International Funds Group

Update: Private Fund Registration Act Advances

2009-11-04T12:00:00.004-05:00

On October 27, the U.S. House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act (the "Bill"), introduced by Congressman Paul E. Kanjorski (D-Pa.). The Bill, which would require advisers to hedge funds and other private funds to register with the SEC and would impose certain recordkeeping and regulatory disclosure requirements, received almost unanimous support in the Committee as it was passed with a 67-1 vote.

If enacted, the Bill would remove the "private client" exemption of section 203(b) of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), which exempts advisers from registration if they have had fewer than 15 clients during the preceding 12 months. The version of the Bill cleared by the Committee includes several amendments to the original proposal which alter the potential registration obligations of advisers.

Advisers to offshore funds are no longer exempt from registration under the Bill. Under the Bill's revised definition of "private fund," an adviser may be subject to registration if it advises any fund which would be considered an investment company but for its reliance on the exemption provided by section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, as amended.

The amended Bill provides an exemption from Advisers Act registration to a private fund adviser if each of the private funds it manages has assets under management ("AUM") of less than $150 million. It is not yet clear, however, whether the AUM test will be calculated once or periodically, and whether it will be based on committed or invested capital. Advisers to venture capital funds (as defined by the SEC) continue to remain outside the scope of registration, as envisaged by the original proposal. Although they will be exempt from Advisers Act registration, advisers to funds with AUM of less than $150 million or venture capital funds will nevertheless be required to maintain records and provide the SEC with annual reports or other data the SEC deems necessary or appropriate.

Advisers who solely advise small business investment companies ("SBICs") licensed under the Small Business Investment Act of 1958 would also be exempt from registration under the amended Bill. Advisers relying on the SBIC exemption would not be required to maintain records or provide reports to the SEC.

The Bill includes a transition period of one year following enactment before its provisions become effective. This would give advisers who would become subject to registration time to implement the appropriate internal systems and controls.

According to Rep. Kanjorski, the newly introduced reporting costs are expected to be in the range of $5,000 to $15,000 for most hedge funds, while they could exceed several hundred thousand dollars for more complicated hedge funds.

The bill is expected to go to a full House vote in November.

FSA Publishes Report on Impact of AIFM Directive

2009-10-27T10:14:00.004-04:00

On October 15, 2009, the UK Financial Services Authority published a report (the "Report") prepared by Charles River Associates assessing multiple aspects of the proposed EU directive on Alternative Investment Fund Managers, which we covered extensively since it was published in April. The Report looks at the proposed directive's impact on the alternative funds industry (in particular the cost implications), investor choice and returns, and employment and economic growth in the EU.

The Report, which is based on data gathered from a cost survey and interviews with market participants including professional investors, trade associations and companies involved in the provision of different fund types, estimates that significant new compliance costs would arise for fund managers. In particular, one-off costs are expected to amount to €3.2 billion, while an additional €311 million is expected to be spent on ongoing compliance with the directive. Additional costs are expected to arise in connection with the envisaged depositary duties and their liabilities. The Report forecasts the biggest impact will be felt by private equity funds due to the inconsistency of their business model with the proposed compliance requirements. For example, because private equity funds invest in unlisted companies to which the fund managers often provide ongoing management assistance, the funds typically rely on internal teams familiar with a company's operations to establish the value of the fund's investment. By requiring that private equity funds appoint an independent valuator to undertake the complex valuations associated with such investments, the directive is likely to increase private equity fund operational costs significantly. The interviewees expect these added costs to be passed on to the investors leading to significantly smaller investment returns.

While the Report does not establish what percentage, if any, of non-EU funds will relocate to the EU as a result of the proposed directive, it does suggest that the high compliance costs associated with the directive may present too high of a burden for some non-EU funds, which will instead decline to market their funds within the EU, leading to reduced choice for EU investors. In its conclusion, the Report states that the proposed directive "will cause a fundamental reorganisation in the business model of global fund mangers (with significant one-off costs) and may lead to costly changes of legal structures and domicile", and concludes that its burdens outweigh its benefits.

