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PwC: 12th Annual Alternative Investment Seminar


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Increasing demands from investors and regulators, and an uncertain economic environment are changing the alternative investments industry. As it becomes a bigger force in capital markets, are you …

Increasing demands from investors and regulators, and an uncertain economic environment are changing the alternative investments industry. As it becomes a bigger force in capital markets, are you ready to seize the opportunities? PwC’s 12th annual alternative investments seminar explores how the industry can face the challenges posed by a changing regulatory and tax environment. Read the full report on these hot topics. More info:

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  • 1. 12th Annual Alternative Investments Seminar Highlights November 29, 2012 New York City
  • 2. Introduction The alternative investments industry is on track to be a bigger force in the broader capital markets. To seize this opportunity, managers are challenged to focus on both growth and infrastructure, and to do this in an environment marked by uncertainty, greater regulatory risks, and rising tax rates. The first panel of the general session, Creating and sustaining excellence, looked at issues facing funds in today’s investment environment with a particular focus on growth, differentiation, efficiency, and regulation. The second panel, Taxes: Charting a path forward, explored issues involving taxation, governance, and the impending fiscal cliff. Following the two panels, keynote speaker Charlie Rose, acclaimed interviewer and journalist, discussed current affairs. Moving into 2013, hedge fund and private equity managers and firms face the prospect of higher taxes, while regulators are pushed to register and examine a huge pool of investment advisors. This requires watchfulness and a focus on operations, along with a dedication to maintaining the entrepreneurial spirit that differentiates the alternative investments industry. In response to last year’s positive feedback, the 12th annual Alternative Investment conference expanded the number of Closer Look breakout sessions from four to eight. Participants had the opportunity to take an in-depth look at a variety of issues including: Tax, Valuation, Regulation, FATCA, Global Tax, and Institutional Quality. Summaries of the breakouts follow the general session overview. With this as a backdrop, PwC convened its 12th annual alternative investments seminar in New York on November 29, 2012 to explore how the industry can face the challenges posed by a changing regulatory and tax environment. Mark Casella, US leader of PwC’s Alternative Investment practice, led off the general session in front of an audience of approximately 1,200 hedge fund and private equity professionals by discussing the landscape, and outlining three key issues that investment managers must keep in focus. This publication captures highlights from the New York City seminar, PwC’s flagship event in its Global Alternative Investments seminar series, which brings together over 3,500 hedge fund and private equity managers in 20 cities around the world including eight US cities, including New York, Boston, Washington DC, Chicago, Dallas, Seattle, San Francisco and Los Angeles, as well as prominent international locations such as London, Zurich, Geneva, Frankfurt, Dublin, Luxembourg, Hong Kong, Singapore, Tokyo, Cayman, Bermuda, Sao Paulo, Toronto, Cape Town and Sydney. Increasing demands from investors and regulators, along with an uncertain economic environment, are bringing major shifts to the alternative investment space. 12th Annual Alternative Investments Seminar Highlights
  • 3. Contents Introductory remarks 1 Creating and sustaining excellence 3 Tax risk management: Charting a path forward 5 Keynote address: Charlie Rose 7 Closer Look sessions 8 Achieving institutional quality 9 Taxes: New developments impacting private equity and hedge funds 10 Pricing and valuation in focus 11 Focus on the new regulatory climate 12 Global tax trends: Risks and opportunities 13 FATCA: Moving into implementation for asset managers 14 PwC’s speakers 15 12th Annual Alternative Investments Seminar Highlights
  • 4. Introductory remarks “Alterative investments will remain an integral part of capital markets, and managers are as focused as ever on growth, performance, and the creation of value for their investors and for themselves.” Mark Casella US Leader of PwC’s Alternative Investments Practice Mark Casella, US Leader of PwC’s Alternative Investments Practice, opened the event by noting the significant changes he has witnessed in the industry since the inception of the seminar 12 years ago. The industry experienced tremendous growth over those years, followed by a stall due to the fiscal crisis, ill liquidity and poor performance, and larger redemptions. Even with these changes, said Casella, investment managers today are as focused as ever on growth, performance and the creation of value. Casella was confident, stating “the engine has clearly restarted” for the alternatives industry, and the 1 12th Annual Alternative Investments Seminar Highlights industry is on track to become a bigger force in the broader capital markets. His remarks prepared the audience for the active agenda that was to follow. He underscored that on a day-today basis, alternative investment managers deal with market uncertainty, volatility, and an ever-increasing rate of change. The current state of the market forces managers to deal with issues stemming from increased investor demands, regulatory changes in the US and abroad, cost pressures, new taxes, threats posed by the fiscal cliff, and decreased margins.
