In the past year, the U.S. Securities Exchange Commission (SEC) and Chairman Jay Clayton have repeatedly cautioned the cryptocurrency and initial coin offering (ICO) industries about the securities law implications for digital assets. On February 6, 2018, in testimony before the Senate Banking Committee, Chairman Clayton notably asserted that “[e]very ICO I’ve seen is ‘a security.’”
We’re half way through 2018 and it’s been a busy six months in the regulatory space for asset managers. This briefing outlines a number of key developments at both domestic and EU level, regarding, regulatory returns, CP86, anti-money laundering, corporate governance, remuneration, depositaries and cross-border distribution of collective investment funds.
On 13 June 2018, the Financial Reporting Council (FRC) published a consultation on corporate governance principles for large private companies (the Principles) and supporting guidance. The Principles are a voluntary set of corporate governance principles for large private companies developed by the Coalition Group, an industry group chaired by James Wates CBE (of family-business, Wates Group) and constituted by representatives from the FRC and various industry bodies including the British Private Equity & Venture Capital Association, the Confederation of British Industry, the Institute of Directors and the Trades Union Congress.
The Council of Ministers' decision no. 2018/11662, published in the Official Gazette on 5 June 2018, paved the way for the Undersecretariat of Treasury ("Treasury") to invest in venture capital funds ("funds").
As technology removes physical borders from the securities industry, international financial institutions must remain vigilant to ensure their business activities do not violate US regulations.
The UK has a well-established suite of reliefs designed to incentivise equity investment in companies in the early stages of their existence. This article focuses on developments in these venture capital schemes, particularly the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust regime (VCTs) and recent trends and developments, with a particular focus on the changes introduced in the Finance Act 2018.
The Federal tax legislation enacted in December 2017 contained many changes that affect high net worth families and their investment and business activities. One change was to prohibit an individual’s deduction for miscellaneous itemised deductions that we have discussed in a prior article . Brief recap: miscellaneous itemised deductions consist of a hodgepodge of unrelated itemised deductions.
On May 24, following passage in both the House and Senate earlier this year, President Trump signed into law a financial services reform bill relaxing certain elements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). The bill, titled the “Economic Growth, Regulatory Relief, and Consumer Protection Act" (the “Act”), limits the application of various provisions of Dodd-Frank to small and mid-sized banks and raises asset thresholds above which larger banks are subject to increased oversight and regulation. The Act also amends certain other provisions of the federal securities laws. Unlike earlier proposed legislation seeking a comprehensive re-working of Dodd-Frank, such as the Financial CHOICE Act (see memorandum on the proposed legislation here), the Act preserves the basic structure of Dodd-Frank while making various targeted adjustments.
On May 30, 2018, the Federal Reserve Board issued a notice of proposed rulemaking and asked for comment on a proposed rule to simplify and tailor compliance requirements relating to the regulation implementing section 13 (commonly known as the “Volcker Rule”) of the Bank Holding Company Act (“BHC Act”) (the “Proposal”). The Proposal was developed jointly with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (together, the “Agencies”).
Launching a cryptocurrency typically involves an initial fundraising process followed by a public sale process, by way of initial coin offering or token sale (“ICO”). In addition to providing the means to the issuer to pursue initial development, offset development costs and fund future projects, an ICO allows a large pool of interested parties to buy (and subsequently trade) the new cryptocurrency. Creation of a diversified and sufficiently large pool of cryptocurrency holders is key to creating an interest and market for the newly launched cryptocurrency. However, in order to reach the ICO, pre-ICO fundraising may also be required. This is where proceeds of pre-ICO fundraising will be used to pay for the final development steps and for it to operate successfully on a cryptocurrency exchange. Pre-ICO fundraising should also help ascertain (and generate) interest prior to the ICO.
Recent federal tax legislation introduced "Opportunity Zones," a new community reinvestment tool designed to use tax incentives to drive long-term investment to rural and low-income urban communities throughout the nation. The Opportunity Zone program is the first new national community investment program in over 15 years and has the potential to be the largest economic development program in the U.S. This broad legislation will benefit many stakeholders from individual taxpayers to developers and fund sponsors.
The Office of Foreign Assets Control recently designated 7 “oligarchs,” 17 government officials, 13 companies, and one bank, all Russian, as Specially Designated Nationals (SDNs), effectively prohibiting US persons (individuals and entities) from any dealings with these SDNs, as well as with entities with 50% or more SDN ownership. Fund investors should be proactive in identifying holdings in blocked entities to avoid inadvertently ending up with interests in blocked assets and the accompanying reporting requirements.
The latest proposals are designed to "ensure fund managers compete on the value they deliver" and act in the interests of investors (see our thought leadership piece).
