New York (J.H. Cohn LLP) – Another year has passed, but President Obama still has not been able to pass his “Carried Interest” bill.

Advisers, as year-end approaches, will benefit from reviewing pending legislation and other issues, including business structure, operations, and respective portfolios, and considering optimal steps they can take to address these issues before 2012 begins.

President Obama’s proposed American Jobs Act, if enacted, will increase the tax rate paid by an investment manager on incentive allocations (“carried interest”) earned from investment partnerships.

Under the President’s proposal, carried interest would be taxed as ordinary income (subject to the maximum rate of 35 percent under current law), regardless of the character of the income. In addition, this income will be subject to self-employment tax. Under current law, income derived from carried interest is taxed using the rates that related to the type of income recognized, therefore some of the income may be taxed at more favorable capital gains rates of 15 percent, which is also not subject to self-employment tax.

Today, it remains unclear when (or whether) the legislation will be passed. As a result, some managers may choose to recognize a long-term capital gain for tax year 2011 to ensure a maximum tax rate on their incentive of 15 percent.

Other points to consider:

Will Federal tax rates go up in 2012? In December 2010, President Obama passed the 2010 Tax Relief Act which will keep the maximum rate limited to 35 percent through December 31, 2012.

Is your fund tax efficient? Investors are increasingly asking: What is the after-tax return on my investment? Your trading style and trading instruments at times may have positive or negative impacts on taxable income (loss). For example, gains on certain Broad-based Index Options may be taxed as Section 1256 contracts (60 percent long-term capital gain and 40 percent short-term regardless of holding period), as compared to an equivalent Exchange Traded Fund (“ETF”), which is short- or long-term capital gain based upon the holding period.

Another important consideration is a review of unrealized losses on positions held at year-end. As the unrealized losses are not deductible unless the securities are sold, if you have net realized gains during the year, your investors will have to pay tax on the gains reported. It may be beneficial for tax purposes to sell a position during 2011 with an unrealized loss to offset them. If you sell a position to offset gains, you cannot reacquire the same position for 30 days or the loss may be disallowed due to the “wash sale” rules. Any offsetting positions are subject to additional rules that may trigger taxable gains or the deferral of losses, such as “constructive sales” and “straddles.” A careful review of the realized and unrealized positions should be done to ensure an efficient result.

475(f) mark -to-market election for traders can yield significant advantages, and traders should evaluate the potential benefits to determine whether this election should be made in early 2012.  Potential benefits may include a change in the character as well as the amount of taxable income each year.

There has been a lot of buzz about the Foreign Account Tax Compliance Act (“FATCA”). FATCA requires non-U.S. financial institutions and non-U.S. entities (including offshore investment funds) to provide information to the IRS identifying U.S. persons invested in non-U.S. bank and securities accounts. The legislation is motivated by incidents of U.S. persons failing to report foreign-source income for U.S. income tax purposes. A 30 percent withholding tax applies on any “withholdable payment” made to a foreign financial institution (FFI) unless the FFI agrees with the Internal Revenue Service to take a number of specific steps pursuant to an FFI agreement. The specific steps are designed to ensure that U.S. persons are identified and U.S. tax is imposed on their investment income.

For more information, please contact Warren Abkowitz, CPA, JD, MST, a member of J.H. Cohn LLP’s Financial Services Industry Practice, at wabkowitz@jhcohn.com or 646-834-4135.

New York (HedgeCo.net) – Since the market correction of 2008, a vast majority of hedge fund net asset flows have gone to a small minority of hedge funds with the strongest brands, marking a change from the pre-2008 environment. A brand is an investor’s perception of the overall quality of a hedge fund based on multiple evaluation factors that evolve over time. A high-quality brand takes a long time to develop, but once achieved, it significantly enhances a firm’s ability to raise capital and retain assets during a drawdown in performance.