  • 5. Several trends are reshaping the landscape, the first being the growing influence of institutional investors. There is tremendous opportunity presented by the growing clout of these investors, specifically sovereign wealth funds (SWFs) and pension funds. Institutional investors’ assets under management have risen greatly over the past decade, and should continue to do so in the future. wealth in different countries will create distinctly different markets in the future. To take advantage of these new opportunities managers, and particularly hedge fund managers, need to consider product design, distribution networks, and reporting practices. Firms will also face new regulatory and infrastructure demands, challenges they will need to address in order to seize the coming opportunities. With larger allocations, these investors have more influence. They behave differently from traditional clients, and demand better performance along with more transparency and documentation. Firms will continue to face significant cost pressure, and they are responding to this new reality by placing an increased focus on cost efficiency and by expanding their investment operations. However, Casella warned, firms need to make sure that an increased concentration on cost does not lead to a sacrifice in quality, and he referred the audience to PwC’s recent Viewpoint, “From good to growth.” Casella then explored three key issues that alternative investment managers must keep in focus: The second significant trend is the long-term impact of demographic change in both the US and abroad. Population growth and increasing • The first issue is client service. Organizations need to become more client-centric, as managers shift from selling standardized products to developing customized solutions. Managers need to work to earn clients’ trust, and they can do this with increased transparency, and better access to firm data. That said, even with this shift, an entrepreneurial spirit must remain a central characteristic of fund strategy. • The second issue is the increased pressure from tax and regulatory authorities. Alternatives firms will continue to face pressure and, increasingly, governments are looking for both revenue sources to address systemic fiscal issues. New taxes around the world will compress profits, and create higher barriers to entry into the industry. Regulatory authorities will continue to step up the number of audits they perform. • Finally, firms will need to increase their focus on governance. The concept of governance in the fund environment is evolving from a compliance focus to a more proactive approach that manages a firm and enhances its control environment. While this trend is still developing, it has gained traction thanks in large part to the influence of investors. Casella concluded his talk with the same note of optimism he offered at the start, stating that PwC is “confident that alternative investments will remain an integral part of broader capital markets” He assured the audience that PwC will continue to bring the same level of energy, passion and commitment, combined with its cumulative resources, to the alternatives industry. 12th Annual Alternative Investments Seminar Highlights 2
  • 6. Creating and sustaining excellence “More than ever, managers are focused on both sides of their business. They’re focused on growth, and they’re focused on infrastructure.” Mike Greenstein Global Alternative Investments Assurance Leader, PwC Left to right: Mike Greenstein, Tom Biolsi, Tim Hartnett, John Siciliano In the aftermath of the financial crisis, many aspects of the alternative investments industry have changed, but managers’ basic, overarching goals have not. Fund managers continue to strive towards building an organization that is highly capable, scalable, and sustainable, all in an economically viable way. PwC’s Global & US Alternative Investments Assurance Leader, Mike Greenstein, moderated a discussion by a panel of PwC industry specialists designed to 3 guide managers in creating and sustaining excellence. Greenstein noted that while delivering performance and delivering confidence has never been easy, the degree of difficulty has never been higher than today. In this context, the panel examined three core issues facing private equity and hedge fund managers including: Delivering the investor experience, creating a highperforming control environment, and raising funds in a newly competitive market. The panel also 12th Annual Alternative Investments Seminar Highlights looked at risks posed by the new regulatory environment, and made some predictions for what the space will look like in the future. The panel included industry specialists from a variety of disciplines: Tom Biolsi, a Principal in PwC’s Asset Management Regulatory Practice; Tim Hartnett, Leader of PwC’s US Private Equity Practice; and John Siciliano, a Managing Director in PwC’s Alternative Investments Practice.
