Annual Investment Management Conference

7 July 2011

Annual Investment

Management

Conference

Table of Contents

Program Agenda

Speaker Biographies

Presentations

U.K. Hot Topics

U.S. “Hot Topics” in Investment Adviser Regulation

International Marketing

U.S./U.K. Enforcement Developments

U.S./U.K. Regulation of Derivatives/OTC Markets/Swaps 7

AIFMD — Application to Non-EU Funds and Non-EU Managers and Extraterritoral

Aspects

8

U.S. Registered Funds Update 9

5

6

3

4

Tab

1

2

1

Thursday, 7 July 2011

8:30

–

16:45

K&L Gates

One New Change, London

K&L GATES ANNUAL INVESTMENT MANAGEMENT CONFERENCE

Critical Legal and Regulatory Issues for Investment Managers and Funds

8:30 – 8:45 REGISTRATION AND BREAKFAST

8:45 – 9:00 WELCOME AND OVERVIEW OF PROGRAM

Presented by: Philip J. Morgan

Mr. Morgan is a partner in the London office. He concentrates his practice on investment management and has wide experience in all aspects of law and regulation in the U.K. financial services industry. You may reach him at

+44.(0)20.7360.8123 or philip.morgan@klgates.com.

9:00 – 10:00 U.K. HOT TOPICS

Presented by: Clifford J. Alexander, Martin W. Cornish, Ian Fraser, Robert Hadley,

Cary J. Meer and Philip J. Morgan

• Remuneration Code

—

Practical Steps to Take

• U.K. Bribery Act/FCPA

• MiFID

—

Focus on High Frequency Traders

Featured Presenters:

Mr. Cornish is a partner in the London office. He concentrates his practice on investment management and financial services matters and has acted for securities, commodities and derivatives brokers and dealers, banks, investment banks and investment managers for over 20 years. You may reach him at +44.(0)20.7360.8162 or martin.cornish@klgates.com.

Mr. Fraser is a partner in the London office’s employment, pensions and incentives group, focusing on employee incentives. He is experienced in all tax, legal and regulatory issues affecting employee incentives (including share incentives and cash arrangements), employment taxes and corporate tax. You may reach him at +44.(0)20.7360.8268 or ian.fraser@klgates.com.

Mr. Hadley is a partner in the London office’s Regulatory and Commercial

Litigation practice groups. He focuses on regulatory enforcement and investigation and commercial litigation matters. You may reach him at

+44.(0)20.7360.8166 or robert.hadley@klgates.com.


8:30

–

16:45

K&L Gates


Mr. Morgan is a partner in the London office. He concentrates his practice on investment management and has wide experience in all aspects of law and regulation in the U.K. financial services industry. You may reach him at +44.

(0)20.7360.8123 or philip.morgan@klgates.com.

10:00 – 11:15 U.S. “HOT TOPICS” IN INVESTMENT ADVISER REGULATION

Presented by: Clifford J. Alexander, Martin W. Cornish, Cary J. Meer and Philip J. Morgan

• SEC Pay-to-Play Rule (Political Contributions)

• State/Local Lobbyist Registration, Gift and Political Contribution Requirements

• SEC Whistleblower Rules

• Potential New SRO for Registered Investment Advisers

• Registered Investment Adviser Exemption for Foreign Private Advisers

and for Private Fund Advisers

• Qualified Client Standard

—

New Developments

• Delay of Investment Adviser Registration

• New “Bad Boy” Rules under Rule 506 of Regulation D

• CPO and CTA Exemption for Private Funds

Featured Presenters:

Mr. Alexander is a partner in the Washington, D.C. office who concentrates his practice in banking, investment company, broker-dealer and investment adviser law. You may reach him at +1.202.778.9068 or clifford.alexander@ klgates.com.

Ms. Meer is a partner in the Washington, D.C. office and a member of the

Investment Management practice group. She focuses her practice on private investment companies, including hedge and private equity funds, and

Investment Advisers Act and Commodity Exchange Act compliance matters.

You may reach her at +1.202.778.9107 or cary.meer@klgates.com.

11:15 – 11:30 BREAK

2


8:30

–

16:45

K&L Gates


11:30 – 12:30 INTERNATIONAL MARKETING

Presented by: Martin W. Cornish, Cary J. Meer, Philip J. Morgan and Choo Lye Tan

• Asia (Hong Kong, Japan, Singapore, Taiwan and PRC)

• Sale of Non-U.S. Funds in the U.S.

• Sale of Non-UCITs Funds in the EU

• UCITs IV

Ms. Tan is a partner in the Hong Kong office. She practices in the areas of securities, corporate finance, restructuring, mergers and acquisitions, funds and public and private equity issues. You may reach her at +852.2230.3528

(Hong Kong), +65.6507.8100 (Singapore) or choolye.tan@klgates.com.

12:30 – 13:15 LUNCHEON

(Provided to all Attendees)

13:15 – 14:00 U.S./U.K. ENFORCEMENT DEVELOPMENTS

Presented by: Clifford J. Alexander, Robert Hadley and Cary J. Meer

• Survey of recent U.S. and U.K. hedge fund-related enforcement cases,

including SEC Asset Management Unit and Insider Trading Cases

14:00 – 15:00 U.S./U.K. REGULATION OF DERIVATIVES/OTC MARKETS/SWAPS

Presented by: Stephen H. Moller and Anthony R.G. Nolan

Mr. Moller is a partner in the Finance group of the London office.

He concentrates his practice on structured finance and banking matters, including restructurings, hedge fund-related and acquisition financings, securitizations, distressed debt trading, and OTC derivatives. You may reach him at +44.(0)20.7360.8212 or stephen.moller@klgates.com.

Mr. Nolan is a partner in the New York office. His practice emphasizes derivatives, structured products and securitization. He advises financial institutions, investment managers, hedge funds and other end-users with respect to a broad range of derivatives, including equity derivatives, credit derivatives and energy derivatives as well as synthetic structured products.

You may reach him at +1.212.536.4843 or anthony.nolan@klgates.com.

15:00 – 15:15 BREAK

3


8:30

–

16:45

K&L Gates


15:15 – 16:00 AIFMD — APPLICATION TO NON-EU FUNDS AND NON-EU MANAGERS

AND EXTRATERRITORAL ASPECTS

Presented by: Martin W. Cornish, Cary J. Meer and Philip J. Morgan

• Passporting

• Equivalence

• Conflicts of Laws

• Focus on Likely U.S. Reaction

16:00 – 16:45 U.S. REGISTERED FUNDS UPDATE

Presented by: Clifford J. Alexander

• Impact of Dodd-Frank Act

• Money Fund Issues

• Political Contributions

• Distribution Fees

• CFTC Exemption for Registered Funds and Their Advisers

16:45 RECEPTION

4

2

Clifford J. Alexander

WASHINGTON, D.C. OFFICE

202.778.9068

TEL

202.778.9100

FAX clifford.alexander@klgates.com

AREAS OF PRACTICE

Mr. Alexander concentrates in investment company, broker-dealer, investment adviser, and banking law. He formerly served as Primary Outside Counsel to the

National Society of Compliance Professionals, a professional association of investment adviser and broker-dealer compliance officers.

Mr. Alexander has had a varied financial practice that includes representation of investment companies and their independent directors, investment advisers, and broker-dealers. His legal experience also has included the organization of national banks as limited purpose trust companies and the representation of numerous state and federally chartered banks on their trust, investment management, and securities activities.

PROFESSIONAL BACKGROUND

From 1982-1983, Mr. Alexander served as counsel to the Task Force on Banking

Boards and Commissions of the President’s Private Sector Survey on Cost Controls

(Grace Commission). From 1975-1977, he was assistant counsel to the Securities

Subcommittee of the U.S. Senate Committee on Banking, Housing and Urban Affairs.

While on the Committee Staff, he was responsible for a study of the Glass-Steagall

Act and was involved in the legislative hearings on the International Banking Act of

1978. He was with a Boston law firm from 1970-1975; and from 1967-1970, was with the Securities and Exchange Commission.

PUBLICATIONS

Co-Editor, Money Manager’s Compliance Guide

Contributing Author, Problems of Fiduciaries Under the Securities Laws,

American Bar Association

PRESENTATIONS

Mr. Alexander has served as Chairman and has been a faculty member of a number of conferences sponsored by the American Bankers Association, Investment Company

Institute, No Load Mutual Fund Association, American Bar Association, Practicing

Law Institute and American Law Institute.

PROFESSIONAL/CIVIC ACTIVITIES

American Bar Association

Committee on Developments in Investment Services

Subcommittee on Securities Activities of Banks of the Banking and

Corporations Section

Boston Bar Association

Federal Bar Association

International Bar Association


COURT ADMISSIONS

Supreme Judicial Court of Massachusetts

U.S. Court of Appeals for the District of Columbia

U.S. Supreme Court

BAR MEMBERSHIP

District of Columbia

Massachusetts

EDUCATION

J.D., Georgetown University Law Center, 1969

A.B., Rockhurst College, 1966

REPRESENTATIVE EXPERIENCE

Investment Companies

Organized new open-end funds, closed-end funds, contractual plans and unit investment trusts

Prepared registration statements and proxy material for open-end and closed-end funds

Organized and represented manager of managers’ funds

Represented issuers of face amount certificates

Represented independent directors and trustees of open-end and closed-end funds

Prepared compliance programs for investment companies

Conducted legal and regulatory examinations of investment company compliance programs

Prepared fund and board policies to comply with Investment Company Act of

1940 rules

Conducted reviews of fund derivatives disclosures and policies

Conducted reviews of the adequacy and consistency of fund complex prospectus and SAI disclosure

Obtained exemptions for funds from various provisions of Investment Company

Act of 1940

Advised funds on Internal Revenue Code Subchapter requirements

Obtained ERISA exemption for closed-end fund industry

Structured Rule 12b-1 Plans, contractual plans, front-end loads and other distribution programs

Liquidated and deregistered open-end funds, closed-end funds, contractual plans and unit investment trusts

Investment Advisers

Organized new start-up advisers

Prepared Form ADVs and registered advisers with SEC and states

Prepared compliance manuals for advisers and assisted advisers with development of compliance programs

Conducted legal and regulatory examinations of adviser compliance programs

Conducted legal and regulatory review of advisers’ sales and marketing programs


Conducted legal and regulatory review of advisers’ portfolio management and trading operations

Conducted review of advisers’ derivatives policies and practices

Advised investment advisers on business unit reorganizations and utilization of dual employee arrangements

Advised advisers on ERISA requirements

Conducted whistleblower investigations

Advised advisers on preparing for and responding to SEC examinations

Broker-Dealer

Organized new start-up broker-dealers

Prepared SEC registration statements and applications for NASD membership

Prepared compliance manuals and written supervisory procedures

Conducted legal and regulatory examinations of broker-dealer compliance programs

Conducted “best practices” examination of broker-dealer subsidiary of savings and loan association

Created financial services accounts and sweep programs

Established brokered bank certificate of deposit programs

Established wrap account programs

Advised on margin rule compliance

Advised firms on preparing for and responding to SEC examinations

Negotiated clearing agreements

Trust Companies

Organized new federally-chartered trust companies

Established common and collective funds

Represented trust companies on mergers of bank funds into registered mutual funds

Advised clients on private offering requirements of Securities Act of 1933

Advised clients on Investment Company Act of 1940 exemptions

Prepared trust company manuals for clients

Obtained relief from Comptroller of Currency for operation of bank funds

Assisted trust company with obtaining grandfather exemptions from Bank

Holding Company Act

Negotiated third-party administration agreements

Real Estate Investment Funds

Organized new REITS

Prepared registration statements for REITs and applications for stock exchange listings

Advised REITs on acquisitions of mortgages and real estate investments

Advised REITs on Internal Revenue Code Subchapter M requirements

Represented REIT director on corporate governance matters

Litigation and Securities Enforcement

Represented clients in management fee litigation

Represented mutual fund client in lawsuit against portfolio company


Represented mutual fund client in lawsuit alleging illegal and excessive Rule 12b-

1 Plan fees

Represented clients in SEC enforcement proceedings involving alleged market timing violations

Represented client in SEC enforcement proceedings involving allegedly misleading private placement memorandum

Transfer Agents

Represented clients with the organization of new transfer agents

Represented client in acquisition of transfer agent

Represented transfer agent on Internal Revenue Code requirements

Conducted private regulatory examination of transfer agent

Represented transfer agent in connection with lawsuit filed by shareholder of issuer

Mergers and Acquisitions

Represented fund boards in connection with sales of their investment advisers

Represented purchasers and sellers of advisers and broker-dealers

Represented over 30 registered investment companies in reorganizations of portfolios and legal entities

Represented client in acquisition of trust company

Legislative Projects

As staff member of Senate Banking Committee, helped draft amendments to

Investment Advisers Act of 1940

As staff member of Senate Banking Committee, conducted two-year study of

Glass-Steagall Act

As staff member of Senate Banking Committee, helped draft Foreign Corrupt

Practices Act

Advised Investment Company Institute on Investment Company Act

Amendments of 1970

Assisted clients with preparation of statements before congressional committees

Assisted trust company with obtaining grandfather exemption from Bank Holding

Company Act

Martin Cornish

LONDON OFFICE

+44.(0).20.7360.8162

TEL

+44.(0)20.7648.9001

FAX martin.cornish@klgates.com


Martin Cornish is a partner in the London office He concentrates his practice on investment management and financial services matters and has acted for securities, commodities and derivatives brokers and dealers, banks, investment banks and investment managers for over 20 years. Mr. Cornish is an acknowledged legal authority and regularly appears as such in the Legal 500 and Chambers' Directories of leading lawyers.


Immediately prior to joining the firm, Mr. Cornish was the Managing and Senior

Partner at the London affiliate of a large U.S. law firm, which had taken over Martin’s prior firm, a niche financial services law firm which he originally established in 1997.

Mr. Cornish started his career at another leading London firm, where he qualified and later became a partner. He left that firm to join an international investment banking client and subsequently became head of a financial services network of law firms, consisting of some 2,500 lawyers in over 40 countries.

PUBLICATIONS

Co-Editor International Guide To Hedge Fund regulation (Bloomsbury

Professional) 2010


The Alternative Investment Managers Association

The Futures and Options Association

The International Bar Association

The Law Society of England and Wales

EDUCATION

M.A., Cambridge University (1977) (History & Law)

LANGUAGES SPOKEN

French

Ian Fraser

LONDON OFFICE

+44 020 7360 8268

TEL

+44 020 7648 9001

FAX ian.fraser@klgates.com


Mr. Fraser is a partner in the London Office's Employment, Pensions and Incentives group, focusing on employee incentives. He is experienced in all forms of employee incentives (including share incentives and cash arrangements), employment taxes and corporate tax.

Mr. Fraser advises on the design, drafting and implementation of share incentive plans and other incentive arrangements (both in the UK and internationally and whether approved by HM Revenue & Customs to provide income tax/NICs relief or otherwise), dealing with incentive arrangements in the course of mergers and acquisitions and other corporate transactions, payroll taxes and social security liabilities and issues relating to internationally mobile employees.


Mr. Fraser joined the firm as a partner in 2005, prior to which he was an associate in the London Office of another international law firm. Mr. Fraser was previously a tax consultant at KPMG.

PRESENTATIONS

Mr. Fraser speaks regularly on current issues relating to share incentives.


Chartered Institute of Taxation (Member)

Share Plan Lawyers Group (Member)

EDUCATION

LPC, Guildhall University, 1997 (Commendation)

CPE, University of Northumbria, 1996 (Commendation)

BA (Geography), Reading University, 1980 (Hons)

Robert V. Hadley

LONDON OFFICE

+44 (0)20 7360 8166

TEL

+44 (0)20 7648 9001

FAX robert.hadley@klgates.com


Mr. Hadley is a partner in the firm’s Commercial Litigation and Securities

Enforcement practice groups. He focuses on commercial litigation and regulatory enforcement and investigation matters. He has experience of litigation at all levels for clients in a variety of industries including the life assurance, financial services, construction, manufacturing, property and publishing sectors, as well as for individual clients. He has acted in FSA enforcement matters and advised firms and individuals on FSA regulatory issues.


Mr. Hadley qualified as a lawyer in 1985 and is a solicitor advocate. He joined the firm in 1988 and became a partner in 1992.

PRESENTATIONS

“Critical Regulatory Issues for International Fund Managers and Investment

Advisers,” London, January 2007

“Third Party Risk in Online Gambling,” London, October 2006


Advisers,” London, January 2006

“Internal Regulatory Investigations,” Commerce & Industry Group, London,

November 2005


Association of Regulatory and Disciplinary Lawyers (Member)

London Solicitors Litigation Association (Member)

The Society of Construction Law (Member)

Life Assurance Legal Society (Member)

EDUCATION

LLB, University of Sheffield, 1982

REPRESENTATIVE MATTERS

FSA investigations and enquiries into market abuse by market manipulation and misuse of information and into the circulation of announceable information

FSA authorization issues

Challenging a share valuation on a compulsory sale of shares at a very substantial undervalue, including an injunction application to restrain the sale

Obtaining an immediate retraction and apology and damages from a national newspaper over a serious libel of a public company in its business pages

Obtaining a freezing order against a currency exchange house

Grupo Torras and Manoukian -v- Prince Jefri

Leading a team of five lawyers, and a dozen paralegals in a highly complex engineering action

Advising clients on warranty and other contractual disputes in share purchase agreements and representing clients in such proceedings

Robert V. Hadley

Injunction proceedings concerning the unlawful removal of confidential documents and information from a technology company by a departing employee

Private company/boardroom/minority shareholder disputes

Disputes over standard terms and conditions and exclusion clauses

Very substantial commission claims from former life insurance salesmen

Freezing injunctions and disclosure orders concerning the "missing" millions allegedly diverted from a Scandinavian public company

Executive director departures

Allegations of lack of performance in major contracts for outsourced and other services

The giving of notices of claims under a £300 million group Sale and Purchase

Agreement

Licensing and copyright disputes

Cary J. Meer

WASHINGTON, D.C. OFFICE

202.778.9107

TEL

202.778.9100

FAX cary.meer@klgates.com


Ms. Meer is a partner in K&L Gates’ Washington, D.C. office and a member of the

Investment Management practice group. She focuses her practice on private investment companies, including hedge and private equity funds, negotiated mergers and acquisitions of investment advisers and broker-dealers, derivatives and related areas.

