The View from Washington Survey of Major 2009 Fund Legislation

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					The View from Washington: Survey of Major 2009 Fund
Legislation and Enforcement Trends

Stuarts 2010 International Funds Conference
Grand Cayman
January 14, 2010

 John A. Brunjes, Partner and Group Head
 Private Investment Management Group

•   Major Proposed Bills Impacting US Fund Managers and Investors
•   SEC, IRS Enforcement Trends
•   Predictions for 2010 and Beyond . . .
•   Recap and Conclusions
Proposed Bills

•   By the numbers:
        – 22 pieces of major legislation impacting Investment Funds
          proposed in 2009
        – 8 of these announced in January alone
        – Treasury/White House proposes "Private Fund Investment
          Advisers Registration Act of 2009" in July
        – Definitive Bills (Rep. Frank, Sen. Dodd) announced/voted on
          in Q4'09
Proposed Bills

•   Topics addressed:
        – Swaps/Derivatives Trading and Market Regulation
        – Adviser Registration and Disclosure
        – Fund Registration and Reporting
        – Enhanced Regulation of US Financial Markets
        – Protection of Pension Investors
        – Systemic Risk Control
        – Commodities Speculation
        – Taxation and Reporting of Offshore Accounts and Holdings
        – Tax Treatment of carried interest payments
        – Coordination with International Regulatory Authorities
Proposed Bills

•   01/15/2009 S. 272 Senator Tom Harkin (IA)
    "The Derivatives Trading Integrity Act"
    Amends the Commodity Exchange Act to:
    (1) repeal the exemption or exclusion from regulation by the Commodity
    Futures Trading Commission (CFTC) of specified derivative
    transactions, swap transactions, and related electronic trading
    (2) restrict futures trading to contract markets or derivatives transaction
    execution facilities; and
    (3) abolish exempt boards of trade.
Proposed Bills

•   01/22/2009 S. 298 Senator Johnny Isakson (GA)
    "Financial Markets Commission Act"
    Establishes in the legislative branch the Financial Markets Commission to:
    (1) examine all causes, domestic and global, of the current financial and
    economic crisis in the United States, including the collapse of major
    financial and commercial firms and the deterioration of the credit and
    housing markets
    (2) investigate the role in the crisis, if any, of the SEC, nationally
    recognized statistical rating organizations, the CFTC, Fannie Mae and
    Freddie Mac, trading facilities for commodities and self-regulatory
    organizations, the federal banking agencies, any financial or commercial
    corporation, partnership, or entity, and any other governmental or non-
    governmental entity
Proposed Bills

•   01/27/2009 H.R. 711 Congressman Michael Capuano (MA)
    "Hedge Fund Adviser Registration Act of 2009"
    To amend the Investment Advisers Act of 1940 to remove the registration
    exception for certain investment advisers with fewer than 15 clients.
Proposed Bills

•   01/27/2009 H.R 712 Congressman Michael Castle (DE)
    "Pension Security Act of 2009"
    Amends Title I of the Employee Retirement Income Security Act of 1974
    (ERISA) to require the financial statement filed with the annual report for
    a defined benefit pension plan covered by ERISA to include a separate
    schedule identifying:
    (1) each hedge fund (i.e., unregistered investment pool) in which plan
    funds are invested; and
    (2) the amount invested.
Proposed Bills

•   01/27/2009 H.R. 713 Congressman Michael Castle (DE)
    "Hedge Fund Study Act"
    To require the President's Working Group on Financial Markets to conduct
    a study on the hedge fund industry to analyze:
    (1) the changing nature of hedge funds and what characteristics define
    a hedge fund;
    (2) the growth of hedge funds within financial markets;
    (3) the growth of pension funds investing in hedge funds;
    (4) whether hedge fund investors are able to protect themselves
    adequately from the risk associated with their investments;
    (5) whether hedge fund leverage is effectively constrained; and
    (6) the potential risks hedge funds pose to financial markets or to
Proposed Bills

•   01/29/2009 S. 344 Senator Chuck Grassley (IA) and Carl Levin (MI)
    "The Hedge Fund Transparency Act"
    Exempts an investment company with assets, or assets under
    management, of at least $50 million from ordinary registration and
    filing requirements only if that company:
    (1) registers with the SEC;
    (2) files with the SEC a specified annual electronic information form,
    made available to the public, concerning ownership structure, investors,
    primary accountant and broker, and current assets value;
    (3) maintains such books and records as the SEC may require; and
    (4) cooperates with any request for information or examination.
    Would not impose restrictions on leverage and short selling on such
Proposed Bills

