Knowledge is power

Simmons & Simmons' new online service aims to help with legislation-compliance. David Walker reports

As the burden of regulation on hedge funds becomes both greater and more complex, lawyers Simmons & Simmons have introduced a truly comprehensive online information service encompassing key regulatory facts and assistance for sales/marketing teams and hedge fund managers for around 60 jurisdictions.

The information that is delivered is broken down into three regions - Europe; the Americas; and the Middle East, Far East, Australasia and Africa - and comes as a subscription service, charged per region, with discounts for those applying to take up more than one region. There is also an annual updating charge, with information updated quarterly.

"Because we are retaining counsel in nearly 60 jurisdictions there is a cost involved," explains Charlotte Stalin, partner in the financial services group at Simmons & Simmons in London. Getting all the requisite information for a single jurisdiction without using Simmons & Simmons' service would cost around £10,000 per jurisdiction, Stalin says, whereas access to information on the Simmons & Simmons database Navigator service will be a fraction of the cost.

Richard Perry, also a partner in the financial services group at Simmons & Simmons, says the globalisation of the investment management and hedge fund industry and diversity of investor types - broadening from the hedge fund industry's heritage of being a largely HNWI- and family office-based affair largely in the US and continental Europe - "means every hedge fund launch is now multi-jurisdictional". And that means dealing with a plethora of regulations in the various jurisdictions into which a hedge fund or hedge fund-like product is to be marketed.

"Furthermore, as hedge funds look at products for the retail market they can approach that through the regulated fund structure using strategies such as 130/30 funds," Perry says.

As well as detailing contact details for Simmons & Simmons' own experts on fund regulation, the online product includes names and contacts for local counsel in cases where one of Simmons & Simmons' 21 offices globally did not produce information about a particular jurisdiction.

Three-part service

The service is broken down into three portions. The package's "questionnaire" portion includes specific extensive details on the regulation and selling restrictions region by region - each region taking up 50-60 pages in the extended chapter of details. Then there is a matrix, where the various countries sit side by side to allow easy comparison. And finally there is a compact version of each country, laid out in a"tear sheet".

The tear sheet, typically one page long, is for a firm's sales force and sets out an overview of how open-ended funds can be marketed in each jurisdiction. It considers the position of both locally registered funds (whether Ucits or non-Ucits which have been notified/registered for public distribution) and for foreign unregistered funds whether Ucits or non-Ucits. For EEA jurisdictions two tearsheets are available, differentiating between where the entity marketing the fund has obtained a cross-border services passport.

"The tear sheet can be modified by each firm," Stalin adds, so instructions can be given, for example, for salespeople to contact compliance to ensure that key tasks have been completed or forms filled out as per the firm's own internal guidelines/stipulations.

It outlines private placement exceptions where they exist, and whether or not one may respond to unsolicited requests, and details legends if required on marketing materials.

The matrix in the pack compares jurisdictions side by side. It aims to help legal/compliance staff with licensing requirements. These include whether a licensing requirement will be triggered by marketing/sales; applicable exemptions; the EEA passport position; sanctions for breach; if locally licensed intermediaries would avoid licensing issues; and marketing restrictions for both locally registered and registered/notified funds and foreign unregistered funds.

For unregistered funds it describes any marketing restriction; territorial scope of restrictions; private placement exemptions; pre-approval or content requirements for marketing materials (for example, translations); issues around unsolicited business; legend requirements; and sanctions. Cold-calling restrictions, registration process and other local regulatory restrictions are detailed as well.

The longer questionnaire for each jurisdiction covers all these areas, but in more detail.

Hedge funds, largely unregulated or only lightly regulated in international financial centres, have been largely untouched by heavy compliance obligations. However, as hedge fund groups launch 130/30 products and wish to have products passportable into more than one EU jurisdiction, they are coming up ever more against the EU Ucits III Directive, for example.

Stalin notes that while the Ucits legislation aimed to provide greater flexibility as to what regulated funds can invest in - and has achieved this at the directive level - the Ucits directives must be implemented locally and different countries' regulators interpret the directives in different ways. This makes ensuring adherence to the directives somewhat complex, Stalin says.

Directive compliance

And, as if the EU-inspired Ucits directives weren't enough to handle, Stalin notes there is also the Markets in Financial Instruments Directive (MiFID), live as of 1 November, "applicable from an activities- and services-point of view. Activities include marketing, and giving of investment advice, and it depends on where you are as to whether it is a service licensable under MiFID," she says.

"If you look at the Ucits directive and passporting and the way it's been implemented it's very different across Europe," Stalin says. "One of the problems is it is a host-state regulator driven process and you get a certificate from your home-state regulator (allowing you to passport Ucits-compliant product) and you make your own submission to the host state.

"This means when a manager wants to get a Ucits fund registered, it must go through the hoops every time for each jurisdiction, and set aside time for submitting forms. This is straightforward under the directive, but in local terms it can take up to six months and a regulator can put so many hurdles in place to make it impracticable."

Some regulators have in the past told Hedge Funds Review they are uncomfortable with retail Ucits funds' ability to engage in hedge fund-like techniques of shorting using derivatives, and so could move to make the passporting of such funds into their jurisdiction a more onerous process for managers.

While Simmons & Simmons' service does not run through absolutely every detail of getting funds registered as Ucits-compliant, for example - and Stalin notes managers may have to engage counsel in the jurisdiction in question - it does give the basics of what is required to apply for Ucits-certification, how long it will take and costs, and what forms are required.

Jumping hurdles

"It takes you through the regulatory hurdles and things you need to make sure of or consider before, or as part of, distributing it in a particular jurisdiction," Stalin explains.

"We give you enough information to see if it is feasible for you, which is also a question of your internal processes, how quickly you can do it and how much you have to spend. It gives you an indication of legal expenditure, and transaction requirements, for example, and timing," Stalin says.

"That is covered both for unregistered funds but also for funds which are part of the directive and should be easier to move through the process."

Stalin offers some guidance as to a first entry point to assess where you stand as a product provider vis a vis the Ucits directives.

"What matters if you want easier distribution is whether the fund has been registered for public distribution with that jurisdiction, then you look at the jurisdiction you're in. If it's the EEA and it's a Ucits fund you have a special process for that fund. If you're in the EEA and it's not Ucits you will have a more difficult process.

"For everything else you will have local criteria for whether you can get the fund locally registered."

Richard Perry adds that investors in other jurisdictions, in the Middle East and Asia for example, are tending towards favouring Ucits-compliant hedge fund vehicles, typically Luxembourg- or Irish-domiciled. So while the main aim of a manager may be to gain a Ucits passport for ease of pan-EU distribution for their fund, having such a vehicle may also help for marketing a fund outside the EEA.

Stalin says presently it is largely emerging markets that treat all funds and funds investing in different asset types in the same way, but she expects over time these markets will tend towards the developed markets model of differentiation, making a more varied analysis of what is or is not possible for certain fund types more important.