Singapore to Abolish "Private Manager" Exemption

2009-10-19T14:15:00.003-04:00

As reported by Bloomberg, hedge fund managers in Singapore will likely need to be licensed as a result of anticipated Singapore central bank regulation. Hedge fund managers in Singapore have been able to avail themselves of an exemption from holding a capital-markets services license as long as they managed funds on behalf of no more than 30 "qualified" investors, as defined by local laws. The new regulation would remove the current exemption in line with guidelines by the G20 and IOSCO.

While the new regulation is expected to raise the operational costs of hedge funds in Singapore, it is expected that "the potential cost burden will be modest and won’t damage the industry."

Congressman Proposes Private Fund Registration Act

2009-10-05T10:15:00.003-04:00

On October 1, 2009, House Representative Paul E. Kanjorski, Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released a discussion draft of legislation to regulate private advisers to hedge funds and other private pools of capital. The draft bill, called the "Private Fund Investment Advisers Registration Act of 2009" (the "Bill"), substantially mirrors the fund adviser legislation, introduced by the Obama Administration in July.

However, in contrast to the Obama Administration proposal, the Bill would exempt "venture capital fund" advisers from registration with the SEC under the Investment Advisers Act of 1940. The SEC would then be required to identify and define what constitutes a "venture capital fund" for purposes of the exemption.

IOSCO Publishes Elements of Regulatory Standards for Funds of Hedge Funds

2009-09-17T15:10:00.003-04:00

On September 14, 2009, the Technical Committee of the International Organization of Securities Commissions ("IOSCO") published its Final Report on Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practices (the "Report"). The Report provides guidance to managers of funds of hedge funds regarding their liquidity risk management and due diligence policies, two areas seen as requiring additional investor protection regulation.

The Report recommends four broad methods for funds of hedge funds' managers to better manage liquidity risks. Managers are encouraged to consider (i) the consistency of the liquidity profiles of the fund of hedge funds and the underlying hedge funds; (ii) the liquidity of the investments held by the underlying hedge funds prior to investing and thereafter on an ongoing basis; (iii) whether the introduction of limited redemption arrangements would be consistent with the fund's aims and objectives and in compliance with certain proposed conditions; and (iv) whether any conflicts of interest may arise between the underlying hedge funds and any relevant party.

The Report's guidelines require a fund of hedge funds' manager to establish due diligence processes with regard to (i) elements to be constantly monitored and analyzed by funds of hedge funds’ managers (including, inter alia, the appropriateness of the legal regime and service providers, and the transparency, valuation and reporting arrangements of a specific hedge fund); (ii) the resources, procedures and organizational structures that the manager could be required to have in order to carry out appropriate due diligence; and (iii) the conditions for authorizing the outsourcing of due diligence.

The standards suggested by the Report are not meant to be comprehensive and are not legally binding. However, they do reflect the common views of the IOSCO members on the subject, and might serve as an indication for future regulation.

Update: Council Presidency Publishes Note on EU AIFM Directive

2009-09-08T12:35:00.003-04:00

On September 2, 2009, the Presidency of the Council of the European Union (the "Council") published a note on key issues to be addressed in the proposal for the Directive on Alternative Investment Fund Managers, the text of which was published in April this year. The Council Presidency prepared this note after initial working party meetings and comments received by EU Member States highlighted a number of issues in the current proposal. The note groups key issues into 10 broad topics, and suggests possible solutions that may advance the legislation. Issues of a technical drafting nature, and alignment with existing legislation, are not addressed in the note.

Update: FSA to Assess Cost of Proposed EU Funds Law

2009-08-24T16:57:00.007-04:00

As reported by Reuters, the UK Financial Services Authority (the "FSA") has commissioned an external cost-benefit study to assess the possible impact the EU Directive on Alternative Investment Fund Managers, proposed earlier this year, may have on the sector's competitiveness. According to an FSA spokesman, the research is expected to be completed "later this year".