•   01/29/2009 S. 344 Senator Carl Levin (MI) and Chuck Grassley (IA)
    "The Hedge Fund Transparency Act"
    Requires any investment company meeting such exemption requirements
    to establish an anti-money laundering program, according to rules
    prescribed by the Secretary of the Treasury, and report suspicious
    Requires such rules to require exempted investment companies to use
    risk-based due diligence policies, procedures, and controls reasonably
    designed to ascertain the identity of, and evaluate, any foreign person
    that supplies funds, or plans to supply funds, to be invested with the
    investment company's advice or assistance.
    Requires such rules also to require exempted investment companies to
    comply with the same requirements as other financial institutions for
    producing records requested by a federal regulator, particularly within
    120 hours of receiving such a request.
Proposed Bills

•   02/11/2009 H.R. 977 Congressman Collin Peterson (MN)
    "The Derivatives Markets Transparency and Accountability Act"
    Requires the CFTC, to the extent information is available, to disaggregate
    and make public monthly: (1) the number of positions and total
    notional value of index funds and other passive, long-only and short-only
    positions in all markets; and (2) data on speculative positions relative to
    bona fide physical hedgers in those markets.
    Subjects persons involved in derivative and swap transactions, as well as
    large traders in over-the-counter contracts, to reporting and
    recordkeeping requirements.
Proposed Bills

•   02/13/2009 H.R. 1068 Congressman Peter DeFazio (OR)
    "Let Wall Street Pay for Wall Street’s Bailout Act of 2009"
    Amends the Internal Revenue Code to require securities trading facilities
    to pay an excise tax on a specified percentage of the value of securities
    and commodities transactions sufficient to recoup the net cost of
    carrying out the Troubled Asset Relief Program (TARP) of the Emergency
    Economic Stabilization Act of 2008
Proposed Bills

•   03/02/2009 S. 506 Senator Carl Levin (MI)
    "Stop Tax Haven Abuse Act"
    Amends Internal Revenue Code provisions relating to tax shelter activities:
    (1) establishes legal presumptions against the validity of transactions
    involving "offshore secrecy jurisdictions" (i.e., foreign tax havens
    identified in this Act and by the Secretary of the Treasury)
    (2) imposes restrictions on foreign jurisdictions, financial institutions, or
    international transactions that are of primary money laundering concern or
    that impede U.S. tax enforcement
    (3) treats certain foreign corporations managed and controlled primarily
    in the United States as domestic corporations
    (4) increases the period for IRS review of tax returns involving offshore
    secrecy jurisdictions
Proposed Bills

•   03/02/2009 S. 506 Senator Carl Levin (MI)
    "Stop Tax Haven Abuse Act"

    (5) requires tax withholding agents and financial institutions to report
    certain information about beneficial owners of foreign-owned financial
    accounts and accounts established in offshore secrecy jurisdictions;
    (6) disallows tax advisory opinions validating transactions in offshore
    secrecy jurisdictions;
    (7) subjects dividend equivalents and substitute dividends to the 30%
    tax on foreign income; and
    (8) imposes reporting requirements for transactions involving a passive
    foreign investment company.
Proposed Bills

•   03/02/2009 S. 506 Senator Carl Levin (MI)
    "Stop Tax Haven Abuse Act"
    Amends the Securities Exchange Act of 1934 and other federal enactments
    to impose a penalty for failure to disclose holdings or transactions
    involving a foreign entity.
    Requires the Secretary of the Treasury to publish a final rule requiring
    unregistered investment companies, including hedge funds or private
    equity funds, to establish anti-money laundering programs, and to
    submit suspicious activity reports.
    Increases penalties for promoting abusive tax shelters and for aiding and
    abetting the understatement of tax liability.
    Denies tax deductions for certain fines and penalties for violations of
    law and for interest paid on certain understatements of tax.
Proposed Bills

•   04/02/2009 H.R. 1935 Congressman Sander Levin (MI)
    To amend the Internal Revenue Code of 1986 to provide for the treatment
    of partnership interests held by partners providing services as income
    taxable at ordinary rates.
    Defines "investment services partnership interest" as any interest in a
    partnership held by a person who provides services to a partnership by:
    (1) advising the partnership about investing in, purchasing, or selling
    specified assets;
    (2) managing, acquiring, or disposing of specified assets; or
    (3) arranging financing with respect to acquiring specified assets.
Proposed Bills

