Laura M. Brank
London +44 20 7184 7870
Washington, D.C. +1 202 261 3484
A review of recent developments in the international financial services industry, including:
European Fund Regulation – Just Like London Buses?
It is often said that you wait a considerable amount of time for a London bus to arrive, and then three turn up at once. If they are all going in the same direction, then (barring a breakdown) your choice should be relatively easy – but what if the route is a mysterious acronym that could set you down a path that might not get you to your destination, or only get you there in a roundabout way? Until very recently – UCITS apart – it was left to individual EU member states to determine whether and how alternative investment funds were regulated and marketed. 22 July 2013 saw not just one new regime come into force – the AIFMD – but two additional, lesser-known regimes that certain investment managers may want to consider using. So what is behind those other two acronyms, EuVECA and EuSEF, when compared with the better-known AIFMD?
U.S. Private Offerings: SEC Approves JOBS Act Requirement to Permit General Solicitation and Dodd-Frank Requirement to Disqualify “Bad Actors” from Using Rule 506 to Offer Securities
The SEC has amended Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to (1) permit, in certain circumstances, an issuer to engage in general solicitation and general advertising in connection with Rule 506 and Rule 144A offerings and (2) disqualify securities offerings involving certain “felons” and other “bad actors” from relying on Rule 506 of Regulation D, whether or not the issuer is relying on the new general solicitation rules. These rules took effect on September 23, 2013. The SEC also has proposed rules that are intended to enhance the SEC’s ability to monitor how the general solicitation rules will affect the private offering market and to provide additional investor protection safeguards.
The Long Arm of U.S. OTC Derivatives Reform and Non-U.S. Fund Managers
Dodd-Frank upended the status quo of the global OTC derivatives markets, imposing a host of clearing, margin and other requirements on market participants. But as these reforms began to take effect in the United States in the second quarter of 2013, managers of non-U.S. funds were still waiting for the answer to a key question: how would these requirements apply outside of the United States? Because funds that are “U.S. persons” will be subject to nearly the full weight of Dodd-Frank’s OTC reforms, the answer turns on how both the U.S. CFTC and SEC define “U.S. Person.” But the two regulators took very different approaches to this task. Crucially for non-U.S. managers, these definitions are not the same.
European Long-Term Investment Funds (ELTIFs)
The European Commission published its draft proposal of a regulation regarding European long-term investment funds on June 26, 2013, heralding the creation of a new type of fund with a long-term investment horizon. The ELTIF regime is intended to address specific needs of investors (such as insurance companies and pension funds) that commonly invest on a long-term basis. By permitting the marketing of ELTIFs to retail, as well as institutional, investors, the draft proposal offers retail investors the opportunity to gain exposure to long-term capital appreciation. The creation of ELTIFs aims to strengthen Europe’s “real” economy.
French AMF Guidance on Best Practices Regarding Rebates and Inducements in the Marketing of Financial Instruments
Pursuant to the market practice in France, distributors – such as investment service providers or financial advisors – are not paid directly by investors but rather receive a rebate or inducements from the issuer of the financial instrument. This practice raises potential conflict of interest issues and, in an effort to deal with this potential conflict, the Autorité des Marchés Financiers issued a set of rules regarding transparency requirements for remuneration, rebates and inducements in the course of the marketing of financial instruments Following a public consultation by the AMF in 2012 regarding the application of the remuneration rules, the AMF issued a position and recommendation paper on 10 July 2013 with a view to providing guidance and to address practices that the AMF deemed non-compliant with the remuneration rules.
U.S. SEC’s Proposal to Amend Rules Governing Money Market Funds: Implications for Boards
The SEC has proposed sweeping amendments to Rule 2a-7 under the Investment Company Act of 1940 and other rules relating to money market funds. The proposal included two main alternatives, to be adopted separately or in combination: (1) requiring “institutional money funds” to operate with a floating net asset value, rounded to the fourth decimal place, and/or (2) requiring money funds (other than government money funds) to impose a two percent liquidity fee during times of stress and allowing them temporarily to suspend redemptions using “redemption gates” during such times. If adopted, the proposal would greatly impact the money fund industry and have significant implications for a money fund’s board of directors/trustees.
Recent Developments in the Hong Kong Funds Industry
The Hong Kong Government has been keen to demonstrate its willingness to evolve and focus its efforts on the overall growth of the Hong Kong financial services industry. Recent proposals to make fund-friendly changes to Hong Kong’s trusts, corporate and tax rules, as well as the introduction of the mutual recognition of Hong Kong and Chinese funds, serve as examples of the push towards raising Hong Kong’s profile in the global asset management industry.
A New Private Funds Regulatory Framework for the PRC
For years, the Chinese private fund industry has operated in regulatory limbo, but a recent series of legislative and regulatory actions should provide greater certainty and help create a more favorable environment for the incipient hedge fund industry in the People’s Republic of China. These changes apply only with respect to domestic PRC private funds, although non-PRC private fund managers may wish to bear them in mind as they seek to access China’s burgeoning investor base.
Russian Financial Regulator Announces the First Case Involving Insider Trading
The Federal Service for Financial Markets (FSFM) on July 1, 2013 announced that it had opened its first investigation into a potential violation of the Insider Trading Law, which had entered into force in June 2010. Later that month, President Vladimir Putin signed the Order “On Dismissing of FSFM”, effectively transferring all of the authorities of the FSFM to the Central Bank of Russia (CBR), beginning on September 1, 2013. This case should provide a valuable insight and a potentially powerful precedent with respect to how the CBR will investigate insider trading, especially since there was no legal framework for doing so prior to the passage of the Insider Trading Law.
AIFMD Resources: Cutting Through the Noise
Dechert has established a new web page that provides tools for navigating the EU Alternative Investment Fund Managers Directive (AIFMD), including reference guides, legal updates and video briefings. AIFMD is the most significant EU regulation of the alternative investment funds industry in recent times. AIFMD will affect a wide range of asset managers, not just traditional hedge and private equity managers, whether they are based within or outside the EU.