The FSA move comes on the back of intense political debate between the UK (Europe's major fund centre) on one side, and Germany and France on the other. The UK, which is strongly supported in its position by industry representatives, is believed to be attempting to tone down the proposed directive's requirements, fearing that the costs of the proposed regulation in its current form would far outweigh its benefits. On the other hand, France and Germany have criticized the proposal for stopping short of introducing a robust legislative framework for the industry.

The proposed directive requires approval by the European Parliament and Council before it becomes effective.

Update: SEC Proposes Alternative Uptick Rule for Comments

2009-08-19T15:18:00.002-04:00

On August 17, 2009, the SEC reopened the comment period on the proposed uptick rule intended to curtail short selling. As previously reported on April 9, 2009, the original proposal offered two approaches, one imposing a market-wide and permanent restriction on short selling based on either the last sale price or the national best bid, and the other a "circuit breaker" which would limit sales of a particular security during severe price declines. The SEC is now seeking comments on an alternative uptick rule that would allow short selling only at an increment above the national best bid. The SEC believes such alternative uptick rule may be "more effective" and "easier to implement" than the earlier proposed approaches as it would eliminate the need to monitor previous national best bid or sale sequences.

The comment period for the April proposal ended on June 19, 2009, but will now be extended for an additional 30 days after publication of an associated SEC note in the Federal Register.

SEC Press Release

Update: Cayman Islands and BVI Added to OECD White List

2009-08-17T17:03:00.001-04:00

On August 14, 2009, the Organisation for Economic Cooperation and Development (the "OECD") announced that the Cayman Islands and the British Virgin Islands have been moved into the category of "Jurisdictions that have substantially implemented the internationally agreed tax standard" (the "White list") on the OECD list of tax havens. See also our previous posting from April 2, 2009.

The OECD list divides more than 80 jurisdictions into the White list, the Grey list, and the Black list depending on their progress in meeting (the) "internationally agreed tax standard". The Cayman Islands and the British Virgin Islands have been moved from the Grey to the White list after signing tax information exchange agreements with New Zealand, increasing the number of tax information exchange agreements that each of the two jurisdictions has to twelve, which is the minimum number required to qualify for the White list.

House Approves Bill to Regulate Compensation Policies

2009-08-05T11:29:00.004-04:00

On July 31, 2009, the U.S. House of Representatives adopted Bill H.R. 3269 entitled the Corporate and Financial Institution Compensation Fairness Act of 2009 (the "Bill"), which, if passed into law, may restrict the income policies of certain financial institutions. The Bill covers U.S. financial institutions with at least $1 billion in assets under management, including investment advisors, banks, broker-dealers and other financial institutions. Covered financial institutions will be required to disclose to the regulators any compensation structures that include incentive-based allocation arrangements, such as carried interest and performance fees, in order to allow the regulators to assess such structures against risk management standards. Regulators will also be able to bar the compensation structures of a specific financial institution if they are deemed to encourage "inappropriate risks".

The Bill also contains "say on pay" rules for public companies, giving their shareholders the right to cast an annual advisory vote on executive compensation. Shareholders would also have the right to cast an advisory vote on golden parachute compensation in the event of a merger, consolidation, sale or acquisition of the company. In addition, the Bill would require all public companies to have compensation committees comprised of independent directors. Consultants to the compensation committee would also be required to meet SEC standards for independence.

The Bill needs to be signed off by the U.S. Senate and President Obama before it becomes law.

Link to House press release

SEC Publishes Proposed "Pay to Play" Rules

2009-08-04T12:32:00.005-04:00

On August 3, 2009, the SEC published the text of its proposed rules to limit "pay to play" practices by investment advisers who seek to manage state and local government money and make political contributions to influence their selection. The proposed rules would apply to advisers registered under the Investment Advisers Act of 1940 (the "Act") as well as certain advisers of hedge funds and other private pools of capital who are exempt from registration by virtue of section 203(b)(3) of the Act. Section 203(b)(3) -- otherwise known as the "private adviser" exemption -- exempts from registration any investment adviser that is not holding itself out to the public as an investment adviser and had fewer than 15 clients during the last 12 months.

