Quarterly Newsletter – Q2 2010

Laven Celebrates its 5th Birthday!

The Laven group, founded by Jérôme de Lavenère Lussan, CEO, in 2005, celebrated its fifth birthday this year.

During the past five years, Laven has expanded from just one firm to a group with offices in the UK, Switzerland, Luxembourg and the Caribbean. The Laven group, as hedge fund and fund management consultants, now provides services covering regulatory compliance, law, tax, operational due diligence and corporate services.

The recent years have seen considerable growth within the group overseeing the successful launch of offices in Geneva in 2007, Barbados in 2008 and Luxembourg in 2009. With the opening of the global offices and the gradual development of services, we have constantly driven to meet client demands and quickly reacted to changes in the industry. We foresaw demand for better regulation; developing FSA, FINMA and CSSF dedicated units, anticipating the growth of UCITS III in Luxembourg and the move of managers out of the UK notably to Switzerland. We have become acclaimed for our proactivity and practical advice – principles which are instilled within the firm and the members of our team.

During the last five years Laven has won the Best Regulatory Advisory Firm award at the HFM Week Service Provider Awards in 2009 and also acquired the much coveted ISO 9001:2008 certificate for its Independent Process of Operational Due Diligence (IPODD). The ISO recognition acknowledges that Laven’s IPODD services follow the highest standards of review and analysis as well as maintaining an exemplary level of customer satisfaction.

Furthermore, Laven’s frequent appearances on the media circuit have enabled the firm to participate in a diverse range of programmes, for example as FSA experts on Bloomberg TV and on Resonance FM’s “N@ked Short Club”, as well as writing for the leading financial press. Having regularly provided articles for the FT, the Economist and City A.M. we are currently in the process of writing a book on operational due diligence which is due to be published later this year by Pearson Education. Other Laven publications include an array of research papers in addition to contributions to books and newsletters. A year ago we also launched a popular monthly update on the proposed Alternative Investment Fund Managers (AIFM) Directive, which has been well received by the industry and has been picked up by the press for its useful content.

Laven has continued to participate in a wide range of conferences across the globe, the most recent ones being the Redomiciliation of Managers conference which took place at the beginning of 2010 in London, Geneva and Luxembourg, as well as the Hedge Fund Regulation, Reporting & Controls conference in February 2010. We have also organised a variety of our own breakfast seminars, occasionally collaborating with established industry players such as PricewaterhouseCoopers and Lobard Odier Darier Hentsch & Cie.

Furthermore, Laven’s strong connections with the financial regulatory bodies (the FSA, CSSF, AMF, FINMA, MAS, and SEC) have helped make the firm one of the leading consultancies with regards to issues affecting asset managers and other financial institutions. Other professional memberships include Laven Advisors LLP as a member of the Alternative Investment Managers Association (AIMA) and Jerome as a member of the International Tax Planning Association (ITPA).

With the next five years in view, we look forward to continuing to stay in touch with our clientele and friends maintaining our dialogue with industry professionals and bodies as well as with government officials, anticipating changes in financial services and providing the asset management industry with solutions of the highest of quality.

Laven Partners Comments on the Abolition of the FSA

The Chancellor George Osborne announced in June plans to abolish the FSA and move regulatory powers to the Bank of England. The Chancellor said the FSA had become a narrow regulator, and that no one was controlling levels of debt and that when the crunch came no one knew who was in charge.

“Any development towards better compliance is to be welcomed and this is clearly the ambition of the new government. However, the transfer of powers to the Bank of England must not be just for show and must address the true problem of regulation which historically has been the lack of enforcement. We have over 100 clients in the alternative and long only investment industry who will be concerned by these news.

This change could increase costs for asset managers enhancing their desire to leave the UK which in turn would be hurtful to our economy and London.

“We should also bear in mind the costs to the taxpayer, particularly in view of the government’s plans to cut costs.”

“In terms of improving regulation, we hope that the new Consumer Protection and Markets Authority which according to the plans would be in charge of conduct of business issues, will continue to implement and enforce the existing rules which are good, ultimately benefitting investors and regulated firms.”

“We are however concerned about the announced separation of prudential regulation from the conduct of business rules – often issues discovered through the course of prudential regulation (such as FSA ARROW visits) lead to further detection of problems in conduct of business practices. We will be particularly interested to see how the link is expected to work between the two regulators.”

“All in all, we knew this was a major plan by the Conservatives. Now that the first steps have been taken, it will be interesting to see how the new regulators will tackle the task. Most importantly however, we believe there will need to be continuity within enforcement which was successfully set in motion by the FSA and that any change must be done quickly so as not to leave investors and asset managers in limbo.”