•   05/04/2009 S. 961 Senator Carl Levin (MI)
    "Authorizing the Regulation of Swaps Act"
    Amends the Gramm-Leach-Bliley Act, the Securities Act of 1933, the
    Securities Exchange Act of 1934, the Commodity Futures Modernization
    Act of 2000, the Legal Certainty for Bank Products Act of 2000, and the
    Commodity Exchange Act to repeal prohibitions against regulation of
    credit default swaps and other swap agreements, whether traded on an
    exchange or over-the-counter, including commodity, equity, foreign
    currency, and interest rate swaps.
    Grants the SEC sole oversight authority over: (1) any exchange or
    clearing agency; and (2) any swap agreement traded on or cleared
    through such exchange or clearing agency.
Proposed Bills

•   06/16/2009 S. 1276 Senator Jack Reed (RI)
    "Private Fund Transparency Act of 2009"
    Amends the Advisers Act to: (1) repeal the exemption from its registration
    requirements for private investment advisers; and (2) continue to exempt
    from such requirements only foreign private advisers.
    Authorizes the SEC to require any registered investment adviser to
    maintain and submit records for federal supervision of systemic risk.
    Shields the SEC from any compulsion to disclose any supervisory
    report or information that is required to be filed with the SEC.
    Empowers the SEC to ascribe different meanings to terms (including the
    term "client") used in different sections of the Act.
Proposed Bills

•   07/22/2009 H.R. 3300 Congressman Michael E. McMahon (NY)
    "The Derivatives Trading Accountability and Disclosure Act of 2009"
    Establishes within the Department of the Treasury the Office of
    Derivatives Supervision (Office) to:
    (1) implement this Act and oversee the registration of derivatives traders;
    (2) coordinate with the SEC and the CFTC in developing comprehensive,
    standardized regulations for derivatives transactions; and
    (3) facilitate information exchange among specified agencies regarding the
    development of derivatives regulations.
    Prescribes registration requirements for derivatives traders. Makes it
    unlawful for any unregistered derivatives trader to make use of the
    mails or any means or instrumentality of interstate commerce to effect any
    transactions in, or to induce or attempt to induce the purchase or sale of
    any type of derivative.
Proposed Bills

•   12/02/2009 H.R.4173 Congressman Barney Frank (MA)
    "Wall Street Reform and Consumer Protection Act of 2009"

    Latest Major Action: 12/11/2009 passed/agreed to in House.
    Status: On passage passed by recorded vote: 223 - 202 (Roll no. 968).

    To provide for financial regulatory reform, to protect consumers and
    investors, to enhance Federal understanding of insurance issues, to
    regulate the over-the-counter derivatives markets, and for other
Proposed Bills

•   12/02/2009 H.R.4173 Congressman Barney Frank (MA)
    "Wall Street Reform and Consumer Protection Act of 2009"

    Increases Consumer Protections: Creates the Consumer Financial
    Protection Agency (CFPA), a new, independent federal agency solely
    devoted to protecting Americans from unfair and abusive financial products
    and services.
    Creates a Financial Stability Council: Increases oversight, standards,
    and regulation of financial firms that are so large, interconnected, or
    risky that their collapse would put the entire financial system at risk.
    Ends Taxpayer Bailouts and “Too Big to Fail”: Establishes an orderly
    process for shutting down large, failing financial institutions.
Proposed Bills

•   12/02/2009 H.R.4173 Congressman Barney Frank (MA)
    "Wall Street Reform and Consumer Protection Act of 2009"

    Reins in Executive Compensation: Gives shareholders an advisory vote
    on pay practices. It also enables regulators to ban inappropriate or
    imprudently risky compensation practices, and it requires financial firms
    to disclose incentive-based compensation structures.

    Safeguards Investors: Strengthens the SEC and orders a study of the
    entire securities industry that will identify needed reforms and force the
    SEC and other entities to further improve investor protection.
Proposed Bills

•   12/02/2009 H.R.4173 Congressman Barney Frank (MA)
    "Wall Street Reform and Consumer Protection Act of 2009"

    Regulates Derivatives: Requires all standardized swap transactions
    between dealers and “major swap participants” to be cleared and traded
    on an exchange or electronic platform. The bill defines a major swap
    participant as anyone that maintains a substantial net position in
    swaps, exclusive of hedging for commercial risk, or whose positions create
    such significant exposure to others that it requires monitoring.
Proposed Bills

