Archive for the ‘ Securities Regulation ’ Category

Hedge Funds – A New Era of Transparency

Hedge funds play a critical role in capital formation, and are increasingly influential participants in the capital markets.  The hedge fund industry is transitioning from a secretive industry to a widely-recognized and influential group of investment managers.

Mary Jo White’s speech at the Managed Funds Association Conference on October 18, 2013 underscores the transformation of the hedge fund industry and highlights the important changes in the regulatory landscape pertaining to the hedge fund industry. I had previously commented on this here.

The changes introduced by the Dodd-Frank Act and the JOBS Act may be described as tectonic shifts for the hedge fund industry.  The Dodd-Frank Act required most advisers to hedge funds and other private funds to register with the SEC and directed the SEC to collect information, on a confidential basis, from private fund advisers regarding the risk-profiles of their funds. See further on the Effects of the Dodd-Frank Act on the Hedge Fund Industry here.

Similarly, the JOBS Act, directed the SEC to lift the decades-old ban on general solicitation that applied when companies or funds make private securities offerings under Rule 506 of Regulation D.  As a result, as of September 23, 2013, hedge fund managers are free to communicate with investors and the public. They can advertise, talk to reporters, and speak at conferences.  See further on Lifting the Ban on General Solicitation  here.

Mary Jo emphasizes in her speech: “Our knowledge of the markets and understanding of your businesses is also enhanced when [private fund managers] provide us with non-public data on [private] funds’ risk profiles, which is required by new Form PF mandated by the Dodd-Frank Act. Form PF provides information on the types of assets [private fund managers] are holding to help to inform government regulators tasked with monitoring systemic risk. Using this information, regulators can then assess trends over time and identify risks as they are emerging, rather than reacting to them after they unfold [. . . ] This era of hedge fund transparency is also new for [the SEC]. We need to continuously ensure that we – as regulators – are asking for the right information, in the most appropriate way.”

The effects of the new era of hedge fund transparency are still largely unclear and will continue to motivate and dominate my work. There is some anecdotal evidence that the SEC may be struggling to ask “for the right information, in the most appropriate way.”  Several previous articles and three works in progress, including a forthcoming survey study on Form PF, evaluate if the SEC’s evaluation of systemic risk data in Form PF can facilitate regulators’ assessment of: “trends over time and identify risks as they are emerging.”  Another work in progress evaluates the effects of new Rule 506 (c) on the hedge fund industry.

Advertisements

HEDGE FUND REGULATION SYMPOSIUM


UNIVERSITY OF MINNESOTA LAW SCHOOL CORPORATE INSTITUTE

HEDGE FUND REGULATION SYMPOSIUM

Tuesday, November 5, at 3:15-5:15PM (Reception to follow)

University of Minnesota Law School Room 25

Applied for CLE Credits – 2 hours (No charge)

RSVP to melloh@umn.edu

 

US hedge fund regulation under the Dodd-Frank Act of 2010…European hedge fund regulation…legal and illegal use of nonpublic information for securities trading

PANELISTS: 

Tim O’Brien, General Counsel and Chief Compliance Officer, Pine River Capital Management L.P.

Richard W. Painter, S. Walter Richey Professor of Corporate Law, University of Minnesota Law School

Wulf A. Kaal, Associate Professor of Law, University of St. Thomas School of Law

AGENDA:

Panel 1:   Legal and Illegal Use of Nonpublic Information in Securities Trading

Not all trading on the basis of nonpublic information is illegal, but trading on the basis of misappropriated information is illegal in the US; so is trading on the basis of most nonpublic information about tender offers. Other countries have different approaches to insider trading laws and enforcement, and it can sometimes be confusing to determine which jurisdiction’s laws apply. Governments, international organizations and other entities sometimes selectively disclose nonpublic information to investors and in many, but not all instances, investors can legally take advantage of this information.  This panel will explore the difference between legal and illegal trading on nonpublic information as well as situations where the legality of trading is debatable. The panel will also discuss use by investors of expert networks and other consulting firms.

Panel 2:  Hedge Fund Regulation in US and Europe – Recent Developments and Projections   Both the US and Europe responded to the financial crisis of 2008 with extensive new regulation of investment funds and investment advisors, including many hedge funds.  This panel will discuss the impact of regulations adopted in the US pursuant to the Dodd-Frank Act of 2010.  The panel will also discuss developments under the European Union directive regulating alternative investment funds (“AIFs”) that was adopted in June 2011, supplemented in December 2012 by Level 2 implementing regulations, and further supplemented in February 2013 under Guidelines published by the European Securities and Markets Authority.

All three panelists will participate in both panels.  There will be a roundtable discussion format and participation by the audience will be strongly encouraged.

PANELIST BIOGRAPHIES:

Tim O’Brien is General Counsel and Chief Compliance Officer for Pine River Capital Management LLP in Minneapolis.  He is responsible for the legal and compliance functions at Pine River. Prior to joining Pine River in 2007, he served as Vice President and General Counsel of NRG Energy, Inc. from 2004 until 2006. He served as Deputy General Counsel of NRG Energy from 2000 to 2004 and Assistant General Counsel from 1996 to 2000. Prior to joining NRG, he was an associate at Sheppard Mullin in Los Angeles and San Diego, California. He received a BA in History from Princeton University in 1981 and a JD from the University of Minnesota Law School in 1986. Tim was admitted to the Pine River partnership in 2010.