Branding is a critical issue for all hedge funds, because the marketplace has become increasingly competitive. Most agree that there are over 10,000 hedge funds in the market place. Hedge fund investors are inundated with requests for meetings, with some receiving hundreds of phone calls or e-mails per week from investment managers. To filter through the overload of information, investors are turning more and more to a firm’s brand when choosing which funds to meet and ultimately invest with.

From the 4th quarter of 2008 through the 3rd quarter of 2010, most hedge fund inflows gravitated to the largest hedge funds with assets greater than $5 billion, deep operational infrastructure, large investment teams and an institutional client base. Performance became a secondary consideration. During this period a large percentage of the assets flowing into the hedge fund industry were driven by large pension funds making their first direct allocation to hedge funds. Their primary objective was increasing their exposure to hedge funds while minimizing headline risk. The large hedge funds that had developed well-known brands within the industry were perceived as providing a conservative approach to investing in this space.

Beginning in the 4th quarter of 2010, the definition of a high quality brand began to evolve and a greater emphasis was placed on potential future performance. This coincided with the re-emergence of more experienced and sophisticated hedge fund investors within the endowment, foundation, large family office and fund of fund sectors of the market. Many of these experienced investors came to believe that the largest hedge fund managers had accumulated too many assets, which diluted their alpha over a larger asset base and, more importantly, increased the investment risk to investors because of the larger bets they were required to make in individual securities due to their size.

This greater focus on smaller, more nimble managers has continued to gain momentum as some of the largest hedge funds have recently experienced significant publicity for the poor performance they have generated over the past year. This is good news for small and mid-sized hedge fund managers that represent a majority of the firms in the industry. Unfortunately for many of these managers, they are not participating in these flows because, unlike before 2008, a vast majority of flows are going to those small and mid-sized managers that have developed the strongest brands. The key question is, what are the firms that have developed the strongest brands doing differently?

For the small number of new hedge fund launches that are successful each year, their high-quality brand was typically created at their previous firm. This may include having held a senior position at another top-quality brand hedge fund, having spun out of a top investment bank proprietary trading desk, or having been seeded by a well known investor. These high profile fund launches attract a significant amount of media attention and generate a buzz throughout the hedge fund investor community, which allows these funds to be created with a large amount of committed capital despite having no historical performance track record for the fund.

For the hedge funds not fortunate enough to launch with such fanfare, Agecroft Partners believes there are three critical steps involved in creating a strong brand and raising assets in today’s competitive environment. These include the quality of the fund offering, the investor’s perception of the quality of the fund offering, and their marketing and sales strategy.

The first step in the process is having a high quality product offering. Agecroft Partners hedge fund research process looks at thousands of hedge funds each year and the reality is that many hedge funds are not very good based on multiple evaluation factors. With over 10,000 hedge funds to choose from, it is almost impossible for these sub-par managers to raise assets from investors outside of friends and family.

The biggest mistake most of these lower-quality hedge funds make is not understanding the evaluation factors investors utilize to select hedge funds and therefore not creating a top-quality offering. These factors typically include an evaluation of a firm’s operational infrastructure, investment team and their pedigree, investment process focused on their differential advantages, risk controls, performance, service providers and fund terms. A weakness in any of these factors can eliminate a firm from consideration. Hedge fund performance tends to be a quantitative screen to eliminate a majority of managers, but once performance has reached a certain hurdle its weighting in the evaluation process is less important than most managers realize.

The second step in the process of building a strong brand is making sure the market’s perception of the firm is equal to reality. This requires a consistently delivered, concise and linear marketing message that identifies the differential advantages across each of the evaluation factors investors use to select hedge funds. Many high quality hedge funds have difficulty raising assets because they do a poor job of articulating their message to the marketplace. The marketplace is highly competitive and hedge fund investors use a process of elimination in selecting hedge funds. This typically begins by screening the thousands of hedge funds in the market place, meeting with a couple hundred and hiring a select few each year. It only takes one poorly worded answer to get a firm eliminated from consideration.

