Highlights 12th Annual Alternative Investments Seminar November 29, 2012

www.pwc.com/us/ais2012
12th Annual Alternative
Investments Seminar
Highlights
November 29, 2012
New York City
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
Contents
Introductory remarks1
Creating and sustaining excellence
3
Tax risk management:
Charting a path forward
5
Keynote address: Charlie Rose
7
Closer Look sessions8
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 managers14
PwC’s speakers15
12th Annual Alternative Investments Seminar Highlights
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.
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
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.
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
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 http://www.pwc.com/us/en/
washington-national-tax/newsletters/wnts/index.jhtml
5
12th Annual Alternative Investments Seminar Highlights
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
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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.
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12th Annual Alternative Investments Seminar Highlights
Closer Look sessions
12th Annual Alternative Investments Seminar Highlights
8
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
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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
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
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
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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.
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
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.
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
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
More information regarding the topics discussed at PwC’s 12th
Annual Alternative Investments Seminar can be downloaded
online at www.pwc.com/us/ais2012
For more information on PwC’s Alternative Investments Practice,
please visit pwc.com/us/assetmanagement
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