Ms. Meer structures private funds as limited liability companies, limited partnerships, common trust funds and business trusts, and prepares disclosure documents and organizational documents for such entities. She also advises investment advisers, private fund managers and investment companies on compliance issues, including under the Investment Advisers Act of 1940 and whether their futures-related trading or advice brings them within the regulatory structure of the Commodity Exchange Act and, if so, with respect to their obligations under the regulations of the Commodity

Futures Trading Commission and the National Futures Association.

Ms. Meer also represents financial institutions with respect to private fund offerings and strategic alliances, counsels clients regarding federal securities law matters (for example, insider trading and short-swing profits issues), and structures employment arrangements and stock-based executive compensation programs.


100 Women in Hedge Funds, Washington, D.C. Education Committee

Money Manager’s Compliance Guide, Editorial Advisory Board Member

Managed Funds Association, Member

BAR MEMBERSHIP

District of Columbia

New York

EDUCATION

J.D., Harvard Law School, 1982 ( cum laude )

B.S., University of Pennsylvania (1979) ( summa cum laude )

Stephen Hans Moller

LONDON OFFICE

+44.(0)20.7360.8212

TEL

+44.(0)20.7648.9001

FAX stephen.moller@klgates.com


Stephen Moller is a partner in the Finance group of the London office. His experience includes a broad range of banking and capital markets transactions. Mr. Moller’s structured finance practice covers standalone derivatives as well as credit linked and fund linked notes and also receivables financing and asset backed securities. His broader banking experience includes finance for private M&A transaction and public bids, real estate loans and project finance transactions. He has also acted on a number of debt restructurings and distressed debt acquisitions/disposals, as well as structured transactions to securitise distressed debt. In addition to his investment bank and corporate clients, Stephen acts for hedge funds as lenders and as syndicate members and for fund of funds raising finance through bank debt or structured note issues.


Before joining K&L Gates in February 2010, Mr. Moller was a Partner for 11 years in the Financial Markets group of an international law firm headquartered in London.

BAR MEMBERSHIPS

England and Wales

EDUCATION

Law Society Finals, Nottingham Trent University, 1989

B.A., Durham University, 1987 (Law and Politics; honors)


Acting for the lender on the provision of £1.6bn of debt finance for the acquisition of Resolution plc

Acting for a hedge fund on the establishment of a £100bn structured note programme to acquire distressed debt

Advising a hedge fund in relation to the restructuring of United Company Rusal – the World’s leading aluminum company

Advising an investment bank on the securitisation of a portfolio of nonperforming loans through an asset backed commercial paper conduit.

Philip J. Morgan

LONDON OFFICE

+44 (0)20 7360 8123

TEL

+44 (0)20 7648 9001

FAX philip.morgan@klgates.com


Mr. Morgan is a partner in the firm’s Investment Management practice group and has wide experience in all aspects of law and regulation in the UK financial services industry. He works closely with U.S. and other colleagues to provide international financial services regulatory advice and his practice also focuses on investment funds, particularly hedge funds, real estate funds, private equity funds and listed investment funds. His transactional work also encompasses corporate projects such as joint ventures and establishment of limited liability partnerships, with a particular emphasis on the investment management and real estate sectors. He has advised a number of

U.S. clients on the establishment of their business in the UK.


Mr. Morgan worked for an international law firm from 1993 to 2000. During that period he worked on a broad range of corporate projects with a particular emphasis on work for investment management groups, London-listed investment trusts, offshore funds and private equity funds. Mr. Morgan has been with K&L Gates since April

2000 and was made a partner in April 2002.

PUBLICATIONS

 Regular investment management client alerts - see www.klgates.com

 “FSA publishes final Code of Practice on policies relating to remuneration of personnel at FSA regulated firms”, Journal of Investment Compliance , Volume 10

Number 4 2009

 “ The Securities Enforcement Manual, ” Second Edition, published by the ABA

Section of Business Law, 2007 (Co-author)

“FSA targets betting and gaming sector,” World Online Gambling Law Review ,

January 2006

 “Doing business in the UK: FSA Consultation on Hedge Fund Regulation,” MFA

Reporter , August/September 2005

PRESENTATIONS

Mr. Morgan has given various seminars on financial services and other topics including financial promotion, mortgage regulation, soft commissions and unbundling, UK limited liability partnerships, hedge fund regulation, the Markets in

Financial Investments Directive, the UCITS Directive and a variety of FSA Handbook issues.

“An Introduction to UCITS and FSA Regulation”, K&L Gates presentation ,

London and New York, July 2009


Advisers”, K&LNG full day workshop , London , January 2005, 2006, 2007, 2008 and 2009

“Rogue Traders” and Other Nightmares, Their Fallout and How to Deal with

Them", K&L Gates seminar, London, September 2008

 “U.S. and UK Perspectives on the Sub-Prime Mortgage Crisis”, K&L Gates

Philip J. Morgan

telephone conference, September 2007

“Mergers and Acquisitions in the Investment Management Industry”, K&LNG seminar , New York and London , June 2006

 “FSA Registration Issues” - Hedge Funds Compliance, K&LNG Seminar , New

York , March 2005

“Hedge Fund Hot Topics: Expanding Markets, Evolving Regulations”, K&LNG seminar , New York and London , September 2005

“Unbundling and Soft Commissions: Managing Conflicting National Standards in

Use of Brokerage”, K&LNG seminar, New York and London , September 2005

EDUCATION

Law Society Finals, Guildford College of Law, 1993

MA (Law), Oxford University, 1992

REPRESENTATIVE/SIGNIFICANT MATTERS

Established UK operation of U.S.-based hedge fund manager, advising on regulatory and corporate aspects, and on a UK limited liability partnership structure

UK financial services regulatory advice to many overseas-based investment managers and brokers on financial promotion issues, and on the perimeter of FSA regulation

Corporate and regulatory advice on multi-million pound joint ventures established for real estate investment and development using limited partnership and offshore unit trust structures

Merger of two professional partnerships, and conversion of one to a UK limited liability partnership structure

Various advice to hedge fund managers on the establishment of new fund structures and ongoing regulatory and contractual issues

UK regulatory advice in connection with a multi-million pound transatlantic investment management industry merger

Advice to a sovereign wealth fund on its investments in UK-established private equity funds

Funds and regulatory work relating to an offshore fund seeking a listing on the

AIM market

Anthony R.G. Nolan

NEW YORK OFFICE

212.536.4843

TEL

212.536.3901

FAX anthony.nolan@klgates.com


Mr. Nolan’s practice emphasizes derivatives, structured products and securitization.

He has represented fixed income and alternative investment managers, financial institutions and servicers in a range of transaction types. He advises financial institutions, investment managers, hedge funds and other end-users with respect to a broad range of derivatives, including equity derivatives, credit derivatives and energy derivatives as well as synthetic structured products. Transaction types with which he is familiar include synthetic, cash-flow and market value CDO, large loan CLOs,

REMICs, asset-backed commercial paper conduits and structured investment vehicles.

Mr. Nolan has represented issuers and investors in the securitization of a wide range of assets, including commercial and residential mortgages, intellectual property, project finance loans, aircraft and equipment leases and many types of consumer assets. This structured finance experience also carries over to the negotiation of credit default swaps referencing mortgage-backed securities, asset-backed securities and

CDO tranches. Mr. Nolan has represented sponsors and investors in connection with

TALF-eligible securitizations.

Recent transactions include the representation of investors in the workout of CDO and

SIV transactions, the representation of investment managers and hedge funds in connection with initiatives to address counterparty risk in their derivatives arrangements, the representation of a regional bank as sponsor or servicer in several securitization transactions and the representation of the arrangers in several emerging markets credit derivatives issuances. His experience also includes the representation of several aircraft leasing companies in connection with portfolio securitizations and joint ventures, representation of financial institutions in connection with Latin

American structured finance transactions and the representation of collateral managers in CDO and CLO transactions, including fully-distributed and single-tranche synthetic transactions. Mr. Nolan also has significant experience advising depository institutions in connection with the regulatory aspects of their derivatives and securitization activities.


Prior to joining K&L Gates, Mr. Nolan was a partner in the New York office of a national law firm where he practiced in the securitization and derivatives areas.

PRESENTATIONS

Mr. Nolan has written and spoken extensively on structured finance and derivatives, including securities law and bank regulatory issues associated with synthetic securitization and credit derivatives. He has also been widely quoted in numerous national publications. He was co-chair of the American Securitization Forum’s 2006

Securitization Institute.


Lecturer in Law, Columbia Law School.

Recognized by peers as a New York Superlawyer.

Anthony R.G. Nolan

New York City Bar Association Structured Finance Committee (chair of the

Derivatives Subcommittee).

American Securitization Forum (Legal and Regulatory Subcommittee).

American Bar Association (Commercial Financial Services Committee -- vice chair of the Securitization and Derivatives Subcommittee 2006-2008).

BAR MEMBERSHIP

Massachusetts

New York

LANGUAGES

French

German

Italian

Portuguese

Spanish

Thai

EDUCATION

M.A., Oxford University, 1992

J.D., Columbia University Law School, 1991 (Harlan Fiske Stone Scholar; articles editor, Columbia Journal of Transactional Law )

B.A. (Hons.), Oxford University, 1983

Choo Lye Tan

HONG KONG OFFICE

+852 2230 3528

TEL

+852 2511 9515

FAX choolye.tan@klgates.com


Choo Lye Tan is a partner in the firm’s Hong Kong office. She practices in the areas of securities, corporate finance, restructuring, mergers and acquisitions, funds and public and private equity issues. Prior to joining K&L Gates, Ms. Tan practiced in international law firms based in Malaysia and Hong Kong, advising her clients on general corporate issues in relation to the laws of Malaysia, Bermuda, the British

Virgin Islands, the Cayman Islands and Hong Kong. As a result of her background in offshore and Asian laws, she frequently advises on cross-border transactions, including the strategic structuring and reorganization of groups of companies to best benefit from local corporate legislation, particularly in the areas of asset protection, fund-raising, securities offerings, employment, prospectus registration and tax. She has a particular interest in utilizing corporate procedures such as takeover offers, capital reorganizations, anonymous associations, trusts and schemes of arrangements to achieve clients’ aims, and has been involved in the structuring and establishment of funds using such procedures to invest in Japanese and Chinese assets. As a result of the strong investor base in Asia, she has also advised extensively on offers of securities in Asian jurisdictions on both a public and private basis and licensing and registration of securities, investment and financial entities. Her mandates have involved investments in China, Hong Kong, Japan, Singapore, Malaysia, Indonesia,

Guyana, Australia, Philippines, Mongolia, the United States, England, Italy, and New

Zealand in such diverse businesses as timber, investment advisory and management, venture capital, microcredit, real estate and property development, logistics, telecommunications, banking, finance and securities, oil palm, mining, hydropower and water and wastewater treatment, retail and manufacturing.

JURISDICTIONS ADMITTED

England & Wales

Malaysia

Bermuda

Hong Kong


Barrister-at-law, Lincoln's Inn

The Law Society of Hong Kong

EDUCATION

LL.B., University College London, 1993

LANGUAGES SPOKEN

Cantonese

English

French

Malay

ADDITIONAL INFORMATION

Choo Lye Tan

Ms. Tan is the author of numerous articles and delivers papers on a variety of legal and commercial issues, most notably on corporate restructurings and schemes of arrangement, funds, securities laws and licensing, offshore jurisdictions and corporate governance on a regular basis.


Acted for Aqua Resources Fund Limited (listed on the London Stock Exchange) in its 2009 US$20 million subscription for Series C preferred shares in China

Hydroelectric Corporation

Acting as general legal counsel and providing corporate secretarial and administrative services to Aqua Resources Fund Limited and its investment manager, FourWinds Capital Management, in Hong Kong, including, among other things, general legal, corporate and securities compliance with the rules and regulations of the Securities and Futures Commission in Hong Kong, the

Companies Ordinance and the Rules Governing the Listing of Securities on The

Stock Exchange of Hong Kong Limited

Acting as general legal counsel and providing corporate secretarial and administrative services to Samling Global Limited (listed on The Stock Exchange of Hong Kong Limited) in Hong Kong including, among other things, general legal, corporate and securities compliance with the rules and regulations of the

Securities and Futures Commission in Hong Kong, the Companies Ordinance and the Rules Governing the Listing of Securities on The Stock Exchange of Hong

Kong Limited

Acted for Samling Global Limited in its 2008 US$50 million investment in the

Elegant Living group of companies in China

Acted for Samling Global limited in its 2007 public takeover of Brewster Limited in Australia

Acted for several private equity funds in their establishment and reorganization for purposes of investments in Japanese real property, including their anonymous associations with a Japanese company to benefit from the Japanese Yugen Kaisha

Tokumei Kumiai tax structure and the establishment of a Cayman STAR trust for tax benefits

Advising several private equity fund managers in the establishment, management and on-going legal compliance of their private equity fund vehicles, both on- and off-shore

Acted for a private equity fund in its US$50 million note subscription in Green

Dragon Gas Holdings Limited

Acted for a private equity fund in its US$50 million acquisition of a PRC fashion business, including the establishment of an SPV, restructuring of the group and transferring of intra- assets for tax and administrative efficiency

Acted for high net-worth families in the planning, reorganization and holding of their personal assets

Acting for several US-based multinationals in compliance reviews of their operations in China and South East Asia, particularly in the area of FCPA compliance

Acted for the third-largest banking and securities conglomerate in Malaysia, the

Rashid Hussain group of companies, in their consolidation, reorganization and

Choo Lye Tan

eventual acquisition by the Utama Bank group of companies

Acted for several banking and securities companies in their mergers and consolidation into single entities with other securities companies in accordance with the 1997 consolidation directive by the Malaysian government, including

Hwang-DBS Securities, Sarawak Securities, Mayban Securities, RHB Bank and

Utama Bank

Acted for numerous companies in the establishment and administration of creditors’ schemes of arrangement and group reorganizations, including the establishment of new companies, the de-listing of the shares of the previous listed company and the listing of the shares of the new company on a stock exchange under the laws of Hong Kong, Bermuda, the Cayman Islands and Malaysia

Acted for several companies listed on Kuala Lumpur Stock Exchange and The

Stock Exchange of Hong Kong Limited in court-sanctioned capital reductions and schemes of arrangement, including Henderson Cyber Limited and the Akai and

Hang Ten group of companies, involving companies incorporated in Bermuda, the Cayman Islands and Malaysia

Advised the-then Kuala Lumpur Stock Exchange in the drafting of new rules upon the introduction of the then-new disclosure-based regime in 1997/8

Acted for a co-operative society in its corporatisation exercise, involving its conversion into a corporate entity, KUB Malaysia Berhad, and the listing of its shares on the-then Kuala Lumpur Stock Exchange

3

U.K. Hot Topics

7 July 2011

Clifford J. Alexander – Partner, Washington, D.C.

Martin W. Cornish – Partner, London

Ian Fraser – Partner, London

Robert Hadley – Partner, London

Cary J. Meer – Partner, Washington, D.C.

Philip J. Morgan – Partner, London

DC-9221541-v1

Copyright © 2011 by K&L Gates LLP. All rights reserved.

Topics

• Remuneration Code

• U.K. Bribery/U.S. Foreign Corrupt Practices Act

• MiFID

2

Remuneration Code

Ian Fraser

3

FSA Remuneration Code



Background

 Compliance for firms newly in scope in 2011

 Some other practical issues

FSA Remuneration Code - Background

 FSA Code revised in December 2010 to incorporate CRD3

 In force from 1 January 2011 in respect of remuneration awarded on or after 1 January 2011

 Applies to all FSA regulated banks, building societies and investment firms that fall within MiFID, but not exempt CAD firms

 Over 2,500 firms now in scope

 Code’s general principles apply to all staff – e.g., remuneration policies must take into account the underlying risk to the business and no multi-year guarantees

 Specific provisions on remuneration policies apply only to “Code

Staff” (Identified Staff under CRD3), for example:

 Deferral of 40% - 60% of variable pay

 50% of up front and deferred variable pay must be “shares”

 Retention of “shares”

 Proportionality – the FSA’s 4 tier approach

5

Proportionality

Tier 1 Firms

-

-

Around 26 significant banks, building societies and broker-dealers

Banks and building societies > £1bn capital resources

Full Scope BIPRU Investment €730k firms > £750m capital resources

Tier 2 Firms

-

-

Tier 3 Firms

-

-

Tier 4 Firms

-

-

Around 200 large banks, building societies and brokerdealers

Banks and building societies > £50m < £1bn capital resources

Full Scope BIPRU Investment €730k firms > £100m < £750m capital resources

Around 300 small banks and firms taking short-term balance sheet risk

Banks and building societies < £50m capital resources

Full Scope BIPRU Investment €730k firms < £100m capital resources

Over 2,000 firms that carry little balance sheet risk

BIPRU Limited Licence firms

BIPRU Limited Activity firms

6

4

Compliance Deadlines for Firms Newly In

Scope In 2011

 Remuneration policies to be Code compliant by 1 July 2011

 Identify Code Staff by 1 July 2011

 Prepare a Remuneration Policy Statement by 1 September 2011

 Disclose remuneration (including 2010 variable remuneration paid after 1 January 2011) as soon as possible and in any event before

31 December 2011

7

Are Remuneration Policies Compliant?