It is important that the marketing message is clearly understood by all employees of the hedge fund and that the message is consistently integrated throughout all the firm’s mediums of communication, including the website, oral presentations, written materials, due diligence questionnaires and quarterly letters. A well-prepared and accurate marketing presentation eliminates inconsistencies and helps foster a level of integrity when interfacing with potential investors.

The final step in building a strong brand is implementing a highly-focused marketing and sales strategy that broadly penetrates the market place while being compliant with regulatory guidelines. The hedge fund investor marketplace is highly inter-connected. Many investors exchange ideas on managers and, as a result, the more deeply a manager penetrates the marketplace the stronger their brand will become. Building a strong brand and raising assets takes time and cannot be rushed. The hedge fund industry is not transaction oriented. In many instances, being too aggressive will eliminate a firm from the selection process. Many investors require a minimum of three or four meetings with a fund before they will invest.

One way to truncate the process is to utilize a well-seasoned, highly respected internal sales team, top-tier third party marketing firm or a combination of both. Experienced and well-thought of salespeople can have a large impact on a hedge fund’s success in growing their asset base. They will often have a reputation or brand in the marketplace themselves. If their brand is strong, it can significantly increase the possibility of meeting with an investor and increase the initial credibility of a firm. Prime broker capital introduction areas can be a valuable resource to introduce a firm to investors through their conferences or other activities. However, they should not be relied upon solely. As mentioned before, it usually takes multiple meetings for an investor to invest and it is very important to have people focused full time on the sales process.

The days of a hedge fund participating in hedge fund databases and then sitting back and waiting for the assets to flow are over. The firms that will be successful in growing their business in the future are organizations that stay highly focused on providing a top-quality offering, clearly articulate their firm’s differential advantage across the multiple evaluation factors investors use to selected hedge funds, and have a highly professional sales and marketing strategy.

By Don Steinbrugge, Chairman of Agecroft Partners.

New York (HedgeCo.net) – It’s a busy week for sentencings stemming from the Galleon Group insider trading scheme, according to Artur Davis, a White Collar and Government Investigations expert.

Yesterday, Emanuel Goffer, convicted alongside his brother Zviand another trader for their role, was sentenced to three years in prison. The other individual, Michael Kimelman, will learn his fate on Wednesday. But the main event is Thursday, when Raj Rajaratnam, the once-invincible Galleon Group hedge fund manager – convicted of 14 counts of insider trading this past spring – will learn his punishment in a Manhattan federal court.

Will he really get 24 years?

That’s the question in advance of the Rajaratnam sentencing. Odds are that it will be the lengthiest prison term ever handed out for insider trading. Does he deserve it? As The New York Times noted, the 24-year sentence sought by prosecutors would exceed the average federal sentences for sexual abuse, kidnapping and even murder.

Glenn Colton and Artur Davis, partners with SNR Denton, have been watching the Galleon saga since it broke last year and know a thing or two about sentencing white collar defendants. Both are former federal prosecutors – Colton spent 10 years as an assistant US Attorney in New York’s Southern District (where he appeared before Judge Richard Sullivan, who is handling the Kimelman case) and in private practice has represented numerous companies and individuals in cases involving financial wrongdoing. Davis is a former five-term Congressman who served on the House Judiciary Committee. As an assistant US Attorney in Alabama, he led some 30 jury trials and turned in a nearly 100% conviction record.

Both Colton and Davis believe U.S. District Judge Richard Holwell will indeed go long in his sentencing hearing on Thursday, in a move they feel is short on fairness.

“The disparity between the proposed sentence for Rajaratnam and the sentences his co-conspirators received is excessive, well beyond what the guidelines contemplate when they allow credit for substantial assistance and acceptance of responsibility,” says Davis. “A fair sentencing regime should not reflect such a dramatic difference in penalty between individuals who committed the same core offenses.” He notes that former Galleon trader Zvi Goffer was sentenced to 10 years for his role in the affair, while Galleon go-between Danielle Chiesi – who was actively peddling stock secrets to Rajaratnam from her high-placed lovers – got only 30 months.

