With more than 50 lawyers experienced in representing hundreds of funds, our Funds Services group has the skill to help your fund succeed in its goals.
Pepper Hamilton LLP’s Funds Services Group — a core component of the firm’s Investment Funds Industry Group — partners with U.S. and international funds and their sponsors, managers, advisers and investors to define and achieve their goals. The more than 50 lawyers in the Funds Services Group have represented hundreds of pooled investment vehicles and are well versed in the dynamic and ever-evolving arena of investment industry regulation. We work with our clients to help them not only understand the new regime of transparency, accountability and enforcement but to successfully adapt to it.
Our Fund Services team — which includes veterans of the asset management industry, the SEC, FINRA, the Department of Justice and other agencies — has experience in investment management, corporate, securities and regulatory matters. We regularly counsel on the various issues that may arise from different fund structures, fund strategies and investor bases. We are also able to call on our colleagues throughout the firm to assist with other issues arising during a fund’s life cycle, including technology, litigation and litigation-risk mitigation, government investigations and white collar defense, FCPA issues, FATCA compliance, CFTC matters, energy and environmental regulation, information management, privacy, governance, shareholder activism and public securities regulation.
Fund Life Cycle Counseling
We counsel funds and their sponsors, managers, placement agents, administrators and registered and unregistered advisers, as well as exempt reporting advisers, in all matters arising throughout the fund’s life cycle, including:
fund formation and structuring (domestic and offshore)
investor negotiations and relations
general partner and management structuring, compensation and succession
investor relations, interest transfers, employee issues and other fund operations
investment and divestment transactions
annex, bridge and successor funds
At the outset of the fund formation process, we seek to understand and be aligned with our clients’ goals and expectations, the expected evolution of the fund’s structure, the fund’s investment strategy and the fund’s likely investor complement. Taking these factors into consideration, we provide practical advice on strategies for crafting the fund’s economic and management terms; the fund’s structure; possible exemptions under the Investment Company Act of 1940; the structure of the general partner and management company; compliance with the Investment Advisors Act of 1940; state law and ERISA issues; and contractual arrangements.
On the operational side, we counsel clients globally on fund management issues, including the following:
identifying costs as fund expenses or management company expenses
the structure, constitution, use and compensation of advisory boards
regulatory issues, including mock, SEC and other regulatory audits
transfers of investor interests
structuring and using employee participation vehicles, fund leverage and liquidity facilities
conflicts of interest
amendments to fund documents
limited partner consents and defaults
governance and operations
portfolio company management and governance
portfolio company valuations
broker-dealer and execution issues
calculating and timing distributions to investors and the general partner
clawbacks and management fee waivers
establishing and maintaining reserves and holdbacks
We assist our hedge fund clients with a wide variety of issues that arise within their industry, such as:
calculation and payment of incentive allocations
hurdles and high-water marks
private equity–like special allocations for initial costs
withdrawal fees, reserves against withdrawals and withdrawal gates
holdbacks for illiquid investments and special assets
rebates/discounts in management fees or incentive allocations
separate series (“ring fenced”) partnership and LLC structures
back-office service agreements
custody and know-your-customer rules
International Swaps and Derivatives Association contracting
Funds of Funds and Investments in Other Funds
We advise clients on forming and operating private equity and hedge funds that invest in other funds — commonly known as “funds of funds,” as well as the unique issues that clients face in this industry. We regularly help clients with matters involving special structuring and flow-through issues, ratcheting carried interests and preferred returns, fee-stacking, confidentiality and transparency goals and problems, redemption and withdrawal, transfer and reinvestment rights and custody and compliance issues. We also often represent our fund of fund clients in their investments in underlying funds.
We often represent funds on both sides of secondary transactions, analyzing exposure to potential liabilities, negotiating the terms of sale and negotiating the terms of consents of fund managers, lenders and others. When we represent the buyer of a portfolio of interests, we also examine the underlying portfolio to assess the tax liability and reporting exposures to the buyer’s mix of investors.
Successor Fund Counseling
Our work for clients on successor fund issues includes planning for the next fund and reconciling fiduciary responsibilities to limited partners and other principals within the general partner with management resources and responsibilities. We also help clients in situations when conflicts may arise, such as when two affiliated funds co-invest.
Management, Succession and Cultures of Compliance
We advise fund managers and advisers, including general partners and investment managers, on a variety of business matters, such as tax issues, applicable regulatory frameworks, defining and documenting governance standards and mechanisms, and issues ranging from compensation of principals to non-compete covenants. We also ensure our fund manager clients begin succession planning early on to avoid unexpected disruptions to fund operations.
We also advise managers, advisers, general partners and principals regarding the following issues:
business dealings with investors in the fund
procedures for advisory and investment committees
participation in other activities, including conflicting activities
forming follow-on or other investment funds
follow-on and “rescue” investments
adding “annex” funds
designing codes of ethics, operating and compliance manuals, and marketing and trading policies
developing trading policies to allow for side-by-side management of funds, registered products and separately managed accounts
We also work with managers on broker-dealer and futures market regulatory issues and advise on the overlap and entanglements of different regulatory agencies’ requirements, with the aim of helping managers develop and maintain “cultures of compliance” in their fund operations.
The Enforcement Environment
With asset managers facing increased scrutiny from federal and state regulators, as well as self-regulatory organizations, the Fund Services Group and our securities enforcement litigators work side by side to counsel and defend fund, advisory and broker/dealer and CPO/CTA clients at every stage of matters involving government oversight.
We guide our clients through investigations and litigation involving a wide variety of allegations, including insider trading, allegations of financial fraud, market manipulation, market timing and late trading, improper sales practices, excessive markups and advisory fees, inadequate supervision of securities professionals and accounting irregularities by corporate executives.
Understanding the reputational harm caused by an enforcement action, we work with clients to evaluate all options and ensure proactive communication with regulators.
Employee Participation Vehicles
As the market for alternative investment vehicles matures, principals look for more creative ways to attract good management and to share the rewards associated with strong fund performance. As long as capital gain treatment for carried interests income remains a possibility, fund managers will likely be interested in sharing those tax benefits with personnel deep within their organization, and we have helped clients establish investment vehicles that enable employees to invest in the fund or share in the carried interest earned by the sponsor.
New Challenges for the Private Funds Industry
Alternative investment funds, particularly hedge and private equity funds, have been subject to heightened scrutiny from legislators and government agencies in recent years. With increased regulation under the Dodd-Frank Act, new actions from Congress and the SEC and changing requirements in international jurisdictions, this trend is likely to continue in the future. We work with our clients to ensure they both stay on top of these developments and prepare for future change.
Given the complex regulatory environment in which funds and their advisers must now operate, we are regularly consulted by persons who are not yet clients of Pepper to provide “second opinions” to verify the conclusions and recommendations of management, in house counsel or other outside counsel, or simply to offer a differing point of view. The scope of a second opinion can be as narrow or broad as the particular issue under consideration and the client’s business objective. Second opinions also provide a vital link in the due diligence analysis applicable to complex investments, transactions and the ever-changing regulatory mandates.