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       Administration Proposal for Financial
               Regulatory Reform

    • Released on June 17, 2009

    • Designed to restore confidence in U.S. financial system following
      financial crisis

    • Proposed reforms target all aspects of financial system – including
      hedge funds and derivatives

    • Most comprehensive proposed financial services legislation since
      the passage of the securities laws

                    Five Key Objectives

    • Promote robust supervision and regulation of financial firms

    • Establish comprehensive supervision of financial markets

    • Protect consumers and investors from financial abuse

    • Provide the government with tools needed to manage financial

    • Raise international regulatory standards and improve
      international cooperation

    Robust Supervision of all Financial Firms

    • Creation of Financial Services Oversight Council (FSOC)

       – Replaces the President’s Working Group on Financial Markets
       – Mandate is to identify emerging risks and advise Federal
         Reserve on potential problem firms
       – Chaired by Secretary of Treasury; members of council should
         include: Chairman of the Board of Governors of the Federal
         Reserve, Director of the National Bank Supervisor, Director of
         the Consumer Financial Protection Agency, Chairman of the
         SEC, Chairman of the CFTC, Chairman of the FDIC and Director
         of the Federal Housing Finance Agency
       – FSOC to have permanent staff at Treasury Department

    Consolidated Supervision and Regulation
           of Certain Financial Firms
    • All financial firms found to pose a threat to financial stability based
      on size, leverage and interconnectedness will be classified as Tier 1
      FHCs and subject to consolidated supervision and more strict

    • The Federal Reserve will identify those firms that should be
      classified as Tier 1 FHCs (based in part on recommendations from
      the FSOC)

    • Tier 1 FHCs will include those private pooled vehicles (individually
      or collectively) that meet the established criteria

    Consolidated Supervision and Regulation
           of Certain Financial Firms

    • Congress will be directed to establish factors that the Federal
      Reserve must consider when making the determination that a
      financial firm should be classified as a Tier 1 FHC including:

        – Impact firm’s failure would have on the financial system and the
        – Firm’s combination of size, leverage (including off-balance sheet
          exposure) and degree of reliance on short-term funding
        – Firm’s importance as source of credit for households,
          businesses and state and local governments and as source of
          liquidity for financial system

     Additional Federal Reserve Powers

    • To collect information (periodic and other reports) from all
      financial firms that meet certain size thresholds

    • Access to financial firm reports submitted to other regulators
      (e.g., SEC or CFTC)

    • Authority to require reports and conduct examinations of
      Tier 1 FHCs and their subsidiaries even though the entities
      may be supervised by other regulatory agencies

        Prudential Standards for Tier 1 FHCs

    In consultation with the FSOC, the Federal Reserve will establish
    “prudential standards” for Tier 1 FHCs
    •   Capital requirements
    •   Prompt corrective action
    •   Liquidity standards
    •   Overall risk management
    •   Market discipline and disclosures
    •   Restrictions on non-financial activities
    •   Rapid resolution plans

     Restrictions on Non-Financial Activities

    • Tier 1 FHCs would be subject to the nonfinancial activities
      restrictions of the Bank Holding Company Act

    • Such restrictions may include a prohibition that prevents a Tier 1
      FHC from acquiring more than 5% of the outstanding shares of a
      company unless such company is engaged in financial activities or
      activities incidental to a financial activity

     Registration of Advisers to Hedge Fund
       and Other Private Pools of Capital
    • Proposal would require all advisers to private pools of capital
      whose assets exceed a modest threshold to register with the SEC
       – hedge funds
       – private equity funds
       – venture capital funds

    • Possible required disclosures to investors, creditors and

    • SEC recordkeeping requirements would extend to investment
      funds managed by SEC-registered advisers

              Reporting Requirements for
                 Registered Advisers
     • Registered Advisers would be required to report information
       about the private funds that they manage sufficient to enable
       regulators to assess the threat to financial stability

     • Reporting should be confidential and include:
        – amount of assets under management
        – borrowings
        – off balance sheet exposures

     • SEC should share information with the Federal Reserve to be
       used to determine whether any fund or families of funds meet the
       Tier 1 FHC criteria

           Strengthening Regulation of Core
           Markets and Market Infrastructure
     • Strengthen supervision of securitization markets

     • Originator of securitized loan (or sponsor of securitization) must
       retain 5% of credit risk of securitized exposures

