DC 9882109 v1

Inside The Beltway─Report From WashingtonDiane E. AmblerMary Burke BakerCary J. MeerKara WardDecember 11, 2014

Agenda New Republican Congress Commodity Exchange Act Reauthorization Tax Legislation and Tax Reform Agency Action

Financial Stability Oversight Council (“FSOC”) Commodity Futures Trading Commission (“CFTC”) Securities and Exchange Commission (“SEC”)

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New Republican Congress

Changes in the Congress*

* As of December 4, 2014

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Republican Congress and Democratic President─ Confrontation Before Cooperation

“Moderate Middle” is absent Each party must first play to its base Obama’s executive actions The young (net neutrality) Environmentalists (climate change) Hispanics (immigration)

Republican Congress Oversight/Overturning Obama actions Dodd-Frank “fixes” CFTC reauthorization

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114th Congress: Senate Banking Committee

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Sherrod Brown (D-OH) Richard Shelby (R-AL)Tim Johnson (D-SD)

Chairman, 113th Congress

Mike Crapo (R-ID)Ranking Member,

113th Congress

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Financial Services Bills Did Pass the House with Bipartisan Support in 113TH Congress…1. Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification

Act of 2013 (H.R. 2274)2. Capital Access for Small Community Financial Institutions Act of 2014 (H.R.

3584)3. Business Risk Mitigation and Price Stabilization Act of 2013 (H.R. 634)4. Mortgage Choice Act of 2013 (H.R. 3211)5. Swaps Regulatory Improvement Act (H.R. 992)6. Retail Investor Protection Act (H.R. 2374)7. Disclosure Modernization and Simplification Act of 2014 (H.R. 4569)8. SBIC Advisers Relief Act of 2014 (H.R. 4200)9. Commodity Exchange Act and the Securities Exchange Act of 1934 to

specify how clearing requirements apply to certain affiliated transactions(H.R. 5471)

…and are Likely to be Enacted in the 114th Congress6

Commodity Exchange Act Reauthorization

Commodity Exchange Act Reauthorization

Industry Priorities Additional funding Repeal of changes to CFTC Regulation 4.5 U.S. person definition/cross-border guidance Reinstate CFTC Regulation 4.13(a)(4) Exemptions for non-U.S. commodity pool operators (“CPOs”) operating

non-U.S. funds (similar to foreign private adviser and private fund adviser exemptions)

Exempt non-deliverable forwards and compo-equity swaps from “swap” definition

Relief for listed non-U.S. commodity pools Clarification of CFTC Regulation 3.10(c)(3)

Chance of Success?

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Tax Legislation and Tax Reform

114th Congress: House Ways and Means Committee

Paul Ryan (R-WI)Chairman

Sander Levin (D-MI)Ranking Member

Dave Camp (R-MI)Chairman, 113th

Congress

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114th Congress: Senate Finance Committee

Orrin Hatch (R-UT)Chairman

Ron Wyden (D-OR)Ranking Member

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Financial-Related Tax Issues at Risk

Taxation of Financial Instruments (Camp)

FTT (Tobin Tax) Bank Tax Taxation of Mobile/Passive

Income Inversions REITs PFICs Commodities Carried Interest Hedge Funds

Active Financing Exception Retirement Security New Markets Tax Credit Tax-Exempt Interest Mortgage Interest Deduction Mortgage Insurance

Deduction Cancellation of Indebtedness Mega-IRAs

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Virtual Currency─Emerging Issue IRS Notice 2014-21 Property, not Currency Realization of Income When “earned” When “used”

Information Reporting Impact on Exchangers SEC Actions Security? Ponzi Schemes Bitcoin ETF

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FATCA Status of IRS Implementation Status of IGAs Influence on OECD-AEOI Congressional Concerns Impact on Treaty Ratification Nonresident Alien Information Reporting

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Agency Action ― FSOC

What is the FSOC?

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Designation….not just for Banks

Non-Bank SIFI Designation Framework

- Size- Interconnectedness- Lack of substitutes

- Leverage- Liquidity Risk & maturation mismatch- Existing regulatory scrutiny

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What is the FSOC Worried About When it Comes to Asset Managers? 2013: Office of Financial Research Study 2014: FSOC Conference on Asset Management

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The Role of the SEC SEC moves to try to keep FSOC at bay “ . . . since the enactment of Dodd-Frank . . . the

Commission has consistently faced encroachments on its regulatory purview from prudential regulators and, even more concerning, pressure to join the prudential regulators in adopting the defense against “systemic risk” as part of our mission.” – Commissioner Gallagher

What could SEC regulations/enforcement look like? Large asset managers stress tests Requirement for more cash or cash equivalent holdings Enhanced reporting

Timeline? Unclear, but likely a year or more

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Agency Action ― CFTC

Industry Priorities Recordkeeping

CFTC Regulation 1.31 CFTC Regulation 1.35

Cross-Border Issues Listed Foreign Funds Reform of CFTC Regulation 3.10(c)(3) Disclosure Document/Account Statement/Annual Report Delivery Changing Reporting Periods in CFTC Regulation 4.7(b) Netting of over-the-counter swaps under CFTC Regulations 4.5/4.13(a)(3) Compo Equity Swaps FAQs─Forms CPO-PQR and CTA-PR and NFA Forms PQR and PR

International Financial Reporting Standards

Regulation 4.20(c)/Section 17 Funds of Funds

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Recent Successes JOBS Act CPO Delegation Relief Family Office Relief

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Agency Action ― SEC

SEC Initiatives Rulemaking “ . . . many, if not most, of the 100 mandates imposed upon the

Commission by the Dodd-Frank Act do not by any measure represent the best use of the Commission’s time and resources.” – Commissioner Gallagher

Cost-Benefit Analysis Hurdles

Regulation by Enforcement Asset Management Unit Morgan Keegan

Regulatory Fiat IM Guidance Updates─Fixed-Income Markets Valuation “Guidance”

Congressional Pressures and Self-Funding

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Open Issues for Funds and Advisers

New Product Development ETFs, ETMFs

Old Product Reform Money Market Funds What’s next?

Oldies but Goodies FINRA as SRO for Advisers? Fiduciary Duty Debate

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QUESTIONS?

DC 9880933 v1

Key Issues Affecting Investment ManagersMatt T. MorleyAnthony R. G. NolanAndras P. TelekiCraig A. Ruckman

Cybersecurity and the Securities Industry

Cybersecurity Threat Environment and Business Risks

Risks to Data and Systems Risks to data and systems can be classified into four

general categories: Risk of Disclosure

Risk of Modification

Risk of Unavailability

Risk of Destruction

Risk events may be triggered either intentionally(malicious) or unintentionally (accidental).

Risks event may come from internal or external sources.

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External ThreatsMost common external cyber threats to financial

services firms are hackers and organized criminals.Other external threats include: Competitors

Activists/Hacktivists

Terrorists

Foreign Organizations

Foreign Nation States

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Internal ThreatsMost common internal cyber threats to financial

services firms are current and former employees.Other internal threats include: Current Service Providers/Contractors

Former Service Providers/Contractors

Suppliers/Business Partners

Information Brokers

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Risks of Cybersecurity EventClients or employees may suffer identity theft,

fraud, and financial impacts. Firm may suffer fraud and financial impacts. Firm reputation may suffer. Firm may incur regulatory fines and/or litigation

expenses.Strategic business plans or intellectual property

may be compromised.

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Types of Sensitive InformationClient Information Personal Identifying Information (PII) Name, Address, Social Security Number, Birth Date, Usernames,

Passwords

Personal Financial Information (PFI) Account Numbers Account Balances and Investments Bank Routing and Account Numbers Credit Card Numbers

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Types of Sensitive Information Company Information Portfolio Strategy Information Investment Process, Trading Strategies and Algorithms, Quantitative

Models and Proprietary Research

Company Financial Information Bank and Other Accounts, Revenues and Earnings, and Other Material

Non-Public Information

Confidential Business Information Strategic Plans, Intellectual Property, Board Documents, Legal Matters,

Personnel Information

Company Systems Information Systems Architecture, Trade Execution and Information Storage

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Cybersecurity Legal and Regulatory Requirements

Noteworthy Regulatory Requirements

Reg. S-P “Safeguards Rule” Reg. S-ID (Identity Theft Red Flags) 15c3-5 – Risk management controls for brokers or dealers with

market access Business Continuity Plans Rule 38a-1 and Rule 206(4)-7 Testing Suspicious Activity Reporting Mass. Information Security Regulation State Breach Notification Laws

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SEC/OCIE Cybersecurity Sweep Announced in April 2014

providing written guidance and periodic training to employees concerning information security risks and responsibilities;

maintaining controls to prevent unauthorized escalation of user privileges and lateral movement among network resources;

restricting users access to those network resources only as necessary for their business functions;

maintaining a segregated environment for testing and development of software and applications;

preventing users from altering the baseline configuration of hardware and software without authorization;

managing IT assets and performing regular system maintenance;

maintaining controls to secure removable and portable media against malware and data leakage;

maintaining protection against DDoS attacks for critical internet-facing IP addresses;

maintaining a written data destruction policy; maintaining a written cybersecurity incident

response policy; periodically testing the functionality of the firm’s

backup system; use of encryption; conducting periodic audits of compliance with the

firm’s information security policies.

