Just a reminder for all registered investment advisers that annual Form ADV Part 1 updates are due at the end of this month. ADV Part 1 is filed/updated electronically via the IARD system.
This time of year is also a good opportunity to familiarize yourself with the list of changes to your business that may require a “prompt” ADV update during the year. You can read our ADV Basics post for the details.
By a partisan vote of 13 to 10, the Senate Banking Committee voted early Monday evening to send Committee Chairman Christopher Dodd’s proposed overhaul of the nation’s financial system to the full Senate without any amendments.
HedgeOp Compliance, LLC will be holding a free webinar next week on March 24th on the topic of: “Conducting an Annual Compliance Review.”
This seminar will look at HedgeOp’s suggested method for conducting an annual review including: review of compliance inventory items, conflicts of interest of review, use of employee and service provider questionnaires and more. Please note that this seminar is not only geared towards SEC-registered managers, but also unregistered managers looking to conduct an annual compliance review as a form of “best practice.”
You can view more information and register for the event here.
As reported by CNBC, during a European Parliament meeting held yesterday in Brussels, EU finance ministers decided to postpone talks on a controversial proposed directive that would regulate managers of hedge funds, private equity funds and venture capital funds in Europe. Talks stalled after finance ministers were unable to resolve a dispute between Britain, the leading opponent of the proposal, and Germany and France, which favor the proposal’s increased regulation.
As posted last night on Compliance Avenue, Senator Christopher Dodd unveiled a financial regulatory reform bill Monday. This 1336 page bill proposed what some have called the “most sweeping overhaul of financial regulation since the depression,” and included a provision that would require advisers to private funds with more than $100 million in AUM to register with the SEC as investment advisers. Two other areas of the bill are of particular import to hedge funds and hedge fund managers: (1) the regulation of over-the-counter derivatives markets; and (2) the inclusion of the “Volcker Rule” (For a full report on the bill see the Wall Street Journal.)
1. Regulation of Over-the-Counter Derivatives Markets.
The current bill represents little change from the November draft. But, Senators Jack Reed and Judd Gregg are working on a substitute amendment to this title that may be offered at full committee. As currently written, the over-the-counter derivatives market will be regulated by the SEC and the CFTC. The bill also requires central clearing and exchange trading for derivatives that can be cleared. The SEC and the CFTC must pre-approve contracts before clearing houses can clear them but, both regulators and clearing houses will have a role in determining which contracts should be cleared.
The bill has also added safeguards for un-cleared trades. Any un-cleared trades will require margin to offset the greater risk such trades pose. In addition, swap dealers and major swap participants will be subject to capital requirements.
Finally, the bill aims to increase market transparency by requiring data collection and publication through clearing houses or swap repositories.
2. Volcker Rule.
The bill would implement a form of the “Volcker Rule,” named after former Fed Chairman Paul Volcker. Specifically, the bill would require regulators to implement regulations to prohibit banks, their affiliates and bank holding companies, from proprietary trading. The regulations would also prohibit such institutions from investing in, or sponsoring, hedge funds and private equity funds. Notably, before any regulations are written, the bill calls for a study and recommendations to made by the Financial Stability Oversight Council.
The New York Times reports that Sen. Dodd hopes to begin holding votes in committee starting next week, and to have the legislation on the Senate floor by late April.
Today Senate Banking Committee Chairman Chris Dodd (D-CT) released a sweeping financial regulatory reform bill entitled the Restoring American Financial Stability Act of 2010.
Title IV of the bill, the Private Fund Investment Advisers Registration Act of 2010, would require advisers to private funds with more than $100 million in AUM to register with the SEC as investment advisers and to disclose financial data about their trades and portfolios as necessary to assess monitor systemic risk and protect investors.