The Bank of Uganda recently released the Financial Institutions (Islamic Banking) Regulations (the “Regulations”), which were gazetted on 2 February 2018. The Regulations seek to operationalise Islamic banking in the country, which was introduced by The Financial Institutions (Amendment) Act, 2016 as part of its wider efforts to boost financial inclusion. With this development, Uganda joins several African countries that have sought to develop the sector to expand financial access and inclusion among rural communities.
Ten years ago, private equity funds and hedge funds were practically nonexistent in Puerto Rico. This has changed dramatically as the result of two main developments: the enactment of Act 185-2014, known as the Private Equity Funds Act and (ii) the influx of financial industry professionals moving to the island to take advantage of the tax benefits available under Acts 20 and 22 (for a more detailed discussion of those benefits, please see Puerto Rico's Act 20 and Act 22 – key tax benefits).
This alert highlights important changes to the regulatory and compliance regime for the Cayman Islands investment funds industry in 2018
On March 1, 2018, the Administrative Measures for Outbound Investments by Enterprises (??????????) (“Circular 11”) issued by the National Development and Reform Commission (the “NDRC”) went into effect. In addition to regulating direct outbound investments by Chinese companies in general, Circular 11 introduces a new regulatory framework administered by the NDRC governing Chinese companies’ sponsorship of, and investment in, offshore private equity investment funds.
This tax brief discusses those aspects of the US tax reform which have most relevance to Australian corporate and international taxation, both from a tax policy perspective and for inbound and outbound investment to and from the US.
On December 15, 2017, a Conference Committee established by the House of Representatives and the Senate released a unified agreement on the “Tax Cuts and Jobs Act” (the “Conference Agreement”) in the wake of the passages of the House version of the Tax Cuts and Jobs Act on November 16, 2017, and the Senate version on December 2, 2017.
The Tax Cuts and Jobs Act (the New Tax Law), signed into law in late December by President Donald Trump, makes major permanent and temporary changes to the US federal tax system. The changes will have a significant impact on the structuring of US and foreign investments.
Financial Services Commission (FSC) recently announced proposed changes to regulations regarding asset management businesses and called for industry feedback. A number of the proposed changes include items that will be of interest to foreign asset managers. The updated regulations are expected to be finalised and take effect around November this year.<br />
Although the following would not necessarily reflect the forthcoming amended regulations, the items discussed will provide insights to the direction in which Korean fund regulations are heading. This discussion should provide valuable lead time to strategise your future business opportunities in Korea.
The Council of the EU formally adopted the Securities Financing Transactions Regulation (SFTR) on 16 November 2015, which will form part of the EU’s package of legislation targeted at reforming shadow banking and aims to improve transparency in the securities financing transactions (SFT) market. The SFTR is expected to be published in the Official Journal of the EU shortly and will enter into force 20 days after its publication. Set out below is an outline of the SFTR’s scope, its requirements and the dates by which those requirements are to take effect.
The China Insurance Regulatory Commission (CIRC) recently issued new regulations that relax restrictions on the investment of insurance proceeds by allowing insurance capital to be used for the formation of private equity funds within the PRC. The Circular of the China Insurance Regulatory Commission on Matters relating to the Formation of Insurance Private Equity Funds (the Circular) was released on 10 September 2015 and aims to further enhance the unique advantages of the long-term investment of insurance funds, support economic development and prevent potential risks. The Circular sets out the categories, investment objectives, governance structure, management and operation and registration and regulation of private equity funds formed by insurance capital (insurance PE funds).
On July 23, 2015, the Internal Revenue Service (IRS) issued long-awaited proposed regulations discussing the taxation of management fee arrangements commonly used by private equity funds and their management. The proposed regulations address the tax treatment of disguised payments for services under Section 707(a)(2)(A) of the Internal Revenue Code (the Code) where a partner has rendered services to a partnership in a capacity as other than a partner. By specifically classifying certain fee arrangements, including particular carried interest mechanisms, as disguised payments for services, the proposed regulations target purportedly abusive situations where private equity funds use management fee waivers to convert services income, taxable at the ordinary rates, into income items meriting capital gain treatment.
There has recently been a wave of global regulatory reforms which affect fundraising. These changes are far-reaching and can impact how fund managers structure funds, their proposed investor base, how and where funds are marketed, the remuneration that may be received, registrations that may be required and dealings with investors.
In new guidance published on 1 June 2015 the AIM Regulation team has clarified its approach to the free float requirement for AIM companies and reminded nominated advisers of the steps they are expected to take to ensure that a company seeking to join AIM has proper policies and procedures in place to enable it to comply with its financial reporting and other obligations under the AIM Rules.