Do remuneration policies need to meet the prescriptive structuring rules?

 Tier 3 FSA expects disapplication of rules re:





 bonus deferral share retention

Performance adjustment

 Tier 4 Additional disapplication of rules re:

 fixed ratios between fixed and variable pay

 Multi-year framework for ex-ante risk adjustment



Practical Questions:

 Are prescribed remuneration policies required?

 If yes, do changes need to be made?

8

Identifying Code Staff

9

Remuneration Policy Statement – To Be

Available From 1 September 2011

 General topics covered by an RPS – see FSA templates:















Governance

Summary of remuneration policies

Independent control function oversight

Risk adjustment (ex-ante; ex-post)

Guarantees/retention/severance

Justification for any disapplication of Code principles







Other reporting obligations

Firms in Tiers 2, 3 and 4 may be asked to provide Code Staff lists in ARROW assessment or supervising review

All firms to certify that policies are compliant through the GABRIEL system

All firms to submit return setting out aggregate data on remuneration policies and practices – first submission Q3/Q4 of 2011

10

Disclosure – As Soon As Practicable And In

Any Event By 31 December 2011

 What disclosures need to be made under BIPRU 11?

 Qualitative disclosures

 Quantitative disclosures

 Where should disclosure be made?

 Financial Statements

 Elsewhere if cross reference in financial statements and location is “easily accessible”

11

Disclosure Requirements by Proportionality Tier

1. Qualitative Disclosures

Disclosure requirement

Information concerning governance

Information on the link between pay and performance

The most important design characteristics of the remuneration system, including information on the criteria used for performance measurement and risk adjustment, deferral policy and vesting criteria

Information on the performance criteria on which the entitlement to shares, options or variable components of remuneration is based

The main parameters and rationale for any variable component scheme and any other non-cash benefits

Proportionality tier one







Relevant proportionality tier

Proportionality tier two



Proportionality tier three



 



Proportionality tier four









12

Disclosure Requirements by Proportionality Tier

2. Quantitative Disclosures

Disclosure requirement

Aggregate quantitative information on remuneration, broken down by business area

Proportionality tier one



Relevant proportionality tier

Proportionality tier two Proportionality tier three

 

Proportionality tier four



   

Aggregate quantitative information on remuneration, broken down by senior management and members of staff whose actions have a material impact on the risk profile of the firm

…..indicating the following:

 

Fixed and variable remuneration

Amounts of cash, shares, and share-linked instruments

Amounts of outstanding deferred remuneration, split into vested and unvested portions

Amounts of deferred remuneration reduced through performance adjustments

New sign-on and severance payments made during the financial year

The amounts of severance payments awarded during the financial year, and highest such award to a single person













13







Some Other Practical Issues





Implications for LLPs and owner managers





All control functions (CFs 1-29) are in scope

Includes all partners (CF 4) – unless they do not have a material impact on the firm’s risk profile

But proportionality applies

Impact depends on nature of firm and which proportionality Tier it is in

Interaction with AIFMD





AIFMD contains very similar provisions regarding remuneration to CRD 3

How will proportionality apply?

International aspects





Remuneration committees

Home country/host country issues

14

International Regulatory Regime

G-20

BIS

FSB

BCBS

US/FRB

EU - CRD3

EBA (CEBS)

EU MEMBER STATE REGULATORS

(FSA, BaFin etc)

OTHER COUNTRY

REGULATORS

Financial

Services Firm

15

The Brave New World of U.K.

International Anti-Corruption

Enforcement –

The Great Protection

Opportunity: Bribery Act

2010/U.S. Foreign Corrupt

Practices Act 1977

Robert Hadley

16

US: Foreign Corrupt Practices Act of 1977

17

U.S. FCPA

 Enacted 1977 to prohibit bribery of foreign officials

 Anti-bribery provisions

 “Accounting provisions” for U.S.-listed public companies

 Seldom enforced during first 25 years



1990s: U.S. effort to “level the playing field” for

U.S. companies

18

1997: OECD Convention on Combating Bribery

19

U.K. Corruption Law

 OECD Convention 1999



Overseas Corruption 14 February 2002

 Bribery Act 2010

 Passed April 2010: original intention to be in force from about October 2010



Guidance issued on 31 March 2011

 In force 1 July 2011

20

FCPA Actions Against Companies: 2002-2009

8

6

4

2

14

12

10

0

2002 2003 2004 2005 2006 2007 2008 2009

21

FCPA Actions Against Individuals: 2002-2009

15

10

5

0

30

25

20

45

40

35

2002 2003 2004 2005 2006 2007 2008 2009

22

FCPA Fines and Penalties: 2002-2009

Fines

$1,000.0

$800.0

$600.0

$400.0

$200.0

$0.0

2002 2003 2004 2005 2006 2007 2008 2009

Fines

23

U.S./FCPA Developments



SEC rumoured to be investigating bribes to

Sovereign Wealth Funds

Wall Street Journal – 14 January 2011

 CalPERS

 The Shot Show sting

24

Bribery Act 2010 – in Force 1 July 2011

Four Offences

 “Bribing” (section 1)

 “Being bribed” (section 2)

 “Bribery of a foreign public official” (section 6)

 “Failure [by a company] to prevent bribery” (section 7)

Also consent or connivance by senior officer (section

14)

Anywhere in the world

Not just public officials – contrast with the FCPA

25

Bribery Act 2010 (cont.)

Bribing/Being Bribed Concepts



“P” offers, promises, gives / “R” requests, agrees to receive, accepts

 a financial or other advantage

 intending to bring about/as a reward for

 performance of a relevant function or activity:

 almost anything not wholly personal and

 which is expected to be performed in good faith or impartially or in a position of trust

 improperly – in breach of that expectation/trust

26


Bribery of a Foreign Public Official

 P bribes foreign public official F if directly or through a third party he offers, promises or gives

 any financial or other advantage

 to F or someone else at F’s request or with F’s assent or acquiescence (and F is not permitted/required to be influenced by P’s gift etc. by local written law)

 and P is guilty of the offence if

 P intends to influence F in F’s capacity as a foreign public official and

 P intends to obtain or retain business or an advantage in the conduct of business

27


Failure to Prevent Bribery

Who can be prosecuted?

 Any U.K. corporate

 Any corporate, wherever based or incorporated, which

“carries on business or part of a business” in any part of the U.K.

28



A relevant commercial organisation, C, commits the offence if:

 a person (“A”) who performs services on behalf of C, e.g., an employee, agent or subsidiary

 bribes another person (i.e., commits a s1 or s6 bribing offence - or would have done if A subject to the Act)

 intending to obtain or retain business/a business advantage for C

Presumed that an employee of C performs services on behalf of C unless otherwise shown

29



EVEN IF NO ONE AT “C” AUTHORISED OR

APPROVED OR KNEW OF THE BRIBERY

30


Company’s Failure to Prevent Bribery - “Adequate

Procedures” Defence

C is not guilty of failure to prevent bribery:

 If C proves that it had in place “adequate procedures” designed to prevent persons performing services on behalf of C from undertaking such conduct



Compare FCPA “effective” programme – not a defence but goes to decisions to charge/penalty

31


Penalties

 Up to 10 Years Imprisonment (FCPA 7 years)

 Unlimited fine (FCPA US$2million)



Debarment from EU government contracts

 Public Contracts Regulations 2006

 Utilities Contracts Regulations 2006



EU Procurement Directive Article 45

32


IT’S NOT THE FCPA!

 Not just public officials

 No exception for reasonable corporate hospitality

 No exception for facilitation payments

33

Bribery Act 2010 – “Adequate Procedures”

The Six Principles:

 Proportionate procedures to prevent bribery

 Top-level commitment



Risk assessment

 Due diligence

 Communication including training



Monitoring and review

34


(cont.)

Hospitality



MoJ Guidance refers to not wishing to penalise bona fide reasonable and proportionate hospitality and promotional expenditure that seeks to:

 improve the image of a commercial organisation

 improve ability to present products and services

 establish cordial relations

35


(cont.)

Due Diligence - Agents

 Identifying high risk situations

 Attention to “red flags” such as:









Business environment of country

Reputation for involvement in corrupt activities

Unusual payment arrangements



Unusually high commissions

Lack of skills or resources needed to perform duties

36

Corruption Perception Index

37


(cont.)

Due Diligence Red Flags in Plain English

 “Please Pay Me In Cash”

 “Pay Me Through My Swiss [Or Offshore] Bank Account”

 “My Close Relative Is A Government Official, And You Don’t

Have A Chance Unless You Deal With Me”

 “I Have No Facilities Or Staff, But I’ll Get The Job Done”

 “I Have Never Worked In Your Industry Before, But I Know

The Right People”

 “While My Commission Rate Is Twice The Market Rate, I’m

Well Worth It”

 “I Hear Your Deal Is Stuck Because of [ X ]. I Can Sort That

Out for You”

38


(cont.)

Contract Provisions

 Confirm awareness of anti-bribery laws/Code

 No violation/improper payments

 Termination for breach



Periodic certification

 Transparent payment methods



Pre-approval of expenditures

 Require accurate books and records relating to transaction

 Availability of books and records for audit

39

FSA Principles

 Principle 1 Integrity; a firm must conduct its business with integrity

 Principle 2 Skill, care and diligence; a firm must conduct its business with due skill care and diligence

 Principle 3 Management and control; a firm must take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems

 Principle 6 Relations with regulators; a firm must deal with its regulators in an open and cooperative way, and must tell the FSA promptly anything relating to the firm of which the FSA would reasonably expect prompt notice

 SYSC 3.2.6R A firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime

40


(cont.)

 FSA CP11/12 Draft Financial Crime: a guide for firms http://www.fsa.gov.uk/pubs/cp/cp11_12.pdf



FSA Thematic Review of anti-bribery and corruption measures in commercial insurance brokers www.fsa.gov.uk/pubs/anti_bribery.pdf

41

U.K. Overseas Corruption Trends

 SFO increased resources, activity and charm offensive

 Balfour Beatty £2.5million, costs, monitor (civil)

 Amec plc £4.9million, costs, consultant (civil)

 Mabey & Johnson Limited criminal convictions

£6.6million

 British Aerospace £30million (US DoJ US$400million)

 Innospec Limited US$12.7million (sterling equivalent),

(DoJ US$14.1million)

 Robert Dougall

 De Puy International Limited £4.829 million, costs (Civil)

 (US Johnson & Johnson DoJ US$21.4 million, SEC

US$24.258 million plus US$6.263 million interest)

42

U.K. Overseas Corruption Trends

 Five Individuals charged September 2010 re: alleged corruption in energy engineering contract procurement

 Messent – 21 months

 MW Kellogg Limited - £7million, “overhaul” procedures, costs (Civil) (High Court 16 February

2011) (KBR settled with DoJ by February 2009)

 Jessop – 24 weeks Iraq Oil for Food

43

FSA Fine

 Aon Limited fined £5.25 million (£7 million discounted by 30% for early settlement) January

2009

 Breach of Principle 3 of the FSA’s Principles for

Business - Systems and Controls:

 failure to take reasonable care to maintain systems and controls to counter the risk of bribery in payments to overseas firms/individuals

44

FSA Prohibition

Fabio De Biase

 Cash equities broker

 Agreed with Mr. Anjam Ahmad to charge increased commissions to Mr. Ahmad’s firm



Shared his own commission with Mr. Ahmad

Statement of Principle 1 - Integrity

 Prohibition order

 Disgorgement £198,000

 Financial penalty £500,000 - reduced to £54,239 through 30% discount and financial hardship

45

MiFID

Philip J. Morgan

46

MiFID Review

• Timetable

• Main themes

• Focus on “micro-structural” issues including highfrequency trading

47

MiFID Review – Timetable

• CESR technical advice during 2010

• EU Commission consultation paper – December 2010

• Commission legislative proposal now expected in

October 2011 (along with MAD Review Proposal)

• After that, parallel Parliament and Council development of legislation

48

MiFID Review – Main Themes

• Taking account of technological developments and trading patterns

• Taking account of new trading venues currently falling outside MiFID

• Increased transparency requirements for all, including additional markets, such as bond markets and derivatives markets

• Tackle under-regulated and opaque aspects of the financial system

49

MiFID Review – Main Themes (cont.)

• Improve oversight and transparency of commodity derivative markets, in particular to ensure that they operate efficiently especially for hedging and price discovery purposes

• Improve certain areas of MiFID concerning investor protection

50

MiFID Review – Focus on High-Frequency

Trading

• CESR Technical Advice (July 2010) – Views of Industry

Respondents:

 HFT – estimated at 13% to 40% of total trading

 Drivers for growth – arbitrage across new venues/asset classes; availability of specialist IT staff; increased volumes and volatility due to macro events; standardised minimum tick sizes across venues for each security

51


Trading (cont.)

 Limitations – tick sizes forcing order book queuing; decreased volumes and volatility due to macro events; increased HFT competition reducing profits; cost of trading; clearing and settlement; regulatory restraints/tax

 Generally thought to increase liquidity, reduce bidoffer spreads and reduce volatility

52


Trading (cont.)

 Risks suggested: order entry/deletion; rogue algorithms; increased market abuse (NB: detection of market abuse more difficult in a fragmented automated environment); sudden liquidity withdrawal; potential de-correlation of prices from market fundamentals if trading strategies focus solely on short-term profits

 Industry feels HFT – specific regulations not required

 Some advocate additional market surveillance and that all HFT firms should be caught by MiFID

53


Trading (cont.)

• CESR Technical Advice (July 2010) – CESR views:

 Further work needed to understand HFT strategies and risks they pose

 Further work on appropriate systems and controls – e.g., volatility measures/circuit breakers

 Further work on members of RMs/MTFs that are

MiFID exempt because they trade on own account and are not market makers

54


Trading (cont.)

• December 2010 – EU Parliament resolution – asked

ESMA to “study the costs and benefits of high volume, high speed trading on markets, look into the potential abusive manipulation of markets leading to an uneven playing field and analyse the impact of these trading methods on overall market stability”

• Post “Flash Crash” – all trading platforms should be able to demonstrate an ability to cope with extreme circumstances and be able to recreate order books by end of day so that any unusual market activity can be pinpointed

55


Trading (cont.)

• 8 December 2010 – EU Commission Public Consultation:

 Impact on market efficiency “inconclusive” – e.g., impact on liquidity, volatility

 Proposals:

 Automated trading defined broadly – trading using algorithms; high-frequency trading a subcategory where

“sophisticated technology” is used to execute high-volume automated strategies, usually either quasi market making or arbitraging, within very short time horizons

 All persons involved in HFT over specified minimum quantitative threshold would be authorised as investment firms

56


Trading (cont.)

 Proposals:



New specific organisational requirements for automated traders; robust risk controls to mitigate trading system errors; information to regulator on design, purpose and functioning of algorithms; additional requirements on trading venues and providers of “sponsored access” to prevent errors – e.g., circuit breakers at venues

 Specify minimum tick sizes in implementing measures

57


Trading (cont.)

 Proposals:

 Market operators required to ensure that HFTs executing significant numbers of trades in financial instruments would continue to provide liquidity in the relevant financial instruments subject to similar conditions applicable to market makers

 Market operators required to ensure that orders would rest on an order book for a minimum period of time before being cancelled (or limit the ratio of orders to transactions executed)

58


Trading (cont.)

• Responses to EU Commission Consultation – AIMA:



Difficult to define “automated trading”; suggests excluding algorithmic systems used for investment selection as opposed to execution

 Difficult to define HFT

 Authorisation proposal does not explain approach to non- EU traders

 Does not see a need for bespoke risk controls

 Does not consider HFTs should be required to provide liquidity on an ongoing basis – costly/would reduce participants

 Minimum rest period for orders would hit liquidity

59


Trading (cont.)

• Responses to EU Commission Consultation – HM

Treasury/FSA joint response



HM Treasury sponsoring research project to explore how computer-generated trading may evolve

 Care should be taken not to introduce measures based on the assumption that high-frequency trading is in itself harmful to markets

 Concern that a number of CESR recommendations “disregarded or ignored … with no explanation”

60


Trading (cont.)

• Responses to EU Commission Consultation (cont.)



Case not made to mandate the provision of liquidity by high-frequency trading firms – may reduce liquidity by causing firms to exit market; may also create prudential risks for firms which cannot withdraw

 Case not made for requiring orders to rest on the book for a minimum period – a participant may want to delete an order for prudential reasons

 HFT firms could be required to be authorised, not over a quantitative threshold but if they are direct members of a trading venue

61


Trading (cont.)

• Responses to EU Commission Consultation (cont.)

 Intermediary to manage risks posed by firms using sponsored access



UK does not agree regulators should be notified of computer algorithms employed – regulators do not have the resources to monitor daily changes, and probably do not have the expertise to review in a meaningful way

62


Trading (cont.)

 FSA supports:

 Review of MiFID exemption for unauthorised prop trading firms but a “cut down” set of investment firm requirements should apply to firms that have no clients

 Extension of transaction reporting to non-EEA authorised firms

 More detailed and robust risk controls for authorised firms on automated trading and for firms providing sponsored access to automated traders

 Harmonised requirements on trading halts

63


Trading (cont.)

