Month: May 2016

Doing Business in Europe Today #CFOandCCO

I’m attending the PERE CFOs & CCOs Forum. These are my notes from the session.

PERE

Most of the attendees are using private placement to get into Europe, with the rest split between a parallel Europe fund and reverse solicitation.

AIFMD arrangements are possible with a third-party who has the AIFMD passport. The non-EU firm acts as a subadvisor.

Reverse solicitation is grey area. It can’t be used for a large input of European investors.

Private placement regimes will terminate in 2018 and AIFMD will take over fully. Currently, using the private placement regime requires a great deal of local knowledge of the individual regulatory regimes in each country.

Setting up a new European-based manager for a parallel fund is a solution. That requires more money and more people (and that means more problems).

There is a new Luxembourg investment vehicle type called a RAIF that allows easier use of AIFMD. European investors would come in through this entity. You do not need to submit a prospectus approved. You can also use it for multiple funds. Cells under the RAIF would invest in the fund.

AIFMD has the requirements of a depositary and disclosure of renumeration. You can deal with these, but it’s difficult. The reporting is time-consuming.

The renumeration rule has three boxes. If you have your own AIFM, then you need to report pay of key personnel. If you use a third-party AIFM that subcontracts the management back to the manager, you still may need to report your key personnel. The Annex 2 Guidelines govern the compensation disclosure and variables.

The key control is to have the fund manager control the bank accounts and not allow the appointed-AIFM to control the bank accounts. The AIFM is merely an adviser it does not legal authority to act on behalf of the fund manager.

There are grey areas around the difference between a joint venture and pooled-fund. If the investor has significant control, it may not be a fund subject to AIFMD.

The view is that may take tens of million, if not hundreds of millions of AUM from Europe to justify the cost of being AIFMD compliant.

Sources:

Where Are We Now? #CFOandCOO

I’m attending the PERE CFOs & CCOs Forum. These are my notes from the session.

PERE

Operations are increasingly the difference maker in an environment of declining revenue per AUM. If we are going to be a cost center, we should be the best.

International operations takes up a disproportionate amount of time. Investing overseas has a lot of regulatory hurdles. There are some overseas markets that it is really hard to do business and meet the legal and regulatory requirements of the US. Getting overseas investors is an even bigger hurdle. Getting it right is a value-add proposition for your firm.

Most attendees rated themselves “moderate” in terms of legal/regulatory/compliance risk. A third rated themselves “ultra conservative” and small as “aggressive.”

Complexity is a cost to the bottom line to deal with those legal and regulatory burden.

Everybody in the firm is marketing firm. In a culture of compliance, you want everyone to be their own compliance officer.

Finding people to fill roles that understand the business and understand the compliance requirements is hard. Then you need really good communicators that can distill complex issues into an easy to understand package. More is not necessarily better.

There is great consternation of the unintended consequences of regulations. Private equity real estate is a tough fit for the existing SEC regulations.

I’m Asking For Your Money

Compliance Building is a free resource I publish for me, and share with you, to help the compliance profession. But I’m asking for money.

I should point out that the money is not for me; It’s for charity.

I’m riding the Pan Mass Challenge in 2016 and hope you will consider supporting me this year. [Click here to make a donation]

Compliance Building readers were very generous last year and help me achieve my fundraising goal. (For those who have already donated, I apologize for this second request.)

Unfortunately, I have another reason to ride this year:

jeff

Jeff was diagnosed with cancer just before Thanksgiving. This terrible disease killed him just after the New Year. He was a big, strong, brash guy. We grew up together, went to high school together, went to college together, snowboarded together and climbed mountains together.

Cancer took him.

I can’t think of a better way to remember him than to to ride for him and raise money to fight what killed him. Maybe we can help save the next person.

Jeff and I grew up with Dave. After Dave’s mom died of cancer, Dave formed Team Kinetic Karma and I first rode my first Pan-Mass Challenge.

I came back to ride again when Dave was diagnosed with cancer. He fought back and won. The Dana-Farber Cancer Institute helped him beat back the disease.

Then my dad was diagnosed with cancer. He fought back and won. The Dana-Farber Cancer Institute helped him beat back the disease. But his sister, brother, and mother (my aunt, uncle and Nana) did not win and lost their battles with cancer.