Davis goes further and questions just who was victimized by Rajaratnam’s conduct. “While Galleon was obviously unraveled by his actions, his crimes did not imperil the larger economic market or the hedge fund industry,” he argues. “It is also relevant that the vast majority of these cases are handled civilly, and in fact there are parallel civil proceedings still related to these crimes.”

Colton believes the judge will hand out the maximum sentence to deliver the strongest message that courts are tough on insider trading – which is not necessarily the right metric. “Sentencing should reflect the individual and the specific crimes committed, as well as the harm caused to others, the risk of recidivism and – as required by statute – not be any longer than necessary to achieve the goals of the sentencing statute,” he said. “Prosecutors are not allowed to ask juries to convict a defendant in order to send a message. That concept should apply to judges as well and be considered by the courts when it comes to sentencing.”

Colton adds that “these extreme prison terms reflect the unreality of the sentencing guidelines in white collar cases. The loss amount – which can be calculated into millions of dollars of improper gains – drives these sentences beyond what the most violent criminals would get, even when the loss is nowhere near the level of a Bernie Madoff.”

Editing by Alex Akesson

For HedgeCo.net
alex@hedgeco.net
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New York (HedgeCo.net) – In a new opinion piece, BNY Mellon CEO of Alternative and Broker-Dealer Services Brian Ruane argues that recent industry and economic events will see custody banks continue to play a larger role providing services to hedge funds that previously were the sole domain of prime brokers.

The paper, ‘Filling the Void: Transparency and the Rise of Custodian Banks,’ was presented to more than 150 client and industry attendees at recent events in Dublin and London.  In it, Ruane writes that due to stricter regulations following the credit crisis – from Dodd-Frank to the AIFM Directive – alternative fund managers are being compelled to reevaluate the right balance between counterparty exposure and a higher degree of safety.  Ruane says this is creating distinct operating models for hedge funds in the U.S. and Europe.

Following the crash in 2008, U.S.-based hedge funds sought out custodians to safe-keep and service their unencumbered cash and securities.  Through a custodian bank, hedge funds had the assurance not only that their un-invested cash balances were 100% FDIC insured through 2012, but also that securities would be kept off the custodian’s balance sheet and assets couldn’t be rehypothecated.  Services traditionally reserved for prime brokers, such as clearing, cash and collateral management, became components of a service partnership between primes and custodians.

The second model is the evolving European interpretation of prime custody.  In Europe, hedge funds primarily use custodian banks to provide collateral management services on initial and variation margin.  But European-based hedge funds are increasingly showing interest in custody services for their unencumbered assets as well.  Driven by the need for greater asset protection and control, hedge funds inEurope are pushing prime brokers toward service models similar to those found in the U.S.

“The universe of companies providing key services to hedge funds has shifted dramatically.  Hedge funds have gained a new appreciation for counterparty risk and financial strength and started to look at another group of service providers – custodian banks,” said Ruane.  ”Alternative investment managers in the U.S. and Europe, as well as the more institutionally focused managers in Asia, are looking to custody banks as financial intermediaries who can deliver a seamless offering.”

Ruane says the two models are evolving to meet the demand for asset protection through improved transparency.  In the U.S., several prime brokers have created partnerships with custodians.  These partnerships enable prime brokers to maintain their current relationship with their hedge funds, while offering the fund the ability to hold assets with a third-party custodian.  Interest is expanding to European shores as well. (Download PDF)

On Startups – If you’re starting a company, one of the most important decisions you’ll make early on is the selection of a co-founder. Some might advocate just “going it alone” because finding a great co-founder is hard and fraught with risk. It is hard and it is fraught with risk. But going it alone is harder — and riskier. Startups are very challenging and having someone to share the ups and downs with, to be a great sounding board for ideas and to just help get things done is immensely valuable.

