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New Regulatory Reforms: The Impact on Your FirmAugust 17, 2010
Agenda
Overview of Dodd-Frank Wall Street Reform Act– Registration
– New Exemptions
– Recordkeeping
The Volcker Rule
Data Protection Requirements – Business Continuity
– Disaster Recovery
– Archiving
– Data Privacy Compliance
Speakers
Jeffrey Blumberg, PartnerDrinker Biddle & Reath LLPwww.drinkerbiddle.com
Bob Guilbert, Managing Director Eze Castle Integrationwww.eci.com
Financial Reform:What it Means to the Hedge Fund Industry
Presented byJeff Blumberg
August 17, 2010
Financial Reform | August 17, 2010 5
Overview
> Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law July 21, 2010
> Significant impact for investment advisers, broker-dealers, participants in the derivatives markets and registered investment companies
Financial Reform | August 17, 2010 6
Registration Under the Advisers Act
> Removal of de minimis exemption– For managers advising fewer than 15 clients
> Exemption for private fund advisers with less than $150 million total U.S. AUM
> Federal registration eligibility– If AUM is between $25 million and $100 million,
adviser may register only if otherwise required to register with 15 or more states
– SEC may raise $100 million threshold by rule
– Effective one year after enactment
Financial Reform | August 17, 2010 7
New Exemptions
> For foreign private advisers
– No U.S. place of business
– Fewer than 15 direct or indirect U.S. clients
– Less than $25 million AUM for U.S. clients
– Does not generally hold itself out in U.S.
> For family offices
– To be defined by SEC
> For venture capital fund advisers
– Defined by SEC regulation within one year
Financial Reform | August 17, 2010 8
Recordkeeping and Reporting Requirements
> Reporting requirements to SEC and Financial Stability Oversight Council
> Periodic SEC inspections of records– Generally treated as confidential
– AUM, use of leverage, counterparty credit risk, trading and investment positions, valuation, types of assets held, side agreements, trading practices, other information related to investor protection or systemic risk assessment
> Effective one year after enactment
Financial Reform | August 17, 2010 9
Implications for Private Funds and Other Advisers
> Independent custody of client assets
– SEC custody rules for registered advisers
– Asset verification by independent accountant
> Accredited investors
– Standard immediately changed to exclude value of primary residence from net worth
– SEC must review definition every four years and may make adjustments by rule
– Within one year, SEC must disqualify, by rule, “bad actors” from conducting Rule 506 private offerings
Financial Reform | August 17, 2010 10
Implications for Private Funds and Other Advisers
> Qualified client
– SEC must adjust standard for inflation one year after enactment, and every five years thereafter
> Short sale reform
– Disclosure of short positions on Form 13F
– Prohibition of “manipulative” short sales
– Broker-dealers must notify customers that They may elect not to allow lending for short sales
Broker-dealer may receive compensation for lending
Financial Reform | August 17, 2010 11
Volcker Rule on Bank Activities
> Prohibits banking entity from engaging in proprietary trading or sponsoring or investing in a hedge or private equity fund
> Exception when eight requirements met– Bank provides bona fide trust, fiduciary or
investment advisory services to the fund
– Fund offered only in connection with provision of such services and only to bank customers
– Bank and affiliates to do engage in “covered transactions” and treat fund as an affiliate
– Bank does not guarantee fund obligations or performance
Financial Reform | August 17, 2010 12
Volcker Rule on Bank Activities
> Exception when eight requirements met (continued)– Bank and fund do not have same or variations on
the same name
– Only bank directors and employees who provide services to the fund have ownership interests in the fund
– Disclosure to investors that losses not borne by bank
– Bank makes only seed or de minimis investment in fund
Financial Reform | August 17, 2010 13
Volcker Rule on Bank Activities
> Effective earlier of
– 2 years after enactment
– 12 months after issuance of final rules, which must be issued within 15 months of enactment
> Banks then have two years to dispose of prohibited investments or relationships
Financial Reform | August 17, 2010 14
Implications for Private Funds and Other Advisers
> Mandatory arbitration clauses– SEC rulemaking to limit or prohibit predispute
arbitration agreements for investment advisory clients
> Several studies– Private fund accredited investor status criteria
– Feasibility of hedge, private equity and venture capital fund self-regulatory organization
– Custody rule compliance costs
– State of short-selling in the market
Technology Considerations & Best PracticesBob Guilbert, Eze Castle Integration
Eze Castle Integration OverviewEze Castle is a firm’s partner to eliminate enterprise infrastructure riskand enhance operations. We provide a foundation for investment firms at any stage of their lifecycle.
Client
Technology
Managed Services
Compliance
Trading
Founded 1995
Mission To be the leading provider of IT services and technology solutions to the investment community worldwide
Offices Boston, New York City, Chicago, Minneapolis, Los Angeles, San Francisco, Stamford, Singapore and London.
Clients Over 550 hedge fund clients, managing $300B+ of assets
83 firms with $1B+ AUM
Data Protection Requirements
Regulations mandating Business Continuity Planning, Disaster Recovery & Archiving
Data Protection
& Retention
NASD Rule 3500 Series
NYSE Rule 4370
Financial Reform Act
MA Privacy Compliance Law
(201 CMR 17.00)
BCP & DR: Understanding the Difference
Business Continuity Blueprint
BCP Life
Cycle
Five key steps to effective BCP Planning:
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
• Nightly Backups
RPO = 24 hrs
• Snapshots
RPO < 4 hrs
• Continuous Replication
RPO = 0
• Restore from Backups
RTO > 24 hrs
• Hot Standby
RTO < 4 hrs
• High Availability
RTO = 1 hr
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 currently advises hedge funds 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
Questions to Ask
Will you have a dedicated server or shared server?
Does the provider utilize Natural Language Processing ?
Bloomberg compliant?
Use WORM storage to maintain message integrity?
Allow for single-search of all information?
Can end users see and search their own electronic records without seeing those of other users?
Privacy Compliance: Security Requirements
Secure User Authentication
Protocols
Control user IDs, passwords, etc
Restrict access to authorized active
users
Block access after multiple
unsuccessful attempts
Secure Access Control
Measures
Restrict records access to need-to-know employees
Assign unique ID plus password to
each employee with computer access
Technical Safeguards
Encrypt all transmitted records with PI that travel
over public network
“Reasonably up-to-date” firewall
protections, security patches, security
agent software, etc.
Software configured to receive most current security
updates
Audit & Educate
Monitor networks & systems for
unauthorized use, and record audit
trails
Train on proper use of computer security
system
Final Thoughts
Expect future financial reform (state & federal) and best practices to include:– BCP & DR
– Archiving
– Data Privacy Compliance
For more information on these technologies and other recommended solutions, visit www.eci.com.
Contact Information
Bob GuilbertManaging DirectorEze Castle IntegrationOne Federal Street, 9th floorBoston, MA [email protected]
Visit: www.eci.comHedge IT Blog:www.eci.com/blog
Jeff Blumberg PartnerDrinker Biddle & Reath LLP191 North Wacker DriveSuite 3700Chicago, IL [email protected]
Visit: www.drinkerbiddle.com
800.752.1382 www.eci.com