100% of your donation to my PMC ride with go the Dana-Farber Cancer Institute.

If everyone who reads Compliance Building donated a few dollars I would exceed my fundraising goals.

I’m really looking to the smaller group of loyal readers. A group that I think gets some value from what I publish. If you think it’s worth $1 a week. Then, please contribute $50…(Or More)

The Pan Mass Challenge ride is 192 miles over two days from Sturbridge to Provincetown. If I hit my fundraising goal, I’m going to add on another 100 miles and a third day of riding from the New York border over the Berkshires to Sturbridge.

Donations can be made by clicking on any of the buttons below, or sending a check to my mailing address:

Doug Cornelius
15 Lockwood Rd
West Newton MA 02465

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Dodd-Frankly, My Dear, I Don’t Give..

Perhaps one day there’ll be another famous movie line: “Dodd-Frankly, my dear, I don’t give…” But probably not. Its not clear if Dodd-Frank has been a success or a failure.

GoneWiththeWind1

It certainly has been a change.

From the regulated side, I think the failure or success depends on which part of Dodd-Frank affects you. New regulations make winners and losers. Most research shows that it makes it harder for new firms to enter the regulated space.

From 2009 to 2013 only 7 new banks were formed, fewer than 2 per year. From 1990 to 2008, over 2,000 new banks were formed, more than 100 per year. Its easy to blame that on Dodd-Frank, but the economy has been weak and interest rates low.

Certainly, big banks are not any smaller and few believe that too big to fail is gone. It brief glance at bank credit ratings, you can see a boost in the ratings for an implied government bail-out.

It also depends on how you rate size: amount of deposits, amount of assets, amount of lending activity.

We have seen the reach of the non-bank too big to fail labeled and then removed. The firms may be important, but not systemically important.

One of the clear winners is the compliance profession. Dodd-Frank clearly requires more compliance efforts and people to take on those efforts.

Sources:

Compliance Bricks and Mortar for May 13

These are some of the compliance-related stories that recently caught my attention.

bricks 40

Stop Faxing by David Smyth in Cady Bar the Door

The problem was the same as with all faxes: nobody wants them. They want emails instead. So when the firm set up an electronic faxing service, they added an extra step in the communication chain, and routed the faxes to email addresses. While they should have sent those faxes to email addresses with the firm’s domain name, thousands went to personal email addresses instead. Those personal email addresses were outside the firm’s communication management system, and the data in the faxes was unprotected. [More…]

Recent Criticisms of the SEC: Fair or Unfair? by Jon Eisenberg and Shanda N. Hastings of K&L Gates

Over the last few years, the SEC has been criticized for (1) failing to “consistently and aggressively enforce the securities laws and protect investors and the public,” (2) obtaining sanctions that amount to only a slap on the wrist against major financial institutions, (3) settling rather than taking big banks to trial, 4) failing to name individuals in enforcement actions, (5) failing to require that companies admit guilt, (6) granting waivers from the collateral consequences of enforcement actions, and, most recently, (7) failing to prevent a prominent hedge-fund manager from getting back into the hedge-fund business. [More…]

Yates Assesses Effects of ‘Yates Memo’ by Samuel Rubenfeld in the WSJ.com’s Risk & Compliance Journal

Ms. Yates said Tuesday that despite predictions that companies would no longer cooperate, they’re now making “real and tangible efforts” to comply with U.S. requirements. They’re even providing troves of documents, called “Yates Binders,” that contain the relevant emails of individuals being questioned by the government, she said. Ms. Yates also said the new approach is causing positive change within companies, where she said compliance officers are helping steer employees toward best practices and higher standards.