Two-Year "Time-Out" for Contributors
The proposed rules would make it unlawful for an investment adviser to receive compensation, either directly or through a fund, for providing advisory services to a "government entity" for two years after the adviser or any of its "covered associates" makes a political contribution to an "official" of the entity in a position to influence the selection of advisory business. The proposed rules contain a de minimis exception that would allow a covered associate to contribute up to $250 per election per candidate if the contributor is able to vote for the candidate.

Under the proposed rules, "government entities" would include all state and local governments, their agencies and instrumentalities, and all public pension plans and other collective government funds. "Covered associates" would include the adviser’s general partners, managing members, executive officers, or other individual with a similar status or function, as well as employees who solicit government entity clients for the adviser. An "official" would include an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for or can influence the outcome of the selection of an investment adviser.

The proposed rules would prohibit an adviser and its covered associates from coordinating or asking another person or political action committee to make a contribution to an official who can influence adviser selection or make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government entity.

The proposed rules would also prohibit an adviser and its covered associates from paying a third party to solicit advisory business from a government entity on behalf of the investment adviser. Additionally, the proposed rules would prohibit an adviser and its covered associates from engaging in any indirect "pay to play" conduct that would violate the rule if the adviser or covered associate did it directly, such as contributing to an official via a spouse, lawyer or company affiliated with the adviser or associate.

Record-Keeping Requirements
The proposed rules would require an adviser to make and keep the following records:

(i) the names, titles and business and residence addresses of all covered associates of the investment adviser;

(ii) all government entities for which the investment adviser or any of its covered associates is providing or seeking to provide investment advisory services, or which are investors or are solicited to invest in any covered investment pool to which the investment adviser provides investment advisory services, as applicable;

(iii) all government entities to which the investment adviser has provided investment advisory services, along with any related covered investment pools to which the investment adviser has provided investment advisory services and in which the government entity has invested, as applicable, in the past five years, but not prior to the effective date of the proposed rule; and

(iv) all direct or indirect contributions or payments made by the investment adviser or any of its covered associates to an official of a government entity, a political party of a state or political subdivision thereof, or a political action committee.

The SEC is soliciting comments on the proposed rules until October 6, 2009.

Link to SEC Release

SEC Updates "Naked" Short Selling Rules, Works to Improve Short Sale Transparency

2009-07-29T14:37:00.004-04:00

On July 27, 2009, the SEC announced various steps it is taking to address abusive "naked" short sales and provide the public with more information on the short sale practices of equity market participants.

First, the SEC made permanent Rule 204T under Regulation SHO, which aims to reduce failures to deliver securities (known as "fails to deliver") resulting from sales of any equity security and provides a disincentive to those who might engage in potentially abusive "naked" short selling. A "naked" short sale generally refers to selling short without having borrowed the securities to make delivery to the buyer by the settlement date (typically three days after the trade, known as T+3). Under new Rule 204, a broker-dealer must purchase or borrow securities to close out any "fails to deliver" resulting from short sales by no later than the beginning of trading on the day after the fail to deliver occurs (typically T+4). Until the "fail to deliver" position is closed out, a broker-dealer may not short sell the security either for itself or the account of another without first borrowing or arranging to borrow the security. Investment managers engaged in short selling activity should be cognizant of the constraints Rule 204 places on their broker-dealer and take care not to compromise their broker-dealer's ability to satisfy its requirements or the requirements of Regulation SHO in general.

Second, the SEC is working with several self-regulatory organizations ("SROs") to provide short sale volume and transaction data on the SROs' websites. The available information is expected to include:

daily publication of the aggregate short sale volume in each individual equity security;

monthly publication (on a one-month delayed basis) of individual short sale transactions in all exchange-listed equity securities; and

twice monthly publication of fails to deliver information for all equity securities.

This information will supplant the nonpublic short sale information currently provided to the SEC by certain institutional investment managers on Form SH under temporary Rule 10a-3T, which is set to expire on August 1.