 FSA wants further work on whether there should be:



Requirements to stress test algorithms before going live

 Specific trading controls (e.g., price/size of order)

 A requirement on trading venues to be able to recreate trading on their markets

(sources for FSA views: speech of Alexander Justham, FSA

Director of Markets, November 2010 and speech by David

Lawton, FSA Head of Markets Infrastructure and Policy, April

2011)

64

4

U.S. “Hot Topics” in Investment Adviser

Regulation

7 July 2011





DC9216766 v. 4


I. Overview of U.S. Hot Topics



The Dodd-Frank Act and other new laws, regulations and developments are drastically reshaping U.S. investment adviser and private fund regulation

1

I. Overview of U.S. Hot Topics (cont.)

 These topics include, among other things:

I.

The Securities and Exchange Commission (SEC) pay-to-play rule

II.

State and local lobbyist registration and gift and political contribution regulations

III.

The SEC’s new whistleblower rules

IV.

Potential creation of a new self-regulatory organization (SRO) for investment advisers and support by certain SEC Commissioners and others for an investment adviser net capital requirement

V.

New exemptions from investment adviser registration for foreign private advisers and advisers to certain private funds

VI.

The delay of investment adviser registration obligations until 30 March

2012

VII. The SEC’s confirmation of the continuing validity of the Unibanco line of no-action letters

VIII. Proposed disqualification of “bad boy” actors from use of Rule 506 of

Regulation D

IX.

Proposed amendments to “qualified client” standard

X.

Potential repeal of exemptions from commodity pool operator (CPO) and commodity trading advisor (CTA) registration

2

1

The SEC’s Pay-to-Play Rule

Cary J. Meer

II. SEC Pay-to Play Rule

 On 30 June 2010, the SEC unanimously adopted

Rule 206(4)-5 under the Investment Advisers Act of

1940 (Advisers Act)



Effects of the rule:

 Two-year “time out”

 Prohibition on using certain third-party solicitors

 Prohibition on coordination of solicitation and bundling

 Compliance date was 14 March 2011 – 13

September 2011 for the prohibition on use of thirdparty solicitors

4

II. SEC Pay-to-Play Rule (cont.)

 Ban on Compensation

 Advisers are prohibited from receiving compensation for advisory services from a “government entity” within two years after the adviser or a “covered associate” made political “contributions” over:

 $350 per official per primary or general election to any “official”

 of that government entity for whom the covered associate is eligible to vote, or

$150 if they are not eligible to vote for such official

 “Covered associate” means any general partner, managing member, executive officer or other individual with a similar status or function, any employee that solicits a government entity for the adviser, any person that supervises such soliciting employee and any political action committee controlled by the adviser or any of its covered associates

5

3

2




Contributions of covered associates of the adviser may be attributed to the adviser

 “Look-back” - Contributions made during the 6-month period before an employee becomes a covered associate of an adviser are attributed to the adviser, unless the employee solicits clients on behalf of the adviser, in which case contributions made during the prior two years are attributed to the adviser

 “Look-forward” - A contribution made by a covered associate remains attributable to the adviser for the full two-year period, even if the employee ceases to be a covered associate within such period

6


 Ban on Compensation

 Exceptions:





Returned contributions



Contributions of up to $350 per election to any one official by a

 covered associate, if discovered by adviser within 4 months and the contributor obtains a return of the contribution within 60 days after discovery

May be relied upon 2 or 3 times per calendar year (depending on the number of the adviser’s employees) and once per covered associate

SEC exemptive order

7


 Ban on Soliciting Contributions

 Adviser or its covered associates cannot coordinate or solicit any contribution to an official of a government entity to which it is providing or seeking to provide advice, or any payment to a political party of a state or locality where the government entity is located

8

3




Ban on Third-Party Solicitors

 Advisers are prohibited from making, directly or

 indirectly, payments to a placement agent or other third party (not including the adviser’s employees, general partner, managing members or executive officers) for solicitation of a government entity on behalf of such adviser unless:

 such party is itself an SEC-registered adviser, a broker-

 dealer that is a member of the Financial Industry

Regulatory Authority, Inc. (FINRA) or a registered municipal advisor and such party is in compliance with similar restrictions on political contributions

FINRA has stated that it is adopting similar rules for its members

9


 Indirect Activities

 Advisers and covered associates are prohibited from doing indirectly what would be a violation if done directly

 Contributions by family members and friends of covered associates and affiliates of advisers are prohibited only if used as means of circumventing the rule

 Now also applies to private fund advisers and foreign private advisers

10


 Record-Keeping Obligations of the Adviser

 Covered associates

 Contributions by adviser and its covered associates

 Government entities advised or which are/were investors in a covered investment pool advised by the adviser for the past 5 years (but not prior to 13 September 2010)

 Third-party solicitors paid by adviser for soliciting government entities

11

4

State and Local Regulations

Cary J. Meer

12

III. State and Local Regulations

 Many states and local governments also have or are adopting pay-to-play and related restrictions

13

III. State and Local Regulations (cont.)

 Examples of State Initiatives:

 California State-Level : Requires registration of placement agents as lobbyists with respect to CalPERS and CalSTERS



Placement agents include internal marketing personnel



Exception for individuals who spend at least one-third of their time per year managing the assets of the adviser

 Lobbyist employers and lobbying firms must also register



Registered lobbyists may not accept contingent fees for securing an investment contract with CalPERS or CalSTERS



Strict limitations on gifts and entertainment

 Strict prohibition on political contributions for lobbyists

 Elaborate pre-contractual disclosure requirements relating to the use of placement agents



California Cities and Counties: Many California cities and counties have their own lobbyist registration requirements and gift restrictions

 All are required to adopt pre-contractual disclosure requirements relating to the use of placement agents

14

5

III. State and Local Regulations (cont.)



Examples of state initiatives (cont.)

 New York City : Persons who attempt to influence the investment decisions made by the New York City pension systems and spend over $2,000 per year on lobbying must register

 There are limitations on campaign contributions for certain persons who are engaged or attempting to engage in business dealings with New York City

(including investment management contracts)

 Strict gift and entertainment restrictions

 Pre-contractual disclosure requirements relating to contacts with City Comptroller’s Office

 The Comptroller makes the investment decisions on behalf of the City plans

15

The SEC’s New Whistleblower Rules

Clifford J. Alexander

16

IV. The SEC’s New Whistleblower Rules

 Section 922 of the Dodd-Frank Act added a new

Section 21F to the Securities Exchange Act of

1934

 Section 21F provides for payments subject to certain conditions to whistleblowers who provide information about a violation of the securities laws

 The SEC adopted rules under and implementing

Section 21F on 25 May 2011

 The rules will be effective 12 August 2011

17

6

IV. The SEC’s New Whistleblower Rules (cont.)

 Section 21F and the rules thereunder require payment of 10 to 30% of monetary sanctions obtained to eligible whistleblowers who voluntarily provide original information about a violation of the federal securities laws leading to enforcement action with sanctions exceeding US$1 million

 Bounty awards are mandatory if the criteria are met

18


 Eligible Whistleblowers

 Includes almost anyone, save for certain excluded categories of persons, including:





Regulatory and law enforcement personnel

Independent public accountants (for information obtained in course of an audit)

Non-natural persons 





Lawyers -under most circumstances

 Compliance personnel -under some circumstances

 No exclusion for persons involved in misconduct, unless they are criminally convicted

No amnesty is given to whistleblowers for misconduct

19


 Eligible Whistleblowers

 Attorneys are not eligible with respect to information obtained in the course of representation

 Unless “up the ladder” or ethics exception applies



Compliance personnel are only eligible if:

 The company doesn’t self-report within 120 days, or

 Compliance personnel have a “reasonable basis to believe” that disclosure is necessary to prevent substantial injury to company or shareholders

20

7




Eligible Whistleblowers

 Whistleblower is eligible even if information was obtained in violation of:





Privileges (other than attorney-client)

Civil law

 Criminal law (unless convicted of violation)

 A whistleblower may report anonymously until culmination of the action by reporting through counsel

21


 Information Must be “Original” Information

 It was not previously known to authorities

 Only the first person to report information is eligible for a bounty

 Information must be provided “voluntarily” -before company’s receipt of a request from the SEC or other authorities

22


 Protection from Recrimination

 Employer may not discharge, demote, threaten or discriminate against whistleblower

 Whistleblower has federal right of action to enforce this provision

 Remedies include:







Reinstatement

2 times back pay

Costs

23

8




Tension with Internal Compliance Efforts

 No requirement that employees first report concerns internally

 SEC states its rule seeks to “not discourage” employees from first reporting to the company

 SEC “may” (but need not) consider higher percentage awards for those who first report internally

 Company personnel who learn of an issue by being questioned in an internal review can qualify for bounty

24


 Proactive Steps

 Seek to ensure that the company will be the first to know of potential wrongdoing

 Promote the expectation that the company wants to know about potential wrongdoing

 Implement effective internal reporting procedures

 Enhance the credibility of internal reporting

 Promptly investigate legitimate reports

 Take appropriate remedial actions

 Do not tolerate retaliation in any form

25


 Avoiding Recrimination

 Limit the number of individuals aware of the identities of whistleblowers

 Do not seek to identify anonymous whistleblowers



Provide training for managers at all levels

 Adhere to best practices for employee evaluations





Document fully and accurately

Review performance honestly and timely

 Exercise extra caution with employees who may use whistleblowing as an offensive strategy

26

9

Potential New SRO for Investment Advisers and Net

Capital Requirement


27

V. Potential New SRO for Investment Advisers and Net

Capital Requirement



Investment Adviser SRO

 The Dodd-Frank Act required the SEC to study and create a report on the possibility of creating an SRO for investment advisers





The SEC delivered this report in January 2011

The report posited three ways to bolster adviser oversight:

 allowing the SEC to charge a user fee for exams,



 establishing an SRO for advisers or allowing FINRA to extend its reach to investment advisers who also are registered as broker-dealers

28


Capital Requirement (cont.)

 Investment Adviser SRO

 The study concluded that: “The [SEC’s] and Commodity

Futures Trading Commission’s experiences with SROs support the view that an SRO can augment government oversight programs through more frequent examinations”

 FINRA appears to be strongly campaigning to be chosen as the investment adviser SRO





Federal budget considerations and FINRA’s established presence are bolstering this effort

As with broker-dealers and FINRA, investment advisers would likely pay fees to support the SRO, reducing the government’s financial burden

29

10



 One SEC Commissioner has suggested that registered advisers be subject to the same financial capital requirements as broker-dealers

 Commissioner Elisse Walter made the statement in connection with an SEC study on a uniform fiduciary standard for broker-dealers and advisers

 Broker-dealers are required to maintain a certain minimum amount of “net capital”





The amount of net capital required of a broker varies depending on its business activities

Commissioner Walter stated that the SEC should explore

“comparable financial requirements for both types of financial professionals [brokers and advisers]”

30

V. Potential New SRO for Investment Advisers and Net Capital Requirement (cont.)



The North American Securities Administrators

Association (NASAA) has proposed (but not yet adopted) capital requirements for state registered advisers

 NASAA is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S.

Virgin Islands, Canada, and Mexico

31



 Goal of capital requirements is to ensure a financial institution has the assets to fund operations and to meet obligations to investors, customers and clients

 Traditionally, investment advisers do maintain a significant amount of capital in the adviser itself

 Particularly in cases where an adviser does not have custody of client assets, industry participants are questioning the need for minimum capital requirements



The SEC has not formally proposed any capital requirements and it is unclear whether it is considering doing so

32

11

New Exemptions -- The Private Fund Adviser

Exemption

Cary J. Meer

33

VI. New Exemptions from Registration

 The Dodd-Frank Act creates or directs the SEC to create new exemptions from registration

 Two most relevant to non-U.S. advisers are:

 Private fund adviser exemption



Foreign private adviser exemption

 These exemptions are mutually exclusive

34

VII. The Private Fund Adviser Exemption

 Section 408 of the Dodd-Frank Act provides an exemption from registration under the Advisers

Act for:

 An adviser that acts as an investment adviser solely to qualifying “private funds” with assets under management in the U.S. of less than $150 million

 SEC adopted rules interpreting the exemption on 22

June 2011

35

12

VII. Private Fund Adviser Exemption (cont.)

 The rules define a “qualifying private fund” for this purpose as a private fund that is not registered under the

Investment Company Act of 1940 (1940 Act) and has not elected to be treated as a business development company (BDC)

 This definition includes a fund exempt from the definition of investment company through any exemption in Section

3 of the 1940 Act, not just Sections 3(c)(1) or 3(c)(7)

 Could include:

 Certain lending or real estate funds under Section 3(c)(5)

 Certain funds engaged in owning and holding oil and gas royalties or leases

 Generally, a single investor fund may not be a “qualifying private fund”

36


Private Fund Adviser Exemption

 Under Management in the U.S.

 An adviser that has its principal office and place of business outside the U.S. but that does not have a U.S. place of business is treated differently from one with a U.S. place of business

 Place of business is defined in Advisers Act Rule 222-1 to mean:

 An office at which the adviser regularly provides investment advisory services, solicits, meets with or otherwise communicates with clients and

 Any other location that is held out to the general public as a location at which the adviser provides investment advisory services, solicits, meets with or otherwise communicates with clients

 Place of business includes a location where only research is performed or where an adviser communicates with any client (U.S.

or non-U.S.)

 U.S. office of an affiliate could be treated as the office of the adviser if personnel of the adviser regularly use the U.S. office

37




Under Management in the U.S.

 In order to rely on the exemption, an adviser without a U.S. place of business:

 cannot have U.S. separate account clients



 can have other types of clients outside the U.S.

 In order to rely on the exemption, an adviser with a U.S. place of business:

 can accept U.S. investors in U.S. or non-U.S. private funds and



Cannot have U.S. separate account clients

Cannot manage the accounts of clients from the U.S. office (whether a U.S. client or otherwise) that are not qualifying private funds

 Cannot manage US$150 million or more in AUM from the U.S. place of business

38

13


 US$150 Million AUM Limit

 Must be calculated by reference to the AUM calculation method in new ADV Part 1A Item 5.F

(also adopted on 22 June 2011)

 Gross asset value calculation (cannot deduct liabilities)

 All assets of a qualifying private fund must be treated as a “securities portfolio”

 Must be calculated based on current market value or fair value

 Must include assets of any qualifying private fund, even if it is:





Proprietary money and/or

Assets managed without compensation

 Must include any uncalled capital commitments

39


 US$150 Million AUM Limit

 AUM must be calculated on an annual basis and reported on the annual reporting form (discussed below)

 If an adviser exceeds the limit, it has 90 days after filing its annual update to its limited reporting information to register with the SEC

 The 90-day grace period is only available to advisers that are current on reporting obligations (discussed below)

 If transition period is available, adviser will effectively have up to 180 days from fiscal yearend to register

40


 Subject to Reporting and Inspection

 Although exempt from registration, a private fund adviser:

 Must make certain publicly-available reports through the

Investment Adviser Registration Depository system

(IARD)

 Is subject to inspection by the SEC staff as if it were registered



 the SEC has said it will not routinely inspect such advisers examinations will be for cause based on tips, referrals, etc.

41

14


 Reporting

 A private fund adviser must file a very limited subset of the information referenced on Form ADV Part 1A, including identifying information, form and state of organization, executive officers, direct and indirect owners, disciplinary history and information about private funds

 A private fund adviser initially would have to file the sections of the amended Form ADV Part 1A within 60 days of beginning to rely on the exemption

42

Foreign Private Adviser Exemption


43

VIII. Foreign Private Adviser Exemption

 Section 402(a) of the Dodd-Frank Act provides an exemption from registration under the Advisers Act for a non-U.S. adviser that meets the definition of “foreign private adviser”

 SEC adopted rules interpreting and implementing the exemption on 22 June 2011

 “Foreign private adviser” means an adviser that:

 has no place of business in the U.S.

 has fewer than 15 clients and investors in the U.S. in private funds

 has less than US$25 million AUM (subject to increase by

SEC rule) attributable to such clients and investors

 does not hold itself out generally to the public in the U.S. as an investment adviser and

 does not act as an investment adviser to any registered investment company or BDC

44

15

VIII. Foreign Private Adviser Exemption (cont.)

 Who is an Investor?

 A “beneficial owner”

 Must look through certain entities to underlying investors in some cases

 Includes holders of any of the issuer’s securities, including both debt and equity

45


 Who is an Investor?