Pine River Capital Management L.P. was founded in early 2002.  The firm was originally located in Pine River, Minnesota, and moved to Minneapolis in 2003 and then to Minnetonka in 2007.   Pine River opened research and trading offices in London in 2004, Hong Kong in 2007, San Francisco and New York in 2008, and Austin in early 2013. In the summer of 2010, Pine River opened a research office in Beijing and in 2012 the firm opened a research office in Shenzhen. The Minnetonka office remains its headquarters.

Pine River Capital Management L.P. became registered as a Commodity Pool Operator and a Commodity Trading Advisor with the US National Futures Association in May 2002. Pine River Capital Management (UK) Limited became authorized by the Financial Conduct Authority to manage investments in the UK in January 2004. Pine River Capital Management L.P. became registered as an investment advisor with the US Securities and Exchange Commission in January 2006. Pine River Capital Management (HK) Limited became licensed by the Securities and Futures Commission to manage assets in Hong Kong in March 2007. Pine River Capital Management L.P. became registered as a Foreign Institutional Investor in India in February 2008.

Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School.   He has published extensively on financial services regulation, investment banking, insider trading and selective disclosure of nonpublic government information to hedge funds and other investors.

From February 2005 to July 2007, he was Associate Counsel to the President in the White House Counsel’s office, serving as the chief ethics lawyer for the President, White House employees and senior nominees to Senate-confirmed positions in the Executive Branch.  In 2002, he was instrumental in assuring passage of a key provision of the Sarbanes-Oxley Act requiring the SEC to issue rules of professional responsibility for securities lawyers that was based on earlier proposals he had made in law review articles and to the SEC.  Professor Painter has on five separate occasions provided invited testimony before committees of the U.S. House of Representatives or the U.S. Senate on securities litigation and/or the role of attorneys in corporate governance. He also testified as a defense witness in SEC. v. The Reserve Money Market Fund (SDNY, November 2012), a jury trial of an SEC enforcement action against the founders of the world’s oldest money market fund that ended with a defense verdict on all of the fraud counts.

Professor Painter received his B.A. from Harvard University and his J.D. from Yale University. Following law school, he clerked for Judge John T. Noonan Jr., of the United States Court of Appeals for the Ninth Circuit and later practiced at Sullivan & Cromwell in New York City and Finn Dixon & Herling in Stamford, Connecticut.

Wulf A. Kaal is a tenured associate professor of law at the University of St. Thomas School of Law.  He is a leading expert on hedge fund regulation in the United States and the European Union. He uses empirical methods to investigate the effects of financial regulation and the strategic behavior of private fund advisers. His theoretical research focuses on the use of finance and economic theory to analyze and inform financial and regulatory policy.

He has published more than two dozen articles in the United States and Europe. His study on the effects of hedge fund registration requirements under the Dodd-Frank Act has gained national attention and was covered in a Business Week article and in other journals.  He is the author of a book chapter on Investment Advisers in the Research Handbook on Corporate Law and Governance, published by Edward Elgar.

Before entering law teaching, Kaal was associated with Cravath, Swaine & Moore LLP in New York and Goldman Sachs in London.  He has published more than two dozen articles in the United States and Europe. He has also been a consultant to major corporations and hedge funds regarding various aspects of financial markets and regulation.  He received his Ph.d from the Humboldt University in Berlin, Germany, his M.B.A from Durham University in the United Kingdom, and his J.D. from the University of Illinois.

 

Hedge Fund Performance after the Dodd-Frank Act – Presentation at the Midwestern Law & Economics Association

Paper presentation at 9:00 AM on Friday, October 11 at the University of Illinois in Champaign Urbana – Presentation at the Midwestern Law & Economics Association.

Hedge Fund Performance After the Dodd-Frank Act – A Regression Discontinuity Analysis 

by

 Wulf A. Kaal (UST Minneapolis)*

Barbara Luppi (Modena Italy)*

Sandra Paterlini (EBS Germany)*

Abstract

Title IV of the Dodd-Frank Act introduced the most significant regulatory change in the history of the hedge fund industry in the United States, boosting the permissible regulatory oversight of the hedge fund industry to an unprecedented level. Title IV and SEC implementation rules introduced a registration requirement for hedge fund managers and increased the disclosure requirements pertaining to confidential and proprietary information.  We study the impact of Title IV of the Dodd-Frank Act and the SEC’s implementation of these requirements on hedge fund performance by applying the Imbens and Lemieux (2008) methodology to a regression discontinuity design in the context of hedge fund performance. This approach has not previously been applied in this context.