(The SEC/OCIE Sweep Requests Information on the Following Data Security Protection Activities)

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State Law Regulatory Trends Standards for the Protection of Personal

Information of the Residents of the Commonwealth of Massachusetts. State notification requirements in the event of a

data breach or loss of customer-related information (notification thresholds and requirements vary state by state; any loss of data must be reviewed on a state-by-state basis).

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State Breach Notification Laws Forty-seven states, the District of Columbia, Guam, Puerto Rico and

the Virgin Islands have enacted legislation requiring private or government entities to notify individuals of security breaches of information involving personally identifiable information.

Security breach laws typically have provisions regarding: who must comply with the law (e.g., businesses, data/ information brokers,

government entities, etc.); definitions of “personal information” (e.g., name combined with SSN, drivers license

or state ID, account numbers, etc.); what constitutes a breach (e.g., unauthorized acquisition of data); requirements for notice (e.g., timing or method of notice, who must be notified); and exemptions (e.g., for encrypted information).

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The Dodd-Frank Whistleblower Program: Recent Developments

Dodd-Frank Whistleblower Provisions

Effective August 2011 (Exchange Act §21F) Fourteen awards to date Nine in SEC’s FY 2014

10 to 30 percent of recovery to be paid to: Persons who supply original information that enables a successful

securities enforcement action Where enforcement action yields sanctions of over $1 million

Almost anyone can be a whistleblower: employee, customer, competitor, or others

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SEC’s Office of the Whistleblower

~ 3000 tips per year Increase ~10% per year since start of program

Full range of potential securities violations Corporate disclosure and financial statement issues Offering fraud Market manipulation Insider trading FCPA

Sources: 90% domestic, 10% non-U.S. 60 different countries, highest from U.K., Canada, China, Russia,

India, Ireland, Australia, and Germany

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Dodd-Frank Whistleblower Awards

Largest payout to date: $30 million To foreign national (unknown) Nature of case not disclosed Information concerning an “ongoing fraud that would have been very difficult to

detect.” Award reduced from the maximum level because whistleblower had

failed to come forward earlier Purportedly due to uncertainty as to whether the SEC would take action in the

matter. SEC found this delay “unreasonable.”

October 2013: $14 million for tip that led to substantial recovery of investor funds

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$300,000 payout to (unknown) individual employed in corporate compliance function (August 2014) Had reported the concerns internally Compliance and internal audit personnel are ordinarily ineligible for

awards BUT Company took no action for 120 days

Dodd-Frank Whistleblower Awards (continued)

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Anti-Retaliation Provisions Paradigm Capital Management (“PCM”) First anti-retaliation case brought by SEC under the rules PCM allegedly engaged in prohibited principal transactions PCM’s head trader reported these violations directly to SEC No suggestion that he sought to report them internally Four months later disclosed to PCM that he had done so

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Relieved of duties, directed to: Prepare a report detailing the facts relating to his allegations. Review 1,900 pages of hardcopy data to identify any potential wrongdoing. Consolidate PCM’s multiple trading procedure manuals into one comprehensive

policy.

Ultimately resigned. PCM charged with violation of anti-retaliation provisions PCM and its owner/president fined $300,000, plus disgorgement and interest of

$1,900,000, forced to retain compliance consultant to review trading procedures.

Anti-Retaliation Provisions (continued)

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Proactive Measures Encourage employees to report internally in the first

instance No requirement to first report internally – can go directly to SEC

Actively encourage reporting of genuine concerns

Guarantee that reporting employees will not suffer adverse consequences

Prompt investigation and resolution of reports Visible to the extent consistent with confidentiality needs

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SEC Sweep of Alternative Funds

Growth of Alternative Funds

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Rapid growth Press reports estimate

December 2008: $38 billion in assets, 172 funds February 2014: $160 billion in assets, 429 funds

SEC estimates September 2014: $282 billion in assets and $95 billion of cash inflows in

2013

Drivers Offering the investment profile of an alternative investment

vehicle (e.g., hedge funds, PE funds) in a structure that provides daily pricing, liquidity, transparency and low investment thresholds

Low correlation to traditional equity and fixed-income investments

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What is an Alternative Mutual Fund?

No single, universally accepted definition exists SEC – An alternative mutual fund’s primary investment

strategy falls into one or more of the following buckets: Non-traditional asset classes (e.g., currencies, etc.); Non-traditional strategies (e.g., long/short equity, managed

futures, etc.); and Illiquid assets (e.g., private debt).

Generally, alternative mutual funds can be understood to seek a low correlation to the returns of traditional asset classes such as equity and fixed-income markets.

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SEC Shift to Proactive Regulator Rapid growth draws the attention of the SEC

SEC seeks to be perceived as more proactive regulator following 2008 crisis

SEC staff identifies “alternative investment companies” as a national exam priority in January 2014

SEC staff launches alternative funds sweep exam during Summer 2014 Initial reports indicated that approximately 15-20 fund companies

would be contacted Subsequent reports suggested that number may have grown to

approximately 35-40 fund companies Latest comments from staff members indicate that the exam is

“ongoing”

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SEC Areas of Concerns Focus Issues

Leverage, liquidity and valuation Policies and procedures for managing non-traditional investments and strategies

within the requirements of the 1940 Act Stress testing and liquidity backstops (i.e., standby letters of credit)

Board governance and compliance programs Ensuring that Boards of Directors are sufficiently informed regarding alternative

investments and the requirements of the 1940 Act

Conflicts of Interest Registered fund investors vs. private fund investors

Disclosure Traditional retail fund investors may not have experience with alternative

strategies and asset classes SEC staff is stressing clear and concise disclosure to promote investor

understanding

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SEC Areas of Concerns Focus Issues (continued)

Experience of Investment Advisers Private fund advisers entering the registered fund space and managing issues

under the 1940 Act Daily pricing and valuation Maintaining sufficient liquidity Leverage constraints Board reporting Compliance programs

Traditional fund advisers launching alternative funds and dealing with issues associated with managing alternative investments Requisite experience and skill Full understanding of the risks involved

Traditional fund adviser overseeing a private fund adviser managing an alternative fund on a sub-advised basis Appropriate due diligence, oversight, and compliance controls

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Sample Request Items Board materials and presentations Compliance policies and procedures (especially as they

relate to liquidity, leverage, and valuation) Compliance reviews Valuation policies Liquidity analyses and reports Leverage / senior debt analyses and reports Holdings analyses and reports Stress testing Trade blotters Risk analyses

U.S. Swaps Regulation After the Crisis:Emergence of the New Normal

Agenda 2014 Swap Documentation Initiatives Recent CFTC Developments Other Regulatory Developments

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2014 Swap Document Initiatives

Overview 2014 ISDA Resolution Stay Protocol 2014 Credit Derivatives Definitions

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2014 ISDA Resolution Stay Protocol

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Background At the 2013 G-20 summit, the G-20 leaders committed to make progress

towards ending “too big to fail” and implementing principles developed by the FSB on key attributes of effective resolution regimes.

In November 2013, regulators from six major economies asked ISDA to revise ISDA Master Agreement documentation to eliminate close-out rights triggered by the resolution of a SIFI.

In September 2014 the FSB issued a consultative paper on Cross-border recognition of resolution action.

ISDA subsequently developed the Protocol to provide a contractual approach to cross-border recognition until comprehensive regulations are adopted.

The protocol was opened for adherence in November 2014 in coordination with the 2014 G-20 Summit; 18 large global banks adhered at opening.

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What the Protocol does:

Adhering parties can opt in to resolution regimes that stay (or override) certain cross-default and direct-default rights in swaps contracts upon receivership, insolvency, liquidation, resolution, or the like.

The Protocol also introduces similar stays and overrides under certain U.S. insolvency regimes where none exist.

The Protocol amends existing ISDA Master Agreements and Credit Enhancements. Future ISDA Master Agreements and Credit Enhancements are not amended unless the parties agree to incorporate the Protocol.

The Protocol is subject to sunset revocation from time to time. The idea is that while a contractual approach is a useful short-term solution it must be replaced by uniform cross-border regulations for a longer-term fix.

2014 ISDA Resolution Stay Protocol (continued)

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Impact on Investment Funds:

Adhering to the Protocol would disadvantage fund investors at the expense of bank creditors and violate the fiduciary duty owed by investment advisers to their clients.

As a result of these concerns being aired, buy-side adherence to the Protocol was separated from bank adherence.

The FSB has proposed that national regulators introduce rules in 2015 to create a level playing field to encourage buy-side firms to adopt stays. ISDA has indicated it expects sunset revocations if regulations are not enacted.

In the meantime, the question is whether non-adhering firms will be locked out of trading by sell-side firms.