“That’s exactly what we had hoped for. After all, it is much better to deter bad conduct from happening in the first place than to have to punish it after the fact,” said Ms. Yates, according to her prepared remarks. [More…]

Measuring Culture by Erica Salmon-Byrne This post originally appeared on Ethisphere Insights

Measuring culture is a topic many companies struggle with – or have delegated to HR to handle through an engagement survey. It should be noted that while engagement is a critical component of culture, it isn’t a synonym – a good engagement survey is no substitute for a culture survey, because how someone feels about their benefits, their work environment and their colleagues is not a proxy for how likely they are to tell you when something’s gone wrong in the company. And at the end of the day, that’s your key metric – how likely are your employees to notice misconduct, and to tell you about it? [More…]

America! The Cyclist Is Not Your Enemy by Jason Gay in the Wall Street Journal

But it’s exasperating to see how Bad Cyclist anecdotes receive equal treatment to voluminous statistical evidence that cycling makes communities better. It’s maddening to watch public meetings where bike lanes are raged over like they’re landing pads for Martian armies. The transportation data is incontrovertible: Streets that accommodate for cycling get safer. Fewer people get hurt. Fewer people get killed. People on bikes and people walking on the street. Everybody. Even people in automobiles. [More…]

America! The Cyclist Is Not Your Enemy

 

Does Compliance Work?

This has been an existential question for a long time. How do you measure compliance success? How do you know if it’s working?

Folder with the label Compliance

Sean Griffith, director of the Corporate Law Center at Fordham University in New York casts a skeptical eye on compliance through the lens of corporate governance in a new law review article: Corporate Governance in an Era of Compliance. He concludes there is not enough data to prove that compliance works.

That part is true. It is hard to measure successful compliance.

The first goal of compliance is to prevent bad acts from happening. Part one is education to let employees know what is good and what is bad. Part two is detection so that an employee making a bad act will have a fear of getting caught.

For most organizations few bad acts ever happen. The occurrence is an outlier with no data to measure against. It is only the biggest of organizations that will have an ongoing occurrence of bad acts to measure.

For those biggest of organizations, they can measure a decrease in the occurrence of bad acts as a measure of success. But that decrease can be for one of two reasons. One reason is an actual decrease in bad acts. A sign that compliance is working. The second reason could be that the bad acts are not being caught. Employees knowing that they may get caught take extra steps to avoid their bad acts from being detected. In the second reason, compliance is not being effective. Yet the data is the same.

It’s hard to prove that something didn’t happen because of compliance.

As  Professor Mike Koehler, the FCPA Professor, responded to my note, “nobody knows whether #compliance really works”, with

“Same can be said for lots of things in life – but how can one truly measure compliance success stories?”

The other problem with measuring compliance success is that “compliance” means different things to different industries and different firms.

Compliance in financial services is different from compliance in health care and different from extractive industries. You can’t find a meaningful measure of compliance across those industries.

None of this is meant to say that compliance doesn’t work. I feel strongly that it does work. The issue is merely measuring that success.

Sources:

Alternative Funds and Valuations

It should come to no surprise that alternative funds have an extra level of scrutiny when it comes to valuations. RD Legal Capital is under scrutiny by the Securities and Exchange Commission according to a story in the Wall Street Journal.

Valuation

RD Legal is in litigation finance with a strategy to to buy stakes in a judgment at a discount to the likely settlement. The firm bankrolls lawsuits hoping to collect if damages are paid. It took a big stake in a lawsuit against Iran, buying claims at a steep discount.

Apparently RD Legal has been writing up the value of that stake even though no settlement has been paid.

Valuation, whether right or wrong, is more subjective when it comes to illiquid assets. Real estate fund managers and other alternative fund managers are aware of this. The fairness question and therefore the regulatory question is what the effect of the valuation is on the investors and the fund manager. If the fund manager can take an extra fee on unrealized gains, the valuation should be subject to extra scrutiny.

The SEC is accusing RD Legal of taking cash at the expense of investors based on the increased valuation.

I fear the outcome will be one based on hindsight. If the settlement gets paid, the increased valuation will be justified. If it never appears, then the firm will be subject to even greater scrutiny.

Sources:

Political Contributions Rule Continues to Be Painful

With the contenders for President nearly locked up for the conventions, I’m stuck worrying about political contributions. At least one fund manager continues to look for an exemption after a small oversight.

Politician: Holding Out a Stack of Money

The firm hired a new senior investment professional in September 2014. A year earlier, the employee had made a contribution to Bruce Rauner who was running for Governor of Illinois.

The problem is that the Governor appoints trustees to the board of trustees for the Illinois state pension funds. Some of those funds were investors in one of the firm’s funds.

The contribution was paying the cost of a small meet-and-greet reception for the candidate. The total value was $892.17. That small amount is greater than the $350 limit and triggers the two-year ban on fees.

