2014: The Year Ahead for Hedge Funds

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The presentation details a wide range of legislative and regulatory initiatives that are likely to impact the global alternative investment industry in the year ahead.

2014: The Year Ahead for Hedge Funds offers an overview of some of key dates and expected actions associated with market reforms around the globe. MFA is working to ensure that reform is consistent across jurisdictions.

Topics of note in the presentation include:

U.S.:
-Tax Reform
- JOBS Act
-CFTC Nominations and Reauthorization
-CPO/CTA Regulation
-FATCA

EU:
-EU Commissioner Selections
-MiFID II Legislation and Implementation
-Financial Transaction Tax
-EMIR/AIFMD

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2014: The Year Ahead for Hedge Funds

  1. 1. 2014: The Year Ahead for Hedge Funds Managed Funds Association | March 2014
  2. 2. Overview 2 Financial legislative and regulatory reform is occurring at a rapid pace globally. Around the world, leaders are working to ensure that market reform is consistent across jurisdictions. This presentation gives a general overview of some of the key dates – and expected actions – impacting the hedge fund industry in 2014. U.S. Legislative U.S. Regulatory EU Legislative EU Regulatory
  3. 3. Key U.S. Legislative Dates and Issues 3 This section provides a timeline and description of key legislative dates and issues taking place in the United States (U.S.) in 2014: 2014 Key Legislative Dates Key Dates in the U.S. • March 4 – President Obama Released FY2015 Budget • November 4 – Election Day U.S. Legislative U.S. Regulatory EU Legislative EU Regulatory
  4. 4. Key U.S. Legislative Issues 4 Here is a brief overview of key U.S. legislative issues with the potential to impact the hedge fund industry in 2014: Tax Reform: In the U.S. House of Representatives, Ways and Means Committee Chairman Dave Camp (R-MI) released a comprehensive tax reform discussion draft in February 2014. While the prospects for passage in 2014 are unlikely, elements of the Camp plan will shape future discussions on the issue. Transatlantic Trade and Investment Partnership (TTIP): U.S. and EU TTIP negotiators are expected to continue working toward inclusion of financial services issues within the agreement. U.S. policymakers are concerned that inclusion of certain financial services issues could force reconsideration of certain provisions included in previous legislation, such as the Dodd-Frank Act. EU lawmakers have recently made a concerted effort to address these concerns, stating in a recent policy paper that the objective is not to define (or re-define) the substance of international standards for financial regulation, or negotiate prudential rules, but rather to create a workable platform for EU and U.S. regulators to ensure their rules are consistent and coordinated. U.S. Regulatory EU Legislative EU RegulatoryU.S. Legislative
  5. 5. Key U.S. Legislative Issues - Continued 5 Here is a brief overview of key U.S. legislative issues with potential to impact the hedge fund industry in 2014: JOBS Act 2.0 and Beyond: While the Securities and Exchange Commission (SEC) continues to implement the Jumpstart Our Business Startups (JOBS) Act, the House Financial Services Committee continues to work on capital formation legislation, including a bill to implement a tick-size pilot program, which passed the House of Representatives in February 2014. Further work on capital formation could form the basis of a “JOBS Act 2.0” effort for the remainder of the year. Reform of Government Sponsored Enterprises (GSEs): The Senate Banking, Housing and Urban Affairs Committee remains focused on housing finance reform. The House Financial Services Committee has also expressed an interest in issues related to the structure of the U.S. housing market. This is a sector that is watched carefully by our industry. Immigration Reform: To date, the House Judiciary Committee has considered several individual issues related to immigration reform, while the Senate passed a comprehensive bill in June 2013. Immigration is likely to remain a key legislative priority in the House for the remainder of 2014 with a bill possibly reaching the full House for consideration in the Fall. U.S. Regulatory EU Legislative EU RegulatoryU.S. Legislative
  6. 6. Key U.S. Regulatory Dates and Issues 6 This section provides a timeline and description of key regulatory dates and issues taking place in the United States (U.S.) in 2014: 2014 Key Regulatory Dates • March – CFTC Expects to Issue Rulings on the following issues: • Finalize Rule on Governance and Mitigation of Conflicts of Interest of Derivatives Clearing Organizations, Designated Contract Markets and Swap Execution Facilities • Finalize Rule on Market Co-Location Services • Propose Rule on Part 190 Bankruptcy Rules • Propose Rule on Block Trading for Futures and Options on Futures Contracts and Centralized Market Trading on Designated Contract Markets • Propose Rule Amendments to Swap Data Recordkeeping and Reporting Requirements • Propose Rule on Allocation of Business Conduct Obligations by Swap Dealers in a Prime Brokerage Arrangement • May 1st – CFTC No-Action Relief Expires on the Oral Recordkeeping Requirement under CFTC Rule 1.35(a). U.S. Legislative U.S. Regulatory EU Legislative EU Regulatory