2014 ISDA Resolution Stay Protocol (continued)

2014 Credit Derivatives Definitions

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Radical overhaul of 2003 definitions; effective September 22, 2014Amendments generally include the following: Upgrades provisions for successor reference entities; Expanded scope of guarantees that can be hedged with CDS; Rationalizes treatment of contingent debt and guarantee obligations; Addressing currency redenomination issues; Adjusts restructuring settlement mechanism; Integrates auction settlement into the definitions Significantly affects timelines relevant to settlement: Whether a credit event has occurred; When credit event notices must be given; When settlement is required; and When settlement fallbacks apply.

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Some specific changes include the following: Governmental Intervention Credit Event. Triggered by government-initiated bail-in; Can deliver proceeds of bailed-in debt or a restructured ref. obligation; More delineation between senior and subordinated CDS.

New deliverable obligations. Sovereign CDS asset package delivery permits settlement by delivery of assets into

which sovereign debt is converted. CoCo Supplement permits delivery of contingent convertible bonds issued by

financial entities.

Standard reference obligation: Allows for adoption of a standardized ref. obligation across all market-standard CDS

contracts on the same reference entity and seniority level.

2014 Credit Derivatives Definitions(continued)

Recent CFTC Developments

Overview Third-Party Recordkeeping Remaining Recordkeeping Issues CPO Delegation Staff Letters – Conditions Staff Letters - Issues Other Issues

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Third-Party Recordkeeping The CFTC’s “harmonization rules” allowed CPOs to maintain

records in locations other than their main business office But third-party recordkeepers were limited to specified entities (fund

administrators, custodians, distributors, banks, and broker-dealers)

The CFTC issued an exemptive letter dated September 8, 2014 that discarded these categories and permitted CPOs to use any third-party as a recordkeeper, so long as: The CPO has timely access to such records, so that the CPO will satisfy

the obligations of the applicable CFTC regulations, particularly with regard to providing such records for inspection; and

The CPO complies with existing requirements under CFTC Rules 4.7(b)(5) and 4.23(c) requiring that the CPO file a statement to identify the third-party to the CFTC.

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Remaining Recordkeeping Issues CTAs are still not permitted to delegate recordkeeping duties to

any third parties. The CFTC has acknowledged that its electronic recordkeeping

requirements have not kept pace with technology. For example, the CFTC rules contain a requirement that CPOs and CTAs

engage a “technical consultant” if only electronic storage media is used for some records.

Anecdotal evidence suggests that neither the CFTC nor the NFA enforce these antiquated requirements very rigorously.

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Remaining Recordkeeping Issues (continued)

Potential relief ahead? AIMA/IAA/MFA petitioned for more comprehensive recordkeeping

relief this summer (including to address the points referenced on the preceding slide).

In the September 8, 2014 letter, the CFTC stated that it intends to review the current CFTC recordkeeping requirements and their applicability to the current technological environment.

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CPO Delegation The CFTC staff takes the view that the CPO of A corporate fund (for example, a Cayman company) is its board members; A limited partnership or limited liability company fund is its general partner

or managing member/manager; This position does not apply to registered investment companies.

Under CFTC Staff Letter 14-69 (May 12, 2014), delegating CPOs were able to seek individualized no-action relief to delegate the CPO function to the designated CPO (usually the investment manager).

CFTC Staff Letter 14-126 (October 15, 2014) replaced Letter 14-69.

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Staff Letters – Conditions CFTC Letter 14-126 now makes no-action relief “self-executing” and

also modifies certain of the conditions in the prior letter The CFTC will consider granting individualized no-action relief where there are

circumstances that are not addressed in Letter 14-126

These conditions, as modified by Letter 14-126, include the following: The CPO function and investment management function must be delegated to the

designated CPO pursuant to a legally binding document The delegating CPO may not participate in solicitation of investors for the pool

unless (i) the delegating CPO is registered as an associated person (AP) of the designated CPO, or is exempt from such registration and (ii) such solicitation is conducted only in the delegating CPO’s capacity as an AP

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Staff Letters – Conditions (continued)

The delegating CPO may not manage any property of the pool, unless the delegating CPO: (i) is a principal or employee of the designated CPO or of a CTA of the pool, (ii) has management responsibilities over pool property, (iii) exercises these management responsibilities solely in the capacity of a principal or employee of the designated CPO or as a CTA of the pool (and not as the delegating CPO of the pool) and (iv) is subject to supervision as a principal or an employee by either the designated CPO or a CTA of the pool For purposes of this condition, management does not include administrative or

clerical responsibilities

The designated CPO must be registered as a CPO Therefore, the no-action relief is not available if the CPO is exempt

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Staff Letters – Conditions (continued)

The delegating CPO must not be subject to a statutory disqualification

There must be a legitimate business purpose for having separate delegated and designated CPOs Books and records of the delegating CPO must be maintained by the

designated CPO in accordance with CFTC recordkeeping rules If the delegating and designated CPOs are not natural persons, they

must be affiliates There must be joint and several liability, established by a legally binding

contract, between delegating and designated CPOs But this requirement does not apply to unaffiliated natural person delegating CPOs (such

as independent directors)

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Staff Letters – Issues Now that CFTC Letter 14-126 has been issued to provide for

“self-executing” CPO registration relief, there is a question for the industry as to whether the conditions in the letter should be complied with in all cases For example, should there always be a written agreement providing for

joint and several liability? If there is no such agreement, does that create an implication that there is

a registration obligation? It is possible that further relief/guidance may be forthcoming MFA and other industry groups have requested more comprehensive rule-

making on delegation issues

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Other Issues The NFA has stated that CPOs of registered funds do not need

to conduct NFA Bylaw 1101 diligence on fund investors However, this appears to be a temporary position NFA guidance is expected; timing remains uncertain

Funds-of-funds guidance The CFTC has stated that it will provide the fund of funds industry with

guidance on how the de minimis thresholds in CFTC Rules 4.5 and 4.13(a)(3) should be computed in a fund of funds

There is still no concrete indication of when this guidance will be provided It is also unclear whether it will be provided as part of a rule proposal or

as staff guidance

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Other Issues (continued)

JOBS Act CFTC Staff Letter 14-116 (Sept. 9, 2014) harmonizes Regulations

4.7(b) and 4.13(a)(3) with Rule 506(c) of SEC Regulation D, which permits general solicitation

This relief is not self-executing, meaning that a notice filing is required

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Other Regulatory Developments

Overview Key derivatives provisions of the Dodd-Frank Act Central clearing of derivatives Swap Execution Facilities (SEFs) Various margin issues Documentation Challenges Ahead

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Dodd Frank Act – Key Derivatives Provisions

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Dodd-Frank Product Definitions and Registration Requirements Dodd Frank regulations generally cover any transactions done under an ISDA Master

Agreement, with limited exclusions

“Swaps” and “Security Based Swaps” defined

CFTC regulates Swaps Interest rate swaps FX Covered under Dodd Frank: FX options,

swaptions and non-deliverable forwards Not covered under Dodd Frank (except for

Business Conduct), subject to final determination by US Treasury Dept.: FX swaps, FX forwards

Not covered at all under Dodd-Frank: FX spot; securities transactions

Index CDS Index equity derivatives Commodity derivatives Guarantees of swaps are considered to be swaps

SEC regulates Security Based Swaps Single name CDS Narrow index CDS (9 names or less) Single name equity swaps Narrow index equity derivatives (9 names or less) Guarantees of security-based swaps are considered

to be securities subject to federal securities law regulation

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Dodd-Frank Product Definitions and Registration Requirements (continued)

Registration requirements for Swap Dealers and Major Swap Participants

Swap Dealer (SD) / Security-Based SD (SBSD) Statutory definition: a person who Holds itself out as a dealer in swaps Makes a market in swaps Regularly enters into swaps with counterparties in

the ordinary course of business for its own account, or

Engages in activity causing it to be commonly known in the trade as a dealer or market maker in swaps

Liquidity providers on SEFs/exchanges may be required to be registered as SDs/SBSDs

The final regulation sets out a de minimus exception to SD/SBSD status: $8bn in gross notional of swaps executed over preceding 12-months, scaling down, after a phase-in period of 30 months, to $3bn in gross notional executed.