  • 7. Some key views expressed during the discussion: • Investors today expect excellent results that are based on a documented, verifiable, and repeatable process. They also expect managers to have a sophisticated, reliable investment platform in place, and a client-centric attitude. In periods of economic uncertainty, a client-focused platform that is transparent and features candid and straightforward reporting can help maintain trust between the advisor and client. • The SEC recognizes that no chief compliance officer (CCO) can hope to carry out an effective compliance program without a sophisticated, enterprise-wide approach. An effort needs to be made to identify and manage risks from senior management down. The difficulty of providing the data for Form PF is a good example of the expanded role the CCO will have to play. Beyond that, regulators see significant compliance risk in increasingly customized investment options. • Fundraising in the alternatives space has become extremely competitive in recent years. This means that firms have to work harder to define and differentiate themselves. Clients are looking for new strategies that leverage old private equity strategies, and LPs are going into the fundraising process looking for extreme customization. Firms going through the fundraising process need to be prepared for a discussion with potential LPs that adequately covers cost of delivery. • Organizations need to focus on lowering their cost to deliver. They need to be innovative in their strategies without overcomplicating their organizations. Firms need to be simple and direct in analyzing their deficiencies, and they need to be willing to outsource functions that they can confidently outsource while maintaining control over key functions. • Only 50% of SEC investigations came from inspection referrals, the rest came from investors, clients, and other whistleblowers. Today, investors are very quick to go to regulators when they lose money, and regulators usually respond. To avoid issues, firms need disclosures that are consistent, material, and current. • The investment management industry is rooted in the story of the emerging manager. Right now, the industry is in a prolonged environment of intense scrutiny, but firms with a strong investment focus and a good product will continue to succeed. Moving forward, it will be important for firms to be both nimble and institutional meaning that emerging and more established firms will face both opportunities and challenges. • Regulators want controlled success in the alternatives space. Many senior regulatory officials have come out of the alternatives industry, and they understand its importance to the success of capital markets. Firms that commit to setting up a solid compliance department and dedicate the time, people, and energy necessary will see positive results. These firms will see their regulatory risk profile lessen, and have fewer encounters with regulatory agencies. • In general, regulatory risk to a firm equals representational risk. Firms have a tremendous opportunity to present their approach to risk to regulators early, and minimize the depth and intrusiveness of their exams. Of course, the opposite is true as well. In general, the SEC appears to be moving from a onesize-fits-all to a risk-based approach. • The near future promises a number of changes for the alternatives industry. –– Profitability is going to be different moving forward. In the future, the economics will favor LPs more strongly, thanks to higher infrastructure costs and carried interest taxation. Firms need to continue to deliver quality but do so in a more efficient manner. –– There is major ongoing growth in assets available to fund managers. Sovereign wealth funds are growing rapidly, retirement plans in Asia are democratizing, and investors under 50 are less tied to defined benefit plans than in the past. All of these means that there is significant opportunity for growth. –– The alternatives industry is maturing quickly in terms of its understanding of regulations, although there is still a ways to go. Over the next two years, the industry will see a record number of enforcement cases. The industry is quickly coming to terms with the new rules, and is getting better at collaborating to come up with more effective practices. 12th Annual Alternative Investments Seminar Highlights 4
  • 8. Tax risk management: Charting a path forward “With all the pressure on taxes there’s much less of a tolerance for risks, not just in the tax function, but above the tax function. Organizations are looking at tax as a risk and then trying to manage that risk in new and innovative ways.” Left to right: Will Taggart, Pam Olson, Allison Rosier, Oscar Teunissen, Gina Biondo The outcome of the recent presidential election has done little to resolve the uncertainty surrounding the future of tax. Up until the end of 2012, it was unclear whether or not rates would go up in 2013, and whether Congress would find a solution to current fiscal cliff issues.1 One thing that is certain is that the US continues to have a large and growing deficit, and this is something that the president and Congress is going to have to address. It appears that a new normal now exists in the relationship between alternative investment firms and tax authorities. We are seeing a change in the tax function and a change in the expectations of this function. Moving forward, organizations will have to adjust to higher taxes and more audits. To address this reality, they will have to put a greater emphasis on enterprise-wide tax preparedness, and make changes on an institutional level. Against this backdrop, Will Taggart, PwC’s Global and US Alternatives Tax Leader, led a panel exploring current tax issues in the alternatives space focused on how funds are dealing with the pressures of legislative Uncertainty, increased Transparency, and what the New Normal is for the tax function in the face of all of this change. Will Taggart Global and US Alternatives Tax Leader, PwC The discussion featured PwC subject matter specialists including: Pam Olson, PwC’s Deputy Tax Leader and Washington National Tax Services Leader; Allison Rosier, PwC Alternative Investments Tax Principal; Oscar Teunissen, an International Tax Principal in PwC’s Alternative Investments practice; and Gina Biondo, PwC’s New York Alternative Investments Tax Leader and US Tax Diversity Leader. 