The firm is not alone. On page 14 of the request, it lists several other requests for exemption.

  • Davidson Kempner Capital Management LLC, Investment Advisers Act Release Nos. 1A-3693 (October
    17, 2013) (notice) and IA-3715 (November 13, 2013) (order)
  • Ares Real Estate Management Holdings, LLC, Investment Advisers Act Release Nos. IA-3957 (October 22, 2014) (notice) and IA-3969 (November 18, 2014) (order)
  • Crestview Advisers, LLC, Investment Advisers Act Release Nos. IA-3987 (December 19, 2014) (notice) and IA-3997
    (January 14, 2015) (order)
  • T. Rowe Price, Investment Advisers Act Release Nos. IA-4046 (March 12, 2015) (notice) and IA-4058 (April 8, 2015) (order)
  • Crescent Capital Group, LP, Investment Advisers Release Nos. IA-4140 (July 14, 2015) (notice) and IA-4172 (August 14,
    2015) (order)
  • Starwood Capital Group Management, LLC, Investment Advisers Act Release Nos. IA-4182 (August 26, 2015) (notice) and IA-4203 (September 22, 2015) (order)
  • Fidelity Management & Research Company and FMR Co., Inc., Investment Advisers Release Nos. IA-4220 (October 8,
    2015)(notice) and IA-4254 (November 3, 2015)(order)
  • Brookfield Asset Management Private Institutional Capital Adviser US, LLC et. al., Investment Advisers Act Release Nos. IA-4337 (February 22, 2016)(notice) and IA-4355 (March 21, 2016)

That is a list of some A-list fund managers with a long track record of good compliance. Clearly the rule must be overly broad and tripping up advisers and fund managers if so many are seeking exemptions.

Sources:

Compliance Bricks and Mortar for May 6

These are some of the compliance-related stories that recently caught my attention.

how-to-fischli-weiss

We Are All Victims… Except Richard Bistrong by Roy Snell in The Compliance & Ethics Blog

Richard was a successful international salesman who selected a bad principle… bribery. He stuck to that principle like glue for 10 years. Before he got caught he hung out with the wrong people and became addicted to drugs but is now clean. After he got caught, he helped the UK and US try to catch other FCPA violations. He spent about 14 months in jail. There were a lot of other bad consequences of Richard’s wrongdoing. In my highly subjective opinion, enough of his life was ruined that I believe he paid for his mistakes. [More…]

Preparing for the SEC’s Increased Pursuit of Compliance Officers by Perkins Coie’s Luis R. Mejia, Mary C. (Molly) Moynihan, Martin E. Lybecker, Jesse P. Kanach

The SEC’s recent activity against CCOs should serve as a warning to all investment advisers, broker-dealers, and compliance professionals that it would be wise to review their policies, procedures, and practices to ensure they are adequate in today’s regulatory environment.

In a speech in late 2015, Andrew Donahue, Chief of Staff to SEC Chair Mary Jo White, outlined what he believes are the responsibilities of a CCO, and while some steps seem obvious, the list puts firms and compliance professionals on notice of the SEC’s expectations:  [More…]

How Do LLC Owners Contract Around Default Statutory Protections? by Peter Molk in the CLS Blue Sky Blog

Delaware, the leader in out of state LLC formations, requires that owners and managers have only an implied covenant of good faith and fair dealing, leaving substantial space to tailor individualized terms to individual circumstances.  Yet remarkably little is known about how, or even whether, LLCs exercise this discretion.  Do parties fail to wield LLCs’ contractual flexibility, choosing to operate passively under unaltered default protections?  Do they instead engage in robust bargaining for efficient terms?  Or do they do something else entirely?

In a new paper, How Do LLCs Owners Contract Around Default Statutory Protections, I analyze a sample of 233 Delaware and 50 New York private LLC operating agreements to answer these questions.  These agreements were obtained from exhibits attached to private litigation, offering a rare glimpse into the rules governing the inner workings of private companies spanning a range of sophistication, industry, and size.  [More…]

Don’t put illegal conduct in power point slide presentations by Tom Fox in Compliance Week

The Man from FCPA occasionally puts on FCPA training. One of the things he highlights is not to put stupid stuff in e-mails. Such evidence can be clear signs something is amiss. However after this week, Fox has have to amend his training to add not to put illegal conduct into PowerPoint  presentations to senior management, after it was reported in the New York Times that in 2006, a top technology executive at Volkswagenin prepared a slide deck for management, laying out in detail how the automaker could cheat on emissions tests in the United States. [More…]

To finish, a mash-up of real estate and art.

