Global Fund Marketing & Distribution – New Approaches and Practices in

Information about Global Fund Marketing & Distribution – New Approaches and Practices in

Published on August 10, 2014

Author: Miles.Peterson

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Regulatory Compliance Association: Global Fund Marketing and Distribution – New Approaches and Practices in 2014 : Regulatory Compliance Association: Global Fund Marketing and Distribution – New Approaches and Practices in 2014 Brendan Kalb, AQR Brian Guzman, Indus Joseph Deitzer, Ernst & Young Cindy Scotland, CIMA Christopher Wells, Proskauer March 14, 2014 Key Developments: 2 Key Developments JOBS Act AIFMD Cayman Developments Retailization of Alternative Investments Single Investor Funds and Managed Accounts Jumpstart Our Business Startups (JOBS) Act: 3 Jumpstart Our Business Startups (JOBS) Act Yes, hedge funds can now advertise….: Yes, hedge funds can now advertise…. 4 Finding the right disclaimer….: Finding the right disclaimer…. 5 Background: 6 Background Legislation signed by President on April 5, 2012. The legislation aimed to promote job growth by easing corporate governance and financial reporting requirements for initial public offerings by emerging growth companies. It expanded the ability of issuers (including hedge funds) to communicate with prospective investors (i.e., advertise) in Regulation D and Rule 144A offerings. After extended deliberations (and a lot of controversy), the SEC adopted final rules effective September 23, 2013. Implications for Hedge Funds: 7 Implications for Hedge Funds Hedge funds can offer securities in a private placement under Regulation D under either Old rule: Rule 506(b) – without advertising or general solicitation, or New rule : Rule 506(c) – with advertising or general solicitation But , if you use Rule 506(c): Issuer must check box on Form D Issuer must take “reasonable steps” to verify that all purchasers of the securities are accredited investors Review investor’s tax return or W-2 Review bank or brokerage statements Letter from registered broker-dealer, investment adviser, attorney or accountant Self-certification by existing investor in same fund JOBS Act: Why is nothing happening?: 8 JOBS Act: Why is nothing happening? SEC staff has indicated that it will review carefully the activities of any private funds that decide to advertise CFTC exemptions under Rules 4.13(a)(3) and 4.7 do not permit public offering Not entirely clear how a fund switches from 506(b) to (c) in the middle of an offering SEC has proposed additional rules: Make advance filing of Form D mandatory Require advance filing of advertising materials with SEC AIFMD: The European Alternative Investment Fund Managers Directive: 9 AIFMD: The European Alternative Investment Fund Managers Directive What is AIFMD?: 10 What is AIFMD? The Alternative Investment Fund Managers Directive was adopted by the European Economic Area (EEA) to regulate: EEA fund managers and the marketing of alternative investment funds (AIFs) into the EEA by non‑EEA managers. The AIFMD includes numerous requirements for EEA managers. For now, non-EEA managers marketing into the EEA will only need to comply with certain transparency, disclosure and portfolio company requirements in relation to the fund being marketed. What are the key requirements for non-EEA managers marketing an AIF to investors in the EEA?: 11 What are the key requirements for non-EEA managers marketing an AIF to investors in the EEA? Make certain required disclosures to investors in offering materials and financial statements. Make initial filing with local regulator in each country where fund is offered under local private placement rules. Make semi-annual filing (Annex IV) with local regulator in each country where fund is offered . Make certain ongoing required disclosures to investors. Many EEA countries have still not implemented the AIFMD1: Many EEA countries have still not implemented the AIFMD 1 Country Regulator(s) Implemented Austria Financial Market Authority Yes Belgium Belgian Financial Services and Markets Authority No Denmark Danish Financial Supervisory Authority Yes Finland Finnish Financial Supervisory Authority No France AMF Yes Germany BaFin Yes Ireland Central Bank Yes Italy Bank of Italy CONSOB No Luxembourg CSSF Yes Netherlands Autoriteit Financiële Markten, De Nederlandsche Bank Yes Norway Norwegian Financial Supervisory Authority No Spain CNMV No Sweden Swedish Financial Supervisory