Major Swap Participant (MSP) / Security-Based MSP (SBMSP) An MSP/SBMSP needs to meet one of several tests Maintain a “substantial position” in any asset category

(excluding transactions that hedge or mitigate commercial risk), i.e. >$3bn in current, uncollateralized outward exposure in rates or >$1bn in other swaps OR >$6bn in current exposure + potential future exposure in rates or >$2bn in other swaps

Creates “Substantial counterparty exposure” across all asset classes (incl. transactions that hedge or mitigate commercial risk), i.e. for swaps, >$5bn in current exposure or >$8bn in current + potential future exposure , for security-based swaps, >$2bn in current exposure or >$4bn in current + potential future exposure

Is a “highly leveraged” financial entity and maintains a “substantial position” in any asset category (incl. transactions that hedge or mitigate commercial risk)

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ReportingReal-time post trade reporting and Swap Data Repository (SDR) reporting

Dodd-Frank mandates Real Time Reporting for public dissemination of price forming transactions and Regulatory Reporting (SDRReporting) of New Transactions and Lifecycle events, Positions and Valuations

One party to the trade is designated the Reporting party per the following hierarchy: Swap Dealer (regardless of whether it is a USperson or not) in preference to a Major Swap Participant, in preference to an End User. Where both parties share the same registrationstatus, the two parties to the trade will agree the reporting party. Where trades are executed on a SEF or cleared through DCO, thesebodies will provide reporting to an SDR on behalf of the reporting party

All parties need to obtain a legal entity identifier, called a CICI, which can be obtained at www.ciciuitlity.org

Requirement for the Reporting Party Requirement for the SDR

Real Time Reporting

Send summary trade details as soon as technologically practicablefor public dissemination (in any case within 15 mins).

Assign a unique trade identifier (Unique Swap Identifier – USI) andlegal entity identifier

Publicly disseminate information on price forming events.

PrimaryEconomic

Terms

Within 15 mins for electronic execution, 30 mins for voice executionbut electronic confirmation, and 24 hours for paper confirmation:

Send the SDR economic terms of the trade, sufficient to allow theprice to be calculated by a 3rd party. Both new trades and lifecycleevents

Store primary economic terms linked to original real time(RT) report

Confirm Data

Send confirmation data to the SDR (likely to be electronicconfirmation providers).

Send PDF copies of the confirmation for paper confirmed trades.

Link confirmation data record to RT and PET reports Store PDF copies of confirmation linked to the RT and

PET messages

Position Send lifecycle events or daily position snapshot in order to maintainoutstanding positions of all live trades to the SDR.

CFTC rules require lifecycle events for Credit and Equities and snapshot reporting for other asset classes.

SDR to calculate the position for Credit and Equities andto receive and store positions from the reporting partyother asset classes.

Valuation Send the SDR a daily valuation of each live transaction. Send collateral information for each trade.

Record daily valuation of live transactions

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Basic Distinctions between non-cleared bilateral and centrally cleared market

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Clearing of swaps

Client DealerFCM FCMSwap Trade

SEF

Clearinghouse

Matching, settlement, clearance

FCM FCMLSOC Reporting

Parties execute swap in an anonymous market through a SEF or board of trade Clearinghouse steps in between each Client and Dealer to be universal counterparty Clearinghouse requires both “initial” (up front) and “variation” margin (based on market moves and volatility

changes) from FCM, and FCM requires same of Client and Dealer Margin required by FCM (house margin) can exceed Clearinghouse required margin SEF and LSOC Reporting are the main differences from futures clearing model above

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Cleared Swaps

Futures & Options Agreement

OTC cleared addendum (FIA/ISDA form (product/clearinghouse neutral)

Give-up agreement (FIA/ISDA execution agreement)

Potential master netting arrangement to net futures, cleared and unclearedswaps

Clearinghouse Rules

SEF User Agreement and/or SEF rulebook

BothDF Protocol

Swap Dealer must comply with Business Conduct Rules when they face a customer for a swap, whether cleared or not

Off-SEF

Give-up agreement (FIA/ISDA execution agreement)

Schedule to the ISDA Master Agreement

Credit Support Annex

If segregation of IA is elected, then Account Control Agreement with third party custodian and CSA amendments

Uncleared Swaps

Schedule to the ISDA Master Agreement

Credit Support Annex

If segregation of IA is elected, then Account Control Agreement with third party custodian and CSA amendments

Documentation: Cleared vs Uncleared Swaps

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Swap Execution Facilities

Swap Execution Facility (SEF) was introduced in the Dodd-Frank Act in response to the G20 commitment to trade standardizedOTC derivatives “on exchanges or electronic platforms where appropriate”. SEFs will be a type of electronic execution platformintended to be suitable for trading of OTC derivatives

SEF rule and definitions

All trades must be executed on a SEF if: required to be cleared; are made “available for trading” (MAT) on a SEF; and are not “block” trades (CFTC has issued a final rule defining what is a “block” trade)

CFTC Final Rule (applies to Swaps) 2 types of execution methods: request for quote (RFQ) or order book (similar to an exchange); a SEF must provide for

order book execution in order to provide RFQ If RFQ, request must go to 2 or more market participants during the first year, then 3 or more Any responsive resting quotes from the order book must be transmitted to RFQ requester as well SEF submits determination that a swap is MAT to CFTC, which then reviews

SEC proposal (applies to Security-based Swaps) RFQ or central limit order book If RFQ, request can go to 1 market participant so long as SEF allows client the choice to RFQ more than 1

Other SEF obligations Surveillance and Compliance obligations Supply post-trade transparency and reporting to SDRs, electronic confirmation and STP

Standardized OTC derivatives must be traded on exchanges or SEFs, where appropriate

59

Swap Execution Facilities

Market Fragmentation Split in EUR interest rate swaps between US and non-US counterparties Pre-MAT volumes for interdealer trades was 25%; declined to 9% post-MAT

European dealers reluctant to trade with US dealers

Trade compression spikes Significant increase in volume due to compression and compaction May 2014 to June 2014 increased $1.8 trillion

SEF Rulebook review CFTC updating “provisionally registered” status to full registration Could result in significant changes to operations and other processes

Attrition resulting from reputational shifts

Industry Developments

60

Five Factors for long-term success Liquidity investors need trades done in the right size and price

Distribution Direct access, agency models, sponsored-access

Functionality Compression tools, innovative order types – more streamlined wins

Pricing Total cost of trades- ticket fees, spreads, agency fees

Service Investors want the ability to call and talk to about the system and market

Beyond the Numbers

Swap Execution Facilities

61

Margin Re-proposals

On September 3, 2014, U.S. banking regulators re-proposed margin, capital and segregation requirements applicable to SDs/MSPs in light of the Basel Committee on Banking Supervision’s and the International Organization of Securities Commissions’ issuance of their 2013 final policy framework on margin requirements for uncleared derivatives and the comments received on the original proposal. The revised proposal:

provides for a compliance deadline of December 1, 2015 for variation margin and a phased compliance schedule for initial margin, running from December 1, 2015 to December 1, 2019, with compliance timing dependent on the uncleared swaps exposures of a swap entity’s affiliated group and each counterparty’s affiliated group for the June to August period of each prior year;

does not require initial or variation margin for a swap entity’s transactions with non-financial end users;

includes a revised, and very complex, definition of “financial end user,” which differs significantly from the original proposal and existing definitions used by the CFTC and SEC;

outlines the specific collateral eligible to be used to satisfy the margin requirements and related “haircuts,” expanding the list of collateral for initial margin and limiting variation margin to cash;

does not provide an exemption from the margin requirements for uncleared swap transactions between affiliates; and

The revised proposal would apply to swap entities that are regulated by one of the “Prudential Regulators”. The CFTC and SEC have previously issued proposed rules for margin, capital and segregation requirements that would apply to swap entities not regulated by a Prudential Regulator, which differ in some respects from the Prudential Regulators’ proposal.

“Prudential Regulators” Proposal (the Federal Reserve, the FDIC, the OCC, the Farm Credit Administration and the Federal Housing Finance Authority)

62

On September 17, 2014, the CFTC re-proposed rules for uncleared swap margin requirements. The CFTC’s re-proposal would apply to CFTC-registered swap dealers and major swap participants that are not US or foreign banks, which includes non-bank subsidiaries of bank holding companies. The CFTC re-proposal is largely consistent with the re-proposal issued by the Prudential Regulator’s, except that unlike the Prudential Regulators’ re-proposal:

the CFTC specifically seeks comment on whether it is appropriate to allow SDs/MSPs to rely upon a foreign counterparty’s certification as to whether it is a financial end user. The CFTC’s re-proposal permits the CFTC to designate additional entitiesas financial end users if it identifies additional entities whose activities and risk profile would warrant inclusion;

the CFTC’s re-proposal requires control mechanisms for the calculation of variation margin. SDs/MSPs must: create and maintain documentation setting forth its calculation methodology with sufficient specificity to allow the

counterparty, the CFTC and any applicable Prudential Regulator to calculate a reasonable approximation of the margin requirement independently; and

evaluate the reliability of its data sources at least annually, and make adjustments, as appropriate

the CFTC’s re-proposal requires a SD/MSP to have in place alternative methods for determining the value of an uncleared swap in the event of the unavailability or other failure of any input required to value a swap and may at any time require a SD/MSP to provide further data or analysis concerning the methodology or a data source used to value a swap for variation margin purposes.

the CFTC’s re-proposal does not include a concrete proposal for how margin requirements would apply extraterritorially. Instead the CFTC’s re-proposal includes an advance notice of proposed rulemaking that offers three potential alternative approaches for industry comment.