1 On 1/2/13, President Obama signed into law the American Taxpayer Relief Act of 2012. Enacted in response to the “fiscal cliff,” the new legislation institutes a top rate of 39.6% beginning after 12/31/12 for individuals with incomes above $400,000 and joint filers with incomes above $450,000 (hereinafter “High Income Individuals”). In addition, a top rate of 20% for capital gains and qualified dividends will be effective for High Income Individuals after 12/31/12. Additional aspects of this legislation impact estate tax rates, personal exemptions and itemized deductions. A detailed summary of this legislation is available at washington-national-tax/newsletters/wnts/index.jhtml 5 12th Annual Alternative Investments Seminar Highlights
  • 9. Some key views expressed during the panel: Uncertainty • At the end of 2012, it was unclear what the legislative landscape would hold for 2012, and now it is clear that rates will be increasing. One thing that was certain is that the 3.8% Medicare Tax on investment income will definitely come into play in the beginning of 2013, so individuals have an opportunity to plan for that. • With the expectation that rates were likely to rise in 2013, many managers explored ways to accelerate income in 2012. At the management company level, some looked to accelerate income by pre-paying management fees. Others looked to defer management company losses, like paying compensation and certain state tax payments in 2013. Finally, managers are looking at ways to structure around the 3.8% Medicare tax, including whether it makes sense to convert from a carried interest to a management fee. Also, it may be the case that certain income streams are not subject to the 3.8% tax. • Managers are also exploring ways to accelerate income at the fund level. The most straightforward way to do this is by selling and repurchasing assets. The key to this is economic substance. Another method involves constructive sales of assets. The advantage here is that investors have until January 2013 to perfect the gain and decide whether they still want to go forward with the sale. Overall, it is important to look at the economic performance of the fund and not just accelerate taxable income in a vacuum. • Delaying FATCA implementation to January 1, 2014 is a positive development, and firms should move forward in a strategic fashion. The original deadlines were troubling for a variety of reasons, including the misalignment of US and foreign implementation dates. As of now, all dates are aligned on January 1, 2014. Inter-Governmental Agreements (“IGAs”) have been announced with 50 countries, and should help organizations avoid legal impediments. A potential issue stems from a potential quid pro quo situation, as it is unclear right now if other governments will ask the US and US businesses for reciprocal arrangements. Transparency • Audit activity on the industry has ramped up significantly as the IRS extends its focus to pass-through entities. This is partially due to the fact that 50% of US business income now occurs in this format. In addition, recent rhetoric accusing the alternatives industry of not paying enough taxes has also impacted IRS behavior. High net worth individuals have seen an increase in the number of audits, and these audits can extend through multiple funds and over multiple years. • States have increased transparency through concepts like economic nexus which sources management fee income based on the residence of the investor/payor. State audits continue to increase along with increases in state tax rates. California, for example, just raised the individual tax rate to 13.3% on individuals with income over $1 million. • From an international perspective, numerous countries in the EU have adopted or are thinking about adopting a financial transactions tax. The new normal • Right now, alternative firms’ tax departments are expected to do more with less. Tax departments are often relatively small, and members have been turning their attention to the process and technology areas. Departments have placed an increased emphasis on data management and creating a more efficient data system. They are pushing for real time visibility and acceleration of processes. Finally, tax departments are looking to automate as much as is possible, and to build an integrated dashboard for tax compliance requirements. 12th Annual Alternative Investments Seminar Highlights 6