One additional thought: I’m an introvert. I don’t enjoy being around people very much. If you’re like me, the notion of just doing something all by your lonesome might seem appealing. And, it is — but I think it’s a mistake. Even for introverts, having someone on your side is useful and fun.

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By George Soros – Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.

Three bold steps are needed. First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone. In the meantime, the major banks must be put under European Central Bank direction in return for a temporary guarantee and permanent recapitalisation. The ECB would direct the banks to maintain their credit lines and outstanding loans, while closely monitoring risks taken for their own accounts. Third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debt at a very low cost. These steps would calm the markets and give Europe time to develop a growth strategy, without which the debt problem cannot be solved.

This is how it would work. Since a eurozone treaty establishing a common treasury would take a long time to conclude, in the interim the member states have to appeal to the ECB to fill the vacuum. The European Financial Stabilisation Fund is still being formed but in its present form the new common treasury is only a source of funds and how the funds are spent is left to the member states. It would require a newly created intergovernmental agency to enable the EFSF to cooperate with Europe’s central bank. This would have to be authorised by Germany’s Bundestag and perhaps by the legislatures of other states as well.

The immediate task is to erect the necessary safeguards against contagion from a possible Greek default. There are two vulnerable groups – the banks and the government bonds of countries such as Italy and Spain – that need to be protected. These two tasks could be accomplished as follows.

The EFSF would be used primarily to guarantee and recapitalise banks. The systemically important banks would have to sign an undertaking with the EFSF that they would abide by the instructions of the ECB as long as the guarantees were in force. Banks that refused to sign would not be guaranteed. Europe’s central bank would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own account. These arrangements would stop the concentrated deleveraging that is one of the main causes of the crisis. Completing the recapitalisation would remove the incentive to deleverage. The blanket guarantee could then be withdrawn.
To relieve the pressure on the government bonds of countries such as Italy, the ECB would lower its discount rate. It would then encourage the countries concerned to finance themselves entirely by issuing treasury bills and encourage the banks to buy the bills. The banks could rediscount the bills with the ECB but they would not do so as long as they earned more on the bills than on the cash. This would allow Italy and the other countries to refinance themselves for about 1 per cent a year during this emergency period. Yet the countries concerned would be subject to strict discipline because if they went beyond agreed limits the facility would be withdrawn. Neither the ECB nor the EFSF would buy any more bonds in the market, allowing the market to set risk premiums. If and when the premiums returned to more normal levels the countries concerned would start issuing longer-duration debt.

These measures would allow Greece to default without causing a global meltdown. That does not mean that Greece would be forced into default. If Greece met its targets, the EFSF could underwrite a “voluntary” restructuring at, say 50 cents on the euro. The EFSF would have enough money left to guarantee and recapitalise the European banks and it would be left to the International Monetary Fund to recapitalise the Greek banks. How Greece fared under those circumstances would be up to the Greeks.

I believe these steps would bring the acute phase of the euro crisis to an end by staunching its two main sources and reassuring the markets that a longer-term solution was in sight. The longer-term solution would be more complicated because the regime imposed by the ECB would leave no room for fiscal stimulus and the debt problem could not be resolved without growth. How to create viable fiscal rules for the euro would be left to the treaty negotiations.
There are many other proposals under discussion behind closed doors. Most of these proposals seek to leverage the EFSF by turning it into a bank or an insurance company or by using a special purpose vehicle. While practically any proposal is liable to bring temporary relief, disappointment could push financial markets over the brink. Markets are likely to see through inadequate proposals, especially if they violate Article 123 of the Lisbon treaty, which is scrupulously respected by my proposal.

That said, some form of leverage could be useful in recapitalising the banks.
The course of action outlined here does not require leveraging or increasing the size of the EFSF but it is more radical because it puts the banks under European control. That is liable to arouse the opposition of both the banks and the national authorities. Only public pressure can make it happen.

