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

Dodd-Frank Update: Legal & Technology Requirements for Firms

Agenda
Dodd-Frank & Investment Adviser Registration
Technology as Part of an Adviser’s Compliance Program
Technology Best Practice Guidelines

Dodd-Frank and Investment Adviser Registration

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

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
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

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”

State Issues
Individual state registration requirements
Notice filings
Investment Adviser representatives

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

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

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

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.
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Technology in an Investment Adviser’s and Broker/Dealer’s Compliance Program

Two High Level Constituents in Compliance Management
Elements in Compliance Program Operations
Technology Components in a Compliance Program
Benefits of Automated Systems
Agenda

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

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

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

Benefits of Automated Systems
After…
Compliance Program Before…
Organize
So You Can
Analyze
Provides
Benefits:
Reduces Costs
Reduces Risk
Saves Management Time
Attracts Assets

Technology in an Investment Adviser’s and Broker/Dealer’s Compliance Program

Technology Best Practice Guidelines

Dodd-Frank Technology Implications
Specific technology system safeguards not defined
Other portions of Act are more specific
Imply best practices
Investor requirements dictating expectations

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.

Technology Focus Areas

Disaster Recovery vs. Business Continuity

Five Steps to Business Continuity Planning
BCP Life Cycle

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

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

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

Considerations for Archiving

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

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