  • 10. Keynote address: Charlie Rose Charlie Rose – acclaimed interviewer and broadcast journalist – brought the seminar to a close with an insightful look at some of the great challenges facing our nation and the world as a whole, and some of the great minds working to help us succeed. Perhaps this seems like an obvious directive from a man who refers to himself as “in the question business.” For Rose, one of the most important qualities a human being can have is curiosity, and he cited thinkers like Albert Einstein and George Bernard Shaw as examples. Blending video of his interviews with various leading world figures together with his own personal insights, Rose endeavored to shed a clear light on our times. A common thread emerged during his presentation: Never stop asking questions. Rose characterized this quality as essential to living a successful life. Rose called on the audience to consider American values, and to think about the way that we want to be as a country and as individuals, and to use this to guide one’s actions. 7 12th Annual Alternative Investments Seminar Highlights
  • 11. Closer Look sessions 12th Annual Alternative Investments Seminar Highlights 8
  • 12. Achieving institutional quality Moderated by Tim Mueller, Advisory Partner in PwC’s Alternative Investments Practice, this panel looked at issues with current institutional practices, data management strategies, and human capital functions. The panel included remarks from a variety of PwC subject matter specialists including Danielle Valkner, PwC Alternative Investments Advisory Managing Director; Deepak Sahi, PwC Alternative Investments Advisory Some of the key points made during the discussion included: culture, with a strong tone at the • A new normal exists in the top and robust education, training alternative investments industry, and testing of compliance. thanks to a significant increase in regulatory presence, the • There is a renewed focus on industry’s maturation and the the control environment. increasing sophistication of its Overall, firms continue to clients, and the renewed focus seek opportunities to provide of an expanding number of transparency through controls stakeholders. reports either over their IA operations, or in new areas such • Everyone is asking for new data as compliance, tax, expense points, more timely information allocation, and risk management. with a high standard of accuracy. Current data practices are • Impending requirements, like unsustainable. What’s needed FATCA’s Form PF, will require now is better and timelier data huge amounts of data from reporting. However, cost pressure organizations. In many cases, this and inflexible legacy systems that data will be spread out across are unable to provide this data multiple firm functions and will have created an environment with require some kind of aggregation numerous long-term challenges. to make it useful. Companies need to focus on data governance, • New regulations have created process and technology the need for new practices in holistically and not just focus on dealing with regulatory risk one or two of these aspects. and compliance. Traditionally, alternatives organizations • A good data management system have been very lean, leaving has three features: a holistic them with little extra room approach, a strategic outlook and to incorporate additional risk incremental implementation. management, regulatory, and New technologies have arrived to compliance responsibilities. New make this process easier. Cloud and different infrastructure is computing and capitalizing on needed to address changes in “big data” —a large number regulatory requirements. Leading of data points that have not companies are striving to make been mined for value yet—are risk compliance part of their growing trends. There are new 9 12th Annual Alternative Investments Seminar Highlights Director; Bhushan Sethi, PwC Financial Services Human Capital Managing Director; and Melanie Prusinski, Risk Assurance Partner in PwC’s Asset Management Practice. technologies that can help take advantage of this data. Technological solutions are also arriving to help with reporting, not traditionally a focus in the alternatives space. • In the past, the alternatives industry has under-invested in human resources and in recent years, the people issues in the industry have been growing in importance. Alternative firms are beginning to focus on professionalizing human capital management practices across both the Business and HR –– Sourcing and retaining pivotal talent. A number of clients are reviewing their recruitment processes focusing on changing recruitment selection and evaluation criteria –– Building targeted development programs that focus on technical and behavioral competencies –– Defining and managing executive and middle management succession planning –– Providing transparency in compensation and rewards processes –– Establishing the right culture and behaviors
  • 13. Taxes: New developments impacting private equity and hedge funds Moderated by Mike O’Neill, Tax Partner in PwC’s Alternative Investments Practice, this panel covered tax issues facing private equity, financial products, and other investment managers. Panelists included Brian Rebhun, PwC Tax Partner and Leader of Alternative Investments State and Local Practice; Jeff Maddrey, PwC Asset Management Tax Principal and Judy Daly, Partner in PwC’s Asset Management Practice. Some of the key points made during the discussion included: • The rate differential between 2012 and 2013 has generated a substantial interest in recognizing long-term capital gains, especially following the outcome of the presidential election. More specifically, people are looking for situations where they can realize a gain while remaining in substantially the same position as they were before. The major question in looking at these sorts of issues is whether or not the necessary transactions can be legally carried out under the