CFTC Proposal

Margin Re-proposals

63

Margin Calculations

64

CFTC approves rule amendment for government-owned utilities Excludes “utility operations-related swaps” from counting against special entity “de minimis” Trades still subject to general de minimis threshold ($3billion w/initial phase-in level of $8billion)

CFTC Reauthorization Bill Provides for significant end-user relief from Dodd-Frank requirements

ISDA Resolution Stay Protocol Industry initiative to address “too big to fail”

Clearing Non-deliverable forwards CFTC staff currently considering a proposal for mandating clearing for 12 currency pairs

Bitcoin derivatives TeraExchange completed first bitcoin derivatives trade on regulated exchange

The road ahead…

65

Key Dates In 2014

Effective Date of CFTC final rule on exclusion of utility operations-related swaps w/special entities from de minimis threshold

Comment deadline for Prudential Regulator and CFTC proposed margin rules

SEC cross-border guidancefinalization?

Effective date for rules for segregation of initial margin under uncleared swaps w/existing counterparties

Expiration of CFTC No-Action relief under CFTC letters 13-44, 13-73, 13-81, 14-07, 14-25, 14-26, 14-60, 14-68, 14-74, 14-85, 14-86, 14-87, 14-107

Oct 27 Nov 3 End of Nov/Start of Dec End December/Year -end

66

QUESTIONS?

DC 9880531 v2

Enforcement DevelopmentsStephen J. CrimminsJonathan N. EisenbergShanda N. Hastings Kermitt Brooks, AXA Equitable Life Insurance U.S.

Major Changes in the SEC Enforcement Program

New SEC Decision-MakersSEC Chair Mary Jo White: First SEC chair who was a criminal prosecutor. Get-tough stance (Madoff, financial crisis). “First and foremost a law enforcement agency.” “Broken windows.”

Enforcement Director Andrew Ceresney: Also a criminal prosecutor. Longtime colleague of White.

2

New SEC Decision-Makers(continued)

Case production during White and Ceresney’sfirst year (FYE 9/30/2014): 755 cases (up from 686), with $4.2B awarded (up from

$3.4B).

Asset Management Unit: Continuing huge case production since creation in

2010. What used to be deficiency letter matters can now be

enforcement cases.

3

New SEC Decision-Makers(continued)

AMU leadership change. Promotions from within (former deputy chiefs), so expect the aggressive enforcement approach to continue. Julie Riewe (DC-based, joined SEC in 2005, JD Duke, 8th Cir.

clerk). Marshall Sprung (LA-based, joined SEC in 2003, JD NYU, ND

Tex. clerk).

4

New Enforcement ApproachesRisk identification initiatives – e.g. aberrational

performance.Partnerships with other divisions: DERA for risk assessment; OCIE for surveillance; and Investment Management for theory.No more silos.Gatekeeper focus: attorneys, accountants,

compliance professionals.

5

Requiring Admissions in Settlements

Started by Mary Jo White. Outlier among federal agencies.Problem: Require admissions in what kinds of

cases? Criteria still unclear. Jenson (7/28/2014): COO of Harbinger (Falcone). Aiding and abetting. Assisted Falcone to take related-party loan on favorable

terms.6

Whistleblower Program Gaining Momentum

Relatively new tool resulting from Dodd-Frank. In cases where SEC collects over $1M, can

award up to 30% as bonus to whistleblower. Retaliation protections.Record award $30M this year. Previous record

was $14M. Up from five-figure awards not long ago.

7

Whistleblower Program Gaining Momentum (continued)

First case charging retaliation against whistleblower:Paradigm Capital Management (6/16/2014).

Charged that head trader was demoted following whistleblowing. Settled for $1.7M disgorgement, $300K penalty.

8

Shift to In-House Administrative Proceedings

Dodd-Frank substantially expanded SEC’s power to bring cases before its own ALJs instead of in federal court.Already happening: For FYE 9/30/2014, 57% in court versus 43% as

administrative cases, so approaching 50-50.

9

Shift to In-House Administrative Proceedings

(continued) Problems for litigating defendants: Limited discovery. Time to trial. No jury. No evidence rules (hearsay allowed). Appeal is to SEC commissioners, now aggressive on

enforcement, and further federal court of appeals review is limited.

10

Shift to In-House Administrative Proceedings

(continued)SEC cases often charge fraud and seek serious

penalties, including lifetime professional bars and large monetary penalties. Based on quasi-criminal nature, do these cases

inherently belong before juries? Defense usually needs jury (federal court) in

circumstantial cases. Also in cases where witness credibility is important.

11

Recent Enforcement Focus Areas

Pay-to-Play Rule adopted in 2010. First pay-to-play case against an adviser –

TL Ventures (6/20/2014): Associate contributed $2500 to Philadelphia mayor

(appointed three of nine on city pension board), $2,000 to Pennsylvania governor (appointed six of eleven on state retirement board). Settled for almost $300K.

13

Allocation of Expenses Clean Energy Capital (2/25/2014): Fees and

expenses charged by PE adviser firm. Advisers’ rent, salaries, other employee benefits, bonuses. When funds were short paying expenses, adviser loaned at 17%. Antifraud provisions. Litigated.

Lincolnshire (9/22/14): Integrated portfolio companies operationally. Owned by different managed funds. Some payments benefitted both, or just one, yet not fairly allocated. Settled for $1.5M disgorgement and $450K penalty.

14

Custody Rule Standards when maintaining custody for clients.

Majority do not and, instead, use bank or broker-dealer for custody.

2010 amendments require annual “surprise” exam to verify assets or have an audit by PCAOB-registered auditor.

15

Custody Rule (continued)

Three settled cases (10/28/13): Negligence C&Ds. Further Lane (and CEO): Failed to arrange annual

surprise exam. Disgorgement $347K. Penalty for CEO $150K, plus one-year industry bar. GW & Wade: Failed to identify itself as a custodian to

investors or auditors. $250K penalty. Knelman (and CEO and CCO): Funds were not subject

to annual surprise exams and did not audit financial statements. Firm $60K penalty. CEO/CCO $75K penalty, plus three-year bar as CCO.

16

Custody Rule (continued)

Litigated case: Sands (10/29/2014): Allegedly late for each of three

years in providing audited financials. Also, claim against co-founders and CCO/COO.

17

Undisclosed Compensation Arrangements

Robare Group (9/2/2014): Received a percentage of funds that its clients invested in certain mutual funds. Approximately $440K over eight years. Fraud charges. Litigating.

18

Cherry-Picking in Performance Advertising

Grimaldi / Navigator (1/30/2014): Selectively touted past performance of a fund. Fraud charges. Settled for censure, $100K penalty and compliance consultant.

19

Charging Rule 206(4)-7 as a Standalone Violation

Adopted in 2003. Requires written policies and procedures

“reasonably designed to prevent violation” of the Advisers Act and rules. Must review effectiveness annually. Must designate a CCO.

20

Charging Rule 206(4)-7 as a Standalone Violation (continued)

Must reflect changes in business: Barclays Capital (9/23/2014). Failed to enhance

compliance infrastructure to integrate and support acquisition and growth of Lehman’s advisory business. Settled for $15M penalty and compliance consultant.

21

Other Policies and Procedures Cases

Valuation: GLG Partners (12/12/2013). Hedge fund adviser’s

valuation policy required monthly determination of 25% PE stake in portfolio company by independent pricing committee. Employees got info raising questions on valuation. Inadequate P&Ps to ensure provided to independent pricing committee. Confusion regarding who was supposed to elevate. Charged internal controls violations. Settled for disgorgement of $4.4M and penalty of $750K.

22

Other Policies and Procedures Cases (continued)

Insider trading: Wells Fargo (9/22/2014): Broker learned from customer

about a takeover and traded. Indications the broker was misusing customer information. However, lacked coordination of assigned responsibilities, so failed to act. Charged Exchange Act § 15(g). Settled for $5M penalty, censure and independent consultant.

23

Where Are We With State Enforcement?

Breadth of New York’s Martin Act

Tenth anniversary of NYAG Spitzer’s late-trading and market-timing initiative

Formation of New York DFS: Reach to add enforcement powers

Evolving New York focus: Fairness trumps contractual provisions?

Particular areas to watch at this point?

24

QUESTIONS?

