White Paper Recommends Regulation of Hedge Fund Managers

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29 Jun 2009

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White Paper Recommends Regulation of Hedge Fund Managers
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The Obama Administration's comprehensive financial regulatory reform plan proposes several changes that, if implemented, will subject fund managers and their investment vehicles to SEC oversight and additional disclosure requirements. Set out in an 88-page White Paper, the plan’s overall aim is to modernize and protect the integrity of the US financial system. Although the recommendations summarized below are components of the proposed financial overhaul, they have not yet been formalized by any legislation or regulation. The White Paper proposes a registration requirement under the Investment Advisers Act of 1940 (the Advisers Act) for all investment advisers of hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed “some modest threshold,” which is yet to be determined. In addition, the White Paper recommends certain obligations for investment funds advised by a registered investment adviser, including (i) recordkeeping requirements; (ii) additional requirements with respect to disclosures to investors, creditors and counterparties; and (iii) regulatory reporting requirements. The regulatory reporting requirements would mandate that funds report to the Securities and Exchange Commission the amount of assets under management, details regarding the fund’s borrowings, off-balance sheet exposures and other information necessary to “assess whether the fund or fund family is so large, highly leveraged, or interconnected that it poses a threat to financial stability.” A fund or fund family that poses such a threat would be subject to additional (1 of 2)6/30/2009 11:04:12 AM

DLA Piper | Publications | White Paper Recommends Regulation of Hedge Fund Managers

regulation and supervision by the Federal Reserve. The White Paper also proposes comprehensive regulation of all over-the-counter derivatives. Currently, OTC derivatives markets are largely unregulated. Although the CFTC and SEC currently have limited statutory authority to regulate OTC derivatives, the White Paper recommends amendments to the commodities and securities laws to require clearing of all standardized OTC derivatives through regulated central counterparties. CCPs would be required to impose robust margin requirements, as well as other necessary risk controls. In addition, the White Paper calls for extra scrutiny of customized OTC derivatives to ensure they are not being used solely to avoid using a CCP. It emphasizes that future amendments to the commodities and securities laws must “ensure that the CFTC and SEC…have clear, unimpeded authority to police and prevent fraud, market manipulation, and other market abuses involving all OTC derivatives.” Guidance on harmonization of futures and securities regulation is also a focus of the White Paper. The White Paper recommends an amendment of the current federal regulatory structure to eliminate jurisdictional uncertainties between the CFTC and SEC, and building a common foundation for market regulation through interagency agreement. Finally, the White Paper urges international cooperation on the regulation of hedge funds and their managers, recommending national authorities implement, by the end of 2009, the G-20 commitment to require hedge fund registration and disclosure obligations so that regulators can assess any systemic risk these investment vehicles pose individually or collectively. Please read the full text of the White Paper here. We will alert you to further developments as to the status of the White Paper proposals as they progress towards implementation. For more information, please contact Drew G.L. Chapman or your DLA Piper lawyer.

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