“We shall work closely with all our clients in preparing for any anticipated changes.”

Laven Partners Continues to Provide Updates on AIFM Directive

In June, we sent out our twelfth update on the proposed AIFM Directive. The process of the ‘Trilogue’, which consists of discussions between the European Parliament’s Committee for Economic and Monetary Affairs (Econ), the Economic Financial Affairs Council (Ecofin) and the European Commission, has officially began and will eventually aim to combine the two versions by Econ and Ecofin proposed on 17 and 18 May respectively.

The two drafts differ in some areas, for example the Econ version requires non-EU based fund managers to comply with various standards in order to market their funds to EU investors, whereas Ecofin suggests that national regulations should apply. Both Econ and Ecofin have softened their stance on leverage controls, and managers would be able to set their own leverage limits as long as they report to national regulators. The Directive has also been softened in relation to portfolio company disclosure requirements as now firms with fewer than 50 employees would be exempt from disclosure rules.

The most recent versions of the Directive by both Econ and Ecofin include new measures concerned with remuneration, which have been taken directly from the banking directive and have been deemed by many as inappropriate when applied to hedge funds. The funds that are significant in terms of their size will be required to have a remuneration committee chaired by a non-executive member of the management body.

The AIFM Directive will introduce powers and duties for a new centralised European regulatory authority called the European Securities and Markets Authority (ESMA), which will start work on 1 January 2011.

The creation of the new body was agreed on 23 September 2009 and ESMA will be able to issue guidelines to national regulators on how to monitor conformity with the Directive, hence transforming the financial markets legislation to a supranational level! This will probably add a layer of interpretation which will not be welcomed by managers unless it is seamless.

Laven Partners recently met with Conservative MEP Syed Kamall to discuss the ongoing developments in the negotiations between Ecofin and the European Parliament. Mr. Kamall who has shown a strong understanding of the issues and has the interest of London and its service industry at heart, stressed that Ecofin is well equipped to carry out technical discussions based on facts and practicalities as some members are seconded from the national regulators, and we remain hopeful that a final AIFM Directive text is published soon.

At the recent Hedge Fund Operations Conference attended by Laven Partners a number of speakers suggested the industry might end up in the “Fortress Europe” and “Prison Europe” situation, where the non-EU based alternative managers will not be able to market their funds in the EU and likewise EU residents will not be able to buy offshore funds. The majority view remains that the Directive would serve as a vehicle to force hedge funds to sign up to UCITS III structures. It appears that the patience of some of the industry lobbyists has been exhausted. Javier Echarri, the secretary general at the European Private Equity and Venture Capital Association (EVCA), will leave the organisation at the end of the year, or sooner if the AIFM Directive is voted through before then. Although the Directive has not been cited as the reason for his departure, some may say it marks an end of an era for EVCA.

The move towards more UCITS III structures is certainly not the solution, as it is simply not compatible with some strategies and will lead to more correlation between investment styles which no doubt kills off any idea of being an ‘alternative’ fund. One might also consider whether tighter regulation is needed to protect investors from themselves.

A recent survey by the European School of Management and Technology together with the Rotterdam School of Management has produced evidence that investors systematically allocate money to hedge fund investment styles that have performed well over the previous three quarters without regard for any change in the level of risk. This implies that investors are still simply chasing the best past performance rather than assessing the risks of different investment strategies.

Eurozone’s Fiscal Deficit Crisis affecting the AIFM?

Germany has recently emerged as the world’s financial reformer as the country introduced a number of measures to curb the misbehavior of financial institutions. The decision on 19 May to ban naked short-selling in Germany sent a strong message of tougher regulation and was reiterated with an enigmatic quote by the country’s finance minister Wolfgang Schäuble: “If you want to drain a swamp, you don’t ask the frogs for an objective assessment of the situation”.

This contradicts the notion that Europe should be regulated as one market, further highlighting that one Directive equally regulating the overall European market is virtually impossible. The view that the new rules should be defined on a European level and not by nation states was reflected by the EU Competition Commissioner Joaquin Almunia, who encouraged governments “to adopt such decision at a European level, not on unilateral basis”.

In the past month Germany has also announced plans for a levy on banks, which would be paid into a fund to cover the costs of future financial crises. There have also been further calls for a potential global regulation tax. German Chancellor Angela Merkel is hoping to achieve mutual regulatory objectives at the G20 summit in Canada on 26-27 June: “We will campaign for a tax on financial transactions. It is clear that this is something that will not be agreed at our first dinner. But I don’t think it would ruin the financial markets if we found agreement on a global tax”.