DC 9881456 v2

Marketing and TradingK. Susan GraftonC. Dirk PetersonJoshua O’MeliaRebecca Sheinberg, The Carlyle Group

1

Cross-Border Fund-Raising Trading and Markets Issues Including

Best Execution and Market Structure Developments Advertising and Marketing, Including Use

of Social Media and the Impact of the JOBS Act

Discussion Overview

Cross-Border Fund-Raising

Cross-Border Fund-Raising All the world’s a stage, and all the men and

women merely players . . . .” -- As You Like It, By William Shakespeare

3

Primary Considerations Issuer Considerations – Registration requirements

of the offering itself or available exemptions, as well as, in the case of a pooled investment fund, the extent to which the adviser has a regulatory status in a particular jurisdiction as a result of providing advice

Marketer Considerations – Status of the marketer in a particular jurisdiction when promoting a fund and whether registration requirements apply or exemptions may be available

4

Offshore Offerings – U.S. The United States has a relatively seasoned regulatory regime for

offshore fundraising into the U.S. Private offering regime pursuant to Regulation D of the Securities Act – since 1985,

Regulation D has prescribed a nonexclusive safe harbor to Section 4(a)(2) of the Securities Act to determine the private status of an offering that is exempt from the registration requirements of Section 5 of the Securities Act

JOBS Act Private funds exception – For pooled investment funds that are not intending to

register, or may not qualify for registration (e.g., foreign issuers), Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act exclude issuers from registration requirements of the Investment Company Act to the extent that an issuer would be an investment company within the meaning of the Investment Company (the private fund exclusion ties with Rule 506 of Regulation D to ensure private status under the Investment Company Act)

Rule 15a-6 under the Securities Exchange Act – since 1989 provides an exemption from broker-dealer registration for “foreign broker-dealers” that solicit securities transactions with U.S. institutional investors and major U.S. institutional investors

5

Offshore Offerings – Asia Pacific Australia

A person that conducts a “financial services business” in Australia could be subject to regulation by Australia’s financial services laws “Financial services business” can include providing financial product advice,

dealing in a financial product, and performing custodial or depository services in respect of a financial service product.

The extent of engaging in a financial services business is factual and depends on the depth of contacts in Australia. Potentially, a “fly-over” visit to Australia is not sufficient to be a “business” for these purposes.

Solicitation of subscription interests and other fund-raising efforts can trigger requirements for an Australian financial services (AFS) license regardless of the status of the issuer or manager in the United States.

Potential Exemptions – Australian Securities and Investment Commission (ASIC) Class Order 03/1100

6

Available to SEC-registered investment advisers that may be fund-raising in their own right.

Exemption is not self-executing, and an SEC-registered investment adviser must obtain an exemption from ASIC by applying for the exemption with supporting documentation and by appointing a local agent or, if the activities are substantial in Australia, register as a foreign company.

Limited exemption in the scope of potential investors that could be solicited. Marketing is limited to “wholesale” investors (non-retail investor) characterized as follows: Purchases an interest in the issuer (fund) in excess of (AU)$500K Investor (as certified by an accountant) has net assets of at least (AU) $2.5 million or gross

income for each of the past two financial years of at least (AU)$250K Falls within a category of “professional investor”

Disclosure on offering documents relating to the adviser’s exempt status and its regulatory status as an SEC-registered adviser under U.S. laws, which differ from Australian laws.

Asia Pacific (continued)

7

Asia Pacific (continued)

Japan Two types of licensing considerations arise in Japan in connection with the

marketing of a fund to Japanese investors and the management of a fund in which Japanese investors hold interests.

The Financial Instruments and Exchange Act of Japan (FIEA) regulates investment management functions of foreign investment partnerships in which advice is given indirectly to Japanese investors – e.g., advice to a fund in which Japanese investors hold interests.

Registration is burdensome and impractical for offshore managers. Accordingly, exemptions are sought.

Two exemptions exist─one is self-executing and the other is obtained by notice filing with the Japan Financial Services Agency (JFSA).

8

Asia Pacific (continued)

Self-Executing Exemption Extends to the General Partner of the Fund (not the adviser), although a fund adviser may permissibly

“piggyback” off the exemption obtained by the General Partner insofar as an appointment exists from the General Partner allocating advisory functions to the fund adviser.

All Japanese investors must be “qualified institutional investors,” as defined by the FIES (e.g., banks, securities companies, Japanese-registered investment managers, certain high-net-worth individuals who, among other requirements, have obtained status as a “qualified institutional investor.”

The number or Japanese “qualified institutional investors” is less than ten.

The total amount of contributions by all Japanese “qualified institutional investors” is less than one-third of the total amount of investment in a fund.

Article 63 Exemption Requires notification to the JFSA and requires disclosure of, among other things, the capital formation

of the General Partner, the business activities of the General Partner, and identities of Japanese “qualified institutional investors.”

9

Asia Pacific (continued)

At least one Japanese investor must be a “qualified institutional investor,” and there are less than 50 Japanese non-qualified institutional investors.

Solicitations – In addition to the advisory regulatory and exemption requirements, the solicitation of investors triggers the second of the licensing considerations in Japan. Very generally, soliciting subscriptions from Japanese investors requires the services of a Type 2

financial instruments dealer.

A limited exemption may extend to the General Partner of a fund permitting it to fund-raise in its own right or permitting a placement agent, which has been engaged by the General Partner, to fund-raise in the absence of a Type 2 registration.

If the fund is working through a placement agent that is SEC-registered and does not otherwise hand off fund-raising to a Type 2 licensed dealer in Japan, the placement agent could engage in limited fund-raising, as follows:

Contacts are made outside Japan (inbound calls would be permitted) Contacts are made solely to (i) banks, (ii) insurance companies, (iii) credit unions, credit cooperatives etc. and

(iv) Japanese-registered

10

Asia Pacific (continued)

If the General Partner (not the adviser) seeks to fund-raise directly, a narrow exemption exists, as follows: The fund must contain at least one “qualified institutional investor” and

may have no more than 49 non-qualified institutional investors among Japanese investors.

The fund’s Limited Partnership Agreement must contain transfer restrictions tailored to address transfers by and among “qualified institutional investors” and non-qualified institutional investors.

The General Partner makes a notice filing to the JFSA, which contains background on the offering, including (among other things) the business activities of the General Partner, capital formation, and identities of Japanese “qualified institutional investors.”

11

Asia Pacific (continued)

Hong Kong Consideration in Hong Kong must be given to the regulatory status of those

engaged in fund-raising and the offering itself. Direct fund-raising, as well as advice regarding the merits of a fund investment,

raise “Type 1” and “Type 4”) licensing issues (Dealing in Securities and Advising on Securities, respectively). Marketing in Hong Kong would require the intermediation of a Type 1-licensed dealer, at a minimum.

Generally speaking, a Type 1-licensed dealer could give advice as to the merits of fund investment absent also having a Type 4 license to render investment advice on the theory that the advice was incidental to the offering of fund interests.

Offering would need to focus on “professional investors” in order to ensure that the offering itself would not be subject to registration in Hong Kong.

12

Asia Pacific (continued)

Regulation of “Collective Investment Schemes” (CIS) – a CIS very generally is an arrangement where investors have no day-to-day control over fund operations (they are passive), having delegated such control to a fund manager to manage the business of the fund for the purpose of receiving profits. Exemptions from authorization of a CIS or prospectus approvals apply to offerings to “professional

investors” in Hong Kong.

Very generally, a “professional investor” includes (among others) (i) specified financial intermediaries and institutions, (ii) certain trusts that satisfy a HK$40 million (or foreign currency equivalent) asset threshold (documentary evidence required), (iii) high-net-worth individuals who satisfy a HK$8 million (or foreign currency equivalent) asset threshold (documentary evidence required), (iv) corporation and partnerships with a portfolio of at least HK$8 million or assets of HK$40 million (or foreign currency equivalent)(documentary evidence required), and (v) any corporation whose sole business is to own investments and is owned solely by persons described in (iii).

The offering, however, must be marketed by a dealer authorized by the Hong Kong Securities and Futures Commission (SFC) as a Type 1 dealer.

Assuming reliance on the “professional investor” exemption, and the absence of filing for approvals of a fund and its offering memorandum, the OM would nonetheless need to contain disclosure tailored to an exempt Hong Kong offering.

13

Offshore Offerings – E.U. Alternative Investment Fund Managers Directive

(AIFMD) Slightly more than one year in effect (July 22, 2013) Regulates alternative fund managers rather than the funds

themselves Established to close perceived regulatory gaps in the alternative

asset management and investments space, which was argued to have contributed to the global financial crisis of 2008

Contains many points of regulatory application including (but not limited to) applying to the marketing of non-E.U.-domiciled funds offered by non-E.U. asset managers (or their agents) to E.U. investors (e.g., U.S. advisers to Delaware and/or Cayman pooled investment funds)

14

Offshore Offerings – E.U. (continued)

Key concepts related to marketing of non-E.U.-domiciled funds in the E.U. by non-E.U.-domiciled advisers (or their agents): “Reverse Solicitation” – The AIFMD will not apply to offers of pooled investment funds by reverse

solicitation. Not entirely clear on scope and fact-intensive, but clearly may not be at the initiation or marketing on the part of the adviser (or agent). Factors that may be of guidance include (i) pre-existing business relationship between adviser and investor; (ii) the extent to which the investor’s approach was general (more likely that the adviser would be deemed to have solicited during the course of the communication) or more specific as to fund offering (less likely there would be no solicitation because the investor was specifically informed, assuming that neither the adviser nor its agent was responsible for informing the investor. Just how practical is the reverse solicitation carve out anyway?