  7. 7. Key U.S. Regulatory Dates and Issues 7 This section provides a timeline and description of key regulatory dates and issues taking place in the United States (U.S.) in 2014: 2014 Key U.S. Regulatory Dates – Continued • October – The U.S. Securities and Exchange Commission (SEC) Expects to Issue the Final Ruling on the following issues: • Implementing the JOBS Act • Capital, Margin and Segregation Requirements for Security-Based Swap Dealers • Registration and Regulation of Security-Based Swap Execution Facilities • Prohibition Against Fraud, Manipulation, and Deception in connection with Security-Based Swaps • Ownership Limitations and Governance Requirements for Clearing Agencies, Security-Based Swap Execution Facilities, and National Exchanges • Regulation Systems Compliance and Integrity U.S. Legislative EU Legislative EU RegulatoryU.S. Regulatory
  8. 8. Key U.S. Regulatory Issues 8 Here is a brief overview of key U.S. regulatory issues with potential to impact the hedge fund industry in 2014: Commodity Futures Trading Commission (CFTC) Reauthorization: The House and Senate Agriculture Committees are expected to turn their attention to CFTC reauthorization in 2014. Action in this area could also bring about proposed amendments to Title VII of the Dodd-Frank Act and the Commodity Exchange Act, both of which help determine regulations governing the hedge fund industry. CFTC Nominations: The Senate Agriculture Committee will also be tasked with addressing three nominations to fill positions at the CFTC in 2014. Currently Mark Wetjen is serving as the Acting Chairman of the Commission, and will continue to do so until Chairman-nominee Timothy Massad is confirmed by the Senate. Two other nominees are also pending confirmation as Commissioners – Ms. Sharon Bowen and Mr. J. Christopher Giancarlo. Their confirmation hearings are expected to occur in the first quarter of 2014. U.S. Legislative EU Legislative EU RegulatoryU.S. Regulatory
  9. 9. Key U.S. Regulatory Issues 9 Here is a brief overview of key U.S. regulatory issues with potential to impact the hedge fund industry in 2014: Adviser Regulation: In July 2013, the SEC adopted final rules implementing the JOBS Act by removing the bank on general solicitation for offerings made under the new Rule 506(c) of Regulation D. At the same time, the SEC also proposed additional requirements that would apply to issuers who raise capital through general solicitation activities under Regulation D. The SEC is now considering how to proceed with the proposals and indicated in its semi-annual agenda that it intends to finalize the rulemaking by October 2014. Accredited Investor Definition: As part of the SEC’s release proposing new rules for entities engaged in general solicitation, the agency requested comment on whether it should revise the definition of “accredited investors” under Regulation D. Derivatives: The SEC has yet to finalize a number of key rulemakings related to Title VII of the Dodd-Frank Act, particularly those related to mandatory clearing and reporting of security-based swaps (SBS). IN the fourth quarter of 2014, it is expected to finalize rules addressing: (1) capital, margin and segregation requirements for SBS dealers; (2) registration and regulation of SBS execution facilities (SBSSEFs); (3) the prohibition against fraud, manipulation, and deception in connection with SBS; and (4) ownership limitations and governance requirements for clearing agencies, SBSSEFs and national exchanges. U.S. Legislative EU Legislative EU RegulatoryU.S. Regulatory
  10. 10. Key U.S. Regulatory Issues - Continued 10 Here is a brief overview of key U.S. regulatory issues with potential to impact the hedge fund industry in 2014: Market Structure: In 2013, the SEC proposed Reg SCI, requiring self-regulatory organizations and other market utility-type market participants to implement policies, procedures and testing to ensure their systems are able to maintain operational capability, promote the maintenance of fair and orderly markets, and operate in the manner intended. Reg SCI was proposed after a series of systems mishaps in the equities markets, and meant to ensure that key market participants have comprehensive policies and procedures in place surrounding their technological systems. The SEC estimates that it will adopt final rules in October 2014. Tick Size Pilot Program: The SEC may also propose a tick size pilot program in 2014. The tick size pilot program is a test program in which stocks would be traded in larger increments in order to determine whether this change might make it easier for investors to trade some shares. In 2013, along with some congressional pressure to implement a tick size pilot program, the SEC held a roundtable on decimilization and tick sizes and began considering how to construct a tick size pilot program. However, in January 2014, the SEC’s Investor Advisory Committee issued draft recommendations urging the SEC to maintain its current decimal pricing policy and not to engage in a pilot program. U.S. Legislative EU Legislative EU RegulatoryU.S. Regulatory