Steve Shafer, Chief Investment Officer for Covenant Financial Services, LLC (“Covenant Investors”), thinks copper may soon rival gold as the world’s most sought-after metal because of its key role in China’s unprecedented electrification efforts. Unlike gold, he adds, the copper rush will be driven purely by demand instead of fear, keeping prices high for years to come.

“Copper is the core of what I call a commodity ‘supercycle’ that will last until 2030 or longer, with coal, corn, crude oil, and natural gas part of the mix, ” commented Mr. Shafer, a global macro hedge fund manager. “That’s because to grow China, you must first electrify China, and copper is the key to electrification at every point.  Whether it is houses, hospitals, businesses, bullet trains, or cars, they all need power – which means they all need copper,” he stated.

China experienced rolling power blackouts this summer because of a 1500 gigawatt power deficit (1 gigawatt = 1 billion watts) which, according to Mr. Shafer, equaled approximately the same amount of power used to electrify all of Argentina for a single year.  To put China’s power needs in perspective, Mr. Shafer said China has 160 cities with 1 million or more people, and intends to add urban centers for 300 million of its 1.2 billion population over the next 5 to 10 years. To do that, analysts says China will need to add twice the total amount of coal-fired utility power presently used in the whole country of Britain to meet its rising domestic power needs every year.

Mr. Shafer’s predictions come as the International Copper Study Group (ICSG) projects world copper demand in 2011 outstripping supply by 377,000 tons compared to a deficit of 250,000 tons in 2010, with China using 40% of the total world’s supply.  If this rate of consumption continues, more copper will be consumed in the next 27 years than has been consumed over the past 106 years.

“While copper prices have been depressed recently, and may go yet lower due to macroeconomic uncertainty, we feel certain that within three to five years, copper will be appreciably higher based upon real demand and not the financial alchemy that afflicts gold prices,” commented Mr. Shafer.  “Investors should use these dips to accumulate long term contracts at lower prices and not worry about the volatility in the short term.  Real wealth isn’t made on a tick-by-tick basis but by exploiting real investment opportunities like the supply/demand imbalance presented by China’s insatiable appetite for copper,” he added.

Mr. Shafer calculates that if worldwide demand for copper grows a conservative 3% annually over the next 10 years, an additional 44 new mines that produce at least 150,000 tons per year or more will have to be brought on line.  Today, only 26 mines of this size are known to exist worldwide. In fact, China’s copper consumption grew by 4.3% in 2010 and is slated to increase by 6% in 2011.

“Simply put, we want to own the things that China and its peers want,” commented Mr. Shafer.

His bullish scenario for China contrasts sharply with his pessimistic economic outlook for the U.S. and Europe. In Mr. Shafer’s macro view, Western countries’ high debt-to-GDP ratios will prolong slow or stagnant economic growth for years to come.

New York (HedgeCo.net) – Over the past two years, Merlin has published several white papers that are designed to highlight and help managers imple- ment industry best practices, from shoring up their business model to identifying their target investors based on the development stage of their fund.

In continuing with this theme, Merlin’s latest white paper discusses the importance of business process automation within an asset management firm at all stages of development and how these organizations can measure their current processes versus investor expectations.

Managers, investors and due diligence teams all analyze and measure the business risk and process maturity of a fund. Funds must continually review both their organizational structure as well as the level of automation resident in their systems and procedures.

A hedge fund’s assets, number of strategies, the number and type of its investors, and the amount of people required to run a fund, invariably strain the original processes a fund used when it was a startup. At some point, legacy processes, lack of automation and the lack of delineated roles pose significant operational risk and often impede a fund’s ability to scale and succeed.

“Knowing when to upgrade processes and technology and when to hire additional people is a common challenge for all businesses.”

As funds grow it is imperative that their business processes have the rules, controls and a level of automation that is commensurate with the growth of the fund and the type of investor being serviced. Funds that ignore the natural progression of process maturity will do so at their peril.