Six things every investor, start-up, financial institution and payment processor should know about the future regulation of Bitcoin and other cryptocurrency derivatives. This article considers the current U.S. derivatives regulatory regime of the CFTC and its applicability to Bitcoin, other cryptocurrencies, and the blockchain protocol. We also discuss practical considerations for those entering the market and what future CFTC regulation of cryptocurrency derivatives and blockchain technology may look like.
Last year at about this time in December, we were still working our way through the final Volcker Rule. A year has passed and we are still attempting to understand the exceptions that may be available in connection with hedging of exposures arising in connection with the issuance of structured products. We anticipate that there will be additional regulatory guidance on the Volcker Rule. In fact, in their public statements, Federal Reserve representatives have alluded to possible changes relating to the metrics and compliance policy requirements.
A new exemption from the requirements of Jersey’s Financial Services (Jersey) Law 1998 (FS(J)L) has been introduced which will enable Jersey-regulated fund managers to service qualifying segregated managed accounts (QSMAs) without the need for further regulation in Jersey while continuing to benefit from Jersey’s 0% corporate income tax rate.
“It is difficult to overstate how much the regulatory landscape for hedge fund managers has changed over the past four years.” So said Norm Champ, director of the Securities and Exchange Commission’s Division of Investment Management, in a recent speech wherein he outlined how the SEC has built on its newfound authority to regulate private fund advisers, including by taking advantage of its increased access to information and new analytical tools. As we’ve previously discussed in this newsletter, since Dodd-Frank, most investment advisers to private funds, such as hedge funds, now have to register with the SEC, thus subjecting them to SEC oversight and regulatory requirements.
On August 21, 2014, China Securities Regulatory Commission (CSRC), the Chinese securities regulator, promulgated the Interim Regulations on the Supervision and Administration of Private Investment Funds (the CSRC Regulations). These new regulations became effective on the same date.
It’s probably fair to speculate that there were significant numbers of tax aficionados (including the author of this article) among the audience for Ken Burns’ recent public television extravaganza on the Roosevelt dynasty. Unfortunately for this segment of the audience, the intersection of tax and FDR was not highlighted, with the passage of the Social Security Act receiving only scant mention. Social security taxes have risen dramatically since the enactment of the law.
In a recent speech to the Practising Law Institute’s Private Equity Forum, Norm Champ, Director of the SEC’s Division of Investment Management, discussed the SEC’s increasing attention to the growth in ‘alternative mutual funds’, or open-end mutual funds that feature investment strategies more typically seen in private funds. Similar to recent speeches and discussions related to the SEC’s oversight of hedge funds, previously discussed in this newsletter last November, Champ’s speech contained useful guidance about the types of risks the SEC is monitoring in the alternative mutual fund space, but it also conveyed that the SEC will be ramping up inspection into whether investment advisers to these funds are fully complying with their duties.
The rules governing the asset management of Swiss pension funds, including the use of derivative instruments, are set out in the Federal Act on Occupational Benefit Plans and the Federal Ordinance on Occupational Benefit Plans. Further, the Federal Social Insurance Office, as the federal supervisory authority of pension funds, published professional recommendations for the use of derivative financial instruments (October 15 1996).
Over the last few years, we all have become fairly adept at expecting and addressing the unexpected; however, it still remains useful at year-end to consider what’s on the horizon. Here are our thoughts on what to expect in the structured products area in 2014.
Canada, in keeping with the rest of the world, has seen unprecedented change in the regulation of the financial markets over the past five years – not only in scope and detail, but also in speed of implementation. At the same time, regulators have stepped up their oversight with both broad-based and targeted compliance audits, resulting in the need for financial services participants to place an increasing focus on compliance.
On August 12, 2013, the Commodity Futures Trading Commission (the “Commission” or “CFTC”) issued final rules (the “Final Rules”) with respect to certain compliance obligations for commodity pool operators (“CPOs”) of investment companies registered under the Investment Company Act of 1940 (the “Investment Company Act”) that are required to register with the CFTC due to the recent amendments to section 4.5 of the regulations under the Commodity Exchange Act (the “Regulations”).
The European Securities and Markets Authority (ESMA)'s consolidated Guidelines on ETFs and other UCITS issues (Guidelines) entered into force on 18 February 2013. On the same day, the Commission de Surveillance du Secteur Financier (CSSF) published its Circular 13/559 incorporating the Guidelines into its supervisory practice. In addition, ESMA published Questions and Answers (Q&A) om 15 March 2013 (updated on 11 July 2013) on the practical application of the Guidelines.