Nevertheless, as the Economist suggested, these events shaded into the background, and instead of worrying about the Eurozone crisis, the Econ and Ecofin “thought their time would be well spent agreeing on tough new rules for an industry that has had remarkably little to do with the financial crisis.”

Laven in the Press

UCITS catch on with US managers

Laven Legal Services, the legal arm of the Laven group comments on the drive to locate fund management companies within the European Union. Alexandra Tzalla, Solicitor with Laven Legal Services in London and Luxembourg, says:

“The regulator does not want you to set up a fund in Luxembourg and then disappear. This may be one of the biggest problems for US managers.”

To read the full story, please visit the FT.

Weighing up that big move overseas

Jérôme de Lavenère Lussan, CEO of hedge fund consultants Laven Partners, says that small businesses actually want the high standard of regulation London offers: “Start-ups that we have been talking to have said they want to be well-regulated.”

To read the entire article, please visit City AM.

Swiss regulator issues a deadline for asset managers to comply with minimum standards

The Swiss Financial Market Supervisory Authority (FINMA) outlined in its 2009/1 circular minimum standards for the recognition of self-regulated asset managers.

The minimum requirements address areas such as duty of loyalty, exercise of due diligence, disclosure obligations and remuneration. Asset managers managing collective investment schemes must comply with a code of conduct issued by one of the professional organisations recognized by FINMA and must ensure that their asset management contracts are in compliance with the relevant code of conduct.

The FINMA 2009/1 circular requires firms to disclose information on the risks associated with investment objectives and restrictions, and information on any key changes in the asset manager’s organisation. Transparency of terms and elements of the remuneration of asset managers are also required.

Asset managers must also put in place a monitoring system to control compliance in relation to the code of conduct and to enforce it in the event of a violation.

The deadline for the adjustment of asset management contracts (depending on the chosen professional organisation) are as follows:

  • existing contracts: December 31, 2010
  • new contracts: must immediately be in line with the chosen code of conduct

A thorough review of such contracts by a specialised legal counsel is strongly advised in order to ensure full compliance with the relevant code of conduct.

FSA’s record of enforcement action

Margaret Cole, Director of Enforcement and Financial Crime at the FSA, said at the FSA’s Enforcement Conference held on 22 June that “the last two years have seen a number of firsts for — and a number of records broken and broken again in close succession”.

Indeed, the UK regulator has been relentlessly pursuing enforcement, a priority for the FSA for the last two to three years. Since then, the FSA has had its first insider dealing criminal prosecution, its first appeal from a Tribunal decision, its first prosecution for failing to observe change of control rules, the first use of a cooperating witness in a criminal prosecution and the first European arrest warrant to return a defendant to the UK to be charged and face trial for insider dealing, among others.

The FSA has been successful in enforcing the market abuse rules in particular, and in 2010 the highest market abuse related fine imposed on a firm was £4,000,000 to Winterflood for an illegal share ramping scheme.

The Winterflood fine however was small compared to the £33,320,000 imposed on J P Morgan Securities for failing to protect client money by segregating it appropriately. This was closely followed by fines on other firms for similar failings.

Elsewhere, the SEC has banned the former chief compliance officer of registered investment adviser Interfund Capital Corp. which is no longer in operation. The compliance officer allegedly misappropriated about $650,000 from investors.

Meanwhile in France, Jean-Pierre Mustier, former head of Société Générale’s investment bank where former trader Jérome Kerviel worked, has been fined €100,000 by the Autorité des Marchés Financiers for insider trading. Mr Mustier, who testified at Mr Kerviel’s trial, has always maintained his innocence regarding having inside information when he sold 6,000 SocGen shares in 2007.

Jérôme de Lavenère Lussan, CEO of Laven Partners, says: “When Hector Sants told firms in 2009 ‘to be very afraid’ of the FSA, many ignored this advice. The FSA has now shown its intentions and the regulators taking over the FSA in 2012 will most likely continue on the same path. We would recommend firms implement robust compliance systems to 1) identify any potential breaches by the firm or its employees; and 2) to ensure no rules are breached in the future. What you don’t want is to be caught in the regulator’s teeth right now.”

Regulatory Hosting

Laven offers a UK regulatory hosting platform which provides clients with the opportunity to conduct regulated activities as an Appointed Representative (AR).


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