•   12/02/2009 H.R.4173 Congressman Barney Frank (MA)
    "Wall Street Reform and Consumer Protection Act of 2009"

    Outlaws Predatory Mortgage Lending Practices: Incorporates the tough
    mortgage reform and anti-predatory lending bill the House passed earlier
    this year, outlawing many of the egregious industry practices that marked
    the subprime lending boom, and ensure that mortgage lenders make loans
    that benefit the consumer.
    Requires the Registration of Hedge Funds: Closes a regulatory
    exemption that allows hedge funds and their advisors to escape
    regulation. This bill requires almost all advisers to private pools of
    capital to register with the SEC, and they will be subject to systemic risk
    regulation by the Financial Stability regulator.
Proposed Bills

•   11/10/2009 Senator Chris Dodd (CT)
    "Restoring American Financial Stability Act of 2009"

    Creates Consumer Financial Protection Agency: Creates an
    independent watchdog to ensure American consumers get the clear,
    accurate information they need to shop for mortgages, credit cards, and
    other financial products, while prohibiting hidden fees, abusive terms, and
    deceptive practices.
Proposed Bills

•   11/10/2009 Senator Chris Dodd (CT)
    "Restoring American Financial Stability Act of 2009"

    Ends Too Big to Fail: Prevents excessively large or complex financial
    companies from bringing down the economy by:
          1) creating a safe way to shut them down if they fail
          2) imposing tough new capital and leverage requirements and
    requiring they write their own “funeral plans”
          3) requiring industry to provide their own capital injections
          4) updating the Fed’s lender of last resort authority
          5) establishing rigorous standards and supervision to protect the
    economy and American consumers, investors and businesses.
Proposed Bills

•   11/10/2009 Senator Chris Dodd (CT)
    "Restoring American Financial Stability Act of 2009"

    Protects Against Systemic Risks: Creates an independent agency to
    identify and address systemic risks posed by large, complex companies,
    products, and activities, with the power to require companies that threaten
    the economy to divest some of their holdings.
    Creates Single Federal Bank Regulator: Eliminates the convoluted
    system of multiple federal bank regulators; keeps in place the healthy dual
    banking system that governs community banks.
    Executive Compensation and Corporate Governance: Provides
    shareholders with a say on pay and corporate affairs with a non-binding
    vote on executive compensation and director nominations.
Proposed Bills

•   11/10/2009 Senator Chris Dodd (CT)
    "Restoring American Financial Stability Act of 2009"

    Closes Loopholes in Regulation: Eliminates loopholes for over-the-
    counter derivatives, asset-backed securities, hedge funds, mortgage
    brokers and payday lenders.
    Protects Investors: Provides tough new rules for transparency and
    accountability from investment advisors, financial brokers and credit rating
    Enforces Regulations on the Books: Strengthens oversight and
    empowers regulators to aggressively pursue financial fraud, conflicts of
    interest and manipulation of the system.
Proposed Bills

Provisions specific to Private investment Funds:

•   Private Fund Adviser Registration and Reporting: Similar to the Frank
    Bill, Senator Dodd's Bill, if enacted as proposed, would eliminate the
    "private adviser exemption" from SEC registration
•   SEC Exams and Inspections: Dodd Bill would require "private funds" to
    keep records and make reports that would be subject to SEC exams, and
    would also be subject to periodic SEC inspections in accordance with a
    schedule established by the SEC.
Proposed Bills

•   "Private Funds" subject to legislation:
     – Frank Bill would define the term "private funds" to include both
        domestic and offshore funds relying on section 3(c)(1) or section 3(c)(7)
     – Dodd's Bill would define "private funds" to include only domestic
        funds and offshore funds with 10% or more of their securities
        owned by U.S. persons relying on section 3(c)(1) or section 3(c)(7)
Proposed Bills

•   Record-keeping: The private funds records and reports would include
    the following information:
     – assets under management
     – use of leverage
     – counterparty credit risk exposures
     – trading positions and practices
Proposed Bills

•   Unlike the Frank Bill, Senator Dodd's Bill would require the following
    additional information in the private fund records and reports:
     – valuation methodologies
     – investment positions
     – types of assets held
     – side arrangements or letters
     – such additional information as the SEC, in consultation with the
        Agency for Financial Stability (the systemic risk regulator that would
        be created under Dodd's proposed Financial Stability Act of 2009),
        deems necessary and appropriate in the public interest and for the
        protection of investors, or for the assessment of systemic risk
Proposed Bills