     • SEC will have the authority to require robust reporting by ABS

     • SEC will continue to tighten regulation of credit rating agencies

       Comprehensive Regulation of Markets
         for Over-the-Counter Derivatives
         (including Credit Default Swaps)

     • Transparency for all OTC derivatives trades through recordkeeping
       and reporting

     • Standardized OTC derivatives to be centrally cleared and executed
       on exchanges and other transparent trading venues

     • Higher capital charges for customized OTC derivatives

                   Harmonized Futures and
                    Securities Regulation
     • SEC and CFTC must make recommendations to eliminate
       differences in statutes and regulations with respect to similar types
       of financial instruments
        – For example, many financial options and futures products are
            similar, yet options are regulated by the SEC whereas futures
            contracts on the same underlying security are regulated jointly
            by the SEC and CFTC

     • Provide joint report to Congress by September 30, 2009

     • If SEC and CFTC cannot agree by September 30, 2009 the
       Financial Services Oversight Council will make recommendations to
       resolve the differences within 6 months of its formation

         Providing Government with Tools to
         Effectively Manage Financial Crises

     • More stringent capital, activities and liquidity requirements will be
       imposed on Tier 1 FHCs

     • Prompt corrective action will be required from Tier 1 FHCs to
       address declining capital levels

                 Special Resolution Regime

     • Tier 1 FHCs to maintain rapid resolution plans to be implemented in
       the event of severe financial distress

     • Federal Government to be given emergency authority to resolve Tier
       1 FHCs in an orderly manner

     • Treasury Department would invoke this authority in consultation with
       the President and written recommendation of 2/3 of the members of
       the Federal Reserve Board and the appropriate regulatory agency
       that supervises such Tier 1 FHC

                 Special Resolution Regime

     • Treasury Department authority would include appointment of a
       receiver or conservator

     • Generally, the Treasury Department should appoint the FDIC or
       SEC as the receiver or conservator

     • Receiver or conservator should have the authority to take control of
       firm operations, sell or transfer firm assets, transfer a firm’s
       derivative transactions, renegotiate or repudiate firm contracts and
       borrow from the Treasury Department

          Strengthening Consumer Protection

     •   Creation of Consumer Financial Protection Agency (CFPA) with authority to
         protect consumers of credit, savings, payment and other consumer financial
         products and services and regulate providers of these products and
         services (other than those regulated by the SEC or CFTC)

     •   CFPA would be authorized to reform mortgage laws

     •   Place banks, nonbanks and independent mortgage brokers on a level
         playing field – activities would be regulated regardless of whether it is a
         financial institution

     •   Consumer Financial Protection Agency Act of 2009 establishing the
         Consumer Financial Protection Agency referred to House Committee on
         Financial Services and Committee on Energy and Commerce on
         July 8, 2009

       SEC Focus on Transparency, Fairness
               and Accountability

     • SEC should be authorized to require certain disclosures to investors
       at or before certain sales of financial products

     • Harmonize regulation of broker-dealers that offer investment advice
       and investment advisers

     • Improve accountability of financial firms and public companies

     • On July 10, 2009, the Administration proposed the Investor
       Protection Act of 2009

            Improve International Regulatory
              Standards and Cooperation

     • Subject foreign firms operating in the U.S. to the same regulation
       and oversight as U.S. firms that pose a risk to the U.S. financial

     • Reach an international consensus regarding capital standards,
       oversight of OTC derivatives markets, supervision of internationally
       active financial firms and crisis prevention procedures

                 What Does it All Mean?

 • Unprecedented authority proposed for the Federal Reserve

 • “Power Grab” by Federal Banking authorities?

 • Unclear how differing regulatory mandates will be handled
    – SEC has mandate of investor protection and ensuring the
      integrity and efficiency of financial markets
    – CFTC has mandate of encouraging competitiveness of futures
      markets, investor protection and ensuring integrity of the clearing
    – Bank regulators have mandate of ensuring safety and soundness
      of particular institutions
    – Federal Reserve acts as the central bank and has overall
      responsibility for supervising and regulating segments of the
      banking industry to ensure safe and sound banking practices and
      compliance with banking laws
                 Related Legislative Hearings

 •   June 18, 2009: Senate Committee on Banking, Housing and Urban Affairs Hearing on the
     Administration’s Proposal to Modernize the Financial Regulatory System

 •   July 8, 2009: House Subcommittee on Commerce, Trade and Consumer Protection Hearing on
     The Proposed Consumer Financial Protection Agency: Implications for Consumers and FTC