  11. 11. Key U.S. Regulatory Issues - Continued 11 Here is a brief overview of key U.S. regulatory issues with potential to impact the hedge fund industry in 2014: Regulation of Commodity Pool Operators / Commodity Trading Advisers: The CFTC and / or the National Futures Association (NFA) could address the following issues in 2014: • CFTC will likely consider providing no-action relief to the industry with respect to the ability of certain entities, such as general partners, managing member and board directors, to delegate CPO functions to a registered CPO. • CFTC staff will likely propose or issue guidance on compliance with the CFTC’s rule 4.13 (a)(3) de minimis trading exemption from CPO registration for fund-of- funds and other funds that invest in products that happen to be CPOs. • CFTC staff will work on revising and updating CPO recordkeeping rules and eligible third party record keepers (e.g., Rules 1.31 and 4.23). • CFTC staff will consider proposing JOBS Act equivalence rules for the CFTC. • CFTC staff will continue working on providing guidance on Forms CPO-PQR and CTA-PR. • The NFA will review responses to its request for comments on capital requirements for CPOs and CTAs and other customer protection measures; and consider whether to propose rulemaking in these areas. U.S. Legislative EU Legislative EU RegulatoryU.S. Regulatory
  12. 12. Key U.S. Regulatory Issues - Continued 12 Here is a brief overview of key U.S. regulatory issues with potential to impact the hedge fund industry in 2014: Derivatives: According to the CFTC’s semi-annual regulatory agenda, in 2014, it also expects to finalize rules addressing the governance and mitigation of conflicts of interest of derivatives clearing organizations, designated contract markets (DCMs) and swap execution facilities (SEFs). They are also expected to propose new rules regarding: • Part 190 Bankruptcy Rules • Block trading for futures and options on futures contracts and centralized market trading on DCMs • Amendments to swap data recordkeeping and reporting requirements • Allocation of business conduct obligations by swap dealers in a prime brokerage arrangement Position Limits: The CFTC requested comments to its proposed regulations on position limits and aggregation of limits by February 10, 2014. Rulemaking on this issue is expected throughout the year. U.S. Legislative EU Legislative EU RegulatoryU.S. Regulatory
  13. 13. Key U.S. Regulatory Issues - Continued 13 Here is a brief overview of key U.S. regulatory issues with potential to impact the hedge fund industry in 2014: Foreign Account Tax Compliance Act (FATCA): The Internal Revenue Service (IRS) and the Department of the Treasury expect to continue releasing guidance and finalizing relevant forms and documents to implement FATCA. Beginning in June, the IRS will begin posting the list of foreign financial institutions that have registered and receive a global intermediary identification number. Treasury continues to enter into inter-governmental agreements with regulators in jurisdictions around the world and further agreements are expected in 2014. 871(m) Regulations on Dividend Equivalent Payments: The IRS is expected to work on finalizing its re-proposed regulations to implement Section 871(m) of the Internal Revenue Code, which imposes withholding taxes on non-U.S. investors that receive dividend equivalent payments on U.S. source income. Systemic Risk Regulation: The Office of Financial Research (OFR) is expected to continue its review of Form PF data. Further, the Financial Stability Oversight Council is expected to monitor other global regulators’ recommendations with respect to shadow banking and global systemically important financial institutions. U.S. Legislative EU Legislative EU RegulatoryU.S. Regulatory
  14. 14. Key EU Legislative Dates and Activities 14 This section provides an overview of key legislative dates and issues expected in the European Union (EU) in 2014: Key Legislative Dates in the EU • April 14-17 –Final Plenary Session of the 2009-2014 European Parliament • May 22-25 –European Parliamentary Elections • July 1 – First Plenary Session of the 2014-2019 European Parliament; Italy Assumes the European Council Presidency • November 1 - New European Commission Takes Office U.S. Legislative U.S. Regulatory EU Legislative EU Regulatory
  15. 15. Key EU Legislative Issues 15 Here is a brief overview of key EU legislative issues with potential to impact the hedge fund industry in 2014: EU Commissioner Selections: The European Commission will undertake its selection process immediately following the Parliamentary elections, first with European Heads of State selecting a President of the European Commission. This selection is subject to the approval of the European Parliament (expected action July 14-17). Following that, each EU Member State will put forward one candidate for a Commissioner position, which will then be assigned to the various European Commission offices by the European Commission President. After final approval of all Commissioners by the European Parliament, the new European Commission will begin its term on November 1. EU Banking Union: The European Banking Union – actually a number of pieces of legislation, including the Asset Quality Review (AQR), i.e., stress tests, the Single Resolution Mechanism (SRM), and the Bank Recovery and Resolution Directive (BRRD) – has remained one of Europe’s significant issues over the last two years, progressing at a rapid pace despite the complexity of its scope. These issues will continue to dominate the discussion between the European Parliament and the Council of the EU in order to meet the goal of implementation by 2015. Liikanen Follow Up – Europe’s Volcker Rule: On January 29, the European Commission released a proposal on banking structure reform, colloquially referred to as the Liikanen Follow Up. This proposal would force the “separation of certain trading activities from credit institutions and their parents.” Not technically part of the EU Banking Union debate, the Liikanen Follow Up represents a major legislative undertaking linked to other legislation like the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM). Furthermore, a proposal on transparency of securities financing transactions accompanies the Liikanen Follow Up. The final legislation will likely affect transparency requirements for investment funds as well as the funds’ relationship with banks. U.S. Legislative U.S. Regulatory EU RegulatoryEU Legislative