•   Exemptions: Significant differences between Dodd's Bill and the Frank Bill
    with respect to exceptions to, and exemptions from, registration and
     – Frank Bill would exempt from both registration and reporting
        advisers to SBICs licensed under the Small Business Investment Act
        of 1958
     – Dodd Bill would exempt from both registration and reporting
        advisers to "venture capital funds" (to be defined by the SEC)
     – Dodd Bill would except from the definition of "investment adviser"
        any "family office" (to be defined by the SEC), which would alleviate
        family offices from registration and reporting as well as federal
        investment adviser regulation generally
Proposed Bills

•   Both proposals provide exemptions from registration for certain advisers
    that would not be exempt from reporting.
•   Frank Bill would exempt from registration, but not reporting, advisers to
    private funds with AUM in the U.S. of less than $150 million.
•   Dodd's Bill would exempt from registration, but not reporting, advisers
    to "private equity funds" (to be defined by the SEC within 6 months after
Proposed Bills

•   State-Federal Responsibilities: Dodd's Bill would raise the current $25
    million threshold for federal responsibility of investment adviser
    regulation to $100 million
     – Rep. Paul Kanjorski (D-Pa.), Chairman of the House Financial Services
         Committee’s Capital Markets Subcommittee, is expecting a similar
         proposal in the House to raise the $25 million threshold for federal
         responsibility of investment adviser regulation to $100 million.
Proposed Bills

•   Third-party Disclosures:
     – Under the Frank Bill, private fund advisers would be required to
        disclose such reports, records or other information to investors,
        prospective investors, counterparties, and creditors, as the SEC
        deems necessary or appropriate in the public interest and for the
        protection of investors or for the assessment of systemic risk.
     – Dodd's Bill does not include these third party disclosure obligations.
        However, like the Frank Bill, Dodd's Bill would eliminate Section
        210(c) of the Advisers Act, which currently restricts the SEC's ability
        to require advisers to disclose the identity, investments, or affairs of
        any client.
Proposed Bills

•   Information Sharing:
     – Similar to the Frank Bill, Dodd's Bill would authorize the SEC to share
        the records and reports of registered private fund advisers for the
        purpose of assessing systemic risk.
     – The proposals assume different systemic risk regulators as the
        recipients of the shared information:
          • Frank Bill authorizes the SEC to share information with the
            Federal Reserve and any entity that the SEC identifies as having
            systemic risk responsibility.
          • Dodd's Bill would authorize the SEC to share information with the
            would-be-created Agency for Financial Stability, with an
            agreement of confidentiality for such information to be provided
            to Congress. The SEC would also have to report annually to
            Congress on how the SEC has used the data collected to monitor
            the markets for the protection of investors and the integrity of the
Predictions for 2010 and beyond . . .

•   Legislative and Regulatory:
     – Elimination of Private Adviser exemption in 2010
         • possible effective date of January 1, 2011
         • Increase in threshold for State-federal registration to $50-$100MM
     – Increased reporting requirements on larger "systemically
       significant" funds
     – Exchange requirements for Swaps and Derivatives Trading
     – Protective provisions specific to Pension Plans
     – Higher Accredited Investor standards for investors in pooled capital
     – Segregation and reporting of Client Account assets
     – Regulation of Credit Rating Agencies
     – Possible re-enactment of Glass-Steagall type separation of
       banking and investment/brokerage functions at large institutions
Predictions for 2010 and beyond . . .

•   Enforcement:
     – Insider Trading
     – Market Manipulation Practices
     – Abusive Short-selling
     – Anti-fraud Actions against Managers
     – Emergency Actions/Fund Seizures
     – FBAR Tax Reporting and Prosecutions
Predictions for 2010 and beyond . . .
Recap and Conclusions

•   Momentum for regulatory reform from 2009 will carry-over into 2010
    with elements of many Bills being enacted
•   Increased budgets and staffing at SEC, IRS
•   Federal agencies will continue efforts to broaden regulatory reach
    with new regulations
•   Other political issues (healthcare, job growth, war on terror) may
    upstage the pace of process
Recap and Conclusions

•   Big picture:

       Absent the enactment of legislation or adoption of regulations
       significantly curtailing use of leverage and trading techniques like short-
       selling, the fundamental characteristics that define private
       investment funds as a distinct asset class will remain intact
Recap and Conclusions

•   Thank you to our friends at Stuarts Walker Hersant and members in
    attendance representing the Cayman Islands Government

•   Questions and Answers

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