Dodd-Frank Update: Legal & Tech Requirements for Hedge Funds

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Learn about the Dodd-Frank Wall Street Reform and Consumer Protection Act and it's implications on hedge funds and private equity firms, including registration requirements and technology best …

Learn about the Dodd-Frank Wall Street Reform and Consumer Protection Act and it's implications on hedge funds and private equity firms, including registration requirements and technology best practice guidelines.

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  • Introduce Eze Castle Integration... Founded in 1995 Offices across the world, including 8 offices in the U.S. and locations in London, Geneva and Singapore Over 550 hedge fund clients, managing $300B+ of assets Services and solutions to meet the needs of hedge funds and alternative investment firms, everything from PCs and critical infrastructure to backup and storage solutions, to business consulting and project management
  • There are two major activities for compliance Defining what you have to do as part of your compliance program (Advisory)Monitoring what you have to do (Controls)You define what you have to do with some or all of the inputs

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  • 1. Dodd-Frank Update: Legal & Technology Requirements for Firms
  • 2. Agenda
    Dodd-Frank & Investment Adviser Registration
    Technology as Part of an Adviser’s Compliance Program
    Technology Best Practice Guidelines
  • 3. Dodd-Frank and Investment Adviser Registration
  • 4. Investment Advisers - General
    An investment adviser is any person who engages in the business of advising others or providing analyses or reports concerning securities for compensation.
    Includes hedge fund and private equity fund managers
    Affirmative duty of utmost good faith, and full and fair disclosure of all material facts
    The Investment Advisers Act of 1940 requires “investment advisers” to register with the SEC unless a specific exemption is available.
    End of private adviser exemption under Dodd-Frank
  • 5. Who Must Register
    Advisers solely to Private Funds (e.g., hedge funds and private equity funds) must register with SEC if AUM are $150 million or more.
    Advisers to Private Funds and other accounts must register with the SEC if AUM are $100 million or more.
    Advisers to Private Funds and other accounts must register with state if AUM is between $25 million to $100 million. However, will instead be required to register with the SEC if:
    • Adviser is not required to register with the state securities regulator as an investment adviser, or
    • 6. Adviser is required to register with the state securities regulator, but the Adviser is not subject to examination as an investment adviser by the state.
    Advisers to RICs and BDCs
    Adviser holds itself out to the public in the U.S. as an investment adviser
  • 7. New Exemptions
    Less than $150 million
    Venture capital funds
    Registered CTA
    Foreign private adviser
    Intrastate adviser, no funds
    Small business investment companies
    New category of “exempt reporting adviser”
  • 8. State Issues
    Individual state registration requirements
    Notice filings
    Investment Adviser representatives
  • 9. Registering with the SEC
    Compliance Infrastructure
    Chief Compliance Officer
    Policies and Procedures
    Prepare Form ADV
    Part 1
    Part 2
    Register
    IARD Entitlement and Filing Fees
    Filing Form ADV
    Going Effective
  • 10. Selected Compliance Issues
    SEC Examinations
    Compliance Policies and Procedures
    Emphasis on procedures and training
    Committees
    (risk, valuation, brokerage, compliance)
    Trading practices
    (trade allocation, trade errors, best execution, soft dollars)
    Insider Trading
    Pay-to-Play
    Books and Records
    Code of Ethics
  • 11. Code of Ethics
    Required:
    Annual holdings report
    Quarterly transaction reports
    Pre-approval for IPOs and limited offerings
    Insider trading policies
    Best Practices (not required)
    Pre-approval of most securities transactions
    Provision of duplicate brokerage statements
    Restrictions on gifts and entertainment
    Restrictions on outside activities and boards
    Access Person v. Supervised Person
  • 12. Circular 230 Disclosure: Internal Revenue Service regulations provide that, for the purpose of avoiding certain penalties under the Internal Revenue Code, taxpayers may rely only on opinions of counsel that meet specific requirements set forth in the regulations, including a requirement that such opinions contain extensive factual and legal discussion and analysis. Any tax advice that may be contained herein does not constitute an opinion that meets the requirements of the regulations. Any such tax advice therefore cannot be used, and was not intended or written to be used, for the purpose of avoiding any federal tax penalties that the Internal Revenue Service may attempt to impose.
    Boston
    Frankfurt
    Hartford
    Hong Kong
    London
    Los Angeles
    New York
    Orange County
    San Francisco
    Santa Monica
    Silicon Valley
    Tokyo
    Washington
    bingham.com
    © 2010 Bingham McCutchen LLP One Federal Street, Boston, MA 02110-1726 ATTORNEY ADVERTISING
    To communicate with us regarding protection of your personal information or to subscribe or unsubscribe to some or all of Bingham McCutchen LLP’s electronic and mail communications, notify our privacy administrator at privacyUS@bingham.com or privacyUK@bingham.com (privacy policy available at www.bingham.com/privacy.aspx). We can be reached by mail (ATT: Privacy Administrator) in the US at One Federal Street, Boston, MA 02110-1726 or at 41 Lothbury, London EC2R 7HF, UK, or at 866.749.3064 (US) or +08 (08) 234.4626 (international).