 Adviser must look through record holders of securities if the economic risks and rewards of the investment has been transferred by that record holder to a third-party U.S. person, such as through a total return swap

 Will require additional representations in subscription agreements





May be difficult for adviser to discern

Other types of derivatives require an analysis of the circumstances

 Look-throughs are intended to prevent a foreign private adviser or a third party from creating nominee accounts or other vehicles in which U.S. investors pool money to keep the foreign private adviser from counting the underlying U.S. investors

46


 Client or Investor “in the United States”

 Determined by generally incorporating concepts from

Regulation S (an exemption from 1933 Act registration for offerings made in an offshore transaction)

 A client or investor is deemed “in the United States” if it would be a U.S. person under Regulation S

 Except that a discretionary account or similar account held for the benefit of a person “in the United States” by a non-U.S. dealer or other professional fiduciary is deemed “in the United

States” if the dealer or professional fiduciary is a related person of the foreign private adviser

 Status is judged at the time of becoming a client or at the time of acquisition of private fund securities; if the client/investor adds additional assets or acquires additional shares in the private fund, must re-confirm location

47

16


 Counting Clients

 Rules borrow principles of client counting from private adviser exemption

 A foreign private adviser must count a client even if the adviser receives no compensation from the client for its services

 If an adviser were required to count one or more U.S. investors in a fund, it would not have to count separately the fund as a U.S. client

48


 Calculating AUM for US$25 Million Limit

 Must be calculated by reference to gross asset value calculation in new ADV Part 1A Item 5.F

(cannot deduct liabilities)

 All assets of a qualifying private fund must be treated as a “securities portfolio”

 Must be calculated based on current market value or fair value

 Must include assets of any qualifying private fund, even if it is:





Proprietary money

Assets managed without compensation

 Must include any uncalled capital commitments

49




Foreign private advisers are not subject to reporting, recordkeeping rules or inspection by

SEC staff



SEC has the authority to raise the US$25 million limit, but chose not to do so likely because of this lack of regulation

 Key issues

 Less flexible exemption than private fund adviser; lower AUM limit

 Permits separate account clients, but must count

U.S. investors even in non-U.S. funds

50

17

Delay of Registration Obligation

Cary J. Meer

51

IX. Delay of Registration Obligation

 The Dodd-Frank Act provides that the provisions of Title IV (those regarding adviser registration) will go into effect on 21 July 2011

 This includes the repeal of the “private adviser exemption” in Section 203(b)(3) of the Advisers

Act and Rule 203(b)3-1 thereunder

 The repeal of this provision is the main reason that many previously unregistered advisers must now register with the SEC

52

IX. Delay of Registration Obligation (cont.)

 The requirement to register as an investment adviser as a result of the

Dodd-Frank Act is being delayed until

30 March 2012

53

18

Confirmation of Unibanco Line of

Guidance

Cary J. Meer

54

X. Confirmation of Unibanco Line of Guidance



The SEC confirmed the continued validity of the Unibanco line of no-action letters

 This line of letters permits an unregistered non-U.S. affiliate of a registered adviser to provide advice with respect to the registered adviser’s U.S. clients under certain circumstances

 The SEC stated that the staff would likely issue guidance clarifying the application of Unibanco going forward

 The status of Unibanco and its progeny had been unclear after the Dodd-Frank Act

55

“Bad Boy” Actor Disqualifications and Rule 506 of Regulation D


56

19

XI. “Bad Boy” Actor Disqualifications and

Rule 506 of Regulation D

 As required by the Dodd-Frank Act, the SEC is proposing to include disqualifications for “covered persons”

 If a covered person is “disqualified,” then the issuer cannot rely on the Rule 506 safe harbor in order to conduct its private placement of private fund interests

57


Rule 506 of Regulation D (cont.)

 Covered Persons Include:



The issuer, any predecessors and affiliated issuers

 Directors, officers, general partners and managing members of the issuer

 Any beneficial owner of 10% or more of any class of the issuer’s securities

 Certain promoters

 Persons receiving remuneration for solicitation of purchasers and their directors, officers, general partners and managing members

58





Disqualifications Include:

 Certain misdemeanor and felony convictions

 Injunctions and restraining orders

 Final orders of certain state and Federal regulatory agencies



SEC disciplinary orders

 Suspensions or bars from securities exchanges and associations

 Orders relating to Regulation A offerings

 Postal Service false representation orders



Can apply to SEC to get an exemption

59

20



 Issues With Proposal:

 Retroactive effect

 Requires extensive due diligence on investors in private funds

 Standard is issuer “did not know, and in the exercise of reasonable care could not have known, that a disqualification existed”

 Not clear what level of due diligence is required

 If Rule 506 of Regulation D is not available, then state coordinating exemptions are also not available

60

Amendments to Qualified Client

Standard

Cary J. Meer

61

XII. Amendments to Qualified Client Standard

 The SEC is Required by Dodd-Frank to Increase the Dollar Thresholds in the Qualified Client Rule to Adjust for Inflation Every 5 Years

 The SEC is proposing to increase the assets under management threshold from US$750,000 to

US$1,000,000



The SEC is proposing to increase the net worth threshold from US$1,500,000 to US$2,000,000

 The SEC is proposing to exclude the client’s net equity in his or her primary residence, as Dodd-

Frank did for purposes of the “accredited investor” definition

62

21

XII. Amendments to Qualified Client Standard

(cont.)

 Proposed Grandfathering:

 Clients of previously exempt investment advisers are grandfathered – if they are clients/fund investors before the investment adviser registers

 Existing clients of registered investment advisers are also grandfathered – if they met the standard at the time the advisory contract/fund investment was entered into

 Applies to existing investments and new money

63

Proposed Repeal of Certain CPO and

CTA Exemptions

Cary J. Meer

64

XIII. Proposed Repeal of Certain CPO and

CTA Exemptions

 The Commodities Futures Trading Commission

(CFTC) has proposed repealing:

 The exemptions from CPO registration in Rule

4.13(a)(3) and (a)(4) and

 The exemption from CTA registration in Rule

4.14(a)(8)

 These exemptions are frequently relied upon by sponsors and managers of private funds

65

22

XIII. Proposed Repeal of Certain CPO and

CTA Exemptions (cont.)

 If the Exemptions are Repealed:

 operators of private funds that wish to continue or begin trading futures contracts, commodity options, and – as of 16

July 2011 – swaps (together, “commodity interests”), must register as CPOs

 Proposing to postpone the date by which swaps must be included until the earlier of 31 December 2011 or the date when the “swap” definition is finalized

 advisers to private funds that continue or begin to trade commodity interests must register as CTAs

 The new registration requirements would apply even if commodity interests are used only for hedging or risk management purposes

66

23

5

International Marketing

7 July 2011




Choo Lye Tan – Partner, Hong Kong and

Singapore

DC 9219308 v. 3


Asia (Hong Kong, Singapore,

Japan, Taiwan and PRC)

Choo Lye Tan

1

ASIA

 HONG KONG

 SINGAPORE

 JAPAN

 TAIWAN



PRC

2

1

Asia-Pacific Stock Market Growth (2005-2010)

725

588

544

745

2005: US$8.8 trillion

1,654

4,563

Source: World Federation of Exchanges

Japan

1,871

Greater

China

Korea

Australia

1,454

Asian

India

2010: US$17.7 trillion

 Asia-Pacific stock market capitalisation has doubled over the past 5 years to almost US$18 trillion

4,100



Equity capital markets in

Asia (ex Japan and

Australia) raised

US$163bn in 2010 through 768 listings

(2009: US$70bn)

1,092

1,632

7,558

 Debt capital markets also soared in 2010, raising

US$467bn in 3,082 deals



Outbound M&A in Asia

(ex Japan and Australia) rose 166% to US$126bn in 2010

3

Top Exchanges for Capital Raised

2008 (US$bn)

New York (24.8)

Saudi

Shanghai

London

Hong Kong

(9.7)

(5.5)

(5.5)

(4.8)

2009

Hong Kong

Shanghai

New York

Shenzhen

NASDAQ

(US$bn)

(21.9)

(20.4)

(19.1)

(9.1)

(8.1)

2010*

Hong Kong

Shenzhen

New York

Shanghai

Tokyo

(US$bn)

(61.2)

(40.1)

(31.1)

(15.9)

(11.2)

Source: Ernst & Young, Dealogic, Thomson Financial *to Nov 2010

4

I. Unique Selling Points for Various Jurisdictions

Hong Kong

 Existing experience

 Trilingual, sophisticated employee base

 Client base

 English common law system

 Strong and sophisticated advisory support

 Gateway to PRC

 Fastest growing number of new millionaires

 Converging point in Asia for Western funds professionals

 Commonwealth, “safe-haven” perception + access to PRC market + access to beneficial “local” PRC benefits

5

2


(cont.)

Singapore

 Transparent yet flexible regulatory environment

 Skilled multilingual workforce

 Exemptions for boutique fund managers and representatives of financial advisors

 Low tax rates, industry-specific tax rates

 Strategic location for South Asia initiatives

 Strong government support

 Outstanding product innovation

6


(cont.)

Japan

 Access to Japanese pension funds

 High purchasing power

 Access to East Asia markets

7


(cont.)

Taiwan

 Cooperation Agreement Between Taiwan & Governments of

Luxembourg/Ireland



Introducing Different Fund Products into the Market

 Waiver of One Year Establishment Requirement



No Restriction on Derivatives Investment

 Impact of Economic Cooperation Framework Agreement



Lifting of Restrictions on Funds’ Investment in China



Distribution of Taiwan Funds in China & of China Funds in Taiwan

 Providing Discretionary Advisory Services to China Individuals,

Legal Entities Through Taiwan Qualified Entities

8

3


(cont.)

PRC

$

9

II. Marketing of Funds in Asia

Regulatory

Authorities

Hong Kong Singapore Japan

Securities and

Futures

Commission (SFC)

Monetary Authority of

Singapore (MAS)

Securities and

Exchange

Surveillance

Commission

(SESC)

Taiwan

Financial

Supervisory

Commission

PRC

China Securities

Regulatory

Commission

(CSRC)

Civil Law Civil Law Legal System English Common

Law

English Common

Law

Civil Law

Foreign

Registration

Yes Yes Yes Yes No such registration available

10

II. Marketing of Funds in Asia (cont.)

Hong Kong Singapore Japan Taiwan

Exchange

Control

No No

Licensing Yes Yes

No

Yes

Yes

Yes

Exemptions

/ Avoidance

Professional

Investors for

Type 1 activity only

Incidental exemptions

-Group company exemption

Any bank or financial institution or such other person or class of persons in respect of any regulated activity as may be exempted by the Authority

Complete exemption where

Less than ten Qualified

Institutional Investors (“QIIs”) who are Japanese; AND

the QIIs account for less than one-third of the contributions raised

Exempted but required to file a notification



At least one Japanese QII and less than fifty Japanese non-QIIs



NO restriction on transfer of partnership interests required but must monitor transfers to ensure that there is always at least one

Japanese QII and not more than forty-nine Japanese non-QIIs

N/A

Yes

Yes

N/A

PRC

11

4



Costs

Start-up

Requirements

Application

Cost

US$3,500 -

US$5,000 about US$610

- US$16,668 per Regulated

Activity about US$1,218 -

US$4,060 about US$1,624

- US$6,496

Per Regulated

Activity

US$3,000 -

US$5,000

Time

15 weeks Depends

Taiwan

Various N/A

PRC

6 – 9 months

(Type 1 -

Investment

Management )

3 - 6 months

(Type 2 -

Investment

Advisory and

Agency)

3-6 months

(offshore funds)

1-3 months

(onshore funds)

Various

12


Prospectus

Requirements


Yes

Exemptions from prospectus requirements

Safe Harbour

Exemptions

Exclusions in relation to structured products

(effective 13

May 2011)

Yes


Issue or transfer for no consideration

(section 272 SFA)

Small offers (total amount raised in 12 months is not more than S$5 million or equivalent or such other amount as may be approved)

Private placement

Offers to institutional investors

Yes

Securities registration statement

(“SRS”) must be filed with the

Kanto Local

Finance Bureau

Japanese language prospectus required

Yes

Taiwan

Yes

PRC

13


Liquidity

Requirements

Hong Kong

Paid-up capital: about US$

642,425 - US

$3,855,554

Liquid Capital about

US$12,848 -

US$1,927,277

Singapore

Dealing in Securities

- about

US$203,004 -

US$4,040,078

Trading in Futures

Contracts about

US$203,004 - US$

4,040,078

Trading in

Commodities

Futures Contracts about US$203,004

- US$812,017

Fund Management about US$203,004

- US$812,017

Other Regulated

Activities about

US$203,004 -

US$812,017

Japan

Minimum of about

US$620,000 and greater than 120% solvency ratio

Taiwan

No special requirements for offshore funds

* Note:

For onshore funds, there are various minimum liquidity asset requirements for different types of funds

PRC

No special requirements

14

5


Tax

Hong Kong

16.5%

Singapore

17%

Japan

< about

US$49,849 -

24.87%

≥ about

US$49,849 -

26.48%

< about

US$99,697 -

26.48%

> about

US$99,697 -

40.87%

Taiwan

17% 25%

Special

Requirements

PRC

Outbound Investment

Restriction

Foreign Exchange Control

15


General principles for Hong Kong and Singapore:

• Licensing by the securities regulators for the act of marketing

• Offer Registration for the offers of the units

16

III. Hong Kong

Licensing

 Securities licensing will be required from the SFC if:-

 you carry on business in a regulated activity or hold yourself out as carrying on business in a regulated activity; OR

 you actively market, whether by yourself or another person on your behalf and whether in Hong Kong or from a place outside

Hong Kong, to the public any services that you provide that would constitute a regulated activity if provided in Hong Kong;

OR

 you are an individual performing a regulated function for your principal that is a licensed corporation in relation to a regulated activity carried on as a business or you hold yourself out as performing such function

17

6

III. Hong Kong (cont.)

 What are regulated activities?

 Type 1 - Dealing in securities

 Type 2 - Dealing in futures contracts

 Type 3 - Leveraged foreign exchange trading

 Type 4 - Advising on securities

 Type 5 - Advising on futures contracts

 Type 6 - Advising on corporate finance

 Type 7 - Providing automated trading services

 Type 8 - Securities margin financing

 Type 9 - Asset management

 Type 10 - Credit ratings

18


 Meaning of “active marketing”

 Frequent visits

 Mass media programmes

 Internet activities

 Targeted at the public in Hong Kong

 Meaning of “public in Hong Kong”

 A section of the public

 Less than 50 persons – from the Companies Ordinance

 Meaning of “business”

19


 Relevant Licencing Exemptions

 Professional investors for Type 1 activity only

 Incidental exemptions

 Group company exemption – for Types 4, 5, 6 and 9 only

20

7




Licencing procedures in Hong Kong

 Available licences

 Temporary



Provisional



Permanent



Issues to consider

 Resident responsible officer

 Compliance officer



Processing time of 15 weeks, not including preparation time



Extensive information on the Group required for a permanent licence



Ongoing follow-up filing and notification obligations

 Single licensing regime

 Principle-based approach

21


Offer Registration



Prospectus Registration & Requirements






Relevant Safe Harbour Exemptions

 Offers to professional investors



Small offers



Minimum subscription offers

 Private placements



Exclusions to exemptions in relation to structured products (came into effect 13 May 2011)

 Effect of legends



Legislative requirements



Non-effective statements (e.g., stating an offer is not an offer on the cover)

22


 Authorisation of collective investment schemes in Hong Kong

23

8







IV. Singapore

Licensing

 Financial Advisers Act licence is required for the following activities:-

 advising others concerning any investment product

 issuing or promulgating analyses or reports concerning any investment product

 marketing of any collective investment scheme including unit trusts and

 arranging of any contract of insurance in respect of life policies

Securities, futures and fund management licences under the Securities And

Futures Act

Exemptions

 Exempt persons

Single licensing regime

24

IV. Singapore (cont.)




Offers in Singapore

 Prospectus Requirements

 Exemptions from prospectus requirements



Small offers



Private placements

 Offers to institutional investors



Offers to accredited investors and relevant persons



Minimum subscription offers

25

IV. Singapore (cont.)

• Authorisation of collective investment schemes

26

9

V. Japan

• Registration for:-

• Solicitation for the act of marketing

• Investment Management for the business of offering and marketing

27

V. Japan (cont.)

Solicitation

• Solicitation/Marketing of units to the public in

Japan generally prohibited unless the marketing entity is by a financial institutions firm registered to engage in such business

• No fixed definition of “solicitation”

• Includes targeting Japanese investors outside

Japan

28


• Exemptions:

• Appropriately authorised entity in Japan conducts marketing on its behalf

• More than 1 QII but less than fifty non-QIIs

29

10


Investment Management

• Registration under FIEL generally required

• Exemption

• Complete exemption where less than ten

Qualified Institutional Investors (“QIIs”) who are

Japanese; AND the QIIs account for less than one-third of the contributions raised

• Partial exemption requiring notification only where more than 1 QII but less than fifty non-QIIs

30


Offers where registration is required:

• Small number private placement

• Professional private placement

31


• Authorisation of UCITS

• Prospectus registration

• Language requirements

32

11

VI. Taiwan

Solicitation

 No direct prohibition

 However, solicitation may constitute a business activity that requires:-

 Taiwan-registered company (ROC Company Law)

 Approval by securities regulatory authority under

Securities Investment Trust & Consulting Act

33

VI. Taiwan (cont.)


Offshore Funds (Public Offer)



Registration with regulator

 Appointment of

 Master Agent

 Distributor

 Prospectus

34

VI. Taiwan (cont.)

Structured Note Products



Requirement for local office

 No prospectus required

35

12

VII. PRC

• No specific law, prohibition or regulation on marketing of foreign funds on a private basis

• Marketing may constitute a business activity for which regulation is extensive

• Public offers subject to the authority of

• China Securities Regulatory Commission and

• Ministry of Commerce

36

VII. PRC (cont.)

• Public offers of securities require a PRCincorporated fund manager

• Joint venture with a PRC entity is necessary as foreign ownership cannot exceed 49%

• Foreign ownership must be from a foreign entity approved by CSRC

37

VII. PRC (cont.)

• Restrictions on outbound funds of PRC investors

• For corporate investors, regulatory approval of not less than 3 PRC regulatory authorities required

• For individual investors:-

• Regulatory approval of SAFE

• Use of QIIs

• Foreign exchange controls

38

13

VIII. Considerations



Short- or long-term?

 Where are your proposed investors based?

 Costs?

 What products are you marketing?