Passporting – Since July 2013, AIFMD passporting permits E.U.-domiciled asset managers to market pooled investment funds (deemed AIFs) throughout the E.U., as well as manage AIFs wherever domiciled in the E.U. Passport marketing currently is not available to non-E.U.-domiciled asset managers, although 2015 may mark a potential program to permit passporting to non-E.U.-domiciled asset managers and AIFs. Currently, private placement regimes, to the extent provided in a member state, provide the only option for marketing AIFs sponsored by non-E.U.-domiciled asset managers. The earliest member states may consider the continuation of a private placement regime is 2018.

15

Offshore Offerings – E.U. (continued)

Germany Germany takes a restrictive approach. As of July 21, 2014, Germany requires persons that actively fund-raise for

investment in a pooled investment fund to obtain an authorization from the Financial Supervisory Authority (BaFin), which is the German equivalent to the SEC.

BaFin authorization is required even if the marketing is limited exclusively to “professional investors.” BaFin imposes ongoing reporting obligations for the adviser: Disclosure to BaFin of: (i) the principle markets and instruments in which the fund/adviser trades; (ii)

the primary holdings of the fund, markets transacted in by the fund, risk exposure of the fund and concentrations of the fund; (iii) the percentage of illiquid assets; (iv) the fund’s risk profile and risk-management systems; (v) asset categorization; (vi) stress test results, as prescribed by the Capital Investment Act; (vii) annual report (at BaFin’s request); (viii) leverage information; and (ix) other information BaFin believes necessary to monitor systemic risk.

16

Offshore Offerings – E.U. (continued)

As a condition to authorization, an unaffiliated depository is required to satisfy specified obligations, as follows: Monitoring of fund cash flows and audit functions ensuring custody of investor assets in a custodian

deemed subject to effective prudential regulation and supervision comparable to the laws of the E.U.

Verification of ownership of fund assets

Make assurances of (i) the permissibility of sales, issues, re-purchases, redemptions and cancellations of fund interests; (ii) asset valuations; (iii) directions/instructions of the adviser to the extent the directions/instructions do not conflict with national law, the fund’s rules or fund’s formation documents; (iv) remittances to the fund are timely; and (v) the application of fund income consistent with national law, the fund’s rules or the fund’s formation documents

The adviser must comply with investor disclosure requirements, including the following:

17

Offshore Offerings – E.U. (continued)

Provide an annual report. Describe (i) the investment strategy and objectives of the

fund; (ii) asset types for potential investment; (iii) investment methods and risks; (iv) the use of leverage and collateral use; (v) investment restrictions; and (vi) other material disclosures that relate to, among other things, fees, risk management, valuations process, and material business arrangements relevant to fund management and investment.

Reportings to investors are at the initial investment stage, which could be addressed in the offering memorandum, but also on an ongoing basis.

18

Offshore Offerings – E.U. (continued)

United Kingdom Like Germany, marketing of fund interests by a non-E.U.-domiciled asset

manager would be subject to AIFMD restrictions. The Financial Conduct Authority (FCA) regulates, among other things, firms that

are in the business of “arranging deals,” an activity which includes the active promotion of investment funds in the U.K.

A single “flyover” visit or de minimis contact may not rise to the level of “arranging deals” in the U.K., but the extent of FCA regulatory jurisdiction would depend on frequency of visits, length of time spent in the U.K. marketing, and the extent of fund promotion as a business at the particular adviser. Alternatively, all contacts that are made outside the U.K. could avoid FCA regulatory jurisdiction.

Use of an FCA-authorized intermediary to market a fund could permit a U.S. adviser to participate in fund road shows absent FCA authorization, provided the FCA-authorized intermediary handled investment recommendations and subscriptions.

19

Offshore Offerings – E.U. (continued)

Scope of offering should be limited to “investment professionals” to avoid FCA-authorization requirements.

“Investment professionals” include among others: (i) FCA-authorized firms, (ii) companies that have share capital or assets of £500,000 or £5 million or more, depending on the number of shareholders; (iii) partnerships or unincorporated associations with assets of £5 million or more; or (iv) a trustee having an aggregate value of cash and investments (before liabilities) of £10 million or more presently or that has been £10 million or more during the prior year.

The AIFMD would impose additional obligations that are required at the initial investment and ongoing (see Germany example). A notice filing with the FCA would be required, as would ongoing reporting that related to the fund’s investment and risk management similar to the SEC’s Form PF reporting.

20

Offshore Fund-Raising –Middle East

Bahrain Direct marketing of fund interests raises licensing issues and authorization from

the Bahrain Ministry of Industry and Commerce (MOCI) and the Central Bank of Bahrain (CBB).

Thus, if actively marketing fund interests, efforts should proceed through an intermediary authorized by the CBB to distribute securities.

An adviser could participate in road shows with an authorized intermediary, but those participations should be vetted and subject to guidelines to protect the adviser from acting as an unauthorized distributor of securities.

Very generally, a pooled investment fund would be a “Collective Investment Undertaking” (CIU), which would impose cross-border restrictions on the CIU sponsor.

21

Offshore Fund-Raising –Middle East (continued)

Although a CIU could be offered on a private-placement (non-retail) basis in Bahrain, it is still subject to authorization by the CBB via Form 1 and must be marketed by a securities distributor authorized by the CBB.

Offering circulars will need to contain legends tailored to an offering in Bahrain in addition to specific disclosure prescribed by the CBB.

Generally, the offering must be limited in scope – (i) minimum investment of $100,000; and (ii) offering to “accredited investors,” as established by Bahrain law (e.g., financial assets of $1 million or more).

22

Market Structure Developments

24

One-year pilot program to be developed and filed jointly by FINRA and the exchanges (Release No. 34-573511; File No. 4-657 (Nov. 3, 2014) Comments due: December 22, 2014

Pilot Securities NMS common stocks with (a) a market capitalization of $5 billion or less; (b) a

closing price of at least $2.00 on the last day of the 3-month measurement period; (c) a closing price of at least $1.50 on every day of the measurement period; (d) a consolidated average daily volume of one million shares or less; and (e) a volume weighted average price of at least $2.00 per share during the measurement period

No recent (i.e., within 6-months) IPO stocks

The Pilot Securities will be grouped into 27 categories based on price, market capitalization and trading volume, and each of those three categories will be further subdivided into low, medium or high subcategories.

Tick Size Pilot Program

25

A random sample of Pilot Securities from each of the 27 categories will be placed into three Test Groups in a number proportional to the category's size relative to the population of Pilot Securities.

Pilot Design: Each test group will 400 securities Test Group One: Minimum quote increment of $0.05 minimum; trade at any

currently permitted increment Test Group Two: Minimum quote and trade increments of $0.05; applicable to

brokered cross-trades. Exceptions for: (1) trades at the midpoint, (2) retail investor trades that provide price improvement of at least $0.005, and (3) negotiated trades (e.g., VWAP and TWAP)

Test Group Three: Same as Test Group Two, plus a “trade-at” requirement to prevent price matching protected quotations by a trading center not displaying the NBBO, and to permit a trading center that was quoting at a protected quotations to execute orders at that level, but only up to the amount of its displayed size

Control Group: Current quote and trade increments

Tick Size Pilot Program

Regulation SCI Regulation SCI supersedes and replaces the SEC’s current Automation

Review Policy (“ARP”), established through two policy statements, each titled “Automated Systems of Self-Regulatory Organizations,” issued in 1989 and 1991.

Compliance dates are phased based on the type of entity and requirement Applies to “SCI entities”:

“SCI self-regulatory organizations”: national securities exchanges, national securities associations (FINRA and the MSRB) and registered clearing agencies

“SCI ATSs”: alternative trading systems that meet certain average daily volume thresholds (e.g. , at least 5% in any National Market System (“NMS”) security and 0.25% in all NMS securities, or 1% in all NMS securities

Exempt clearing agencies Plan processors

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Regulation SCI Regulation SCI will require “SCI entities” to:

Establish written policies and procedures reasonably designed to ensure that their systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that they operate in a manner that complies with the 1934 Act.

Mandate participation by designated members or participants in scheduled testing of the operation of their business continuity and disaster recovery plans, including backup systems, and to coordinate such testing on an industry- or sector-wide basis with other SCI entities.

Take corrective action with respect to SCI events (e.g., systems disruptions, systems compliance issues and systems intrusions), and notify the SEC of such events.

Disseminate information about certain SCI events to affected members or participants and, for certain major SCI events, to all members or participants of the SCI entity.

At least an annually, conduct a review of their systems by objective, qualified personnel at least annually, submit quarterly reports regarding completed, ongoing, and planned material changes to their SCI systems to the Commission, and maintain certain books and records.