economic substance doctrine. In dealing with this, different asset classes lend themselves to different gain recognition strategies, and these strategies are often quite complex. As a result, it can be very difficult for an investor to recognize a gain when they want to. • In the private equity space, firms are looking for ways to accelerate gains and defer losses. On the fund side, organizations have been pushing gains into this year by opting out of installment sale treatment, and by borrowing money to pay out dividends. On the management and ownership end, strategies include prepaying management fees or even selling the rights to those fees in the future, and distributing promissory notes. Management companies could even consider delaying bonuses, although it is important to think about how that would affect employees. • Private equity has a bit of a target on its back as one possible source of increasing the amount of tax revenues collected by the Treasury. In particular, carried interest has received a lot of attention. While it seems unlikely that anything will be done about carry in the current lame duck session, President Obama will probably try to do something about it before the end of his second term. Beyond that, countries around the world have introduced proposals to tax carry at a higher rate. • Effectively, US states have already gone over the fiscal cliff. Many of them have substantial budget shortfalls, and are looking for ways to generate revenue. States like New York and California have introduced additional taxes, and many states are flirting with or incorporating economic nexus rules. Audit activity has also increased, and state auditors have become more aggressive. • In response to increased regulatory and tax oversight, finance and tax departments have seen increasing pressure to produce better results with less resources. Essentially, they have been asked to do more with less. Moving forward, firms are going to need to find new and better ways to leverage data and technology to keep pace with the new regulatory environment. To do this effectively, data needs to be databased and standardized on an enterprise-wide level. • Firms need to utilize two concepts: business intelligence and predictive analysis. Business intelligence involves making proactive use of existing data. Predictive analysis involves using models to better understand how potential trades would affect a company’s tax position. These tools can also help better understand client behavior, and to make plans on a company level. 12th Annual Alternative Investments Seminar Highlights 10
  • 14. Pricing and valuation in focus Moderated by Frank Serravalli, PwC’s Financial Instruments, Structured Products and Real Estate (FSR) Practice Leader, this discussion looked at a number of different issues including regulatory developments and market conditions, valuation tools, derivatives, and ASU 2011-04. Panelists covered a wide range of PwC perspectives and included Barry Knee, Audit Partner in PwC’s Asset Management Practice; Debra Rappoport-Bigman, a Partner in PwC’s FSR Practice; Doug Summa, a Partner in PwC’s FSR Practice; and James Marshall, a Transaction Services Partner at PwC. Some of the key points made during the discussion included: • The SEC has become much more rigorous in examining valuation processes. Firms now need to heavily document their process, and make sure that it is consistent and explainable. The SEC has already taken action against organizations whose behavior it disapproves of, and has made known the possibility of pursuing action against others. The process is now much more detailed, with regulators looking to understand its every aspect. Ideally, firms will develop a highly explainable process that is 80 to 85% repeatable within an asset classes. At the same time, firms need to rigorously examine their models both for errors and to make sure they are using the right inputs. • Dodd-Frank, and Basel II and III, are inducing large changes across all participants in the financial services industry. Among other things, regulated firms need to 11 understand capital and funding requirements of their activities and enhanced controls are needed across the financial institutions as more regulation takes effect. There may be an opportunity for alternative firms to enter new spaces in the future as traditional players are constrained by regulations. To give one example, the Volcker rule will prevent big banks from engaging in proprietary trading, opening up space there. • There is a lot of uncertainty with derivatives right now due to changes in markets from an increase in the number of transactions that will be cleared by central counterparties (“CCP’s”) and the increased requirements of posting collateral for uncleared, bilateral transactions with banks and dealers. These changes present organizations with the dual 12th Annual Alternative Investments Seminar Highlights challenge of potentially modifying their estimates value for their derivatives and managing their liquidity arising from increased demand for collateral. Firms need to reassess their practices to determine the value of their derivatives and measure and monitor collateral postings. • ASU 2011-04 will, among other things, require additional disclosures of quantitative and other data. Under it, organizations will need more granular practice data, along with better reporting of their process and measurement techniques. 2011-04 also eliminates blockage discounts, eliminates in-use premise for certain instruments, and allows for certain investment to be looked at on a portfolio basis.
