Category Archives: Offshore

Posts about offshore jurisdictions like Cayman Islands, Bermuda, BVI, etc.

SEC Division of Investment Management Staff Responds to Questions about Form ADV Part 2

Posted on by
1

On March 18, 2011, the staff of the SEC’s Division of Investment Management issued responses to questions about the amended Part 2 of Form ADV.

The Division answered questions regarding the following topics, generally restating information already known about the compliance dates for delivery questions, but providing guidance not previously offered on the remaining issues:

  • compliance dates for delivery of Part 2A and Part 2B
  • Part 2A brochure format, material change and risk disclosure, filing and delivery requirements
  • “covered persons” for Part 2B brochure supplements
  • Part 2B brochure supplement delivery requirements

Among the responses offered are the following:

  • An offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV. (Question II. 6)
  • An adviser that is not required to deliver a brochure, but nevertheless chooses to prepare and deliver one, is not required to file the brochure with the SEC. (Question III. 1)
  • An adviser to a hedge or other private fund could meet its delivery obligation to the fund client by delivering the brochure to a “legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity.”  In its response, the staff cites the U.S. Court of Appeals D.C. Circuit 2006 decision in Goldstein v. Securities and Exchange Commission (“Goldstein”) that the “client” of an investment adviser managing a hedge fund is the fund itself and not any of the investors in the fund. (Question III. 2)

Despite the Goldstein decision, many advisers provide copies of their brochures to all investors in their funds, as a matter of best business practice.   It is expected that many advisers will continue to do so, as a matter of best business practice, despite the staff’s response to Question III. 2.

In their introduction to these responses, the staff of the Division of Investment Management state that they expect to update the site with their responses to additional questions “from time to time.”    Investment advisers  will continue to look for further guidance from the staff.

The full text of the Division of Investment Management staff responses may be found here and the final rule adopting the related amendments to Part 2 may be found here.

EU Agrees to Stronger Hedge Fund Regulation

Posted on by
Reply

Today European Union finance ministers in Luxembourg reached unanimous agreement on a new set of rules regulating hedge funds in Europe.  The deal will create a single “passport” that allows approved hedge funds operating in one EU country access to investors across all other EU countries in exchange for more stringent regulation, which is to be governed by the European Securities and Markets Authority (“ESMA”).

The main obstacle in previous negotiations, which began in April 2009, has been how EU managers operating hedge funds outside the EU would be able market those funds to EU investors.  Great Britain, which is home to approximately 450 hedge funds that comprise 80% of the total European hedge fund market, has been the strongest advocate of a single “passport” system.  France has generally viewed UK regulations as insufficient in light of the financial crisis and supported ESMA being granted strong regulatory authority over the industry.

French finance minister Christine Lagarde acknowledged that the deal was very much a compromise.  “I think we probably could have come up with something better,” she added.

The rules must be backed by the European Parliament next month before becoming law.

Group of International Regulators Publish Suggested Systemic Risk Data Requirements For Hedge Funds

Posted on by
Reply

Last week the International Organization of Securities Commissions’ (IOSCO) Technical Committee published the details of an agreed template for the global collection of hedge fund information, which it believes will assist in assessing possible systemic risks arising from the hedge fund sector.

The template (a copy of which is attached for your reference) was designed to create a comparable and consistent set of data to be collected by regulators from local hedge fund managers to monitor systemic risks and prevent gaps in regulatory reporting requirements. The data can then be exchanged amongst regulators and other competent authorities for the purpose of facilitating international supervisory cooperation in identifying possible systemic risks in the hedge fund sector.

The template, which was developed by the Task Force on Unregulated Financial Entities, contains eleven proposed categories of information. The proposed categories incorporate both supervisory and systemic data, and build on the data collection recommendations set out in the IOSCO Technical Committee’s Final Report on Hedge Fund Oversight, which was released in June 2009.

The list of data includes basic information such as the manager’s name, number of funds and equity owners; as well as the names of auditors, custodians, recent performance, redemptions, total assets under management and the value of long and short positions in different assets. Geographic spread, liquidity of a fund’s assets, the value of borrowings, net credit counterparty risk and the top 10 positions are also included.

The IOSCO Task Force has recommended that the first data gathering exercise should be carried out on a best efforts basis (given pending legislation in many jurisdictions) in September 2010.

Although the IOSCO Technical Committee recognizes that the legislative process is currently ongoing in many jurisdictions, it is publishing the template now to help inform any planned legislative changes currently being considered. As stated by IOSCO Technical Committee Chairman Kathleen Casey (who is also a U.S. SEC Commissioner):

“We recognize that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector, as well as who collects the data. Nonetheless, setting out these categories of information may help regulators in the assessment of systemic risk and help to inform the relevant legislative debates.”

It is unclear at this time whether or how the IOSCO disclosure template will inform or affect the ongoing Congressional debate on financial and regulatory reform, including whether it will impact the proposed hedge fund adviser legislation that was passed by the House in December and is currently pending in the Senate.

SFC to Introduce Short-Position Reporting Regime

Posted on by
Reply

News from other other side of the globe …

Not to long after the SEC announced its new regulations on short sales, we have learned that the Securities and Futures Commission of Hong Kong (the “SFC”) that it will be introducing a short-position reporting regime to enhance transparency of short selling activities in Hong Kong.   There is little doubt that this stems from industry feedback and the SFC’s view of the current domestic market situation.

The SFC’s CEO, Mr. Martin Wheatley, claims that the “build-up of large short positions may be potentially disruptive to market stability” and that this “short-position reporting regime will not only complement Hong Kong’s robust short-selling regulatory framework but will also provide a more complete picture of short-selling activities in our market.”

Under the proposed regime, the reporting obligation will be triggered if a short position is equal to or exceeds, 0.02% of the issued share capital of a listed company, or a market value of $30 million, whichever is lower. Weekly reports must be submitted to the SFC until the short position falls below both trigger levels. The SFC will publish aggregated short positions of each stock on an anonymous basis a week later.

Managers should particulary note that only the constituent stocks of the Hang Seng Index, the H-shares Index, financial stocks and other stocks specified by the SFC will come under this new reporting regime.  Derivatives will not be included.

Fraud from Abroad

Posted on by
Reply

The founder of the K1 Group, a German fund-of-funds manager, was arrested on October 28th as part of a joint US and German investigation.  Helmut Kiener faces charges of fraud and breach of trust in German courts after evidence amounted that he may have deceived the likes of Barclays, BNP Paribas, JP Morgan Chase & Co. and Societe Generale into lending a combined $400 million to facilitate fraudulent investments and supporting his lavish lifestyle.  Continue reading →