It is expected that Senator Chris Dodd will release his Financial Regulatory Reform bill on Monday. Work on a bi-partisan package fell through, but it is expected that Dodd’s proposal will include several agreements made with Republican Senator Bob Corker. The Investment Adviser Association is concerned about certain expected provisions of the bill:
The IAA is especially concerned about provisions in the bill that may address the “harmonization” of broker-dealer and investment adviser regulation and issues relating to whether fiduciary obligations should be extended to others who provide investment advice. Although not yet certain, we expect that the Dodd legislation is likely to include provisions that require the SEC to conduct a study to (1) determine appropriate obligations of broker-dealers and investment advisers, particularly as they relate to personalized investment advice about securities to retail customers; to (2) provide for a report by the Commission to Congress in 18 months; and to (3) require a rulemaking by the SEC to address regulatory gaps and overlap in regulation identified by the study.
Like all of the financial reform bill’s that we have seen over the past 12 months, Dodd’s bill is most certainly going to include the registration of hedge fund managers.
The IRS has provided welcome relief to U.S. investors from the Foreign Bank Account Reporting (“FBAR”) requirement to report large holdings in offshore private funds held in 2009.
Specifically, in a notice issued on February 26, 2010, the IRS said that investors in offshore hedge funds, private equity funds and venture capital funds do not have to file FBAR reports for foreign accounts held during 2009.
Last week the International Organization of Securities Commissions’ (IOSCO) Technical Committee published the details of an agreed template for the global collection of hedge fund information, which it believes will assist in assessing possible systemic risks arising from the hedge fund sector.
The template (a copy of which is attached for your reference) was designed to create a comparable and consistent set of data to be collected by regulators from local hedge fund managers to monitor systemic risks and prevent gaps in regulatory reporting requirements. The data can then be exchanged amongst regulators and other competent authorities for the purpose of facilitating international supervisory cooperation in identifying possible systemic risks in the hedge fund sector.
The template, which was developed by the Task Force on Unregulated Financial Entities, contains eleven proposed categories of information. The proposed categories incorporate both supervisory and systemic data, and build on the data collection recommendations set out in the IOSCO Technical Committee’s Final Report on Hedge Fund Oversight, which was released in June 2009.
The list of data includes basic information such as the manager’s name, number of funds and equity owners; as well as the names of auditors, custodians, recent performance, redemptions, total assets under management and the value of long and short positions in different assets. Geographic spread, liquidity of a fund’s assets, the value of borrowings, net credit counterparty risk and the top 10 positions are also included.
The IOSCO Task Force has recommended that the first data gathering exercise should be carried out on a best efforts basis (given pending legislation in many jurisdictions) in September 2010.
Although the IOSCO Technical Committee recognizes that the legislative process is currently ongoing in many jurisdictions, it is publishing the template now to help inform any planned legislative changes currently being considered. As stated by IOSCO Technical Committee Chairman Kathleen Casey (who is also a U.S. SEC Commissioner):
“We recognize that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector, as well as who collects the data. Nonetheless, setting out these categories of information may help regulators in the assessment of systemic risk and help to inform the relevant legislative debates.”
It is unclear at this time whether or how the IOSCO disclosure template will inform or affect the ongoing Congressional debate on financial and regulatory reform, including whether it will impact the proposed hedge fund adviser legislation that was passed by the House in December and is currently pending in the Senate.
According to Reuters today, the SEC is planning on beefing up its New York office staff by about 8% this year, partly to focus more efforts on regulating the NY hedge fund industry:
The agency plans to hire 18 people on the enforcement side, where it currently employs about 150 people in New York, and add 15 people to its examinations staff, which currently numbers about 210 in New York, Mr. Canellos said at the Reuters Private Equity and Hedge Funds Summit in New York.
The push to hire more lawyers, accountants and even former traders comes at a time that the agency is seeking to become more aggressive in going after the bad guys on Wall Street.
This comes on the heels of comments made by Bruce Karpati, the co-chief of the SEC’s asset management unit, pushing for hedge fund registration. Mr. Karpati is hoping for more disclosures by hedge fund managers and stated at a recent conference:
“When you have more (hedge fund advisers) that are registered, we will have more access to information,”
As congress makes slow progress on its regulatory reform bill, the SEC is clearly gearing up for the expected registration of hedge fund managers.