About Merlin Securities

Merlin is a leading prime brokerage services and technology provider, offering integrated solutions to the alternative investment industry. The firm serves more than 500 single- and multi-primed managers, providing them with a broad suite of solutions including dynamic performance attribution analytics and reporting, seamless multi-custody services, capital development, 24-hour international trading, securities lending experts and institutional brokerage. With more than 100 employees, the firm has offices in New York, San Francisco, Boston, Chicago, San Diego and Toronto. Merlin utilizes the custodial and clearing operations of J.P. Morgan, Goldman Sachs, Northern Trust and National Bank of Canada. Merlin is a member of FINRA and SIPC. For more information, please visit www.merlinsecurities.com.

New York (HedgeCo.net) – Federal and State securities law recognizes a finder as “someone who finds, interests, introduces and brings parties together for a business transaction that the parties themselves negotiate and consummate.” Unlike a broker, a finder has no duty to bring the parties to an agreement, but instead acts as an intermediary or middleman. Finders find potential buyers or sellers, stimulate interest and bring parties together. Brokers bring the parties to an agreement on particular terms.” In the corporate financing context, a finder’s compensation is generally based on a percentage of the amount invested by one party or, in circumstances involving mergers and acquisitions, a percentage of the transaction value.

When A Finder Must Register As A Broker-Dealer, Or Use A Broker-Dealer:

The federal securities laws generally govern whether a finder must register as a broker-dealer, or conduct its activities through a registered broker-dealer. Section 3(a) (4) of the Exchange Act defines “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” Section 3(a) (5) of the Exchange Act defines “dealer” as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.” Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) provides that it is unlawful for any broker or dealer to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security unless such broker or dealer is registered with the Securities & Exchange Commission.

Difference Between Broker Versus And An Intermediary:

As one commentator has noted, although a pure finder may “induce the purchase or sale of” a security within the meaning of Section 15(a) (1), he or she is not normally a “broker” because he or she effects no transactions. In addition, the staff of the Securities and Exchange Commission has issued certain no-action letters further interpreting these provisions. For example, in a no- action letter the staff explained:

[A]n intermediary who did nothing more than bring merger or acquisition-minded people or entities together and did not participate in negotiations or settlements between them probably would not be a broker in securities and not subject to the registration requirements of
Section 15 of the Exchange Act; on the other hand, an intermediary who plays an integral role in negotiating and effecting mergers or acquisitions that involve transactions in securities generally would be deemed to be a broker and required to register with the Commission.
1
In light of the SEC’s no-action letter, potential finders should be wary of performing anything more than an intermediary role in bringing parties together for the purposes of consummating business transactions involving the purchase or sale of securities, otherwise they run the risk of being deemed unregistered brokers pursuant to the federal securities laws. In particular, finders should avoid offering investment advice in connection with their services. Accordingly, finders and drafters of finder’s fee agreements should preliminarily determine what the finder’s role will be in connection with any potential finder’s arrangement. Furthermore, finders and drafters of finder’s fee agreements should explore whether the finder’s role will be restricted to merely bringing two parties together for a business transaction or whether the finder will assume a more active role in negotiating and structuring the ultimate financing arrangement. Only by examining the finder’s duties can the practitioner determine whether the finder must register as a broker pursuant to the federal securities laws.

While the use of finder’s fee agreements have become commonplace, finders and practitioners alike must be wary of potential pitfalls that may arise from such agreements. Before drafting any finder’s agreement, the practitioner should first determine the extent of the finder’s role in consummating the transaction at issue. In addition, the practitioner should evaluate whether the finder may be subject to regulation under the federal securities law. Finally, after the practitioner has addressed these considerations, the practitioner may want to include a provision in the
finder’s fee agreement to ensure that the finder will be compensated from transactions that
culminated from a chain of introductions initiated by the finder.