  16. 16. Key EU Legislative Issues 16 Here is a brief overview of key EU legislative issues with potential to impact the hedge fund industry in 2014: Markets in Financial Instruments Directive (MiFID II) Level 1 (Legislation): MiFID II represents one of the EU’s most significant pieces of financial reform following the 2008 financial crisis. It included new rules on a number of areas, including high-frequency / algorithmic trading, over-the-counter derivatives, third-country registration, and position limits, among others. Negotiators from the three European Institutions (European Commission, European Parliament, and Council of the European Union) reached agreement on the legislation in mid-January. After finalization, the legislation will likely enter into force by the middle of 2014. Markets in Financial Instruments Directive (MiFID II) Level 2 (Implementation): Once the legislation enters into force, the European Markets regulator, the European Securities and Markets Authority (ESMA), and EU Member States will begin their implementation or rulemaking phase (Level 2). This phase is expected to last into 2015. Financial Transaction Tax (FTT): In the EU, taxation issues are decided by individual Member States, not the European Parliament or the European Commission. In mid-January, the Greek Presidency circulated its first draft of the tax as well as a working document discussing the links between taxation and regulation of the financial sector. The document also provided an overview of legislation relevant to ensure proper implementation of the FTT. EU Member State Fiscal Attachés resumed discussions on the issue in January. These talks are expected to continue at regular intervals throughout the year. U.S. Legislative U.S. Regulatory EU RegulatoryEU Legislative
  17. 17. Key EU Regulatory Dates and Activities 17 This section provides an overview of key regulatory dates and issues expected in the European Union (EU) in 2014: 2014 Key Regulatory Dates Key Dates in the EU • February 12 – Start Date for Reporting under the European Markets Infrastructure Regulation (EMIR) • March – European Supervisory Authorities to Issue Joint Draft Regulatory Technical Standards on Risk Mitigation Techniques for OTC Derivatives Contracts Not Cleared by a Central Counterparty • March / April – UK Financial Conduct Authority (FCA) to Publish Final Policy Statement of the Use of Dealing Commissions U.S. Legislative U.S. Regulatory EU Legislative EU Regulatory
  18. 18. Key EU Regulatory Issues 18 Here is a brief overview of key EU Regulatory issues with potential to impact the hedge fund industry in 2014: Alternative Investment Fund Managers Directive (AIFMD): Member state regulators are expected to continue finalizing rules and related guidance to adopt and implement the AIFMD prior to a July 2014 deadline. Member states and the European Securities and Markets Authority (ESMA) are also working to provide more clarity regarding how managers should complete the reporting form required under the Directive. European Markets Infrastructure Regulation (EMIR): The EU is focused on implementing the EMIR clearing and reporting mandates. Mandatory reporting for derivatives began on February 12 for EU entities. Further, ESMA expects to issue both a consultation paper and final regulatory technical standards for clearing in 2014. ESMA is working toward a goal of implementing EU clearing in the fourth quarter of 2014 or the first quarter of 2015. In early March, the European Supervisory Authorities (which includes ESMA, EIOPA, and EBA) also expect to issue joint regulatory technical standards to address margin requirements and other risk mitigation techniques for uncleared derivatives to align with the Basel-IOSCO international standards. ESMA is also expected to continue issuing updated questions and answers covering matters such as the extraterritorial application of EMIR. U.S. Legislative U.S. Regulatory EU Legislative EU Regulatory
  19. 19. Resources 19 As you can see, there are a wide range of legislative and regulatory initiatives underway in 2014 that will shape the further evolution of the global alternative investment industry. Please click here for additional information on how hedge funds are regulated in the U.S. Please click here for more information on how hedge funds are regulated in the EU. Regulatory Agencies: Securities and Exchange Commission (SEC) www.sec.gov Commodity Futures Trading Commission (CFTC) www.cftc.gov Internal Revenue Service (IRS) http://www.irs.gov/ European Securities and Markets Authority www.esma.europa.eu Follow MFA on Twitter @MFAUpdates And visit our webpage at www.managedfunds.org

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