How to Work Better: Making a Mural on Houston Street by Caitlin Dover for Guggenheim

how-to-fischli-weiss

Private Equity Real Estate Top 50 – 2016 Edition of Who is Registered

Private Equity Real Estate has released its ranking of the top 50 real estate private equity fund managers. As I have done in the past, I parsed the list to see which managers are registered with the Securities and Exchange Commission as investment advisers.

pere 50

Rank Firm Headquarters Registration
1 The Blackstone Group New York  Registered
2 Lone Star Funds Dallas  Registered
3 Brookfield Asset Management Toronto  Registered
4 Global Logistic Properties (GLP) Singapore  Exempt Reporting
5 Starwood Capital Group Greenwich  Registered
6 Tishman Speyer New York  Registered
7 The Carlyle Group Washington DC  Registered
8 Oaktree Capital Management Los Angeles  Registered
9 Westbrook Partners New York  Registered
10 Rockpoint Group Boston  Registered
11 KSL Capital Partners Denver  Registered
12 Ares Management Los Angeles  Registered
13 Angelo Gordon New York  Registered
14 LaSalle Investment Management Chicago  Registered
15 Fortress Investment Group New York  Registered
16 Invesco Real Estate Dallas  Registered
17 Colony Capital Santa Monica  Registered
18 GreenOak Real Estate New York  Registered
19 CBRE Group Los Angeles  Registered
20 CIM Group Los Angeles  Registered
21 Northwood Investors New York  Registered
22 Walton Street Capital Chicago  Registered
23 PW Real Assets London  Exempt Reporting
24 Crow Holdings Capital Partners Dallas  Registered
25 Meyer Bergman London  Exempt Reporting
26 Tristan Capital Partners London  Overseas
27 Hines Houston  Registered
28 GTIS Partners New York  Registered
29 Partners Group Baar-Zug, Switzerland  Exempt Reporting
30 Almanac Realty Investors New York  Registered
31 Harrison Street Real Estate Capital Chicago  Registered
32 Carmel Partners San Francisco  Registered
33 Pramerica Real Estate Investors Madison, NJ  Registered
(Prudential)
34 Rialto Capital Management Miami  Registered
35 Hemisferio Sul Investimentos São Paulo, Brazil  Overseas
36 Shorenstein Properties San Francisco
37 Square Mile Capital Management New York  Registered
38 Kayne Anderson Capital Advisors Boca Raton  Registered
39 Greystar Real Estate Partners Charleston
40 DRA Advisors LLC New York  Registered
41 Och-Ziff Capital Management New York  Registered
42 Related Companies New York  Registered
43 KingSett Capital Toronto  Overseas
44 Gaw Capital Partners Hong Kong  Exempt Reporting
45 Tricon Capital Group Inc. Toronto  Registered
46 TA Realty Boston  Registered
47 Fir Tree Partners New York  Registered
48 Bridge Investment Group Partners Salt Lake City  Registered
49 AEW Boston Registered
50 ECE Real Estate Partners Hamburg, Germany  Overseas

 

On this year’s list, 39 of the top 50 are registered with the SEC as investment advisers. Of those not registered, four are overseas, likely outside the scope of SEC registration requirements. Five overseas firms filed as exempt reporting advisers. That leaves two firms that are not registered as investment advisers.

There are good arguments to be made on both sides of the registration debate for real estate funds. The core requirement under the Investment Advisers Act is that the manager is giving investment advice about “securities.” Most of these real estate fund managers are truly focused on real estate and not securities. However, the discussion between what is and is not a security may be fun for the first week of your securities law class in law school. It’s not a fun discussion when trying to comply with regulatory requirements.

The PERE 50 measures capital raised for direct real estate investment through commingled vehicles, together with co-investment capital, over the past five years. This edition measures from January 1, 2011 to March 2016 for direct investment through closed-end commingled real estate funds. It excludes core and core-plus funds.

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