 •   July 9, 2009: House Committee on Domestic Monetary Policy and Technology Hearing on
     Regulatory Restructuring: Balancing the Independence of the Federal Reserve in Monetary Policy
     with Systemic Risk Regulation

 •   July 10, 2009: House Agricultural Committee and Financial Services Committee Hearing on a
     Review of the Administration's Proposal to Regulate the Over-the-Counter Derivatives Market

 •   July 13, 2009: House Committee on Financial Services Hearings on proposed Financial
     Regulatory Reform (postponed)

 •   July 15, 2009 - July 17, 2009: House Committee on Financial Services Hearings on proposed
     Financial Regulatory Reform

 •   July 15, 2009: Senate Committee on Banking, Housing and Urban Affairs on regulating hedge
     funds and other private investment pools

      Hedge Fund Adviser Registration Act of
                  2009 (H.R. 711)
     • Proposed January 27, 2009

     • Proposal to amend the Investment Advisers Act of 1940
        – Would remove Section 203(b)(3) of the Advisers Act (current
          exemption for investment advisers with fewer than 15 clients)

     • Result: Investment advisers with $30 million or more in assets
       under management would be required to register with the SEC

     • Status: Referred to the House Committee on Financial Services on
       January 27, 2009

          Hedge Fund Transparency Act (S. 344)

     •   Proposed January 29, 2009

     •   Proposal to amend the Investment Company Act of 1940
          – Private funds (including hedge funds, private equity funds and venture capital
             funds) with $50 million or more in assets under management would be required
             to register with the SEC and comply with certain requirements in order to remain
             exempt from substantive provisions of the Investment Company Act

     •   Requirements include:
          – Maintenance of books and records required by the SEC
          – Cooperate with any request for information or examination by the SEC
          – Establish an anti-money laundering program
          – File an annual information form electronically with the SEC (to be made publicly

     •   Status: Referred to the House Committee on Banking, Housing and Urban Affairs on
         January 29, 2009

         Private Fund Transparency Act of 2009
                                       (S. 1276)

     •   Proposed June 16, 2009

     •   Proposal to amend the Investment Advisers Act of 1940
          – Would replace the current private investment adviser exemption with a
            more limited exemption available only to certain foreign private
            investment advisers with no place of business in the U.S. and less than
            $25 million in assets attributable to clients in the U.S.
          – SEC would be authorized to collect risk data, records and reports from
            registered advisers

     •   Result: All U.S. investment advisers with at $30 million or more in assets
         under management would be required to register with the SEC

     •   Status: Referred to House Committee on Banking, Housing and Urban
         Affairs on June 16, 2009

             Significant U.S. Federal Income
                    Tax Developments
     • Sen. Levin’s Bill (S. 506)
        – Treats foreign corporations, including offshore hedge funds, with
          gross assets of $50 million or more as U.S. corporations if
          “management and control” of the corporation occurs primarily
          within the U.S. (i.e., investment decisions are made within the
        – Subjects dividend equivalent payments received by foreign
          persons with respect to total return swaps and other derivatives
          referencing U.S. corporation stock to a 30% U.S. withholding tax.
        – Status: Referred to Senate Finance Committee on
          March 2, 2009

             Significant U.S. Federal Income
                    Tax Developments

     • Rep. Rangel’s Bill (H.R. 3970)
        – Treats partnership income earned for providing investment
          management services (i.e., carried interest) as ordinary income
        – Status: Referred to House Ways and Means Committee on
          October 25, 2007

     • Administration’s Revenue Proposals
        – Effective in 2011, “carried interest” (e.g., incentive or profit
          allocations) would be taxed as ordinary income (likely would also
          subject carried interest to self-employment tax)

               Significant U.S. Federal Income
                      Tax Developments

     •   Rep. Levin’s Bills
          – H.R. 3501
              • Creates an exception to the unrelated debt-financed income rules
                that would allow U.S. tax-exempt entities to invest directly in
                domestic hedge funds (rather than through foreign blocker
                corporations) without incurring UBTI
              • Status: Referred to House Ways and Means Committee on
                September 7, 2007
          – H.R. 1935
              • Treats income from an “investment services partnership interest”
                (i.e., interest in a partnership held by a person providing investment
                management services to the partnership) as ordinary income and
                subject to self-employment tax
              • Status: Referred to House Ways and Means Committee on April 2,

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