Authority Yes UK Financial Conduct Authority Yes 12 1 Information may not be current . What must a non-EEA AIFM do to comply with AIFMD from July 22, 2013 in the UK?: What must a non-EEA AIFM do to comply with AIFMD from July 22, 2013 in the UK? A non-EEA AIFM that (a) managed an AIF immediately before July 22, 2013, and (b) marketed that AIF into the EEA before July 22, 2013, will have the benefit of a 12 month transition period in the UK. If you qualify for the transition period, compliance with disclosure, transparency and reporting requirements in the UK will be delayed until July 22, 2014, if you are marketing on or after that date. If you qualify for the transition period and you conclude your fundraising before July 22, 2013, you will not need to comply with AIFMD at all. If you do not qualify for the transition period, you will need to comply with the disclosure, transparency and reporting requirements of AIFMD from July 22, 2013. 13 Is transition available to a non-EEA manager marketing in other EEA countries?: Is transition available to a non-EEA manager marketing in other EEA countries? 2 Additional qualifying conditions and limitations may apply. Information may not be current . (NB: delayed implementation) (NB: delayed implementation) 14 Country Transition available 2 Austria ? Belgium Denmark Finland France Germany Ireland Italy Luxembourg Netherlands Norway ? Sweden (NB: delayed implementation) Marketing notification and approval requirements under AIFMD in the UK for non-EEA managers: Marketing notification and approval requirements under AIFMD in the UK for non-EEA managers UK: Prior notification only to the FCA. Form made available by the FCA. In practice, notifications for fundraisings in the UK will be required if: the transition period is not available and/or for marketing after July 21, 2014. 15 Marketing notification and approval requirements under AIFMD in other EEA Countries for non-EEA managers: Marketing notification and approval requirements under AIFMD in other EEA Countries for non-EEA managers Other EEA countries Some countries have notification and/or approval requirements on top of the basic transparency, disclosure and reporting requirements of non-EEA managers. These generally will apply if: transition is not available and/or marketing takes place after July 21, 2014. 16 Marketing notification and approval requirements under AIFMD for non-EEA managers3: Marketing notification and approval requirements under AIFMD for non-EEA managers 3 Country Notification/Approval Period Austria Four months Denmark Three months Finland ? ? France Germany Two to four months Ireland Five to ten working days Luxembourg N/A Netherlands N/A Norway No limit Sweden 60 days UK N/A consent consent consent consent consent consent prior notification or consent depending on fund type 17 prior notification N/A for notification/no limit for consent 3 Information may not be current. prior notification What constitutes “marketing” under AIFMD?: What constitutes “marketing” under AIFMD? The AIFMD definition of marketing is the direct or indirect offering or placement of an AIF managed by the AIFM. Regulators in different countries may place different parameters around what constitutes marketing. For example in the UK, current guidance issued by the FCA provides that communicating with investors regarding draft fund documentation is not “marketing an AIF”. It is only when fund documents are final in all material respects that the fund can actually be offered to the investor and compliance with AIFMD is required. Before that time, marketing and fundraising activities need only be conducted under normal rules. 18 What if a prospective EEA investor seeks you out…?: What if a prospective EEA investor seeks you out…? Reverse solicitation – i.e., marketing at the initiative of the investor – is not considered to be “marketing an AIF” under AIFMD. FCA guidance: A confirmation from the investor that the offering or placement of units or shares of the AIF was made at its initiative should normally be sufficient to demonstrate that this is the case, provided this is obtained before the offer or placement takes place. However, AIFMs and investment firms should not be able to rely upon such confirmation if this has been obtained to circumvent the requirements of AIFMD. 