The hedge fund landscape changed dramatically in 2008 with assets under management in severe decline, the imposition of redemption gates, NAV suspensions and general restrictions on investor withdrawals being imposed on a scale that was previously unseen. As Lord Turner, Chairman of the UK Financial Services Regulatory Authority, noted, although specific national banking crises in the past have been more severe, none have had the global impact of the 2008 financial crisis.
New clearing, risk mitigation, and reporting obligations imposed on certain derivative contracts.
On 15 March, the first six implementing measures of the European Market Infrastructure Regulation (EMIR) entered into force, marking the beginning of the gradual implementation of EMIR over the next two years. EMIR applies widely to both financial and nonfinancial counterparties to derivative contracts, including energy derivatives. In particular, new clearing and risk mitigation requirements for uncleared trades will apply to over-the-counter (OTC) derivative contracts, and a new reporting requirement will apply to both OTC and exchange-based derivative contracts. Some of these requirements are already in force.
As a new ‘regulation light’ fund manager regime is launched in the British Virgin Islands, eligible fund managers can now count on a simpler application process. Philip Graham of Harneys provides an update.
This edition of our update on the pan-European short selling Regulation focuses on the implications of the Regulation for market participants in the United States (US). In particular, we focus on market participants whose trading activities are conducted in the US in financial instruments that have a nexus with the European Union (EU), such as a parallel EU listing of a financial instrument or an EU listing of the underlying financial instrument. Such activities, which may subject the market participant not only to the US short selling regime, but also to the Regulation,3 include short sales of (i) certain American Depositary Receipts (ADRs) of EU-listed issuers, and (ii) dual listed securities of issuers that are concurrently listed on one of the EU and US trading venues.
As previously described in our Client Alert on the pan-European short selling regulation, the European Commission (the Commission) adopted a proposal on September 15, 2010 to harmonise the regulation of short sales and credit default swaps across the European Union. On March 14, 2012, the European Parliament and the Council of the European Union (the Council) each voted to adopt the proposed regulation, after including a number of significant amendments (the Regulation).
The capital markets are heating up, and as a result we are seeing increased interest in raising private capital for early-stage and private equity transactions. Because the private capital market is so inefficient, the use of ‘finders’ to secure capital is increasing.
Hedge funds are increasingly subject to international and local data protection regulations. The amount of personal data held by hedge funds and service providers continues to grow. As obligations to collect data increases with new regulations such as the U.S. Foreign Account Tax Compliance Act (FATCA), hedge fund managers and other service providers must pay attention to data protection laws and regulations.
Following recent trends in the world’s advanced economies for increased regulation of alternative investment funds (AIFs), on May 21, 2012, the Securities and Exchange Board of India (SEBI) issued the SEBI (Alternative Investment Funds) Regulations, 2012 (the “AIF Regulations”) to provide a comprehensive framework for the regulation of AIFs in India. SEBI seems to have adopted many of the suggestions and comments it received from stakeholders when it released a draft of the AIF Regulations back in August 2011.
In early April 2012, President Obama signed into law two separate acts that will have a profound effect on hedge funds. The implications of these two new laws, the JOBS Act and the STOCK Act, are discussed below.
The JOBS Act: allows advertising in hedge fund offerings and increases the permitted number of investors in certain funds
In the blizzard of increased regulation from the United States and European Union, in particular the Dodd Frank Wall Street Reform and Consumer Protection Act and the Alternative Investment Fund Managers Directive (AIFMD), Asia’s two competing international financial centres – Hong Kong and Singapore, have traditionally taken different approaches to the further regulation of hedge fund managers. In the former, since the enactment of the Securities and Futures Ordinance (SFO) in 2003, no exempt status has been available. In the latter, there has long been an exemption for hedge fund managers. In the Special Administrative Region, since the global financial crisis the licensing regime has remained unchanged while in the ‘Lion City’ the regulatory regime is undergoing fundamental reform
Siripen Kaodara and Stephen Jaggs discuss the Thai laws that have brought advancement in the country’s Islamic finance industry.
Thailand has a Muslim population of approximately nine million and an Islamic banking system which dates back to 1998. However, it previously lacked the necessary legal infrastructure for high profile Islamic products such as sukuk. Today, Thailand has advanced a few further steps into the growing Islamic finance market by developing its laws.
The U.S. House of Representatives (lower house) passed late last year House Resolution 2420 (Mutual Funds Integrity and Fee Transparency Act) which would require a study on soft dollars and ban managers from jointly running mutual and hedge funds. A similar bill, Senate 1971 (Mutual Fund Investor Confidence Restoration Act), has been introduced in the U.S. Senate (upper house). The Senate bill would also ban the joint management of mutual and hedge funds. Besides the management ban and soft dollar regulation, both bills are more focused on the mutual fund industry than regulating hedge funds.