    Bingham McCutchen (London) LLP, a Massachusetts limited liability partnership regulated by the Solicitors Regulation Authority (registered number: 00328388), is the legal entity which operates in the UK as Bingham. A list of the names of its partners and their qualifications is open for inspection at the address above. All partners of Bingham McCutchen (London) LLP are either solicitors or registered foreign lawyers.
    Bingham McCutchen LLP, a Massachusetts limited liability partnership, is the legal entity which operates in Hong Kong as Bingham McCutchen LLP. A list of the names of its partners practicing in the Hong Kong office and their qualifications is open for inspection at the address above. Bingham McCutchen LLP is registered with the Hong Kong Law Society as a Foreign Law Firm and does not practice Hong Kong law. Bingham McCutchen LLP operates in Hong Kong in formal association with Roome Puhar, a Hong Kong partnership which does advise on Hong Kong law.
    This communication is being circulated to Bingham McCutchen LLP’s clients and friends. It is not intended to provide legal advice addressed to a particular situation. Prior results do not guarantee a similar outcome.
  • 13. Technology in an Investment Adviser’s and Broker/Dealer’s Compliance Program
  • 14. Two High Level Constituents in Compliance Management
    Elements in Compliance Program Operations
    Technology Components in a Compliance Program
    Benefits of Automated Systems
    Agenda
  • 15. Two Major Constituents in Compliance Programs
    Constituent 1: “Advisory” Deciding What Firm Needs To Do(Many Inputs!)
    Regulator’s Rules
    Legislation
    Expected Practices
    External Advisory (legal or compliance consultants)
    Regulators’ Reporting Requirements
    Regulators’
    “Show Me”
    Expectations
    Firm’s Culture
    Firm’s Products
    Risk Assessments
    Defines
    Firm’s Compliance Program (Policies and Procedures)
    Constituent 2: “Control”: Doing What Firm Said it was Going to Do
    Manual processes or technology tools to ensure policies and procedures are followed
  • 16. Elements in Compliance Program Operations
    New Client Qualification (including AML)
    Personal Trade Monitoring
    Other Code of Ethics and Conflict of Interest Management
    Calendar and Activity Management
    Document Management
    Case Management
    Email/Social Media Retention and Surveillance
    Trade and Fund Surveillance
    Books and Records
    Business Continuity Planning
  • 17. Technology Components in a Compliance Program
    Key Activities in Compliance Program
    Document Management incl. Policies & Procedures
    New Client
    Qualification
    Personal Trading
    Pre-Clearance, Rules, Employee Trades
    Compliance Program Management
    Case/Issue Tracking
    Client Complaints, Trade Errors, etc.
    Compliance
    Calendar
    Procedures, Filings, Reviews, Controls, Tests, Due Diligence, Attestations, Certifications
    Document & Report Review
    Marketing, Trade Reports, etc.
    Custom Forms, Questionnaires
    & Checklists
    Conflicts of Interest
    Disclosures & Review Gifts, Outside Activities, Political Contributions, etc.
    Surveillance
    Trading, Positions, Email, Social Media
    Key Underlying Technology Components
    CRM
    Books & Records
    Trading and Accounting
    Business Continuity Planning
    Data Storage & Retention
  • 18. Benefits of Automated Systems
    After…
    Compliance Program Before…
    Organize
    So You Can
    Analyze
    Provides
    Benefits:
    Reduces Costs
    Reduces Risk
    Saves Management Time
    Attracts Assets
  • 19. Technology in an Investment Adviser’s and Broker/Dealer’s Compliance Program
  • 20. Technology Best Practice Guidelines
  • 21. Dodd-Frank Technology Implications
    Specific technology system safeguards not defined
    Other portions of Act are more specific
    Imply best practices
    Investor requirements dictating expectations
  • 22. Dodd-Frank Guidelines for Others
    Record Keeping
    Each organization shall maintain records of all activities related to the business of the facility, including a complete audit trail —
    (i) in a form and manner that is acceptable to the Commission; and
    (ii) for a period of not less than 5 years.
  • 23. Technology Focus Areas
  • 24. Disaster Recovery vs. Business Continuity
  • 25. Five Steps to Business Continuity Planning
    BCP Life Cycle
  • 26. Disaster Recovery Blueprint
    Recovery Point Objective (RPO)
    The point in time to which you must recover data as defined by your organization
    Recovery Time Objective (RTO)
    The duration of time within which a business process must be restored after a disaster
  • 27. Other Disaster Recovery Considerations
    In-house vs. outsourced
    Traditional vs. managed service
    Redundancy of DR infrastructure
    Data Center security
    Managed by Business Continuity Professionals
    24x7x365 support and monitoring
    Frequency of testing
  • 28. Data Retention & Archiving Blueprint
    SEC advises advisers to retain all internal and external email and IM business communications
    Tape backup is not adequate!
    Sound practices for Archiving include:
    Retaining email and IMs for prescribed amount of time by law
    Storing data in WORM format
    Searchable indexing of files
    Keeping archived data on your own server and make sure it is easily available
  • 29. Considerations for Archiving
  • 30. Eze Castle Integration Overview
  • 31. 260 Franklin Street, 12th floor Boston, MA 02110 617-217-3000 www.eci.com