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					The Potential Impact Of Regulatory
Reform On Investors

October 13, 2009


Ida Wurczinger Draim, Partner
Schulte Roth & Zabel LLP
1152 Fifteenth Street, NW, Suite 850
Washington, District of Columbia 20005
+1 202.729.7462 | ida.draim@srz.com



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The Potential Impact Of Regulatory Reform On Investors
Overview

  • Backdrop of Proposed Legislation:

         – Availability of “private adviser” exemption under SEC Rule
           203(b)(3) for advisers with fewer than 15 clients/year

         – 2004: SEC adoption of “Hedge Fund Rule,” which re-defined
           “client” as “fund investor”

         – 2006: Goldstein decision invalidating Hedge Fund Rule; Court
           holds fiduciary duty owed to funds (clients), not investors

         – Many funds halt SEC registration process or withdraw from
           registration



The Potential Impact Of Regulatory Reform On Investors
Overview

• Reform Proposals:

      – Hedge Fund Adviser Registration Act (Jan. 2009)
             • H.R. 711 (Reps. Capuano and Castle)
             • Eliminates fewer-than-15 clients exemption

      – Private Fund Transparency Act (June 2009)
             • S 1276 (Sen. Reed)
             • Removes exception for 15 or fewer clients/year
             • Introduces “foreign adviser” exemption

      – Private Investment Advisers Registration Act (July 2009)
             •   Treasury Dept. proposal
             •   Eliminates fewer-than-15 clients exemption
             •   “Foreign adviser” exemption
             •   Fund disclosure/filing requirements


The Potential Impact Of Regulatory Reform On Investors
Overview

• Reform Proposals (continued):

       – Hedge Fund Transparency Act of 2009 (Jan. 2009)
               • S. 344 (Sen. Grassley)
               • Eliminates ICA 3(c)(1) and 3(c)(7) registration exemptions
               • Investment cos w/ $50 million or more must register

       – Investor Protection Act of (July 2009)
               • Treasury Dept. proposal
               • Enhanced regulation of IAs and BDs
               • Strengthened SEC Enforcement powers


       – Corporate and Financial Inst’n Comp Fairness Act (July 2009)
               • H.R. 3269 (Rep. Frank)
               • Regulatory authority over financial institution compensation



The Potential Impact Of Regulatory Reform On Investors
Overview

• Conclusions:

      – Managers rather than funds will have to register

      – There will be direct or indirect regulation of funds

      – “Investor” as “client” is not likely to resurface




The Potential Impact Of Regulatory Reform On Investors
Private Investment Advisers Registration Act

• SEC registration for managers of hedge and private
  equity funds with $30 million under management

      – Elimination of “fewer than 15 clients” Exemption

      – Partial elimination of Commodity Trading Adviser
        Exemption

      – New Exemption for “Foreign Private Advisers”

      – New Fund Disclosure and Filing Requirements

      – Confidentiality of Fund Reports


The Potential Impact Of Regulatory Reform On Investors
Private Investment Advisers Registration Act

• Ramifications for Investors:

      – Greater transparency regarding fund managers
        through Form ADV disclosures

      – Unfit advisory personnel pre-screened by
        manager/SEC and removed or restricted

      – SEC policing of manager’s disclosure and
        handling of conflicts of interest



The Potential Impact Of Regulatory Reform On Investors
Private Investment Advisers Registration Act

• Ramifications for Investors (continued):

      – SEC scrutiny of best execution, handling of trade
        errors, trade allocations, valuation, front-running
        by personnel

      – Potential greater transparency regarding funds’
        use of leverage (incl. off-balance sheet),
        counterparty credit risk, positions and trading
        practices

      – SEC scrutiny of side letter agreements and other
        differences in treatment of investors


The Potential Impact Of Regulatory Reform On Investors
Investor Protection Act of 2009

• Broad Rule-Making authority to SEC on various aspects of
  relationship between investment professionals and clients

      – Uniform Fiduciary Duty Standard

      – New RIA/BD Disclosures re:Terms of Customer Relationship

      – Focus on Conflicts of Interest arising out of Compensation

      – New Point of Sale Disclosures

      – Limits on Mandatory Arbitration Agreements

      – Investor Advisory Committee and Consumer Testing



The Potential Impact Of Regulatory Reform On Investors
Investor Protection Act of 2009

• Expanded SEC Enforcement Powers:

      – New aiding and abetting provision, Advisers Act
        Rule 209(f), is broadest to date

      – Collateral bars and suspensions could be extended
        across BD, RIA, MSD, NRSRO lines if requested by SEC


      – Whistleblower incentives and protection under which SEC
        could make monetary awards of up to 30% of fines
        collected over $1 million




The Potential Impact Of Regulatory Reform On Investors
Investor Protection Act of 2009

• Ramifications for Investors:

      – Heightened focus on “Accredited Investor”
        Certification/Back-up Documentation

      – Less flexibility for investment professionals to vary
        terms of client relationship

      – Restrictions on incentive compensation could chill
        innovation of fund managers


      – Changes to Fund Offerings/Manner of Distribution


The Potential Impact Of Regulatory Reform On Investors
Corporate and Financial Institution Compensation
Fairness Act of 2009

• Enhanced compensation structure reporting requirements for
  “covered financial institutions”

      – Disclosure to appropriate Federal regulator of incentive-based
        compensation arrangements for purposes of risk analysis

      – Regulatory authority to prohibit compensation arrangements that
        “encourage inappropriate risks”

      – No reporting of actual compensation of individuals – just
        compensation terms and formulas

      – Exemption for financial institutions with assets of less than
        $1 billion


The Potential Impact Of Regulatory Reform On Investors
Corporate and Financial Institution Compensation
Fairness Act of 2009

• Ramifications for Investors:

      – Flight of large fund complexes overseas

      – Loss of talent to overseas complexes

      – Proliferation of under-$1billion fund complexes




The Potential Impact Of Regulatory Reform On Investors
                                     QUESTIONS




The Potential Impact Of Regulatory Reform On Investors

				
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