39

Sale of Non.-U.S. Funds in the

United States

Cary J. Meer

40

I. Overview

 Offering securities of a non-U.S. fund in the United

States, whether to taxable or tax-exempt investors, implicates and requires consideration of a number of laws and regulations, including:

 The Securities Act of 1933 (1933 Act)

 The Investment Company Act of 1940 (1940 Act)

 The Investment Advisers Act of 1940 (Advisers Act)

 The Securities Exchange Act of 1934 (Exchange Act)

 The Commodity Exchange Act

 We discuss each of these briefly below

41

14

II. The 1933 Act

 Any offer of securities to persons in the United

States must either be registered under the 1933

Act or exempt from registration

 Most private funds rely on an exemption from registration in Rule

506 of Regulation D, a safe harbor under the exemption for private placements of securities in Section 4(2) of the 1933 Act

 Rule 506 places certain restrictions on:

 The types of investors that can purchase securities and

 The manner of offering and selling the securities



The Securities and Exchange Commission (SEC) has proposed but not yet adopted “bad boy” disqualifications (previously discussed) that would prohibit an issuer from relying on Rule 506 if it has certain associations with disqualified persons

 These “bad boy” provisions are required by the Dodd-Frank Act

42

II. The 1933 Act (cont.)

 Investor requirements

 An offering under Rule 506 can be made to an unlimited number of “accredited investors” and up to 35 unaccredited investors

 Most private funds do not accept unaccredited investors because Rule 506 requires they be given additional disclosure

 There is a perceived greater risk of liability in accepting less sophisticated investors

43


 Manner of offering and sale

 Rule 506 offering cannot be made through “general solicitation” or “general advertising”

 Rule 506 defines these concepts to mean:

 Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio and

 Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising

 This requirement prohibits cold calling or mass communications (whether in hard copy or electronic form)

 May restrict information that may be posted on a website maintained by a manager without a place of business in the United States

44

15


 SEC staff guidance has stressed the importance of a substantive, pre-existing relationship between an offeree and the issuer or its agent

 An issuer can rely on the relationship of another, such as a placement agent

 The relationship between the offeree and the issuer or agent must:

 pre-date the offer and

 must be sufficient to give the issuer or agent a reasonable belief that the offeree is qualified to invest

 Certain websites pre-clear investors and give them access to issuer’s offering materials under SEC staff guidance

45


 A fund relying on Rule 506 must file a Form D with the SEC no later than 15 days after the first sale of securities in the offering

 A notice filing of the Form D must be made with states where the U.S. investors are located

 As a result of 1933 Act Section 18(b), states must coordinate filing requirements with the

SEC’s requirements

46


 Failure to adhere to the Rule 506 and the state blue sky filing requirements could:

 result in criminal sanctions or in enforcement actions against a private fund, its manager or individual officers and employees

 jeopardize available exemptions

 give rise to rescission rights to investors

47

16

III. The 1940 Act



A private fund that offers and sells interests to

U.S. persons must qualify for an exemption from registration as an investment company under the

1940 Act

 Private funds generally rely on one of two exemptions:

 Section 3(c)(7)

 Section 3(c)(1)

48

III. The 1940 Act (cont.)

 Section 3(c)(7)



Allows for an unlimited number of investors so long as all investors are “qualified purchasers” or “knowledgeable employees”

 Generally, a “qualified purchaser” is:

 A natural person with $5 million or more in investments (as defined in the 1940 Act and rules thereunder) or

 An entity that owns and invests on a discretionary basis at least $25 million in investments

 “Knowledgeable employee” means, generally, a limited group of officers and employees of the adviser directly involved in making portfolio recommendations for the adviser

 Certain “look-through” requirements may apply that would require a fund adviser to look through an entity to that entity’s own investors

49

III. The 1940 Act (cont.)

 Section 3(c)(1)

 Allows a fund to have up to 100 beneficial owners of its outstanding securities

 Certain “look-through” requirements may apply that would require a fund adviser to look through an entity and count that entity’s own investors

 Both exemptions require no “public offering”

50

17

IV. The Advisers Act



After the Dodd-Frank Act, accepting even a single U.S. investor into a private fund (even a non-US fund) is sufficient to trigger Advisers Act registration obligations

 An adviser to a private fund with U.S. investors must either register as an adviser or qualify for an exemption



The Dodd-Frank Act creates two new exemptions relevant to advisers to non-US funds:

 The private fund adviser exemption



The foreign private adviser exemption

51

IV. The Advisers Act (cont.)

 The two exemptions have been discussed in greater detail in the prior panel

 The registration obligations of advisers, taking into account these exemptions, are summarized in the following chart

52

IV. Advisers Act – Exemption Chart

CLIENTS/INVESTORS

Non-U.S. adviser to private funds and/or managed accounts with <15

US clients or investors and no place of business in the US

ASSETS UNDER

MANAGEMENT

AUM (attributable to U.S. clients/investors) < $25M

Non-U.S. adviser to private funds and/or managed accounts with 15 or more US clients or investors

Any amount

SEC REQUIREMENTS

Exempt from registration

No record-keeping or reporting requirements

STATE REQUIREMENTS

States are permitted to require registration, if meet minimum state nexus test

Non-U.S. adviser to private funds and/or managed accounts with US clients or investors

AUM (attributable to U.S. clients/investors) ≥ $25M

SEC registration required

Subject to record-keeping and reporting requirements required by Advisers Act (including SEC examination)



No state registration permitted


Non-U.S. adviser solely to private funds (U.S. or non-U.S.)

AUM managed from an office in the U.S. < $150M

Exempt from registration

Subject to record-keeping and reporting requirements as SEC determines (including SEC examination)

States are permitted to require registration, if meet minimum state nexus test

Non-U.S. adviser solely to private funds (U.S. or non-U.S.)

AUM managed from an office in the U.S. ≥ $150M




53

18

IV. Advisers Act (cont.)



If a non-US adviser is required to register

 It should begin the process immediately as it could take 3-6 months in total

 Compliance date has been postponed until 30

March 2012

 An adviser that is required to register should nevertheless begin preparations

 Will need to complete Form ADV Part 1A, 2A and 2B

 Must adopt compliance policies and procedures and a code of ethics prior to the effectiveness of registration

54


 Limit on performance compensation

 A registered adviser is only able to accept performancebased compensation (such as a performance fee or incentive allocation) from “qualified clients”

 A “qualified client” under the Advisers Act means:





A natural person who or a company that immediately after making an investment has at least $750,000 under the management of the investment adviser or

A natural person who or a company that the investment adviser reasonably believes, immediately prior to selling shares to the person or company, either:



Has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $ 1.5 million at the time of the purchase; or



Is a “qualified purchaser” under the 1940 Act at the time the contract is entered into

 “Qualified client” also includes certain employees, officers and directors of the adviser

55


 The SEC intends to raise the $750,000 and $1.5 million tests for “qualified client” status on or before 21 July 2011 to $1 million and $2 million, respectively

 Grandfathering was described in previous panel

 Every five years thereafter the SEC will adjust the numbers to take inflation into account

 Will base calculations on Personal Consumption

Expenditures Chain-Type Price Index (or PCE

Index) published by the Department of Commerce

56

19

V. Exchange Act



Offering and selling interests in private funds can give rise to potential broker-dealer registration obligations for placement agents and for an adviser or its marketing personnel under the

Exchange Act and comparable state laws

 Broker is broadly defined as a person engaged in the business of effecting transactions in securities for the account of others

 An interest or share in a private fund is a security

 Transaction-based compensation for sale of securities is the hallmark of broker status (such as a sales load or compensation tied directly to sale of fund securities)

57

V. Exchange Act (cont.)

 Marketing personnel of a fund adviser may be a

“broker”

 Exchange Act Rule 3a4-1 provides an exemption for “associated persons” of an issuer (such as an adviser and its personnel) subject to a number of conditions

 Need to tailor duties and compensation of marketing personnel





No direct link between sales and compensation or bonus; must be based on variety of factors though sales can be considered

Where possible, provide personnel with additional duties other than pure sales activities

58

VI. Commodity Exchange Act

 A fund manager offering shares to U.S. investors that advises a fund trading futures contracts, commodity options, and – at some point in 2011

– swaps must consider whether it must register as a commodity pool operator (CPO) or commodity trading advisor (CTA)

 The Commodity Futures Trading Commission is currently considering repealing the exemptions from CPO and CTA registration most often relied upon by private fund advisers

59

20

Sale of Non-EU Funds in the EU

Martin W. Cornish

60

VII. Introduction

 Structuring Funds for European Investors

 Marketing in Europe – Switzerland, France, Spain, Italy,

Germany, United Kingdom, Belgium, Holland, Sweden,

Norway, Finland, Denmark

 Likely impact of the Alternative Investment Fund

Managers Directive

 Closed-End Funds

 UCITS

61

VIII. Structuring Funds for European

Investors

 Optimal structure depends on nature of underlying investments and investment strategy, and jurisdiction and type of underlying investor

 Europe = 25 plus jurisdictions so analysis is very complex

 Broadly:

 Real estate/private equity funds typically use limited partnerships

 Retail “long only” and hedge funds typically use corporate vehicles

 But detailed analysis driven by tax and regulatory considerations

62

21


Investors (cont.)

– Tax Considerations



Natural capital gains flow-through for real estate/private equity funds

 Use of DTTs – common issue for long-only funds and especially certain emerging market funds – Russia,

India, Brazil

 Use of “blocker corporations” to shield trading income/convert income into capital gains – common issue for hedge funds

63


Investors (cont.)

– Tax Considerations

 European jurisdictions have no “check the box” elections (unlike the U.S.) to treat corporations as transparent

 But several European jurisdictions do have antiavoidance provisions like U.S. PFIC (Passive Foreign

Investment Company) rules, which impute liability to tax on a current year basis; deem capital gains to be liable to income tax; and/or impose surcharges, etc.

 E.g., U.K. Offshore Funds Rules; and German

Investment Tax Act

64

IX. Marketing Funds for European Investors –

Private Placement Rules

Marketing in Belgium

 Marketing must be conducted by EU authorised firms or overseas firms that have registered with the Belgian Finance and Insurance Commission (“ BFIC ”)

 EU authorised firms can market offshore funds privately to all types of investors and without limit on the number of investors provided the minimum investment is at least

€250,000

65

22


Private Placement Rules (cont.)

Marketing in Belgium

 Non-EU authorised marketers can only market to certain categories of qualified investors – banks, investment firms, insurance companies, listed companies with consolidated equity of at least €25 million, institutional investors whose main activity is to invest in financial instruments and collective investment schemes

66



Marketing in Denmark

 Danish authorities have informally said that offers to not more than eight (8) named investors can be a private placement in

Denmark, provided that none of these investors acquire interests for re-sale purposes

67



Marketing in Finland

 Marketing must be conducted on a private placement basis and by (i) Finnish licensed entities, or (ii) entities located in other EU countries that are duly passported into Finland

 Marketing must be limited to professional investors, namely:

 (1) entities that are authorised financial services businesses, and corresponding regulated foreign entities, including investment firms (brokers and investment managers), banks, funds, insurance companies, pension insurance companies, pension foundations, and pension funds

68

23



Marketing in Finland

 (2) companies meeting at least two of the following criteria for the last full financial year:

 (a) a balance sheet total of €20 million or

 (b) net turnover of €40 million or

 (c) own funds of €2 million

 (3) institutional investors whose principal business is investing in financial instruments

69



Marketing in France

 Only certain French single manager and fund of funds (e.g.,

ARIA leveraged and unleveraged funds and fund of funds) can be actively marketed in France and then only to persons who are “Qualified Investors” and or satisfy certain net worth and minimum subscription amounts

 All funds must be marketed in compliance with French

“demarchage” rules, which apply to the marketing of all forms of financial and banking products and services – breach is a criminal offence that can result in fines and or imprisonment

70



Marketing in France

 “Demarchage” means any unsolicited contact and applies to corporations as well as individuals

 Although, by way of exception, these rules do not generally apply, inter alia, to Qualified Investors and existing clients, certain products are excluded from taking advantage of these exemptions, including products whose maximum risk cannot be ascertained at the time of purchase; futures and debt funds; and securities not admitted to trading on a regulated market

 As a result, non-French hedge funds cannot be actively marketed in France, even to professional investors

71

24



Marketing in Germany

 Domestic single manager and fund of funds can be formed in

Germany and are governed by the German Investment Act of 2004

(InvG)

 Single manager funds subject to very few investment, leverage or other restrictions other than a requirement to be diversified

 Fund of funds are subject to greater restrictions – no leverage, specific diversification rules, etc. – but can invest in Cayman and other offshore hedge funds

 But master-feeder structures are not allowed

 Single manager and fund of funds must have a depositary

72

IX.

Marketing Funds for European Investors –



 German single manager funds may be promoted only on a private placement basis

 Must be distributed by German regulated financial services entities

 German fund of funds may be promoted to the public including by unregulated intermediaries/brokers

 Both must issue a prospectus that must be approved by the supervisory authorities

73




 Marketing of foreign funds to the public is also regulated by the InvG

 Rules follow those for domestic funds in that single manager funds can only be promoted on a private placement but foreign fund of funds can be promoted to the public

 Public marketing of FoFs requires the overseas fund to be regulated by an equivalent regulator to BaFin that has a cooperation agreement with BaFin, and is subject to similar investment and other restrictions, reporting and publishing requirements

74

25




 InvG does not apply to non-publicly marketed single manager or fund of funds

 To fall outside the public offer rules, marketing must be restricted to a defined target group all having a prior investment business relationship with the offeror

 Marketing must be carried out by EU regulated persons

 In practice, marketing is therefore usually conducted by

German regulated intermediaries to existing clients

75



Marketing in Holland

 Marketing must be conducted by EU authorised persons or appropriately licensed overseas persons registered with the

Dutch authorities

 Private placements must comply with one of 3 exemptions:

 (1) The subscription amount must be at least €50,000 (or the equivalent thereof in another currency)

76




 (2) An unlimited number of “Qualified Investors” – includes regulated banks and financial services companies, entities whose sole objective is investing in securities, corporate or other undertakings which meet at least two of the following requirements:

 (i) average number of employees exceeding 250 in the relevant financial year

 (ii) a balance sheet total exceeding €43 million and

 (iii) an annual net turnover exceeding €50 million

77

26




 (3) Offers to less than 100 persons who do not qualify as

Qualified Investors

78



Marketing in Italy

 Absent Italian Registration, only passive marketing is permitted

 The concept of a private placement in Italy does not exist

 Unless Bank of Italy approval is obtained, only passive marketing is permitted in connection with the sale of fund interests to Italian residents

79



Marketing in Italy

Passive marketing is defined as:

 Contact leading to the purchase of fund interests that was initiated by the investor and not by the fund, and that can be documented

 Generalized marketing presentations unrelated to any specific fund and that do not mention any fund

 Follow-up of investor-initiated contact that is directed to a person or entity located outside Italy

 All active marketing/solicitation to an investor must take place outside

Italy and

 Execution of all subscription documentation must occur outside Italy with the delivery of such documentation to a location outside Italy

80

27



Marketing in Norway

 Unless Norwegian Financial Supervisory Authority (“ NFSA ”) approval is obtained, only passive marketing is permitted

 NFSA approval will not be granted for any non-UCITS fund including a fund established in another EU jurisdiction

81



Marketing in Norway

Passive marketing means:

Contact leading to the purchase was initiated by the investor and not by the fund/some other person, which can be documented

 Follow-up of an investor-initiated contact that is directed to a person or entity located outside Norway

 All active marketing/solicitation to an investor took place outside

Norway and

 Execution of all subscription documentation must occur outside

Norway with the delivery of such documentation to a location outside Norway

82



Marketing in Spain

 Marketing of funds other than those complying with EU

UCITS Directive is prohibited without approval from the

Comisión Nacional del Mercado de Valores (“ CNMV ”)

 Primary condition for CNMV authorisation is that the foreign fund is subject in its home jurisdiction to similar investor protection rules as those applicable in Spain

 Only funds established in Malta, Ireland, Luxembourg and other EU jurisdictions likely to be approved

83

28




 As a matter of practice, the CNMV has for some time maintained an informal exemption permitting passive marketing where:

 Contact was initiated by the investor and not by the fund, which can be documented

 Generalized marketing presentations unrelated to any specific fund and that do not mention any fund

 Follow-up of an investor-initiated contact that is directed to a person or entity located outside Spain

 All active marketing/solicitation took place outside Spain and

 Execution of all subscription documentation must occur outside

Spain with the delivery of such documentation to a location outside Spain

84




Marketing is limited to no more than 25-30 financially qualified

Investors; financially qualified investors include:

 Banks

 Regulated investment businesses

 Insurance companies

 Pension funds and

 Large corporations

85



Marketing in Sweden

 The Swedish Financial Supervisory Authority does not consider marketing of financial products without the provision of advice to be an activity that requires authorisation or permission under Swedish law

 Accordingly, EU and non-EU marketers should be able to market units in funds in Sweden so long as they do not provide advice or recommendations concerning the merits of investing in the funds but only discuss the factual elements of the investment

 BUT fund subscriptions and redemptions must be accepted outside

Sweden to avoid deemed public offer and registration requirements

86

29



Marketing in Switzerland

 Switzerland has traditionally been one of the main target jurisdictions for managers marketing hedge funds – more than 5% of the entire invested funds of Swiss individuals and institutions are invested in hedge funds

 Swiss and overseas hedge funds may in principle be registered for public sale in Switzerland but in practice this is rarely done as such funds are subject to strict investment restrictions, limited leverage and quite onerous administration and other requirements

 Offshore funds therefore generally “privately placed” meaning in all cases no form of advertising, mass mailing, cold calls, roadshows

(or even NAV publication except by regulated local intermediaries) unless directed at Qualified Investors only

87




 Offshore unregistered funds can be marketed in response to unsolicited enquiries and to Qualified Investors being:

 regulated financial institutions (banks, brokers and fund managers, insurance companies)

 pension funds with professional treasury management

 companies with professional treasury management



HNWIs with minimum net wealth of CHF2m and companies owned by such HNWIs that themselves have CHF2m in net financial assets



“Qualified Asset Managers”

 individuals who have discretionary management mandates with regulated financial institutions or Qualified Asset Managers

88




 Qualified Asset Managers – Swiss managers regulated by one of seven self-regulatory associations and complying with

Swiss Financial Market Supervisory Authority (“ FINMA ”)

Code of Conduct for Asset Managers of Collective

Investment Schemes

89

30



Marketing in United Kingdom

 Difficult to approach U.K. individuals otherwise than through an

FSA/EU MiFID authorised person, which permits such authorised persons to approach individuals they believe to be sufficiently knowledgeable and for whom the investment is suitable

 Both FSA/EU MiFID authorised and non-EU authorised persons can approach:

 Investment professionals

 High net worth companies

 Certified sophisticated investors

 Certified sophisticated venture capital funds

 One-off communications (not part of an organised campaign)

90

X.