Third, on September 30 the SEC intends to hold a roundtable discussion on securities lending, pre-borrowing, and possible additional short sale disclosures. The discussion will address, among other things, possible additional measures to improve transparency. Such measures could include, for example, adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities and requiring public disclosure of individual large short positions.

Link to SEC press release
Link to SEC Release adopting Rule 204

Obama Administration Proposes Fund Adviser Legislation

2009-07-17T10:07:00.003-04:00

On July 15, 2009, the U.S. Department of the Treasury introduced the Private Fund Investment Advisers Registration Act of 2009 (the "Act"), which broadens the scope of the Private Fund Transparency Act of 2009 introduced by Senator Jack Reed (D-RI) earlier this year. The aim of this new legislation is to "help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to [the United States'] overall financial stability." In addition to the concept of a "foreign private adviser" that was previously introduced in Sen. Reed's legislation, the Act also introduces the concept of a "private fund", which is any investment fund that would be an investment company but for section 3(c)(1) or section 3(c)(7) of the Investment Company Act of 1940 and either (i) is organized or otherwise created under the laws of the United States, or (ii) has 10% or more of its outstanding securities owned by U.S. persons. The Act, among other things, proposes to limit the private adviser exemption of the Investment Advisers Act of 1940 (the "Advisers Act") to foreign private advisers, limit the intrastate exemption to only those investment advisers who are not acting as investment advisers to any private funds, and require the registration of any investment adviser that is registered with the Commodity Futures Trading Commission and acts as an investment adviser to a private fund. Further, the Act would subject a registered investment adviser to additional record-keeping and reporting requirements. For each private fund advised by the investment adviser, the adviser would be required to file reports with the Securities and Exchange Commission disclosing, among other things: (i) the amount of assets under management; (ii) use of leverage (including off-balance sheet leverage); (iii) counterparty credit risk exposure; (iv) trading and investment positions; and (v) trading practices. The Act also proposes to remove a provision that otherwise precluded the Advisers Act from requiring, or authorizing the SEC to require, any investment adviser engaged in rendering investment supervisory services to disclose the identity, investments, or affairs of any client of such investment adviser.

Press Release
Full Text of the Act

SEC Outlines Options for Increased Regulation of Private Funds

2009-07-16T10:51:00.005-04:00

On July 15th, 2009, Andrew Donohue, head of the SEC's Investment Management Division, delivered remarks to a U.S. Senate Banking subcommittee on the options for increasing regulation of hedge funds and other private investment vehicles.

Mr. Donohue expressed the SEC's support for the "Private Fund Transparency Act of 2009" introduced on June 16th by Senator Jack Reed (D-RI). If enacted, the Private Fund Transparency Act of 2009 would require advisers to private funds to register under the Investment Advisers Act of 1940 if they have at least $30 million of assets under management.

In addition to favoring investment adviser registration as a means to increase oversight of private funds, Mr. Donohue suggested that private funds could be required to register under the Investment Company Act of 1940 (the "ICA"), or the SEC could be given stand-alone authority to further regulate unregistered funds. Such additional regulation could take the form of restrictions on fund investments and investor terms, diversification and governance requirements, and other structural rules. Another approach suggested by Mr. Donohue would be for Congress to provide the SEC with rule-making authority which would allow it to condition a private fund's use of the section 3(c)(1) and 3(c)(7) exceptions to the ICA on whatever requirements the SEC finds to be necessary or appropriate to protect investors and enhance transparency.

SEC to Review Rule on Mutual Fund Distribution Expenses

2009-07-16T08:28:00.005-04:00

In her July 14, 2009, testimony before a U.S. House of Representatives Financial Services subcommittee, SEC Chairman Mary Schapiro outlined the SEC agenda for addressing the financial crisis.

The agenda includes, amongst other things, a review of Rule 12b-1 under the Investment Company Act of 1940, which permits registered open-end management investment companies to use fund assets to finance expenses connected to the distribution of mutual fund units to investors. These expenses, which include broker-dealer and intermediary service fees, amounted to more than $13 billion in 2008.

