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Article
Publication date: 1 October 2005

F. Scott Thomas and John C. Jaye

The purpose of this article is to describe the process for forming and registering a new investment company (or mutual fund) or converting an existing hedge fund into a mutual…

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Abstract

Purpose

The purpose of this article is to describe the process for forming and registering a new investment company (or mutual fund) or converting an existing hedge fund into a mutual fund and registering the converted fund. This article discusses the timing, tax and regulatory implications under Delaware law, the US Internal Revenue Code of 1986, the Investment Company Act of 1940 (the “1940 Act”), the Investment Advisers Act of 1940 (the “Advisers Act”), the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”).

Design/methodology/approach

This article summarizes and analyzes rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to forming and registering new mutual funds and converting existing hedge funds into mutual funds under the 1940 Act and Advisers Act.

Findings

For smaller hedge fund managers who have recently registered with the SEC and desire to sponsor a new registered fund product as part of their advisory business, converting and registering an existing hedge fund is a viable alternative to forming an entirely new fund. The conversion process involves converting an existing hedge fund into a Delaware trust and then registering the new trust as a mutual fund under the 1940 Act. The adviser may, under certain circumstances, advertise the past performance of the hedge fund when marketing the new mutual fund. In addition, the adviser may continue to receive performance based or incentive compensation within the boundaries established by the Advisers Act. The authors believe that the conversion process is a viable and cost‐effective method for smaller hedge fund advisers to expand their existing investment advisory products and more easily grow assets under management.

Originality/value

This article provides a useful summary of the process for forming a new mutual fund or converting an existing hedge fund, including a brief outline of the SEC rules and regulations applicable to the fund registration process generally under the 1940 Act. Many hedge fund managers have recently incurred significant compliance costs as a result of registering as an investment adviser with the SEC. This article provides insight into the fund conversion process, which the authors believe is an overlooked and viable option for smaller hedge fund advisers to leverage existing compliance costs through sponsoring a registered fund product.

Details

Journal of Investment Compliance, vol. 6 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 23 November 2010

Thomas John Holton, Paul B. Raymond and Curtis Stefanak

The purpose of this paper is to explain certain SEC and state registration, disclosure, and recordkeeping requirements for US and non‐US investment advisers and fund managers as…

291

Abstract

Purpose

The purpose of this paper is to explain certain SEC and state registration, disclosure, and recordkeeping requirements for US and non‐US investment advisers and fund managers as defined in the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010.

Design/methodology/approach

The paper explains SEC and US state registration requirements; the elimination of the “private adviser” exemption; the creation of new, narrower adviser registration exemptions; reporting and recordkeeping requirements relating to private funds; information and confidentiality provisions for private funds; the SEC's authority to make rules and regulations defining technical, trade, and other terms used in the amendments set forth in the Act; provisions of the “Volcker Rule” concerning banking entities' ownership interests in hedge funds and private equity funds; the adjustment of the “qualified client” test for inflation; the definition of an “accredited investor”; and disqualifications from using Regulation D.

Findings

The Act will require many US and non‐US investment advisers and fund managers to register with the SEC under the Investment Advisers Act of 1940, particularly those advisers that have previously relied on the “private adviser” exemption from SEC registration, which has been eliminated by the Act. The Act will also impose new disclosure and recordkeeping requirements on many investment advisers, including some who are not required to register with the SEC.

Originality/value

The paper provides expert guidance from experienced financial services lawyers.

Details

Journal of Investment Compliance, vol. 11 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 23 November 2010

Anne Marie Godfrey, Thomas John Holton, Paul B. Raymond and Curtis Stefanak

The purpose of this paper is to to summarize Advisers Act registration implications for non‐US advisers that now rely on the “private adviser” exemption from Advisers Act

256

Abstract

Purpose

The purpose of this paper is to to summarize Advisers Act registration implications for non‐US advisers that now rely on the “private adviser” exemption from Advisers Act registration and to summarize the principal changes affecting investors in funds managed by non‐US advisers contained in the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010.

Design/methodology/approach

The paper explains the elimination of the “private adviser” exemption and the creation of the narrower “foreign private adviser” and other exemptions from Adviser Act registration, reporting and recordkeeping requirements relating to private funds; the Dodd‐Frank Act's provisions for information sharing by the SEC and the confidentiality of private fund information; the “Volcker Rule's” limitation of investment by banking entities and non‐bank financial companies in hedge funds and private equity funds; changes in the definition of “accredited investor”; and the future adjustment of the “qualified client” test for inflation.

Findings

The Dodd‐Frank Act will require many investment advisers and fund managers with their principal offices and places of business outside the USA to register with the SEC and to observe, with respect to US clients, the full spectrum of SEC regulations that apply to registered investment advisers. The Act will also impose new disclosure and recordkeeping requirements on many non‐US advisers.

