been honored by HFMWeek in this category.

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Strategy shifts now the focus, the SEC extracts another pound of flesh from a fund adviser. In a recently settled administrative proceeding, UBS agreed to return $8.2 million of advisory fees to investors, compensate investors for $4.9 million of investment losses and pay $4.4 million in interest and penalties to the SEC for allegedly failing to disclose an investment strategy shift and failing to supervise disclosures. UBS neither admitted nor denied culpability.

Investment advisers are advised to periodically review the description of their strategy and adjust the disclosure if their practices materially diverge from the described strategy over time. In addition, advisers should consider what manner of disclosure is appropriate in light of the facts and circumstances of a major strategy shift – whether, for example, to disclose promptly in an investor letter, prior to the strategy shift with an opportunity to redeem, and whether and when to involve the board of directors and/or outside counsel.

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In a letter addressed to CalPERS and CalSTRS, California State Treasurer, John Chiang, has called for state legislation to require private equity firms to disclose all fees paid by California public pension funds.  According to the letter, the disclosure requirements should be applicable to the private equity investments of all public pension funds in California and apply to management fees, fee offsets, fund expenses and carried interest.

Read the full article HERE.