19 Possible exemptions and exclusions : Possible exemptions and exclusions Small AIFM status may provide a partial exemption: AIFM with AUM ≤€100m that include leveraged assets AIFM with AUM ≤€500m that do not include leveraged assets and AIFs that do not permit redemptions within five years of initial investment Registration only and minimum annual filings But need to check that applicable EEA country makes this partial exemption available 20 Cayman Developments: 21 Cayman Developments Fund Governance: Fund Governance Public consultation undertaken Announcement of Statement of Guidance (SOG) Testing of SOG during on-site inspections Next steps Implementation of Directors’ database 22 International Cooperation: International Cooperation CIMA participation in international standards-setting bodies Revisions to the Mutual Funds Law (2013) Revision) FATCA: Cayman Islands has signed Model I IGA 23 Retailization of Alternative Investment Funds: 24 Retailization of Alternative Investment Funds New Offerings of Alternative Investment Products: New Offerings of Alternative Investment Products SEC registered mutual funds Daily pricing and liquidity Limits on performance based fees Limits on leverage UCITs Registered commodity pools Actively managed ETFs 25 Single Investor Funds and Managed Accounts: 26 Single Investor Funds and Managed Accounts Why the Recent Growth in SMAs and SIFs?: Why the Recent Growth in SMAs and SIFs? 27 What is driving the dramatic recent growth in separate managed accounts (SMAs) and single investor funds (SIFs)? Increased investor demand for: Customized portfolios (excluding certain assets; focusing on certain assets; increased leverage; etc). Ability to negotiate different terms. Greater control of assets/power to remove manager. Greater transparency regarding underlying investments. Insulation from possible negative effects on performance due to subscriptions and redemptions by other fund investors. Increased influence of consultants. Pros and Cons of SMAs and SIFs: Pros and Cons of SMAs and SIFs 28 SIFs typically involve additional administrative costs: audit, tax reporting, administration. SIF: Manager typically deals with all trading, credit and counterparty arrangements. SIF: Manager can receive more favorable tax treatment from special allocation of profits rather than performance-based fee. SIF or SMA may not be able to participate in some fund positions that cannot be replicated in the market. SIF or SMA: No automatic rebalancing of positions as in master-feeder structure. Key issues when managing parallel funds and separate accounts: Key issues when managing parallel funds and separate accounts Adopt appropriate trade allocation policies: Must not favor some accounts over others. Allocations do not have to be formulaic, but generally better if they can be. Regular review of trade allocations / performance of parallel accounts. Keep good records, and be prepared to explain variances. Allocate expenses appropriately. 29 Do investors in funds and SMAs have the same rights? Are SMAs different?: Do investors in funds and SMAs have the same rights? Are SMAs different? 30 Does a fund manager have an obligation to offer the same terms to all investors in a fund? No, but need to disclose in PPM that manager may offer more favorable terms to some investors. What distinguishes differences in, for example, fees charged to investors from differences in redemption rights? Precise terms must be disclosed to investors if more favorable terms (e.g., more favorable redemption terms) granted to some investors may have an actual economic impact on other investors. Investors should ask for information about the size and terms of parallel funds and managed accounts. Other key recent developments affecting marketing of hedge funds: Other key recent developments affecting marketing of hedge funds David Blass speech on application of broker-dealer registration requirements to hedge fund managers possible registration of marketing personnel receipt of transaction fees Continuing focus of SEC on anti-fraud rules need to review marketing materials, DDQs, RFPs for accuracy and consistency increase in recent enforcement actions Continuing focus of SEC on conflicts of interest 31 Regulatory Compliance Association: Global Fund Marketing and Distribution – New Approaches and Practices in 2014: Regulatory Compliance Association: Global Fund Marketing and Distribution – New Approaches and Practices in 2014 Brendan Kalb, AQR Brian Guzman, Indus Joseph Deitzer, Ernst & Young Cindy Scotland, CIMA Christopher Wells, Proskauer March 14, 2014

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