Impact of Alternative Investment Fund

Managers Directive

 Passport

 Investor preference for regulated funds?

 “Brand potential” of AIFMD funds similar to UCITS recognition?

 Private placement rules remain until 2018

 But private placement rules could be tightened, and note jurisdictions that are already closed – e.g., France, Spain,

Italy

 Reverse solicitation – but how reliable is this?

91

XI. Impact of AIFMD – Passporting

 How much of a benefit will passporting really be?

 Passporting notification to home authority

 Needs to be accompanied by fairly extensive disclosure

 Able to market in no more than 20 working days

 Better than “host state” notification

92

31

XI. Impact of AIFMD – Use of Third Party

Marketers

 Not wholly clear whether marketing is a required activity of manager and therefore has to be delegated

 Appears that it does because rights to market given to manager not anyone else

 When marketing is delegated by manager:

 Manager to remain liable to fund and investors

 Manager required to monitor/supervise solicitation agent

 Appears to change the balance in this relationship

93

XII. Closed-End Funds

 Caught by AIFMD

 But can be marketed publicly under Prospectus

Directive if compliant – i.e., separate from AIFMD passport and therefore to the retail public

 May be appropriate for fund of funds, private equity, real estate and other more illiquid strategies

94

UCITs IV

Martin W. Cornish

95

32

XIII. UCITS

 Exempted from AIFMD

 “Newcits”

 Eligible assets rules – relevant to hedge funds and hedge fund of funds

 UCITS IV:

 Procedures for mergers of UCITS funds

 Master-feeders available for first time

 Standardised “Key Features Document”

 Management company passport

 Simplified/improved passporting mechanisms

96

33

6

U.S./U.K. Enforcement Developments

7 July 2011


Robert Hadley – Partner, London

Cary J. Meer – Partner, Washington, D.C

DC-9218773v2


I. Overview of U.S. Enforcement Issues

 SEC Enforcement Division is reinvigorated since the

Madoff and Stanford scandals

 Undergone internal reassessment and reorganization

 Division has created five specialized units:

 Asset management

 Market abuse

 Structured and new products

 Municipal securities and public pensions

 Foreign corrupt practices

 Asset management unit focuses on enforcement investigations and proceedings relating to investment advisers, investment companies, hedge funds, and private equity funds

1

I. Overview of US Enforcement Issues (cont.)



The Department of Justice has also been active in securitiesrelated cases



Preet Bharara, U.S. Attorney for the Southern District of NY, has been particularly active in bringing insider trading and other cases



Many investigations and actions are the result of cooperation among government agencies

Preet Bharara

2

1

I. Overview of U.S. Enforcement Issues (cont.)



Traditional areas of regulatory and liability risk are getting increased attention:

 Insider trading

 Due diligence processes

 Valuation practices

 Performance advertising



Policies and procedures

 “Pay-to-play” practices

3

I. Overview of U.S. Enforcement Issues (cont.)

 Recent sweep activity reveals new concerns that may result in future enforcement actions:



Foreign Corrupt Practices Act

 Use of social media

4

Adviser as Fiduciary

Cary J. Meer

5

2

II. The Adviser as Fiduciary

Areas of regulatory and liability risk often relate to an adviser’s fiduciary duties to clients:



The duty of care: to act reasonably, in good faith, and with the same degree of care as a prudent person would act in his or her own affairs

 The duty of loyalty: to act in your clients’ interest and not to benefit improperly from the relationship

6

II. The Adviser as Fiduciary (cont.)

 An adviser is a fiduciary with respect to its clients – See

SEC v. Capital Gains Bureau , 375 U.S. 180 (1963)

 The SEC has the authority to police fiduciary duties of advisers under the Investment Advisers Act

 SEC is currently studying and may propose to clarify advisers’ duties of care and loyalty

 SEC has proposed recommendations to harmonize adviser and broker-dealer fiduciary duties when providing investment advice

7

II. The Adviser as Fiduciary (cont.)

 Many of the topics of enforcement stem from fiduciary issues

 Duty of care











Due diligence

Valuation

Monitoring placement agents

Policies and procedures

Performance calculation disclosure

 Duty of loyalty

 Insider trading









Inflated valuations

Deception

Unlawful conduct

Undisclosed arrangements

8

3

Insider Trading Issues


III. Insider Trading

 Insider traders are subject to civil SEC enforcement action and/or parallel criminal prosecutions for securities fraud

 Their firms and supervisors are also subject to

SEC enforcement actions for aiding and abetting securities fraud and/or failure to supervise

 Firms can be subject to SEC or FINRA enforcement actions for failure to maintain policies and procedures to reasonably detect or prevent insider trading

 Investors can bring civil claims for insider trading

10

9

III. Insider Trading (cont.)

The federal securities laws have been applied by the courts, the SEC and DOJ to prohibit each of the following activities:

 Trading by an insider while in possession of material nonpublic information

 Trading by a non-insider while in possession of material nonpublic information, where the information was disclosed to the non-insider either improperly (i.e., as a tip) or with an explicit or implicit understanding that the non-insider would keep it confidential or

 Communicating material non-public information to others in breach of a fiduciary duty (aka “tipping”)

11

4


Raj Rajaratnam and Galleon Management, LP, filed 16 October 2009 – guilty verdict, 11 May

2011

 Billionaire hedge fund manager convicted of 14 counts of securities fraud and conspiracy

 Rajaratnam allegedly received insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton, Sun Microsystems and Clearwire

 Prosecutors alleged his profits and losses avoided totalled

$63.8 million, a small amount compared to the $7 billion his firm managed

 The government used wiretaps extensively in building and presenting the case against Rajaratnam and related parties

12


 Galleon case has resulted in more than two dozen arrests and 21 guilty pleas to date

 Those implicated include senior executives at IBM,

Intel, and McKinsey, hedge fund managers, lawyers, and investment professionals as well as a Goldman Sachs director

Rajaratnam in Happier Times

13


 Danielle Chiesi was a key source of information for

Rajaratnam







Worked at hedge fund manager New

Castle Funds

Has pled guilty and is awaiting sentencing on three counts of conspiracy for passing inside information obtained through sexual relationships with company executives

Claimed her boss used their “toxic” sexual relationship to manipulate her into passing information

 Chiesi’s boss (the founder of New Castle Funds, Mark

Kurland) has also pled guilty and is serving two years in prison

14

5


 Additional convictions related to the Galleon case were handed down earlier last month



Zvi Goffer – 14 counts of conspiracy and securities fraud

 Emanuel Goffer and Michael Kimelman

– each convicted of one count of conspiracy and two counts of securities fraud



Zvi Goffer was a former Galleon trader who started his own firm with his brother and Kimelman

 Obtained information from traders, company executives and others at

“expert networking firms”

 Goffer nicknamed “Octopussy” for his many and varied sources of insider information

Zvi “Octopussy” Goffer

15


 The Department of Justice has brought additional cases related to inside information passed through expert network firms

 “Expert networks” such as Primary Global Research

(“PGR”) are at the core of the inquiry

 On 20 June 2011, a PGR consultant, Winnie Jiau (nicknamed

“Poohster” by her co-conspirators), was convicted of passing inside information and faces up to 25 years in prison

 In taped conversations, she used code words such as “sugar”

(money payments and other gifts made to her), “recipes”

(confidential information) and “cooks” (tipsters in companies)

 More than a dozen persons related to her insider trading practices pled guilty and cooperated with investigators

 Another PGR consultant, Don Ching Trang, pled guilty to one count of conspiracy to commit securities fraud and one count of conspiracy to commit wire fraud

16


 Suspicious trading cases

 SEC has been pursuing cases based entirely on the suspicious timing of trades

 SEC v. One or More Unknown Purchasers of Securities of

Telvent GIT S.A. – action based on extremely large purchase of call options immediately prior to an announcement of an acquisition





Similar cases:





SEC v. One or More Unknown Purchasers of Martek Biosciences

Corporation , Case No. 10 Civ. 9527 (S.D.N.Y. Filed Dec. 22,

2010)

SEC v. One or More Unknown Purchasers of Options of

InterMune, Inc.

, Case No. 10-Civ. 9560 (Filed Dec. 23, 2010)

The SEC has been able to freeze assets based on little more than the suspicious timing and size of trades

17

6


 The SEC is bringing cases involving more than just equities:

 Credit default swaps: SEC v. Jon-Paul Rorech (defense verdict returned)

 Rorech allegedly learned of restructuring of an upcoming bond offering, which would cause price of credit default protection to rise, and allegedly purchased credit default swaps



Municipal bond fund: David W. Baldt (SEC administrative judge found for the SEC; Baldt has stated he plans to appeal)

 Baldt managed a municipal bond fund. He allegedly knew municipal bonds held by fund were losing value and redemptions were upcoming; he allegedly tipped family members to sell shares in fund based on that information



Treasury bonds: SEC v. Steven E. Northern (SEC verdict returned 22

June 2009)

 Northern allegedly learned confidential information regarding issuance of 30-year

Treasury bonds at Treasury briefing and allegedly tipped consulting clients who traded on the information

 Auction rate securities: David Harris Shulman (NY AG administrative settlement)

 Shulman, a UBS executive, allegedly sold student loan ARS after learning of distress in UBS auctions process

18

Due Diligence

Cary J. Meer

19

IV. Due Diligence

 Cornerstone of the duty of care

 Inquiry into details of investment

 Gathering of facts to evaluate

 Investigation of “red flags”



Must follow the processes you state that you will follow

 Continuing obligation



Implied and express representations

20

7

IV. Due Diligence: Case Studies

 In the Matter of AXA Rosenberg Group LLC ,

Administrative Proceeding No. 3-14224 (settled action)

 SEC alleged failure to perform adequate due diligence on

AXA’s own quantitative investment program

 Adviser discovered an error in its quantitative program in

2009 that dated back to 2007

 SEC alleged:

 The error effectively eliminated a key risk management element of the firm’s program





The error had caused over $210 million in losses

Adviser had not conducted independent quality control tests over work of certain programmers

 The adviser allegedly concealed the error after it was discovered and allegedly misrepresented the cause of losses in client’s portfolio, blaming market volatility and other factors

21

IV. Diligence: Case Studies: (cont.)

 Fairfield Greenwich

 Fund of funds whose clients ranged from private funds, other fund of funds, institutional investors, pension and endowment funds and high-net worth individuals

 Allegedly represented to investors that it engaged in rigorous due diligence





 manager “assesses the controls managers have in place” manager “often suggests improvements” manager due diligence would allow it to detect fraud

 Invested 95% of client assets with Madoff

22

IV. Due Diligence: Case Studies (cont.)

 Settled and agreed to pay civil penalty and restitution to

Massachusetts investors; other suits pending

 The settlement order describes

 failure to follow its own stated due diligence policies

 on some points, a complete lack of any due diligence

 red flags ignored by Fairfield Greenwich

 Fairfield Greenwich principals facing a significant number of civil suits

23

8

Valuation Issues


24

V. Valuation

 The Director of the SEC’s Office of Compliance and Inspections (OCIE) recently stated that:

“[a]dvisers’ valuation practices are a top priority, particularly when the adviser manages difficult to value instruments, such as derivative-based investment products that do not routinely trade on exchanges or in other established markets”

 He further noted that OCIE will look “for situations where advisers mark positions up to collect higher fees”

- Carlo V. di Florio, Remarks at the IA Watch Annual IA

Compliance Best Practices Seminar (March 21, 2011)

25

V. Valuation (cont.)

 The SEC’s Enforcement Division (particularly the new Asset Management Unit) is also focusing on valuation issues

 In the asset management area, the Director of the

Division of Enforcement recently stated that the

Division “must increase [its] understanding of issues related to valuation of illiquid portfolios, false performance claims, preferential redemptions, and high-risk emerging products”

 Given the liquidity crisis in 2008 and its persistent effect on certain asset classes, more valuation cases will likely be forthcoming

26

9

V. Valuation Case Studies

SEC v. Southridge Capital Management (Lit. Rel.

21790 (25 October 2010))

 Manager allegedly held an investment at acquisition value and charged fees based on that value, despite allegedly knowing that it was worth far less

 The complaint alleges that using the acquisition value violated the valuation policies stated in the offering documents

 Southridge was also sued by the Connecticut

Attorney General

27

V. Valuation Case Studies (cont.)

SEC v. ICP Asset Management , LLC (Lit. Rel. 21563

(21 June 2010))

 SEC alleges investment adviser directed more than a billion dollars in trades at inflated prices

 These trades at inflated prices allegedly increased the advisory fees paid to ICP and were used to prevent losses for other clients

28

Performance and Performance Advertising

Cary J. Meer

29

10

VI. Performance and Performance Advertising

 The SEC has created a “Hedge Fund Suspicious

Performance Initiative”

 The Enforcement Division’s Asset Management Group has developed methodologies to identify funds with “outlier” performance

 Such firms are likely to be subject to further investigation

 Aside from cases of blatant misrepresentation, calculation of performance and performance advertising are perennial favorites of the inspection and enforcement staff

30

VI. Performance and Performance Advertising

(cont.)

Recent SEC cases concerning performance claims

 SEC v. Mack (Lit. Rel. 21731 (4 November

2010))

 Through his advisory firm, Easy Equity Asset

Management, Inc., Mack touted double-digit performance

 SEC alleges that “the representations about prior performance were inflated, overstated, and false”

31

Policies and Procedures


32

11

VII. Policies and Procedures

 Examiners and enforcement staff are looking for fulsome, tailored and effectively implemented policies and procedures to prevent violations of the securities laws

 Such policies are required under the Investment Advisers

Act –

 Rule 206(4)-7 – requires registered advisers to:

 Appoint a Chief Compliance Officer responsible for compliance program

 Adopt and implement written policies and procedures reasonably designed to prevent violation, by the adviser and its supervised persons, of the Investment Advisers Act

 Annually review those policies and procedures

 Rule 204A-1 – requires a registered adviser to adopt a code of ethics requiring certain personal holdings and transaction reports from personnel and pre-clearing of certain personnel trades, among other things

33

VII. Policies and Procedures (cont.)

 The SEC has brought a number of enforcement cases alleging that processes were not adopted, not followed or not enforced:

 In the Matter of Wunderlich Securities, Inc., Administrative

Proceeding No. 3-14403 (27 May 2011) – adviser did not maintain policies and procedures required for its first year as a registered adviser and relied on an untailored, off-the-shelf model, also failed to adopt and implement a code of ethics

 In the Matter of Commonwealth Equity Securities, LLP ,

Administrative Proceeding No. 3-13631 (29 Sept. 2009) – dual registered broker/adviser settled action alleging failure to maintain sufficient and reasonable policies and procedures to protect investors’ confidential information

34

Pay-to-Play

Cary J. Meer

35

12

VIII. Pay-to-Play: New/Old News



Charges brought against advisers and placement agent for participating in “pay-to-play” in obtaining state investment advisory business

 California and New York City have aggressive rules



SEC has new regulations and investigations

 Common theme: SEC alleged that advisers did not monitor their placement agents’ conduct

36

VIII. Pay to Play Cases – Key SEC Allegations

(cont.)