Originality/value

The paper provides expert guidance from experienced financial services lawyers.

Details

Journal of Investment Compliance, vol. 11 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 January 2002

Terrance J. O’Malley and Kenneth E. Neikirk

Wrap fee programs are an increasingly popular product offered by broker‐dealers and investment managers to their clients. Wrap fee programs present unique issues under both the…

Abstract

Wrap fee programs are an increasingly popular product offered by broker‐dealers and investment managers to their clients. Wrap fee programs present unique issues under both the Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Advisers Act”), the two primary bodies of law that govern the product and those who offer and manage it. The regulations and rules under those Acts applicable to wrap fee programs and related interpretive statements made by the SEC staff, however, are wide ranging and have not been provided in a single format. This article attempts to present a comprehensive discussion on the regulation of wrap fee programs, as well as the many compliance issues associated with these programs. The article is delivered in two parts. Part I, presented in this issue, addresses the regulation of wrap fee programs under the Investment Company Act. Part I also begins a review of unique issues arising under the Advisers Act, including registration requirements for wrap fee sponsors and other persons who manage or offer the product to their clients, as well as required contents for wrap fee brochures and related disclosure issues. Part II, which will be presented in the next issue, will discuss additional Advisers Act issues such as suitability, fees and advertising. It also will briefly review issues arising under the Securities Exchange Act of 1934 (“Exchange Act”) and the Employee Retirement Income Security Act of 1974 (“ERISA”).

Details

Journal of Investment Compliance, vol. 3 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 October 2006

F. Scott Thomas and John C. Jaye

The article seeks to outline the requirements under the Investment Company Act of 1940 (the “Investment Company Act”), the Investment Advisers Act of 1940 (the “Advisers Act”) and…

430

Abstract

Purpose

The article seeks to outline the requirements under the Investment Company Act of 1940 (the “Investment Company Act”), the Investment Advisers Act of 1940 (the “Advisers Act”) and related US Securities and Exchange Commission (the “SEC”) rules and interpretive guidance for structuring performance‐based fees for investment advisers and sub‐advisers to registered investment companies (or mutual funds).

Design/methodology/approach

The article discusses the appropriate structure and timing for performance fees and describes in detail how SEC standards for structuring performance fees have evolved over time. The article explains recent SEC enforcement actions against investment advisers for improperly structured performance fees, and notes that the use of performance fees has once again become a focus of SEC scrutiny.

Findings

The article concludes that, despite a common perception that performance fees create an effective incentive to improve fund performance by more closely aligning the interests of the adviser and fund shareholders than traditional fee arrangements, there is minimal empirical evidence proving that the use of performance fees translates into superior fund performance. Investment advisers who charge performance fees to mutual fund clients should consider reevaluating the structure and payment process for the performance fees in light of recent SEC scrutiny and enforcement actions, adviser compliance obligations under Rule 206(4)‐7 of the Advisers Act, and fund compliance obligations under Rule 38a‐1 of the Investment Company Act.

Originality/value

The article provides a concise overview of the regulatory requirements for structuring performance fees charged by mutual fund advisers.

Details

Journal of Investment Compliance, vol. 7 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 April 2002

Terrance J. O’Malley and Kenneth E. Neikirk

Part I of this series appeared in the Summer 2002 issue of The Journal of Investment Compliance. It addressed the regulation of wrap fee programs under the Investment Company Act

Abstract

Part I of this series appeared in the Summer 2002 issue of The Journal of Investment Compliance. It addressed the regulation of wrap fee programs under the Investment Company Act of 1940 (“Investment Company Act”) and the requirements of Rule 3a‐4 thereunder, which must be met so that a wrap fee program is not deemed to be an investment company. Part I also discussed certain issues arising under the Investment Advisers Act of 1940 (“Advisers Act”), including how program sponsors and any third‐party portfolio managers generally are viewed as investment advisers and are subject to the Advisers Act. Part II discusses additional Advisers Act issues such as suitability, fees, and advertising. It also briefly reviews issues arising under the Securities Exchange Act of 1934 (“Exchange Act”) and the Employee Retirement Income Security Act of 1974 (“ERISA”). The information provided in Part II assumes that readers have some basic familiarity with Part I.

Details

Journal of Investment Compliance, vol. 3 no. 2
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 27 November 2007

Elizabeth Shea Fries and Jackson B.R. Galloway

The purpose of this paper is to analyze new SEC Rule 206(4)‐8 under the Investment Advisers Act of 1940 and discuss its practical implications.

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Abstract

Purpose

The purpose of this paper is to analyze new SEC Rule 206(4)‐8 under the Investment Advisers Act of 1940 and discuss its practical implications.