  • 15. Focus on the new regulatory climate Moderated by Anthony Conte, a Managing Director in PwC’s Financial Services Regulatory Practice, this discussion focused on issues arising from SEC examinations and enforcement, conflicts of interest, and impending regulatory reporting requirements. The panel drew from PwC Asset Management specialists and included Kent Knudson, Anjali Kamat and Stefanie Kirchheimer, all Directors in PwC’s Financial Services Regulatory Practice. Some of the key points made during the discussion included: • The SEC has begun conducting presence examinations on the 1,300 or so Registered Investment Advisers who registered following Dodd-Frank. Unlike more traditional exams, the presence exams are very focused, and require less document production. The SEC is focusing on five areas: portfolio management, marketing, valuation, safety of client assets, and conflicts of interest. The Office of Compliance Inspections and Examination intends to perform thorough examinations of one or two of these high-risk areas in order to demonstrate to these advisers the level of diligence it expects of them and to encourage them to apply the same level of diligence to areas not covered during the exam. • The industry should continue to see an upward shift in enforcement cases, at least in the short term. Recently, there have been a large number of fraud investigations, although these don’t necessarily stem from the alternatives industry. That said, the recent rash of insider trading scandals has impacted the industry. Moving forward, investors should expect to see more of an SEC focus on disclosure and valuations. • In the past, the SEC has said that organizational failure to address conflicts of interest is indicative of larger regulatory issues, and they plan to continue to focus on this issue in future investigations. Organizations should identify all relevant personal and institutional conflicts of interested, along with what mitigating factors, controls and disclosures surround them. In addition, they should make sure that they have proper procedures in place to prevent, address, and document conflict of interest issues. • Fund operators will face a number of new regulatory reporting requirements in 2013, including SEC Form PF, CFTC form CPOPQR, and possible similar requirements from European regulators. While they cover the same overarching themes, each form is different and requires a unique approach. Beyond that, for the first time ever mutual funds may be required to register with the CFTC. The “hedge fund exemption” from registering with the CFTC no longer exists, although those funds can use the “de minimis” exemption if they meet the requirements. Firms have to register by December 31, 2012, so there is a very limited amount of time to evaluate the applicable exemptions. Once registered, the CFTC imposes a number of requirements. • Regulators will be looking to accomplish two main goals with all this new data: investor protection and mitigating systemic risk. They will use the data in a number of ways including finding out how exposed firms are to financial institutions. They will also look at liquidity risk, both in terms of investor liquidity and portfolio liquidity. Finally, the regulators will focus on counter party credit exposure. In addition, organizations should have a plan with regard to how they will respond to investor requests for these regulatory reports. 12th Annual Alternative Investments Seminar Highlights 12
  • 16. Global tax trends: Risks and opportunities Moderated by Puneet Arora, a Principal focused on International Tax in PwC’s Asset Management Practice, this discussion centered on investor, investment, and management company issues operating in international markets. Panelists came from a broad crosssection of PwC’s global network including Florence Yip, PwC Partner and Asia Pacific Tax Leader of the Investment Management Practice; Rob Mellor, PwC UK Partner and UK Alternative Investments Leader; and Alvaro Taiar, PwC Brazil’s Head of Financial Services. Some of the key points made during the discussion included: • There is a perception that the financial services sector is not paying its fair share of tax after the bailouts and guarantees provided during the financial crisis. As a result Governments are introducing novel taxes such as the financial transactions tax (FTT) and trying to tax the indirect transfers of shares. Governments appear to be not only interested in increasing tax revenue but also influencing behavior, particularly with the FTT. • In Europe, the Alternative Investment Fund Manager Directive (AIFMD) is likely to have a significant impact on non-EU asset managers marketing to EU investors. Non-EU asset managers should be considering the 13 impact on their products being marketing to EU investors. In the UK, the upcoming reduction in UK personal tax rates presents an opportunity for asset managers with UK employees by deferring the payment of bonuses. • In Asia, tax authorities are learning quickly from their Asian and western counterparts. Both China and India have introduced General Anti Avoidance Rules (GAAR) as well as focused on the use of treaty platforms for investing into Asia. As Asian tax authorities continue to learn we are likely to see more changes. • Chinese institutions such as the China Investment Corporation (CIC), National Social Security Fund (NSSF) and State Administration of Foreign 12th Annual Alternative Investments Seminar Highlights Exchange (SAFE) all have large pools of reserves to invest outside China. China is also encouraged increased investment into by China by increasing the Qualified Foreign Institutional Investor (QFII) quotas. Hong Kong continues to be seen as the hub for investing into and out of China as well as with Singapore for more broadly investing into Asia. • Brazil is making a serious effort to be the financial center of Latin America. It is also continuing to encourage foreign investment by offering tax exempt infrastructure and real estate bonds. There are also still planning opportunities for private equity investors investing into Brazil to obtain goodwill deductions and receive tax free capital gains.