About the Authors:

James C. Brennan, J.D., is an experienced trial attorney in practice for 30 years. Jim provides risk analysis and other advice and professional services to the global hedge fund community. Jim served with the United States Department of Justice in Washington, D.C. as a Trial Attorney from 1982 through 2006. There he handled all phases of complex litigation. From 1975 through 1982, Jim was an analyst in the Counter-Intelligence Division of Federal Bureau of Investigation in Washington, D.C. Jim is a welcome addition to Capital Management Services Group and brings a wealth of expertise, counsel, and wisdom to our practice. Jim received his Juris Doctor in 1982 from George Mason University School of Law,
located in Arlington, Virginia. He graduated from King’s College, located in Wilkes-Barre, Pennsylvania,
in 1975 with a B.A. in Government.

Hannah Terhune, J.D., LL.M, has nearly twenty years of solid experience working closely with people and businesses as an international tax and investment law (private investment fund) attorney. Her prior professional experience includes working as a tax law expert with two of the largest accounting firms in the world and with the United States Tax Court. She has an advanced law degree in taxation from The New York University School of Law (Legum Magister 1991) and a law degree from George Mason University (Juris Doctor 1989). She has a Bachelor of Arts degree in Communications from The American University (1985). She has served as an Associate Lecturer in taxation and business at George Mason University in Virginia and at Catholic University in Washington, DC. Her prior military service includes serving as Judge Advocate and Aide-de-Camp in the U.S. Army Special Forces. She has numerous testimonials to her credit. Ms. Terhune has written over 100 published articles and white papers on U.S. and offshore tax planning and private investment funds (hedge fund).

NYT – Our leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

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New York (HedgeCo.net) – The global hedge fund association, AIMA, has responded to the temporary short selling bans introduced by France, Italy, Belgium and Spain.

“We do not think these bans will help the current market situation.” The Alternative Investment Management Association CEO Andrew Baker said, “Past experience has shown that bans on short selling do not prevent market falls and indeed can exacerbate volatility. Independent academic research also supports this conclusion.”

“Short-selling is a legitimate market practice which helps capital markets function effectively. It was only last year that the Committee of European Securities Regulators, the predecessor to ESMA, recognised in an official report that ‘legitimate short selling plays an important role in financial markets. It contributes to efficient price discovery, increases market liquidity, facilitates hedging and other risk management activities and can possibly help mitigate market bubbles’.”

AIMA also supported a statement by the European Securities and Markets Authority (ESMA) on market abuse which emphasised that market abuse is prohibited.

“Of course market abuse is illegal and has always been condemned by our industry. If there is any proof of market abuse having taken place then the authorities should take appropriate action against the perpetrators. If there is any suggestion of market abuse, however, then it may be appropriate to take more targeted action rather than impose blanket bans of this sort.” Andrew Baker concluded.

Editing by Alex Akesson

New York (HedgeCo.net) – A new white paper entitled, “Commodities Outlook: Increased Volatility, Increased Opportunity?” has been released by Credit Suisse’s Asset Management division. The paper examines the recent rise in the volatility of commodity prices within the context of a longer-term, secular trend of increasing volatility and how investors can best position their hedge fund portfolios in this environment going forward.

The paper is written by Credit Suisse hedge fund managers Nelson Louie, Global Head of the Commodities Group within Asset Management, and Christopher Burton, Senior Portfolio Manager, who believe that a sustained level of volatility may actually benefit long-term commodity investors for the following reasons:

• Tightening supply/demand conditions may exacerbate commodity volatility, but may also potentially lead to higher returns over the long term;
• Return drivers for commodities are distinct from those of traditional equity and fixed income markets and relate to their idiosyncratic supply/demand functions; and
• Investors can potentially capitalize on the shape of the futures curve by taking advantage of short-term supply shocks to potentially generate alpha.

In addition, the white paper focuses on the drivers of commodity volatility and makes the case for what may be a prolonged period of supply/demand imbalance.  Louie and Burton also address the impact of this imbalance on prices, and how certain events such as extreme weather, economic expansion, labor disputes or geopolitical risk can exacerbate price volatility.

Commodities Outlook: Increased Volatility, Increased Opportunity (PDF)

Editing by Alex Akesson