Design/methodology/approach

The paper describes the new rule, the types of advisers and funds to which the rule applies, examples of topics on which advisers might make statements that run afoul of the new rule, the application of the rule to both existing and potential investors, the application of the rule beyond statements made in the context of a securities transaction, and the application of the rule to any conduct that is fraudulent, deceptive, or manipulative, including negligent conduct. The paper explains that the scope of the new rule extends beyond Section 34(b) under the Investment Company Act of 1940, that the rule creates no new fiduciary duty, and that it creates no new private right of action against fund advisers.

Findings

The new rule signals that the SEC continues to focus intently on the fund activities of both registered and unregistered investment advisers, in particular with respect to their unregistered funds.

Practical implications

The new rule is an indicator of the SEC's enforcement intentions. Advisers should review their compliance programs, particularly as they relate to communication and other interaction with current and prospective fund investors, in light of the new rule.

Originality/value

The paper provides an helpful rule description and practical guidance from experienced securities lawyers.

Details

Journal of Investment Compliance, vol. 8 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 March 1997

Marybeth Sorady

For the foreign investment adviser wishing to do business in the USA, the regulatory climate has never been more propitious. This paper describes the recently restructured…

Abstract

For the foreign investment adviser wishing to do business in the USA, the regulatory climate has never been more propitious. This paper describes the recently restructured framework of federal and state law and regulation applicable to non‐US advisers that provide investment advisory services to US clients, whether from abroad or through a US subsidiary or affiliate. For those advisers that will register either themselves or subsidiaries or affiliates as investment advisers in the US, the paper first describes the requirements of the Investment Advisers Act of 1940 (Advisers Act), rules thereunder and significant interpretations and discusses the SEC's recent enforcement priorities. It then discusses the scope of and limitations imposed under recent interpretations permitting non‐US advisers that register in the USA to comply with US restrictions only in connection with their US clients. Finally, the paper discusses other legal and regulatory provisions that apply if the adviser offers interests in a pooled investment vehicle (ie an investment company) in the USA.

Details

Journal of Financial Regulation and Compliance, vol. 5 no. 3
Type: Research Article
ISSN: 1358-1988

Article
Publication date: 1 January 2004

Jedd Wider and Kevin Scanlan

On September 29, 2003, the staff (“Staff”) of the Division of Investment Management of the U.S. Securities and Exchange Commission (the “SEC”) issued a report to the SEC entitled…

Abstract

On September 29, 2003, the staff (“Staff”) of the Division of Investment Management of the U.S. Securities and Exchange Commission (the “SEC”) issued a report to the SEC entitled the “Implications of the Growth of Hedge Funds” (the “Report”). The Report recommends amending Rule 203(b)(3)‐1 of the Advisers Act to require a hedge fund manager to “look through” each existing client and count each of the hedge fund’s underlying beneficial owners as a “client” of the hedge fund manager for the purpose of determining whether an investment adviser has 15 or more clients and therefore must register under the U.S. Investment Advisers Act of 1940. Such a registration requirement effectively would increase the minimum investment requirement for a hedge fund. The Report does not necessarily support the argument that subjecting hedge funds to periodic examinations by the SEC will help in early detection of fraud and prevention of resulting investor losses. Despite the Staff’s intentions to identify distinctions between customary hedge fund vehicles and other types of investment funds, no clear hedge fund definition or standard was provided in the Report. As a result, there is a danger that the scope of new hedge fund regulations will be too broad

Details

Journal of Investment Compliance, vol. 4 no. 4
Type: Research Article
ISSN: 1528-5812

Keywords

Article
Publication date: 1 April 2004

David A. Goldstein and Bryan Kelly

On July 20, 2004, the Securities and Exchange Commission (SEC) published for comment proposed rules under the Investment Advisers Act of 1940 (the Act), which would require many…

Abstract

On July 20, 2004, the Securities and Exchange Commission (SEC) published for comment proposed rules under the Investment Advisers Act of 1940 (the Act), which would require many non‐U.S. hedge fund advisers to be registered with the SEC. The proposed rules would require non‐U.S. investment advisers to look through their hedge funds (U.S. and non‐U.S. funds) to count all U.S. investors therein as clients for purposes of the Section 203(b)(3) “private adviser” exemption. The SEC stated in the proposing release that it did not intend the proposed rules to change current policy of substantially limiting the extraterritorial application of the Act to dealings between a registered non‐U.S. investment adviser and its non‐U.S. clients. However, there remains some ambiguity as to the application of this policy, which has been developed over the past 12 years through a series of no‐action letters. In addition, notwithstanding the SEC’s statement in the proposing release, the proposed rules could be read as changing current SEC policy in a couple of respects. This article explains those issues.

Details

Journal of Investment Compliance, vol. 5 no. 2
Type: Research Article
ISSN: 1528-5812

Keywords

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