The SEC plans to examine the impact Rule 12b-1 has on investor interests in practice, and is expected to consider the need for adjustments to current regulation.

In her testimony, Ms. Schapiro also reiterated her support for the Obama Administration's recommendation that advisers to hedge funds and other private investment funds be required to register with the SEC under the Investment Advisers Act of 1940.

PPIP Pre-Qualified Fund Managers Announced

2009-07-10T12:17:00.003-04:00

On July 8, 2009, the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation ("FDIC") announced the names of the private fund managers who have been pre-qualified to participate in the Legacy Securities portion of Treasury's Public-Private Investment Program (“PPIP”). The list of managers includes:

- AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC;
- Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
- BlackRock, Inc.;
- Invesco Ltd.;
- Marathon Asset Management, L.P.;
- Oaktree Capital Management, L.P.;
- RLJ Western Asset Management, LP.;
- The TCW Group, Inc.; and
- Wellington Management Company, LLP.

As previously outlined, the Legacy Securities PPIP is designed to improve the market for asset-backed securities by enabling banks and other financial institutions to price and sell those securities so that they can free up capital and extend new credit to homes and businesses. To facilitate the market, Treasury will invest up to $30 billion of debt and equity with leading private fund managers and investors for the purpose of buying qualifying commercial mortgage-backed securities and non-agency residential mortgage-backed securities. Qualifying securities must have been issued before 2009, have originally been rated AAA, and be secured directly by the actual mortgage loans, leases, or other assets.

Once approved, private fund managers will have up to 12 weeks to raise at least $500 million from private investors, which funds will be matched by Treasury. Each fund manager also has to invest a minimum of $20 million of firm capital. Once the money has been raised, the fund managers can purchase qualified securities. Treasury will also provide debt financing up to 100% of the total equity of the fund.

So far Treasury has negotiated equity and debt term sheets with each of the pre-qualified fund managers and expects to negotiate final documentation and announce a first closing of a fund in early August 2009.

The announcement also highlighted the FDIC's plan to test the funding mechanism of the Legacy Loan PPIP by conducting a sale of receivership assets this summer. A counterpart to the Legacy Securities PPIP, the Legacy Loan PPIP is designed to improve the market for distressed or troubled loan assets by facilitating their sale at market prices. Under the program, the FDIC would oversee the formation, funding and operation of private investment funds that will buy these assets from banks or from the FDIC. To fund the purchases, investment funds would provide equity capital and the FDIC would guarantee debt financing collateralized by the purchased assets. The investment funds would be required to pay the FDIC a fee in exchange for providing the guarantee. The FDIC expects to solicit bids for the sale of receivership assets during July.

CESR Publishes Consultation on Pan-European Short Selling Disclosure

2009-07-10T12:12:00.002-04:00

On July 8, 2009, the Committee of European Securities Regulators ("CESR") published a consultation paper on its proposal for a pan-European short selling transparency regime. The initiative follows measures enacted since 2008 by a significant number of CESR members to restrain and/or condition short selling practices within their jurisdictions as a result of the financial crisis, which led to fragmented and complex compliance requirements for market participants across Europe.

CESR's approach is based on a two-tier disclosure system of significant net short positions. When a person reaches a net short position equal to 0.1% (the private disclosure threshold) of the issued share capital of a particular issuer, such fact would need to be disclosed to the regulator. A second-tier threshold requiring disclosure to all market participants is proposed at 0.5% (the public disclosure threshold). Further disclosures are envisaged when a position increases or decreases by a 0.1%. In addition, CESR proposes a lower public disclosure threshold (0.25%) during periods of particular vulnerability for an issuer, such as during a rights issue.

The proposed disclosure regime would only apply to shares admitted to trading on a European Economic Area regulated market or a Multilateral Trade Facility. As usual, exemptions for market makers are envisaged.

CESR recommends that the proposed regime be enacted through EU legislation, either as a regulation or directive. While the current proposal is only concerned with the short selling disclosure regime, CESR will continue to analyze the need for harmonized measures regulating the practice of short selling beyond disclosure.

