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BBD's Industry Insights Video Series Episode 3: What Private Fund Managers Need to Know About the '40 Act

BBD's Industry Insights video series offers our clients and industry friends a brief look into important and timely developments in the investment management industry.

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In Episode 3 of the series, Rich Wagner, partner with BBD, LLP, and Maureen Quill, Executive Director of Registered Funds for UMB Fund Services, discuss how private fund managers can best succeed in the highly regulated '40 Act Environment.



Rich Wagner 00:01
Welcome to Industry Insights, BBD's video series that offers our clients and industry friends a brief look into important and timely developments in the investment management industry. I'm Rich Wagner, a partner with BBD. Today I have the great pleasure of speaking with Maureen Quill, Executive Director of Registered Funds for UMB Fund Services. Maureen was recently interviewed for Global Custodian for an article titled "Don't Fight the '40 Act." As a follow-up to the article, we'll discuss the trend of private fund managers launching registered funds or converting private funds to registered funds and how private fund managers can best succeed in the highly regulated '40 Act environment.

Well, Maureen, thank you for thank you for being here. And we appreciate hearing a little bit about UMB and how not to fight the '40 Act.

Maureen Quill 00:53
You're welcome, Rich. Happy to be here to talk to you about this topic.

Rich Wagner 00:59
Great. Well, do you want to tell us a little bit about UMB?

Maureen Quill 01:03
Sure, UMB is a leader in the mutual fund and alternative investment fund services area. We're known for our high touch client service, our diverse product offerings, supporting a spectrum of funds structures and turnkey solutions. We are backed by the strength and stability of our parent company, UMB Financial Corporation. The services that we generally offer are fund accounting, fund administration and tax, transfer agency and investment servicing, distribution, custody, cash management, and other banking products. UMB is ready to service virtually any investment vehicle, allowing our clients to focus on managing money.

Rich Wagner 01:44
Great. Well, thank you very much. So to get into the questions, what are the challenges with a private fund manager moving into the '40 Act space?

Maureen Quill 01:57
Generally, the challenges that we see when private fund managers move into the registered funds space is not understanding that they're playing a different game. It really is different when they move into the registered fund world. They are selling to a different clientele, and there's different regulations around that and different rules. For example, the way I like to explain to people is my oldest son Mitch was a multi-sport athlete. So he played football in the fall. And then when the seasons change, and he rolled right into basketball, the first couple of games, he'd go in and play the first quarter and ended up with two fouls, his coach would pull him out and say you got to get your head in this game, you got to stop playing football and pushing people around and being physical and you've got to play a different game: basketball. To be successful in basketball, you play by different rules. So if you're moving from the private fund world into the registered fund world, you need to understand you're playing different games and play by the rules of the registered funds.

Rich Wagner 02:56
Being some challenges in the '40 Act space, what are some of the bigger surprises that managers encounter?

Maureen Quill 03:02
I think the biggest surprise is the infrastructure that managers need to build to comply with certain rules that are required for registered funds. So the infrastructure they have to build around them is a huge surprise. The infrastructure would include the auditors- hiring a qualified and experienced auditor. I think the legal counsel that they employ is very important. They need someone that's experienced in the '40 Act. This is a there are very discreet rules in the '40 Act, and it takes a while to understand them. So hiring a qualified legal counsel is really important, along with that a qualified Chief Compliance Officer is also important. When they surround themselves with the right team and they listen to that team, it'll help them be more successful in the registered fund space.

Rich Wagner 03:56
Great, so how can managers avoid pitfalls?

Maureen Quill 04:00
I think they have to pay attention to five important points. They need to make sure that they have a good infrastructure in place, as I discussed earlier, that they adhere to and meet the fixed deadlines- and those are around audits and filings have specific deadlines that they have to meet. They have to ensure that all shareholders are treated equally. And there's ways to do that usually by creating different share classes, but they can't have side pocket arrangements or other arrangements that they had in the private world. That doesn't work in the registered fund world. They need to be aware of the tax consequences of funds' investments. So moving from a K-1 world to generally in these situations they move to a 1099 world is different, and they need to make sure they're managing the tax treatment of different investments in the fund differently for 1099 than they would in the K-1. And they need to make sure that they're hiring a qualified custodian. Private fund managers usually work with prime prime broker for custodial needs. And this is different. So a qualified '40 Act custodian is also required.

Rich Wagner 05:12
Great, so how can service providers help the fund managers?

Maureen Quill 05:18
I think when they decide they're going to move into the registered fund space, they need to make sure they hire and work with a service provider who's experienced with working with private fund managers who have moved into the registered fund space. Those service providers can provide guidance, structure, introduce you to qualified and experienced legal teams, auditors and Chief Compliance Officers. And they're all aimed at helping you navigate the regulated world, manage your expenses, and set you up for success.

Rich Wagner 05:48
Great, and you know what, you know, thinking about it, you know, you built that team around you, to help you out with the '40 Act. So I'm always thinking communication is very important. You know, if you have a question, picking up the phone, talking to the administrator, talking to the attorneys, talking to the auditors, making sure you're following the rules. That communication is super important, especially for a new manager that's not familiar with the '40 Act.

Maureen Quill 06:15
I agree communication is really important. And that's to start with the with a project plan that your service provider can put together for you about the steps, and all the different things you need to go through in order to launch your registered fund product. But it can take more time, you have to get the SEC involved, you know, all of those things are different than what they were using when they were in the private fund world. And understanding the different steps you need to go through before you can launch the product is really important.

Rich Wagner 06:44
Great. So is there any room for interpretation in the '40 Act?

Maureen Quill 06:49
No, no, there really isn't. I wish there was. We've seen many people try to spend money and time and work with lawyers to try and make an easier, faster, or less expensive way around some of these rules. And frankly, it all becomes a waste of time. This rule has been around for eight decades. It's tried and true. We know what we need to do in order to comply with it. The rules are rules, they're not suggestions. They are what we need to do in order to make sure that you have a fully compliant registered product. You need to really in the end, understand the game you're playing when you're entering the registered fund space. You need to establish a capable team around you, listen to them, and in the end really listen to your coaches, that team you've established around you, and don't get in the way of your own success.

Rich Wagner 07:38
Well Maureen, thank you very much for your time today and for your helpful insight.

Maureen Quill 07:44
Thank you, Rich.