  • 17. FATCA: Moving into implementation for asset managers Moderated by Kathryn Kaminsky, an Assurance Partner in PwC’s Alternative Investments practice, this panel looked to provide an overview of FATCA and its effect on alternative investment organizations, and examined recent changes made to the legislation’s rollout. The panel included PwC Asset Management Practice specialists in several fields including Kara Friedenberg, Tax Partner, Joel Gallo, Advisory Director, and Rebecca Lee, Tax Principal. Some of the key points made during the discussion included: • When the Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010, it featured a wide range of implementation dates, with the first key date set as January 1, 2013. The key implementation effective dates have been pushed back to begin on January 1, 2014.Asset managers, however, cannot stop working on FATCA. • Firms can act now to prepare for FATCA implementation. Asset managers should get their FATCA teams committed and mobilized, and determine internally who is going to be responsible for various functions. They should complete a review of their legal entities, services and legal agreements, and start speaking to potential partners and service providers about the allocation of compliance risk. Firms can also talk to fund administrators about likely new roles and responsibilities. • There has been a lot of recent discussion around InterGovernmental Agreements (“IGAs”). IGAs were intended to relieve various concerns, including data privacy. Although a few countries have already signed the agreements, there is a long way to go before all of agreements are completely enacted. In theory, IGAs should reduce complexity, however, for firms with multiple funds around the world, they may increase it. One possible result may be the obligation to share data with tax authorities in multiple jurisdictions, a fact that places further pressure on data technology. to non-compliant investors and counterparties, and will be responsible for reporting on such amounts. Further, US funds still have due diligence requirements for documenting their investors, but these requirements only apply to entity investors (as compared to the due diligence requirements for foreign funds that apply to both individuals and entity accounts). As compared to foreign funds, FATCA compliance is somewhat more straightforward, as US funds do not have to register with the IRS, do not have to make certifications to the IRS regarding their due diligence compliance. • It is important for asset managers to keep in mind that even US domiciled funds have to comply with FATCA. Specifically, US funds will be responsible for withholding under FATCA on USsourced withholdable payments 12th Annual Alternative Investments Seminar Highlights 14
  • 18. 12th Annual Alternative Investments Seminars PwC’s speakers Boston Duncan Barnard Judy Daly Ryan Dumais Dan Feheley Silvestre Fontes Jeff Greene Jon Muroff Sarah Ryan Matthew Shelhorse Joanne Sisk Andrew Thorne Chicago Jason Becker Mark Casella James Conaghan Silvestre Fontes Natasha Granholm James Lelko Alan Naragon Frank Serravalli William Taggart Ken Turner Danielle Valkner Matt Ward Joe Wiggins Dallas Jason Becker Bob Collins David Harpest Louis Koven Wes McCown Kevin McMillen Allison Rosier William Taggart Jason Waldie 15 Los Angeles Mark Casella Brian Flaherty Rebecca Lee John Mattos Sam Melehani Alison Monahan Tomoko Nagashima Robert Nisi Andy O’Callaghan Frank Serravalli John Siciliano William Taggart Mike Wong New York Tom Biolsi Gina Biondo Mark Casella Mike Greenstein Tim Hartnett Pam Olson Allison Rosier John Siciliano William Taggart Oscar Teunissen San Francisco Mark Casella Greg Eckert Jon Franke Rick Giolitti Rebecca Lee Eran Liron Robert Nisi Tim Pauling Zahid Rahman Frank Serravalli William Taggart 12th Annual Alternative Investments Seminar Highlights Seattle Greg Eckert Rick Giolitti Michele Godvin Chris Hugo Rob Nisi Brian Rebhun Alison Rosier John Siciliano Mason Snyder David Steiner Washington, DC Steve Arluna Matt Brockwell Larry Campbell David Gilbertson Mike Greenstein Kristen Hansen Tom Holly Kawme Lewis Allen Minzer Colin Ryan Scott Stein David Steiner
  • 19. More information regarding the topics discussed at PwC’s 12th Annual Alternative Investments Seminar can be downloaded online at For more information on PwC’s Alternative Investments Practice, please visit About PwC US PwC US helps organizations and individuals create the value they’re looking for. We’re a member of the PwC network of firms in 158 countries with more than 180,000 people. We’re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at com/US. Learn more about PwC by following us online: @PwC_LLP, YouTube, LinkedIn, Facebook and Google +.
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