Compliance Avenue

The Alternative Investment Management Association (“AIMA”), a global hedge fund association, announced last week that it will meet with U.S. policymakers and supervisors in September regarding the Dodd-Frank Wall Street Reform and Consumer Protection Act.  AIMA will focus its efforts on several key areas including: registration of hedge fund managers and reporting of systematically relevant data in the interests of a broader financial stability assessment; how smaller managers may be impacted by the legislation; OTC derivatives; the revised “Volcker Rule”; potential tax issues; and the goal of global regulatory consistency.

Todd Groome, Chairman of AIMA, said of the meetings:

“AIMA, as the global hedge fund association, has historically worked closely with U.S. and international supervisors, and we look forward to engaging with U.S. authorities in September and beyond regarding numerous issues related to the implementation of the Dodd-Frank Act, as well as its interaction with reforms in other jurisdictions.

“AIMA supports increased dialogue with supervisors, and the goal of improved trading and market transparency by the industry. That includes periodic reporting of data to supervisors so they may better assess broad market and potential systemic risks.   Hedge funds do not present a systemic risk, but our industry can contribute to the analysis of systemic risk and financial stability.

“We also support OTC derivatives reform, including the introduction of central clearing. We believe central clearing of eligible contracts is a very important reform aimed at improving financial stability. However, we remain focused on certain implementation issues, such as direct access, governance and capital or margin requirements.

“From the outset, we have also called for a globally consistent and coordinated regulatory framework. Many of the measures that feature in the Dodd-Frank Act are being discussed in other jurisdictions, and it is desirable that there is a large degree of consistency in terms of approach and implementation. If that consistency is not achieved it could lead to unnecessary duplication and increased costs.”

AIMA expresses its views on this legislation in more detail in its June 28, 2010 statement on U.S. financial reform.

The Dodd-Frank financial reform bill, signed into law by President Obama on July 21, 2010, has left behind an odd but important ambiguity for investment advisers located in New York state.  The law requires most investment advisers with less than $100 million in assets under management to register with the securities commissioner of the state where the adviser maintains its principal office and place of business, provided that the adviser “would be subject to examination as an investment adviser” by such commissioner.  Unlike most other states, however, New York has never conducted examinations of investment advisers and currently its General Business Laws provide no specific authority for such examinations.

The Investment Adviser Association (the “IAA”), a not-for-profit association representing the interests of federally registered investment advisers, has estimated that approximately 350 New York-based advisers would be forced to de-register with the SEC as a result of the Dodd-Frank law.  David Tittsworth, the executive director of the IAA, has commented that “the answer about where they register is unclear.  It’s highly likely that the SEC will, in time, issue some sort of transitional rules that will deal with this and other questions.”

In order to avoid leaving these New York advisers in “no man’s land”, one of two responses is likely before the law takes effect in July of next year: either the SEC will bring these advisers back within its jurisdiction or New York will adopt an examination program to meet the requirements of the law.  New York advisers affected by the law will have to sit tight for the time being until guidance is released.

If you own or license personal information about a resident of the Commonwealth, you should already be familiar (and compliant, as of March 1, 2010) with the Massachusetts Data Security Regulations, set by The Massachusetts Office of Consumer Affairs and Business Regulation (OCABR).

While the Regulations themselves are best explained by Mr. Patrick Shea of HedgeOp Compliance in an earlier post of this blog, let’s take a moment to look at practical approaches to meeting (and exceeding) the requirements outlined in the Regulations. I will focus my post on the technological aspects of the Regulations but make sure you address the non-technology pieces, including risk identification and assessment, employee training, maintaining proper documentation, etc.

I would like to introduce you to what I call the C.I.A. of your data: Confidentiality, Integrity and Availability. As a business owner or IT gate keeper you want to make sure that your data remains secured, accurate and readily available to your employees and investors. We will get back to data C.I.A. in a second.

Read the rest of this entry »

Last month, the Department of Labor (DOL) adopted an amendment to Prohibited Transaction Exemption (PTE) 84-14.  The amendment introduces new conditions that QPAMs must meet in order to stay within the QPAM exemption when managing assets of a qualified plan that is sponsored by the QPAM or sponsored by an affiliate of the QPAM.  It is important to note that the new conditions will apply when the QPAM is directly managing the assets of the affiliated plan or when the QPAM is managing an investment fund in which the affiliate plan has invested.  Read the rest of this entry »

On July 23, 2010, the FSA published a consultation paper which incorporates the final text of the new Financial Stability and Market Confidence Sourcebook.

FINMAR 1 contains rules on the FSA’s information gathering powers, which have been revised and expanded to, among other things, include the power to require disclosure of information and documents by certain persons whose activities the FSA views as relevant to the stability of one or more aspects of the financial system.

The new FINMAR sourebook comes into force on August 6, 2010.

On July 23, 2010, the FSA published a consultation paper which incorporates the final text of the new Financial Stability and Market Confidence Sourcebook.

FINMAR 2 contains rules on short selling, which incorporate to a large extent the existing FSA short-selling disclosure regime (currently set out in the FSA Code of Market Conduct (“MAR”)), but also add new short-selling powers and penalties granted to the FSA by the UK’s outgoing Labour government under the Financial Services Act 2010 (the “FS Act”, which came into force on April 8, 2010).

Among other things, the FS Act provides that the FSA has the power to:

1. Require a person to provide information and documents that the FSA reasonably requires for the purpose of determining whether a person, or a person connected to them, has contravened any provision of short-selling rules; and/or
2. Impose a financial penalty or public censure on a person that contravenes any provision of short-selling rules or on a person who was knowingly concerned in the contravention.

The new FINMAR sourcebook will come into force on August 6, 2010, which is also the date on which the revised and recast rules will come into effect and the existing short-selling rules in MAR will be deleted.

As reported by FINAlternatives, the New York Legislature managed—finally—to pass the last piece of the state’s very late budget without increasing taxes on hedge fund managers who work in the state but live elsewhere.

This is a follow up on our July 21 blog post reporting that the SEC announced approval for amendments to Form ADV Part II – now officially renamed “Part 2″), which  (among other things) will require advisers to make their brochures publicly available via electronic filing, and will change the format of the brochure from its current “check the box” approach to a more narrative, “plain English” approach.

On July 28, the SEC published the Adopting Release along with the revised Form ADV Part 2 .  More on the specific disclosure items contained within the new Part 2 will be discussed on upcoming blogs.