CESR has invited interested persons to express their views on the consultation paper. Comments should be submitted online via CESR’s website under the heading "Consultations" at www.cesr.eu by September 30, 2009.

FBAR Filing Requirement Includes Private Investment Funds - IRS Extends Filing Deadline For Certain Filers Without Penalty

2009-06-30T16:56:00.005-04:00

Generally, any U.S. person (including any U.S. tax-exempt entity) is required to file a Report of Foreign Bank and Financial Accounts (FBARs) if it has a financial interest in, or signature or other authority over, one or more foreign financial account(s) and the aggregate value of such account(s) exceeds $10,000 at any time during the year. The Internal Revenue Service (IRS) recently clarified on a conference call that, for purposes of FBAR reporting requirements, a "foreign financial account" includes an offshore investment in hedge funds [the audio of the entire conference call is available here]. This could have broad implications for any U.S. person who (i) invests in an offshore private investment fund, (ii) owns more than 50% of an entity (e.g., a feeder fund) that invests into an offshore private investment fund, or (iii) receives any other financial interest in an offshore investment fund (including its investment manager).

Additionally, the IRS effectively extended the filing deadline for 2008 FBARs to September 23, 2009 for two categories of U.S. persons. The first relates to U.S. taxpayers who reported and paid taxes on all their 2008 taxable income but only recently learned of the FBAR filing obligation and could not timely gather all necessary information. These U.S. taxpayers may be eligible for the extended deadline if certain other requirements are met (including providing a statement and copies of tax returns to the IRS). Other U.S. persons who are required to file FBARs with respect to a foreign financial account may be eligible for the extended deadline only if all 2008 taxable income with respect to the accounts is timely reported and certain other requirements are met.

Cayman Islands Planning to Increase Hedge Fund Transparency

2009-06-26T16:05:00.005-04:00

As reported by Reuters, the Cayman Islands Monetary Authority ("CIMA") may introduce increased disclosure requirements for hedge funds based in the British overseas territory. The disclosure could comprise data on fund directors, managers and administrators.

This news follows on the heels of CIMA being admitted as a full member of the International Organization of Securities Commissions ("IOSCO") on June 10, 2009, thereby validating the Cayman Island's regulatory and international cooperation regime.

Update: IOSCO Final Report on Hedge Fund Oversight

2009-06-25T12:17:00.005-04:00

On June 22, 2009, the International Organization of Securities Commissions’ (IOSCO) Technical Committee released its final report on Hedge Funds Oversight. The report, which follows the preliminary findings and recommendations published by the IOSCO on March 19, contains six high level principles designed to assist securities regulators in addressing the regulatory and systemic risks posed by hedge funds in their respective jurisdictions within the context of a consistent global framework. The IOSCO's six principles are:

Hedge funds and/or hedge fund managers/advisers should be subject to mandatory registration;

Hedge fund managers/advisers which are required to register should also be subject to appropriate ongoing regulatory requirements relating to:

a. Organizational and operational standards;

b. Conflicts of interest and other conduct of business rules;

c. Disclosure to investors; and

d. Prudential regulation.

Prime brokers and banks which provide funding to hedge funds should be subject to mandatory registration/regulation and supervision. They should have in place appropriate risk management systems and controls to monitor their counterparty credit risk exposures to hedge funds;

Hedge fund managers/advisers and prime brokers should provide to the relevant regulator information for systemic risk purposes (including the identification, analysis and mitigation of systemic risks);

Regulators should encourage and take account of the development, implementation and convergence of industry good practices, where appropriate;

Regulators should have the authority to cooperate and share information with each other, where appropriate, in order to facilitate efficient and effective oversight of globally active managers/advisers and/or funds and to help identify systemic risks, market integrity and other risks arising from the activities or exposures of hedge funds with a view to mitigating such risks across borders.

