How to beat the competition

A raft of proposed legislation waiting in the wings to be enacted as well as jurisdictions previously not even considered competitors all chomping at the bit to prise business away from the Cayman Islands. These were the topics under discussion at AIMA Cayman’s recent luncheon at the Wharf. Business Editor Lindsey Turnbull reports.

AIMA Cayman welcomed Ron Geffner, a partner at Sadis and Goldberg, New York who is a former SEC prosecutor and a well known media/TV commentator, to their luncheon at the end of November to discuss the US perspective when it comes to potential legislation of the hedge fund industry.
Mark Lewis, partner at Walkers and chairman of AIMA Cayman (the Cayman arm of the Alternative Investment Management Association) said that Geffner is a firm advocate of the Cayman Islands, having referred at least 75 hedge funds to Cayman in recent years. Geffner confirmed his strong ties with Cayman’s fund industry when he said that his law firm represents around 600 hedge funds and a large percentage of those are domiciled in the Cayman Islands.

Setting the scene
Geffner began his presentation by saying that hedge funds have received an unfair rap for the economic woes of the US.
“Eighteen months ago the economic bubble burst with the popular view that hedge funds were somehow responsible or profiting from the economic crisis,” he said. “This was just one view, however, because the real estate bubble also burst and investors did not take full responsibility for what they were investing in.”
Hedge funds, according to Geffner, were painted the villains and perceived benefactors in the crisis. “People are fixated on the very few who have done very well,” Geffner commented.
He said the economic bubble burst meant it was easier to spot a fraud within the industry such as Madoff and Stanford, which had all come to light over the past 18 months.
A large segment in the US distrusts hedge funds as a result, according to Geffner, and as such there has been a succession of regulatory proposals by politicians looking to make their mark and go down in history with their name attached to legislation that somehow saved America.
Explaining the background to these regulatory pushes, Geffner said the regulation of fund managers is governed by both state and federal law in the US.
“In states such as California, Colorado, Texas and Connecticut there is compulsory registration regulation. Under Federal law, however, only managers with 15 clients or more in a consecutive 12-month period need register.”
In the past year US politicians proposed a slew of regulations to curb the activities of hedge funds, they say, to protect investors from losing their cash as they did in the 2008/2009 financial meltdown. Geffner listed representatives Michael Castle’s and Michael Capuano’s introduction of the Hedge Fund Adviser Registration Act of 2009, senators Chuck Grassley’s and Carl Levin’s Hedge Fund Transparency Act, Representative Castle’s proposed Pension Security Act of 2009, The Private Fund Investment Advisers Registration Act introduced by Representative Paul Kanjorski and Senator Chris Dodd’s recent, and rather ambitiously titled Restoring American Financial Stability Act of 2009.
Geffner said thresholds for regulation of managers based on assets under management varied from legislation to legislation, although when he challenged Representative Kanjorski on his original AUM of just US$30 million (a figure that dates back to 1996 legislation) Kanjorski amended this threshold to US$150 million a week later.
“We all have the ability to influence decisions,” he stated.
In particular Geffner said record keeping will come under the spotlight, but he does not believe the new legislation has clear language as to the specifics of what is required.
“They’ve used kitchen sink language, which I imagine they’ll just modify down the line as to what they actually want,” he said. Geffner said there will most likely be a push to make public information such as assets, leverage, off balance sheet items and so on.
Other areas under scrutiny include the possibility of an increase in the number of required surprise audits of fund managers.
“There were only 180 surprise audits by the SEC [Securities and Exchange Commission] on hedge funds last year so with around 9,000 hedge funds in existence expect to see many more,” Geffner confirmed.
The SEC has, since Madoff, become “vicious” according to Geffner and he was hearing on a weekly basis from clients that the SEC was demanding to see their fund’s list of investors, a move that Geffner said is not supported by law.
On the cards
The Private Fund Investment Advisers Registration Act would require investment advisers to hedge funds, private equity funds and other private pools of capital to register with the SEC under the Investment Advisers Act of 1940 and be subject to reporting requirements, including reporting relating to systemic risk.  This piece of legislation, brought in by Representative Paul Kanjorski, will be the most likely new regulation to come into effect, according to Geffner.
He confirmed: “It’s passed through the House of Representatives and now has to be approved by the Senate. I do believe however that once this gets integrated into the system it will have little effect on the day-to-day running of the industry.”       
Never-the-less, Geffner said that hedge fund managers in the US have been concerned as to the perceived costs involved on becoming registered.
“They should realise that this is not the end of the world and that costs vary a great deal, depending on the size of the operation,” he said. “Strategies, the size of the team and so on all affect the cost. A one-person show could easily see the manager wear the same hat as the Compliance Officer. There are ways to deal with the issue and still comply with the law.”

Opportunities for Cayman
Geffner said the Cayman Islands could certainly position itself to welcome fund managers to its shores so that they could avoid this new regime most likely to be implemented on them if they remain in the US. He said he had talked to Cayman’s Premier McKeeva Bush about the issue at length and he believes that Bush has a genuine desire to relocate managers to Cayman.
“US Pension funds are keen to invest in funds with investment managers outside the US. I know of one huge pension fund currently trying to lure fund managers to be relocated to Holland,” he noted.
Holland, as with many European locations, is beefing up its infrastructure to welcome such additions to its economy, according to Geffner. Thus practitioners in the Cayman Islands need to appreciate that competition is now much broader than simply other offshore jurisdictions.
Geffner said Cayman needs to examine whether there is general acceptance among the local population of the relocation of fund managers to this location, and government would have to look carefully at the types of incentives on offer for these managers to relocate to Cayman, both in the monetary sense and also in the possibility of tenure in this location past the seven year term limit imposed on all new foreign residents.
“I believe attracting fund managers here does not just depend on throwing money at them. Encouraging such growth would have a positive effect on the local workforce because new businesses will always need local talent as well as talent from overseas. And let’s face it, if a fund manager is weighing up whether to relocate to Holland or the Cayman Islands I think they would choose the latter any day!”    

The future
Geffner said there will be some serious pairing down within the fund industry over the next few months but there are signs of positive inflow of funds even at the end of November 2009 (at the time of writing) and even into fund of funds, which was extremely positive for the industry. He warned that the SEC would continue to retool, attracting talent from the US Attorney’s Office who would be aggressively moving their cases forward over 2010. Structuring the Cayman Islands to benefit from such moves is therefore the way forward for the industry here.


From left, AIMA executive committee: Andy Stepaniuk (immediate past chairman), Rohan Small (vice chairman), guest speaker Ron Geffner (partner, Sadis & Goldberg), Mark Lewis, (chairman) Denise Gower (media & communications), Alan Milgate (secretary), Stu Sybersma (events). Absent from photo: Gary Linford (education and research), Henry Harford (legal counsel), Greg Bennett (treasurer)