 Quadrangle Group – private equity firm sued by regulators; repaid $7 million to New York Common Retirement Fund

(NYCRF)

 Riverstone Holdings – private equity firm that hired a placement agent, repaid $30 million in management fees to NYCRF

 Pacific Corporate Group – private equity group used placement agent implicated in pay-to-play scandal; repaid $2 million in fees

 HM Capital Partners – private equity firm that, without knowledge of wrongdoing, hired placement agent involved in scandal; repaid $1.3 million in fees

 GKM Newport – fund of funds manager that compensated placement agent implicated in pay-to-play scandal; repaid approximately $1.6 million in fees

37

VIII. Pay to Play (cont.)

 The new SEC “pay-to-play” rule effectively requires advisers to monitor and limit employee political contributions

 States and municipalities have also adopted regulations that either ban the use of placement agents and/or require advisers or referral agents to register as lobbyists

38

13

Developments in FSA

Enforcement 2010/2011:

Priorities, Targets and

Activities

Robert Hadley

39

IX. FSA Enforcement 2010/2011

Promised for 2010/2011

 Significant investment

 “Credible Deterrence"

 Outcomes-focused

 Higher fines - new penalties policy

 Individuals/senior management

 More criminal cases

 Market confidence - market abuse especially insider dealing still an enforcement strategic priority

 More inter-agency cooperation

40

IX. FSA Enforcement 2010/2011 (cont.)

 22.6% increase in Enforcement and Financial

Crime budget (this year another 3%)

 Further 55 staff within Enforcement

 Implemented new penalty regime

 Financial Services Act 2010: additional powers

 Formalised information-sharing arrangements

Memoranda of Understanding – e.g., FINRA, FRC

41

14

IX. FSA Enforcement 2010/2011 (cont.)

New Penalties Policy (From 6 March 2010)

 Step 1: Disgorgement of profits

 Step 2: Seriousness

 Firms - 0-20% of “relevant income”

 Individuals for non-market abuse - 0-40% of “relevant income”

 Individuals for market abuse - the greater of:

 0-40% of last 12 months’ gross income where abuse was in the course of employment or

 0-4 x the profit made/loss avoided or

 £100,000 (only for most serious – e.g., deliberate market abuse)

 Step 3: Mitigating and aggravating factors

 Step 4: Adjustment for deterrence

 Step 5: Settlement discount

 Reductions for Serious Financial Hardship

42

X. Financial Services Act 2010

 New enforcement powers to:

 restrict or suspend the carrying on of regulated activities for up to 12 months

 suspend or impose restrictions on authorised/approved persons for up to two years

 impose a financial penalty at the same time as cancelling a firm’s permission

 penalise any person who performs a controlled function without approval

 impose financial penalties on persons who breach short selling prohibition rules/disclosure requirements and

 publish decision notices ( Unwin and Wright )

43

Number of FSA Fines

90

80

70

60

50

40

30

20

10

0

57

46

2008-2009

2009-2010

Financial Year

83

2010-2011

Source of Figures: FSA Annual Report 2010/11, Appendix 2

44

15

Total Value of FSA Fines

98.5

100

90

80

70

60

50

40

30

20

10

0

27.5

33.6

2008-2009

2009-2010

Financial Year

2010-2011

Source of Figures: FSA Annual Report 2010/11, Appendix 2

45

FSA ENFORCEMENT 2010/11

Final Notices

Firms

Individuals

Financial Penalties

Public Censure

Prohibitions

Cancellations

Variation of permissions

Withdrawal of Approval

1 April 2010 – 31 March 2011

196

72

124

83

8

71

67

13

14

46

2010/11: A Year of Firsts and Records

 Record £98.5 million in financial penalties

 Highest fine to date (£33.3 million)

 Highest fine to date against an individual (£2.8 million)

 First decision notices published while appeals ongoing

 First High Court injunction restraining an individual from committing market abuse

 Longest prison sentence for insider dealing obtained by FSA (3 years 4 months)

 First public censure of a sponsor in relation to the Listing Rules

 First criminal conviction for boiler room fraud

 First simultaneous multi-jurisdictional operation (with German authorities)

47

16

XI. Insider Dealing – Criminal: First Cases

 McQuoid/Melbourne – 8 months/8 months suspended

 Court of Appeal endorsed FSA view that insider dealers should not expect only regulatory as against criminal sanction

 Uberoi/Uberoi – 2 years/1 year

 Calvert – 21 months



Hatcher (co-operating witness) FSA fine of £56,098 – the net profit from the abuse

 McFall/Rimmington/King – Acquitted

48

XI. Insider Dealing – Criminal 2010/2011

 Ahmad – 10 months suspended/community service/£50,000 fine

 Final Notice Fabio Massimo De Biase – Statement of

Principle 1 (integrity) Prohibition. Disgorgement. £500,000 penalty – reduced for hardship/discount

 Rollins – Also Money Laundering – 27 months/£197,000 confiscation (for £50,000 loss avoidance)

 Littlewood/Littlewood/Sa'id – 3 years 4 months/12 months suspended/2 years and £640,000 disgorgement

49

XI. Insider Dealing - Pending

 Shah/Patel/Shah/Shah/Shah/Mustafa/Saini – Trial

September 2011

 Sanders/Sanders/Hossain/Swallow/Buck

 City of London Police matter

 FSA has closed their firm ( Blue Index )

 Parallel investigation with SEC/DOJ/FBI leading to

SEC charges ( Mr. and Mrs. McLellan )

 Rupinder Sidhu

 Simultaneous investigation with German authorities – search warrants executed in U.K. and Germany

November 2010

50

17

XI. Insider Dealing – Market Abuse

 Robin Chhabra / Sameer Patel – £95,000/£95,000 and £85,541 disgorgement. Prohibitions

 Anjam Saeed Ahmad – Disgorgement only

£131,000, following plea to the criminal charge

 William Coppin/Perry Bliss – £70,000/£60,000

(reduced to £30,000 for hardship). Prohibitions

51

XII. Other Criminal Matters

 Stuart Pearson – Langbar (Serious Fraud Office) – 12 months Confiscation pending

 Pending trial of four individuals in relation to iSoft plc

(s.397 FSMA) scheduled for September 2011

52

XIII. Market Abuse – Share Price Manipulation

 Simon Eagle – £2.8 million (£1.3 million disgorgement and £1.5 million penalty)/prohibition



Graham Betton – Prohibition. Financial penalty pending

 Stephen Sotiriou – £200,00/ Jason Robins – £50,000/ Winterflood

Securities Limited – £4 million

See also

 Samuel Kahn – £1.263 million (less 30%) and injunction

Previously bankrupted by FSA for boiler room activity

 Barnett Alexander – £1million (less 30%) £322,00 restitution and injunction

 Henry Cameron (inaccurate announcements to the market) –

£500,000 (less 30%)

53

18

XIV. Miscellaneous

 Disclosure/transparency/listing rules – 3 cases

 Client money – 5 cases



Transaction reporting – 6 cases

54

XV. Senior Management

 David Jones – Northern Rock Asset Management plc

 Finance Director

 Inaccurate statements re loan impairments

 £400,000 (less 20%). Prohibition

 David McGrath – ActivTrades plc

 Compliance Officer and MLRO

 Firm fined for breaches of client money rules

 FSA “does not consider that Mr. McGrath deliberately caused” the firm to breach requirements/standards

 Prohibition. £20,000 (reduced to £3,000 after 30% discount and for hardship)

55

XVI. Systems and Controls

Data Protection



Zurich Insurance plc (UK) – £3.25 million (less 30%). Highest data security fine

Anti-Money Laundering/Sanctions Screening



RBS Group – £8 million (less 30%)

General IT Systems

 Scottish Equitable plc – £4 million (less 30%)

Complaints Handling



RBS - £4 million (less 30%)



Bank of Scotland – £5 million (less 30%)

56

19











XVII. Regulatory Change

Financial Services Act 2010 – “ Twin peaks ” approach



Prudential Regulation Authority (PRA)

 Financial Conduct Authority (FCA) – the enforcement arm

 Financial Policy Committee (FPC)

Internal structure change



Prudential Business Unit and Conduct of Business Unit

EU regulation

 ESRB and three ESAs: EBA, EIOPA and ESMA



Minimum common standards for administrative sanctioning (criminal still under consideration)

Review of Money Laundering Regulations

Review of Market Abuse Directive

 Expand the scope



Delays to announcements

 Attempted market manipulation

 OTC derivatives

57

XVIII. Promises for 2011/2012

 Credible deterrence and the use of enforcement

 Continued focus on:

 reducing market abuse (particularly insider dealing)

 tackling financial crime

 protecting consumers

 Further implementation of new penalties policy

 In 2011 investigations expected to include:

 mis-selling of structured products and

 protection of client money or client assets

58

20

7

U.S./U.K. Regulation of Derivatives/OTC

Markets/Swaps

7 July 2011

Stephen H. Moller – Partner, London

Anthony R. G. Nolan – Partner, New York

NY-891217v3


Introduction And Overview



G20 Pittsburgh Summit: broad regulatory themes

 EU Regulation on OTC Derivatives, Central

Counterparties and Trade Repositories (“EMIR”)

 Dodd-Frank Act: Title VII

 Who's your regulator?

1

Clearing, Collateral And Capital

 Which types of derivative are subject to clearing?

 Who is subject to the clearing obligation?



Back loading of pre-existing Swaps

 Cleared Swaps – collateral and capital

 Non-cleared Swaps – collateral and capital

2

1

Reporting And Regulation

 When does the reporting requirement apply?

 When do parties to swap transactions need to be regulated?



What are the applicable conduct of business rules?



What is the territorial scope?

 What scope is there for mutual recognition?

3

Specific Implementation Issues



The 16 July Issue under the Dodd-Frank Act

 Pension Funds under EMIR

 How does clearing work in practice? Do you have to become a member of a clearing system?

 Will central clearing reduce risk?



Is your collateral safe?

 Organisational, compliance and transactional challenges

4

Conclusion

 EU Timetable

 U.S. Timetable



Closing remarks

5

2

8

AIFMD – Application to Non-EU Funds and Non-EU

Managers and Extraterritorial Aspects

7 July 2011




DC-9221378


Background

 UCITS/UCITS IV

 ISD/MiFID

 FSA Authorisation

 EU Member State Private Placement Regimes

 AIFMD

 A new regime for VC funds?

2

Scope

 EU-established manager of AIF-registered office in a

Member State

 Non-EU AIFMs marketing AIF into the EU

 (from 2015) non-EU AIFMs that manage EU AIF

3

Which Entity is the AIFM?

 Regular business is managing one or more AIFs

 Only one per fund

 Can be internal or external

 Excludes firms providing advice only

 Must engage in both portfolio management and risk management

4

Which Entity is the AIFM? (cont.)

 Can delegate but cannot become “letter-box entity”

 AIFM liability to AIF and investors unaffected by delegation

 Managers with EU and non-EU entities may have a choice: who to designate as AIFM?

 E.g., can EU-based sub-adviser of U.S. Manager be designated as the AIFM?

 If U.S. parent is delegate, must be “authorised or registered for the purpose of asset management and subject to supervision”

5

Application of AIFMD if Fund Is Non-EU, But

Manager Isn’t



Whole Directive applies to manager except depositary and annual report provisions if not marketed into EU

 If marketed into EU (via private placement exemptions), whole Directive applies to manager but modified depositary provisions – exemption from provisions re depositary location and liability

 Passport to market to “professional investors” in the EU not available until 2015

 Must comply with whole Directive to get passport

6

Application of AIFMD if Fund and Manager are

Non-EU

 E.g., Cayman Fund, U.S. Manager

 Directive does not apply if no marketing into EU, or only

“reverse solicitation” (i.e., no direct or indirect offering or placement)

 Can privately place if:

 Manager complies with A.22 (Annual Report), A.23

(Disclosure to Investors) and A.24 (Reporting to

Regulator)

 Also need three-way co-operation agreements between regulators (including regulator in each

Member State where fund marketed)

7

Article 22 (Annual Report)

 Balance sheet and income statement (in accordance with accounting standards in jurisdiction of fund)

 Remuneration disclosures – total amount of remuneration for financial year, split into fixed and variable remuneration, paid by the AIFM to its staff, and number of beneficiaries; also, where relevant, carried interest

 Aggregate amount of remuneration broken down by senior management and members of staff of the AIFM who have a material impact on the risk profile of the AIF

 Audit meeting international auditing standards in fund jurisdiction

8

Article 23 (Disclosure to Investors)

 Requirements appear to require disclosure to all investors

(not just EU)

 Detailed information similar to what would be in prospectus anyway, but need to notify material changes therein

 Some details may go beyond what would be provided anyway – e.g., types and sources of leverage; description of liquidity risk management, including the redemption rights in normal and exceptional circumstances; description of

“preferential treatment” received by any investor; information on the transfer of assets to the prime broker and re-use

 Periodic disclosures required also – e.g., on risk management systems, total amount of leverage employed

9

Article 24 (Reporting to Regulator)

 Principal exposures; main instruments being traded

 Risk management systems employed; arrangements for managing liquidity

 Detailed information on use of leverage if “employing leverage on a substantial basis” – including 5 largest sources of leverage and amount of leverage from each

10

Application of AIFMD if Fund Managers are

Non-EU

 Passport to market to “professional investors” in the

EU not available until 2015

 Manager needs to be authorised under Directive and comply with it all

 Get out if:

(i) Impossible to combine compliance with compliance with mandatory provision of local law

(ii) Local law has an “equivalent rule” having the same regulatory purpose and offering the same level of protection to investors

 Which jurisdictions will pursue “equivalence”?

11


Non-EU (cont.)

 Manager needs “legal representative” in EU to take compliance responsibility; does not need to be a subsidiary

 How viable is this approach with regard to U.S.

Managers?

12


Non-EU (cont.)

 Are there any roadblocks preventing U.S. Manager from being compliant?

 Depositary requirements? – can have Cayman depositary (but not U.S. depositary) if Cayman Fund subject (inter alia) to there being “effective prudential regulation and supervision to the same effect as that under EU law”

13


Non-EU (cont.)

 Remuneration provisions (Annex II)

 Leverage (Article 15(4); Article 25) – Maximum level of leverage to be set; extent of right to reuse collateral; regulators able to impose limits

 Valuation (Article 19) – “proper and independent valuation”; valuation task “functionally independent” from portfolio management; verification by external valuer may be required

14


Non-EU (cont.)

 Capital requirements (Article 9) – initial capital of at least

€125,000 plus 0.02% of AUM in excess of €250m, up to

€10m maximum

 PI cover or additional capital to cover potential liability risks arising from professional negligence

15

Managed Funds Association Letter to ESMA

 Called for coordinated approach, which would be particularly important for global fund managers required to expend significant resources responding to requests for data

 AUM should include only assets of EU-based funds, assets of non-EU based funds beneficially owned by EU investors and assets managed out of a place in the EU

 Suggests using approach for calculating leverage/exposure used under UCITS Directive

 Might a more effective way to collect information be to gather it from prime brokers and other market participants?

16

9

U.S. Registered Funds Update

7 July 2011

Clifford J. Alexander – Partner, Washington, DC

DC-#9212288


I. General

 SEC Budgetary Issues:

 Dodd-Frank Act



Congressional “Defunding”

 SEC Responsibilities Under Dodd-Frank Act

 Studies

 Rules



SEC Amendments to Custody Rule

 SEC Commissioner Recommends Capital

Requirements for Investment Advisers

1

I. General (cont.)



SEC Political Contribution (“Pay-to-Play”) Rule

Issues for Registered Fund Advisers

 Proposed Changes to CFTC Rule 4.5 and

Registered Investment Companies

 Jones v. Harris and Janus Cases



Other Registered Investment Company Issues

2

DC-#9212288v1 1

II. Money Market Funds

 SEC Adopts Money Market Fund Rule

Amendments to Tighten Requirements

 President’s Working Group on Financial

Markets Report on Money Market Funds

 ICI Proposes Money Market Fund Liquidity

Facility



Arguments Over Money Market Fund Reform

3

III. Investment Adviser Exams



SEC Staff Announce New Strategy for

Investment Adviser Exams

 Whistleblower Program Issues for Registered

Investment Companies

4

IV. Rule 12b-1 Reform

 Proposed Rule 12b-1 Reform

 ICI and Independent Directors Council

Comment Letters on Mutual Fund Distribution

Fees

5

DC-#9212288v1 2

Annual Investment Management Conference

Annual Investment

Management

Conference

Table of Contents

Program Agenda

Speaker Biographies

Presentations

U.K. Hot Topics

U.S. “Hot Topics” in Investment Adviser Regulation

International Marketing

U.S./U.K. Enforcement Developments

U.S./U.K. Regulation of Derivatives/OTC Markets/Swaps 7

AIFMD — Application to Non-EU Funds and Non-EU Managers and Extraterritoral

Aspects

8

U.S. Registered Funds Update 9

5

6

3

4

Tab

1

2

Thursday, 7 July 2011

–

K&L GATES ANNUAL INVESTMENT MANAGEMENT CONFERENCE

Critical Legal and Regulatory Issues for Investment Managers and Funds

8:30 – 8:45 REGISTRATION AND BREAKFAST

8:45 – 9:00 WELCOME AND OVERVIEW OF PROGRAM

9:00 – 10:00 U.K. HOT TOPICS

—

—

Featured Presenters:

Thursday, 7 July 2011

–

10:00 – 11:15 U.S. “HOT TOPICS” IN INVESTMENT ADVISER REGULATION

—

Featured Presenters:

11:15 – 11:30 BREAK

Thursday, 7 July 2011

–

11:30 – 12:30 INTERNATIONAL MARKETING

12:30 – 13:15 LUNCHEON

13:15 – 14:00 U.S./U.K. ENFORCEMENT DEVELOPMENTS

14:00 – 15:00 U.S./U.K. REGULATION OF DERIVATIVES/OTC MARKETS/SWAPS

15:00 – 15:15 BREAK

Thursday, 7 July 2011

–

15:15 – 16:00 AIFMD — APPLICATION TO NON-EU FUNDS AND NON-EU MANAGERS

AND EXTRATERRITORAL ASPECTS

16:00 – 16:45 U.S. REGISTERED FUNDS UPDATE

16:45 RECEPTION

Clifford J. Alexander

Clifford J. Alexander

Clifford J. Alexander

Clifford J. Alexander

Martin Cornish

Ian Fraser

Robert V. Hadley

Robert V. Hadley

Cary J. Meer

Stephen Hans Moller

Philip J. Morgan

Philip J. Morgan

Anthony R.G. Nolan

Anthony R.G. Nolan

Choo Lye Tan

Choo Lye Tan

Choo Lye Tan

The Dodd-Frank Act and other new laws, regulations and developments are drastically reshaping U.S. investment adviser and private fund regulation

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