Contrary to the hedge fund industry’s claims that increased supervision and disclosure would affect their profitability, we find statistical evidence of a positive effect of the requirements introduced by the Dodd-Frank Act on hedge fund performance. In particular, we find that: 1) the registration requirement for hedge fund advisers under the Dodd-Frank Act creates a discontinuity in hedge fund returns in March 2012. However, this effect is not persistent and is completely absorbed in the months following the registration effective date for private fund advisers under the Dodd-Frank Act; 2) strategic actions by fund advisers lead to a strong increase in the discontinuity around the AUM registration threshold. The effect is also absorbed in later months of the sample.

Our results are consistent with prior studies and we believe this preliminary analysis can provide policy makers with an important first impression of the possible implications of Title IV.

 

Presenting on “Hedge Fund Compliance Cost” at Canadian Law & Economics Association in Toronto

Presentation at the Canadian Law and Economics Association annual meeting  on September 29, 2013 in Toronto:  

The Impact of Compliance Cost of Financial Regulation ­- Evidence from

the Private Fund Industry

by

Wulf A. Kaal

Abstract 

A common complaint about financial regulation is that it predominantly affects smaller firms because the cost of compliance brings increasing returns to scale. Many studies have shown that an inverse relationship exists between the size of regulated firms and the per-unit cost of compliance.Anecdotal evidence suggests that Title IV of the Dodd-Frank Act, mandating hedge fund adviser registration and increased disclosures, affects mostly smaller hedge fund advisers. To estimate the effect of Title IV on smaller hedge fund advisers, this study evaluates survey data collected after the registration effective date for hedge fund advisers under Title IV.

The author finds no evidence of an inverse relationship between the size of regulated hedge fund advisers and the per-unit cost of compliance.The size of hedge fund advisers as measured by assets under management (AUM) is associated with the cost of Title IV compliance and other independent variables. These findings are inconsistent with the hypothesis that the cost of financial regulation affects smaller firms more than larger firms. Adviser size may not matter as much for policy adjustments and SEC rule making as the hedge fund industry claimed.

 

The Hedge Fund Industry after the Lift of the Ban on General Solicitation

The SEC yesterday approved final rules implementing one of the most important changes to securities regulation and offering practices in decades, as mandated by Congress in the Jumpstart Our Business Startups (“JOBS”) Act: to lift the ban on general solicitation or advertising in offerings to accredited investors that are exempt from registration under Rule 506 of Regulation D under the Securities Act of 1933. The implications of this rule change for the private fund industry could be substantial. However, readers who are expecting to see Beyoncé laud XYZ fund’s risk-adjusted returns in TV-ads, on busses etc. are likely to be disappointed. Private funds are still bound by an existing ban on using celebrity endorsements and other gimmicks to sell financial products.

Although the SEC lifted the ban on general solicitation, it appears to desire a counterbalancing of possible effects in the private fund industry. The SEC approved for publication a series of proposed rules to enhance its ability to monitor offerings in the aftermath of these unprecedented rule changes. The proposed amendments to the private offering rules are designed to reduce the risk of fraud and would require issuers to notify the SEC fifteen days before any offering and provide information on the use of proceeds and the type of general solicitation used.

It will take some time until private fund advisers and their attorneys understand exactly how the combination of new rules works, and it will be interesting to see if the enhanced anti fraud requirements will indeed discourage private fund managers from using general solicitations. Given this significant discontinuity, it will be fun to evaluate the effects of the new sets of rules.

Continue reading

Lifting the Ban on General Solicitation for Private Funds

I previously commented on the bright future for the hedge fund industry. More good news for the industry it seems: private funds could find the ban on general solicitation lifted very soon under SEC rules implementing the provisions of the JOBS Act. Europe’s pending new AIFM regime for alternative investments is stricter but still has lots of loopholes.
Long consigned to silence, hedge fund advisers are starting to practise their sales pitches. Private funds piggybacked on the JOBS Act reforms in the hope of widening the pool of investors they can pitch to. The SEC is busy writing the rules that would put the bill into practice. That process has been bedevilled by delays but it seems inevitable it will overturn the Depression-era ban on “general solicitation”.

The Effect of the Dodd-Frank Act on the Hedge Fund Industry

Presenting initial findings of this study on June 14th 

at the

 2013 Junior Scholars Workshop on Financial Services Law at the University of Connecticut School of Law 

Here is the tentative abstract:

Creating a paradigm shift for private fund regulation in the United States, Title IV of the Dodd-Frank Act mandates hedge fund adviser registration and increased disclosures. Anecdotal evidence suggests that Title IV disproportionally affects smaller hedge fund advisers, leading to barriers to entry for startups and consolidation of the hedge fund industry. To estimate the effect of Title IV, this study evaluates survey data collected after the registration effective date for hedge fund advisers under Title IV. The author finds that the size of hedge fund advisers as measured by assets under management is associated with the cost of Title IV compliance and other independent variables. These findings are inconsistent with the hypothesis that smaller hedge fund advisers are more affected by Title IV compliance than mid-sized and large hedge fund advisers. Adviser size may not matter as much for policy adjustments and SEC rule making as the hedge fund industry claimed. 

Advertisements
%d bloggers like this: