New Regulations for Private Funds Under the Dodd-Frank Act

1. American Bar Association Section of International Law � Spring Meeting New Regulations for Private Funds Under the Dodd-Frank Act

2. 1 7 What does the Dodd-Frank Act look like?

3. 2 Impact of Dodd-Frank Wall Street Reform and Consumer Protection Act on Asset Managers New Registration Requirements and Exemptions for Hedge Fund Managers New Minimum Asset Requirement for SEC Adviser Registration New Recordkeeping and Reporting Requirements Changes to the Definition of �Accredited Investor� and �Qualified Client� Standard of Conduct for Brokers, Dealers and Investment Advisers Custody of Client Assets Derivatives Reform and Short Sales Reporting Systemic Regulation Regime Executive Compensation Volcker Rule

4. 3 Registration of Advisers to Hedge Funds Current law (effective until July 2011) Investment advisers managing $30 million must register with the SEC (optional at $25 million) Generally, investment advisers are exempt from registration if they: (i) have fewer than 15 clients during the preceding 12 months and (ii) don�t hold themselves out to the public as investment advisers (the �private adviser exemption�) One hedge fund is generally considered one client for the registration exemption, thus most hedge fund advisers are currently exempt from registering because they have less than 15 clients

5. 4 New Registration Requirements for Hedge Fund Managers Elimination of the private investment adviser exemption Effective July 2011, the Dodd-Frank Act eliminates the �private adviser exemption� under Section 203(b)(3). Many hedge fund advisers currently rely on this exemption from registration. Certain smaller advisers must deregister with the SEC and register instead with the states Minimum AUM threshold for SEC registration for most U.S. investment advisers is $100 million in general Shifts some of the regulatory burden of monitoring many smaller advisers to the states so that the SEC may instead focus its examination resources on larger investment advisers.

6. 5 New Registration Requirements for Hedge Fund Managers (cont.) Impact of SEC Registration All investment advisers are subject to anti-fraud provisions of the Advisers Act, but registered advisers are subject to additional compliance obligations: Appoint a chief compliance officer Establish a compliance program and a code of ethics Comply with custody and recordkeeping requirements Subject to periodic SEC inspection

7. 6 New Exemptions from Advisers Act Registration New Exemptions from Advisers Act Registration Venture Capital Fund Advisers Exempt reporting adviser (limited amount of Form ADV reporting; no Form PF reporting) Certain Private Fund Advisers (w/ less than $150 million AUM) Exempt reporting adviser (limited amount of Form ADV reporting; no Form PF reporting) Foreign Private Advisers Full 203(b) exemption from the Advisers Act CFTC Registered Advisers that Advise Private Funds Full 203(b) exemption from the Advisers Act Family Offices Exception from the definition of investment adviser, thus such entities are generally outside the scope of the Advisers Act

8. 7 New Exemptions from Registration (cont.) Application of Advisers Act to Different Types of Advisers

9. 8 New Exemptions from Advisers Act Registration (cont.) Dodd-Frank: Venture Capital Fund Advisers The Dodd-Frank Act directed the SEC to provide an exemption from registration for investment advisers who solely act as advisers to one or more venture capital funds. Recordkeeping and reporting requirements as determined by the SEC. On November 19, 2010, SEC proposed rules to implement this exemption.

10. 9 New Exemptions from Advisers Act Registration (cont.) SEC: Proposed Definition of Venture Capital Fund A private fund that invests in �equity securities� of �qualifying portfolio companies� for the purpose of providing business expansion and operating capital QPC: Not publicly traded (or controlled by public company) at time of investment Does not incur leverage in connection with investment by the VC fund Uses capital provided by VC fund for business expansion or operating purposes Is not a fund �Equity securities� includes preferred stock and other convertible securities At least 80% of fund�s interest in each qualifying portfolio company must be acquired directly from company

11. 10 New Exemptions from Advisers Act Registration (cont.) SEC: Proposed Definition of Venture Capital Fund (cont.) Offers or provides significant managerial assistance to the QPC or controls the QPC Does not borrow except for limited amount of short-term borrowing Generally does not offer investors redemption rights Investors can be provided with redemption rights only in exceptional circumstances. However, investors can receive pro rata distributions made to all investors from time to time (e.g., IPO, buyout).

12. 11 New Exemptions from Advisers Act Registration (cont.) Dodd-Frank: Certain Private Fund Advisers The Dodd-Frank Act directed the SEC to provide an exemption to an investment adviser that: Acts solely as an adviser to private funds; and Has assets under management in the U.S. of less than $150 million. Subject to recordkeeping and reporting requirements. On November 19, 2010, SEC proposed rules to implement this exemption.

13. 12 New Exemptions from Advisers Act Registration (cont.) SEC: Proposed Rule for Certain Private Fund Advisers U.S. Advisers (those with a �principal office and place of business� in the U.S.) Acts solely as an investment adviser to one or more private funds; and Manages private fund assets of less than $150 million. �Principal office and place of business� means the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser. Non-U.S. Advisers (those with a �principal office and place of business� outside the U.S.) Adviser has no client that is a U.S. Person (as defined in Regulation S) except for private funds; and All assets managed from a �place of business� in the United States are solely in private funds that have, in the aggregate, less than $150 million. �Place of business� means any office where the investment 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 conducts any such activities.

14. 13 New Exemptions from Advisers Act Registration (cont.) Dodd-Frank: Foreign Private Advisers The Dodd-Frank Act includes a narrow registration exemption for any �foreign private adviser� who: Has no �place of business� in the United States; Has, in total, fewer than 15 U.S. clients and U.S. investors in private funds advised by the adviser; Has aggregate AUM attributable to U.S. clients and U.S. investors in private funds of less than $25M; and Does not (i) hold itself out generally to the U.S. public as an investment adviser, (ii) act as an investment adviser to a RIC or (iii) act as a business development company.

15. 14 New Exemptions from Advisers Act Registration (cont.) SEC: Proposed Rule for Foreign Private Advisers The SEC proposed rules to clarify the meanings of certain undefined terms in the foreign private adviser exemption. �Place of business� has the same meaning as in the private fund advisers rule (see prior slide). Incorporates the safe harbor rules and many of the client counting rules currently in effect for the private adviser exemption. For example, an adviser would be allowed to treat a legal organization (e.g., a corporation or limited partnership) as a single client, if the advice was based on the investment objectives of the legal organization and not its individual beneficial owners. Avoids double-counting of private fund clients and investors. An adviser need not count a private fund as a client if the adviser counts any investor in that private fund for purposes of the exemption. �In the United States� is defined by reference to the definitions of �U.S. person� and �United States� in Regulation S under the Securities Act. An adviser would generally only be required to look to the point in time when the person either became a client or an investor for determining whether the person was �in the United States.�

16. 15 New Exemptions from Advisers Act Registration (cont.) Dodd-Frank: CFTC Registered Advisers that Advise Private Funds The Dodd-Frank Act provides an SEC registration exemption for investment advisers that are registered with the CFTC as commodity trading advisers. Such advisers are exempt from SEC registration unless the business of the adviser becomes predominantly the provision of securities-related advice, in which case the adviser must also register with the SEC.

17. 16 New Exemptions from Advisers Act Registration (cont.) Dodd-Frank: Family Offices The Dodd-Frank Act directed the SEC to define the term �family office� for purposes of an exception to the definition of investment adviser. An exception to the definition of investment adviser generally places such entities outside the scope of the Advisers Act.

18. 17 New Exemptions from Advisers Act Registration (cont.) SEC: Proposed Rule for Family Offices SEC proposed definition of �family office� is any firm that: Has no clients other than family clients; Is wholly owned and controlled (directly or indirectly) by family members; and Does not hold itself out to the public as an investment adviser. SEC proposed rule is generally in line with current positions taken by the SEC on the subject.

19. 18 New Reporting and Recordkeeping Requirements Amendments to Part 2 of Form ADV In July 2010, the SEC adopted amendments to Part 2 of Form ADV These amendments were unrelated to the Dodd-Frank Act The amended Part 2 comprises Part 2A (�Firm Brochure�) and Part 2B (�Brochure Supplement�) Firm Brochure � information about adviser�s services, fees, business practices and conflicts of interest Format has changed from �check-the-box� format to more narrative-style disclosure written in plain English Filed with the SEC online and publically accessible through IARD database Brochure supplement � individualized information about advisory personnel on whom clients rely for investment advice Does not need to be filed with the SEC, but must be delivered to clients

20. 19 New Reporting and Recordkeeping Requirements (cont.) Dodd-Frank Act: New Reporting Requirements for Managers The Dodd-Frank Act requires the SEC to issue rules requiring registered investment advisers (and certain �exempt reporting advisers�) to private funds to file reports containing certain information as the SEC deems necessary. Information reported to the SEC will not be entitled to a broad exemption from FOIA. SEC�s broad FOIA exemption under Dodd-Frank eliminated shortly after enactment due to strong and bipartisan backlash against the provision.

21. 20 New Reporting and Recordkeeping Requirements (cont.) SEC: Proposed Rules on Dodd-Frank Reporting Requirements Two Types of New Dodd-Frank Reporting Requirements: Additional reporting requirements on Form ADV and reporting on new Form PF SEC: Proposed Form ADV Reporting Requirements Applicable to all registered investment advisers that file Form ADV �Exempt Reporting Advisers� would be required to complete a subset of the information required for registered investment advisers on Form ADV. 7 Items under Part 1A, and corresponding schedules Includes new private fund reporting obligations Proposed rules issued in November 2010 (final rules have not yet been issued). Although these rules are proposed, compliance appears to be required by July 21, 2011. SEC/CFTC: Proposed Form PF Joint proposal issued by the SEC and CFTC in January 2011 Required to be filed by registered investment advisers that advise one or more �private funds� (i.e., 3(c)(1) and 3(c)(7) funds) �Exempt Reporting Advisers� do not have to complete Form PF

22. 21 New Reporting and Recordkeeping Requirements (cont.) Proposed Form ADV Reporting Requirements (all registered advisers) Additional disclosures about the adviser and its advisory business: Information about the adviser�s clients and employees Expanded list of reportable advisory activities Types of investments the adviser manages Security rating or pricing services Business practices that may present conflicts of interest (e.g., use of affiliated brokers, soft dollar arrangement, payments for client referrals) Information about the adviser�s related persons and certain non-advisory financial activities New disclosures about private funds Substantial reporting requirements about private funds Census data, number and types of investors, investment strategy, NAV, etc. Reporting of private fund service providers Auditors, prime brokers, custodians, administrators and marketers Fair value reporting of private fund assets (including illiquid securities)

23. 22 New Reporting and Recordkeeping Requirements (cont.) Exempt Reporting Advisers � Proposed Reporting Requirements Must complete 7 items on Part 1A of Form ADV and corresponding schedules Item 1 � Identifying Information Item 2.C. � Basis for Exemption Item 3 � Form of Organization Item 6 � Other Business Activities Item 7 � Financial Industry Affiliations Item 7 � Private Fund Reporting Item 10 � Control Persons (including disclosure of the owners of the adviser); and Item 11 � Disclosure Information (including the disciplinary history for the adviser and its employees). Not required to complete remaining items of Part 1A or prepare a brochure (Part 2) Timing: Exempt Reporting Advisers would have to comply by August 20, 2011

24. 23 New Reporting and Recordkeeping Requirements (cont.) Form PF Reporting (registered advisers that advise 3(c)(1) or 3(c)(7) funds) Joint rule proposed by the SEC and CFTC Reporting requirements about adviser�s various private funds Hedge Funds �Liquidity Funds� (i.e., unregistered money market funds) Private Equity Funds Advisers with >$1B AUM for any of the above private funds: Subject to greater reporting frequency (quarterly vs. annually) Subject to more onerous reporting requirements (completing multiple sections of Form PF) Compliance date would be December 15, 2011, so reporting would begin in 1Q 2012

25. 24 Changes to the �Accredited Investor� and �Qualified Client� Standards Increases the �accredited investor� and �qualified client� standards Raises the �accredited investor� net worth threshold for natural persons to $1 million, excluding the value of the investor�s primary residence 1 year after enactment, the SEC would be authorized to conduct a review of the definition of �accredited investor� as applied to natural persons and to promulgate rules adjusting the definition. SEC has proposed rules implementing this requirement generally in line with Dodd-Frank Act changes Not earlier than 4 years after enactment and at least every 4 years thereafter, the SEC would be required to review the entirety of the definition of �accredited investors� as applied to natural persons Requires the SEC to adjust for inflation, no later than 1 year after enactment and every 5 years thereafter, the assets under management and net worth tests for determining a client�s status as a �qualified client� Heightened �accredited investor� and �qualified client� standards will shrink the pool of investors eligible to invest in 3(c)(1) funds

26. 25 Studies on Investment Advisers and Broker-Dealers Fiduciary Duty In January 2011, the SEC completed a Dodd-Frank mandated study regarding the gaps, shortcomings or overlaps in the standard of conduct and supervision of brokers-dealers and investment advisers providing personalized investment advice about securities to retail customers. Study recommends that the SEC establish a uniform fiduciary standard for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers, no less stringent than currently applied under the Advisers Act. Implementation of uniform fiduciary duty standard was recently delayed until later in the year Enhanced Examination and Enforcement for Investment Advisers In January 2011, the SEC completed a Dodd-Frank mandated study that reviewed and analyzed the need for enhanced examination and enforcement resources for investment advisers, including the role of a self-regulatory organization, and submit a report to Congress on its findings. Three recommendations to strengthen the investment adviser regime: user fees; self-regulatory organizations; authorization of FINRA to examine dual registrants Enhanced Information Re: Broker-Dealers and Investment Advisers In January 2011, the SEC completed a Dodd-Frank mandated study of ways to improve the access of investors to registration information about investment advisers and broker-dealers.

27. 26 Custody of Client Assets Custody of Client Assets The GAO is required to conduct a study by July 2013 regarding (i) compliance costs associated with Rules 204-2 (i.e., maintenance of books and records) and 206(4)-2 (the �Custody Rule�) and (ii) the additional costs associated with eliminating subsection (b)(6) of the Custody Rule relating to �operational independence.� Investment advisers with custody of client assets are required to undergo an annual surprise examination performed by an independent public accountant with certain limited exceptions. This surprise audit requirement will not apply to an adviser that is deemed to have custody of client assets solely because a related person of the adviser has custody of them, if the adviser is �operationally independent� of the related person. Certain conditions must be satisfied for an adviser to be �operationally independent� of a related adviser Under the Dodd-Frank Act, the SEC is provided with discretionary rulemaking authority to require registered investment advisers to take steps to safeguard client assets in their custody.

28. 27 Derivatives Reform and Short Sales Reporting Derivatives Clearing and exchange/swap execution facility requirements and opportunities Registration and regulatory requirements for dealers and major swap participants across different regulators Assessing and complying with margin and capital requirements Position limits Trade reporting Ban on non-cleared and off-exchange transactions with non-ECPs Potential elimination of roadblocks to expanded portfolio margining Extraterritoriality and international implications New standards for business conduct and possibility of new types of duties to customers Structuring and reorganizing businesses to make regulatory obligations most efficient

29. 28 Systemic Regulation Overall The Dodd-Frank Act attempts to identify and impose stricter prudential standards on systemically important financial companies. Certain nonbank financial companies such as hedge fund managers may be designated systemically important by the Financial Stability Oversight Council. No nonbank companies have been designated yet, and no standards have been imposed yet. The criteria for designation are open-ended, but interconnectedness appears to be a priority. Even if not designated, hedge fund managers may receive information requests as the Council considers candidates for designation. What happens if a fund is deemed systemically important? The Federal Reserve would become the systemic risk supervisor of the designated fund or adviser and impose heightened standards. The Fed has yet to propose rules for most such standards. Heightened regulation must include: Enhanced risk-based capital, leverage, liquidity and reporting requirements. Enhanced risk-management requirements, resolution plans, credit exposure reports, concentration limits and early remediation steps. Federal Reserve may establish additional prudential standards, including contingent capital requirements. Ultimate effects will become evident through the rule-writing and implementation stages.

30. 29 Executive Compensation � Incentive-Based Compensation Restrictions Overall Section 956 of the Dodd-Frank Act requires that seven federal agencies jointly prescribe regulations to mandate that each �covered financial institution� (>$1 billion of assets) prohibit incentive-based compensation that is excessive or that could lead to material financial loss to the institution. All covered financial institutions would be required to (i) submit annual reports to their appropriate regulators and (ii) maintain policies and procedures governing the awards of incentive compensation. �Large covered financial institutions� (>$50 billion of assets) would be subject to more substantial incentive-based compensation restrictions. �Covered Financial Institution� applies to a wide array of financial institutions, including banks, broker-dealers and investment advisers with at least $1 billion of total consolidated assets. Calculation of assets is a balance-sheet test, not an assets-under-management test Interpretive questions arise where an investment adviser, for accounting purposes, is required to consolidate its assets with those of affiliated entities (e.g., assets of affiliated funds or general partners).

31. 30 Volcker Rule General Amendments to the Bank Holding Company Act Restrictions on proprietary trading Restrictions on sponsoring or investing in hedge funds or private equity funds Prohibition on Sponsoring or Investing in Private Equity or Hedge Funds Subject to certain exceptions and a transition period, the Volcker Rule prohibits any banking entity from sponsoring or investing in a hedge fund or private equity fund. �Hedge fund� and �private equity fund� are defined as any issuer that would be an investment company, as defined in the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that act, or �such similar funds� as regulators may, by rule, determine. Scope of �similar fund� will be a key interpretive issue.

32. 31 Volcker Rule (cont.) Permitted Sponsoring and Investing Subject to certain limitations, a banking entity may �organize and offer� a hedge fund or private equity fund, including sponsoring such a fund, if certain conditions are satisfied. Delayed Effectiveness and Transition Period General � The activities and investments of banking entities must comply with the sponsoring and investing prohibition by July 2014, which marks the end of an initial 2-year transition period, with the possibility of up to 3 one-year extensions, and an additional extension of up to 5 years available for investments in illiquid funds.

33. 32 International Regulatory Developments Global regulation of hedge funds proceeding on many fronts International vs. national (e.g., EU vs. member states) Financial regulatory reform as well as fund-specific regulation Governmental, quasi-governmental, industry working groups Certain consistent themes and issues Registration and reporting requirements � manager vs. fund Investing requirements � capital requirements, leverage limits Operations requirements � governance, valuation, custody Regulatory intent � systemic risk, investor protection, �prudential� regulation Cross-border information sharing and coordination

34. 33 International Regulatory Developments (cont.) Directive on Alternative Investment Fund Managers Framework for regulation and supervision of AIF Managers to address investor protection, prudential regulation and systemic risk concerns Product of lengthy negotiations among the European Parliament, the EU Council and European Commission. Coverage: Applies to all AIF Managers that manage or market one or more alternative investment funds (AIFs), except: AIF Managers whose assets under management (including those acquired through use of leverage) are less than �100 million; AIF Managers whose assets under management are less than �500 million if the portfolios of AIF managed by the AIF Managers (a) are not leveraged and (b) have lock-up periods of five years or more following the date of initial investment in each AIF; and Funds and managers regulated under the UCITS Directive (existing legislation regulating investment funds and managers in the EC) Directive takes effect in 2011 and each EU Member State must codify the Directive as national law by 2013

35. 34 International Regulatory Developments (cont.) European Commission proposals on regulation of Short Selling and OTC Derivatives September 2010 proposals to limit short selling and over-the-counter derivatives. Will need to flow through the EU legislative process, which will take time.