IOSCO Press Release
Full Text of Hedge Fund Oversight: Final Report

Update: Private Fund Transparency Act of 2009

2009-06-22T11:44:00.004-04:00

On June 16, 2009, Senator Jack Reed (D-RI) introduced the Private Fund Transparency Act of 2009, which would require, among other things, certain investment advisers to private funds, including hedge funds and private equity funds, to register with the SEC. According to Senator Reed, "these statutory changes will help modernize our outdated financial regulatory system, protect investors, and prevent fraud." The proposed statutory changes would eliminate the "private adviser exemption" and require all hedge fund and other investment pool advisers that manage more than $30 million in assets to register as investment advisers with the SEC. However, a limited exemption from registration is created for a "foreign private adviser," which is any investment adviser who (i) has no place of business in the U.S., (ii) during the preceding 12 months has had fewer than 15 clients in the U.S. and assets under management attributable to clients in the U.S. of less than $25 million, and (iii) neither holds itself out to the public as an investment adviser, nor acts as an investment adviser to any registered investment company.

Full Text of the Act
Press Release of Sen. Reed

Obama Administration's Proposed Financial Reforms Include Potential Registration of Investment Advisers

2009-06-18T17:02:00.005-04:00

On June 17, the Obama Administration released its White Paper on Financial Regulatory Reform, which, among other, includes a call for investment advisers to register with the SEC. Under the proposal, all investment advisers to hedge funds that exceed a certain amount of assets under management would be required to register with the SEC under the Investment Advisers Act. Further, it is proposed that these investment advisers be required to report certain information about the funds they manage, in order to adequately assess whether a particular fund poses a threat to financial stability. The Obama Administration's proposal follows on the heels of a Senate bill introduced by Senator Jack Reed (D-RI) on June 16, which would require investment advisers to all private funds, including hedge funds, to register with the SEC if their assets under management exceed $30 million.

House Considers Bill to Tax Investment Adviser Partnerships as Corporations

2009-06-12T11:39:00.004-04:00

On June 8, 2009, Congressman Peter Welch (D-VT) reintroduced a bill in the House of Representatives that would tax as corporations all publicly traded partnerships that directly or indirectly derive income from providing investment advisory or asset management services. In 2007, similar bills were introduced in the Senate, and in the House by Congressman Welch, which he said would fill “a gaping tax loophole” that allowed partnerships to “rip off American taxpayers.” H.R. 2762, now in front of the House Ways and Means Committee, would amend Section 7704(c) of the Internal Revenue Code of 1986 to require this tax treatment whether or not the investment adviser is registered under the Investment Advisers Act of 1940. If the bill is enacted, investment advisers organized as partnerships that are publicly traded would no longer be treated as pass-through entities for tax purposes and would be subject to corporate income tax.

Update: CT Hedge Fund Bill Blocked

2009-06-05T12:23:00.002-04:00

As reported by IDD Magazine, the Connecticut House of Representatives failed to adopt Bill 953 (An Act Concerning Hedge Funds) after running out of time before bringing the bill to a vote on Wednesday, June 3, 2009. It was reported that the legislature is expected to focus on the state budget in its upcoming session, therefore effectively ruling out a new vote on the bill this year. As previously reported, the bill was adopted by the Connecticut State Senate on May 26, 2009, but was subject to consideration by the Connecticut House of Representatives before coming into law.

Update: TALF Participation Continues to Rise

2009-06-04T14:31:00.002-04:00

According to a statement released by the Federal Reserve Bank of New York (the "NY Fed") on Tuesday, June 2nd, prospective borrowers requested approximately $11.5 billion in loans during the June 2nd operation of the Term Asset-Backed Securities Loan Facility ("TALF"). This figure represents a slight increase over the $10.6 billion in loans that were requested at the May 5th facility.

In related news, William C. Dudley, President and CEO of the NY Fed, delivered a speech this morning in which he assessed the early performance and future prospects of the TALF. Mr. Dudley argued that the early evidence indicated that the TALF is functioning as designed, citing an increase in the issuance of consumer asset-backed securities, the fact that TALF loans have accounted for a bit more than half of the total issuance volume of asset-backed securities, and the decline in spreads on consumer asset-backed securities.