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Pending Developments Regulation of high-frequency traders Guidance on “traders exception” from the definition of

“dealer” in Section 3(a)(5) of the Securities Exchange Act of 1934

Elimination of exception from FINRA membership

Increased Disclosure Institutional investor order routing information Order types Payment for order flow and rebates Alternative trading systems

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Disruptive Trading Practices In re Athena Capital Research, LLC,

Release No. 73369 (Oct. 16, 2014) First-high speed trading manipulation case “Marking the Close”

Development of anti-disruptive trading rule Risk management of algorithmic trading

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Best Execution

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Generally, best execution is the duty to obtain the best price given the portfolio manager’s objective

Derives from common law and the anti-fraud provisions of the federal securities laws, particularly Section 206 of the Investment Advisers Act of 1940

SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963): Section 206 imposes a fiduciary duty on investment advisers Duty of loyalty and duty of care

Duty of Best Execution

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Factors in Evaluating Execution Quality; Not Just Price

Price and price improvement Speed Certainty of execution Responsiveness Commission and commission

equivalent rates Order handling capabilities, such

as block and complex trades Expertise with relevant markets or

securities Assistance in finding liquidity and

willingness to commit capital

Access to market centers and other market participants

Low trading errors and willingness to correct mistakes

Value of research Confidentiality Reputation Capital adequacy Back-office capabilities, including

automation and trade reporting Past experience

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Implement and update written compliance policies and procedures addressing best execution: Broker selection Methods and measures for evaluating execution quality Allocation of desk or trader responsibility for particular funds, investing style,

and geographic and industry sectors

Establish a best execution committee with appropriate procedures Committee meetings should be periodic and systematic Minutes should be made and maintained under direction of legal

Implement and test systems for monitoring executions Determine tools that will be used

Broker-dealers’ “dash reports” (Exchange Act Rules 605 and 606) Vendor services

Provide periodic training to relevant personnel

Establishing a Compliance Program

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Focus should be on obtaining the best price given the portfolio manager’s objective

Trading desks should have the necessary tools, including: Effective execution management system Timely and accurate market data as needed to determine the best price of a

security Protocols and mechanisms for handling trade aggregation, trade allocation, and

trade sequencing Procedures for complying with regulatory requirements relating to cross and

agency-cross trades and principal transactions Client account instructions, including account objections, use of soft dollars, and

disallowed brokers

Guidance should be provided regarding the number of dealers that should be contacted to obtain a price, particularly for illiquid and thinly traded securities

Trading Desk Compliance

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Periodic and systematic meetings of the best execution committee to review execution quality Analyze execution quality based on statistical information Review executing brokers, including with respect to the reasonableness of

commissions and commission equivalents, soft-dollar arrangements, potential conflicts of interest, any credit or other financial issues regarding the broker, news relating to litigation, regulatory investigations, and other qualitative factors

Desk errors or mistakes Systems issues Available third-party data

Determine and assign responsibility for pre-meeting preparation

Assign responsibility for implementing any needed changes based on review

Make and keep relevant records

Post-Trade Review and Analysis

Advertising and Marketing

Marketing and Performance SEC examinations – recurring problems:

Cherry-picking composites Comparing performance to inappropriate indices Representing model or back-tested performance as actual

performance Portability Submission of misleading information to publications or

consultants Inaccurate assets under management False or improper GIPS claims Not presenting net-of-fees performance (especially on website) Use of superlatives

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In the Matter of Navigator Money Management, Inc. and Mark Grimaldi (Jan. 30, 2014)

The SEC charged a New York money manager and his firm with making misleading claims about the success of their investment advice, the performance of a mutual fund they managed, and the performance of model portfolios they recommended

For example, they stated that their Sector Rotation Fund was ranked No. 1 out of 375 World Allocation funds tracked by Morningstar; but the time period they picked─October 13, 2010, to October 12, 2011─was “cherry-picked” and did not reflect its performance in other periods

Alleged that the adviser’s claim that it was a “five-star (Morningstar) money manager” was misleading because Morningstar rates funds not investment managers

Alleged that the adviser’s model portfolios “doubled the S&P 500 in the last 10 years” was misleading because the adviser was not involved in the model portfolio performance for the first three years

Failed to comply with rules about advertising past performance recommendations SEC staff alleged that the adviser did not have any written policies and procedures

specifically tailored to address the kinds of advertisements made; rather, the policies and procedures simply “parroted” the SEC’s advertising rule

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Compliance Considerations Customize written policies and procedures Ad preparation process

Consider use of checklist for each advertisement Track SEC requirements and include appropriate disclosures Describe dates, benchmarks, indexes, and sources Document sign-off by all involved in preparation and review Verify that performance data is accurate, and keep records Attach support to verify factual claims Attach checklist to approved advertisement

Consider the facts and circumstances Consider the sophistication of audience If you can’t substantiate it – don’t say it!

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Social Media Guidance Update

SEC Investment Management Guidance on Social Media (March 28, 2014)

Addresses the interactive nature of social media

Prior to guidance, an advertisement with non-investment-related client commentary could be a prohibited testimonial under Rule 206(4)-1(a)(1) Testimonial – any explicit or implicit statement of a client’s

experience with, or endorsement of, an investment adviser

Problems: Advertising guidance for print and email Businesses are using social media Certain functionalities on social media cannot be disabled

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Guidelines for Third-Party Postings Adviser that maintains or links to a social media

site with public commentary (which may include client commentary) is not in violation of the testimonial rule if: Independent social media website Independent third-party commentary Completeness of content No modification of content

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Client Lists Contacts or “friends” on a social media website

of an adviser or its personnel would not be an impermissible testimonial even if a partial client list

May be a misleading advertisement if: Inference that contacts or “friends” have experienced

favorable investment results Manipulate or present the list in a misleading manner

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Policies and Procedures Advisers with a social media presence should

consider policies and procedures that: Expressly identify permissible social media websites

that the adviser and its personnel may use for business purposes

Prohibit personnel from asking clients or the public to post comments about the adviser or its personnel

Prohibit personnel from posting unauthorized comments on the adviser’s social media sites

Prohibit manipulation of third-party posts

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Compliance Considerations Training related to social media Record-keeping requirements Monitor compliance Employee privacy concerns

Follow up any potential violations

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Accredited Investor Standards

Accredited Investor Definition On October 9, 2014, SEC met with its “Investor Advisory Committee”

(IAC) to discuss possible changes to the “accredited investor” (AI) definition Dodd-Frank established the IAC and also requires the SEC to revisit the Al

definition every four years The purpose of the IAC and its subcommittees is to advise and consult with the

SEC on, most notably, investor protection issues

The IAC proposed several key recommendations to change the AI definition, particularly as it relates to individuals

First, the IAC argued that the SEC should revise the Al definition to enable investors to qualify based on financial sophistication, rather than financial thresholds

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Accredited Investor Definition (continued)

The IAC argued that financial thresholds have various shortcomings, including notably the fact that some investors may be wealthy but lack financial sophistication

The IAC suggested that financial sophistication could be demonstrated through: Professional certificates Professional and investments experience Membership in relevant groups Standardized tests

To the extent that financial thresholds are retained in the Al definition, the IAC suggested that some restrictions be added One suggestion was limiting individuals who meet the thresholds to investing up

to [10] percent of their income or net worth in private offerings in aggregate in a [12-month] period

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The IAC acknowledged that any change to the accredited investor definition that increases its complexity will ultimately increase the burden on issuers to verify accredited investor status

Therefore, the IAC urged the SEC to take steps to develop an alternative means of verifying accredited investor status that shifts the burden away from issuers The IAC suggested third-party verification provided by securities professionals,

such as brokers, accountants, and attorneys The SEC has received similar feedback on the verification issue in connection

with Rule 506(c) offerings

The IAC recommendations are, unsurprisingly, focused on the interests of investors, particularly individuals Different constituencies, including issuers of private fund securities will have an

opportunity to share their own perspectives during any rule-making process

Accredited Investor Definition (continued)

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Rule 506(c), (d)

Update on Rule 506(c) Since Rule 506(c) of Regulation D became effective in

September 2013, private fund managers have been permitted to raise capital through general solicitation and advertising

Some industry observers predicted that the adoption of Rule 506(c) would unleash a torrent of private fund advertising

This has not happened Vast majority of private offerings by hedge funds continue to be

conducted pursuant to Rule 506(b), which is to say without general solicitation

Only about 10% of all Rule 506 offerings are conducted pursuant to Rule 506(c)

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Deterrence to Use of 506(c) Requirement to take reasonable steps to verify accredited investor

status of investors Concern about the “burden” of verifying accredited investor status, particularly

because some prospective investors do not want to provide confidential materials to managers

But the burden of verifying status may not be significantly greater than the burden of establishing a “reasonable belief” that an investor is accredited in a traditional Rule 506(b) offering

Private funds may use an institutional sales process─long investment process, personal meetings, and a small number of investors

Don’t want to be the first one to use a new process and be a “test case”

Resistance to change in the manager and investor communities

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Safe Harbors Four safe harbors for the verification requirement

Income Test (obtaining copies of tax returns) Net Worth Test (reviewing bank and brokerage statements, credit reports, etc.) Third-Party Verification (e.g., Broker-Dealers, RIAs, attorneys, CPAs) Existing Investors

In a speech to the Angel Capital Association on March 28, 2014, Keith Higgins, the Director of the Division of Corporation Finance of the SEC, reminded the investment community that the safe harbors are nonexclusive An issuer of securities is not required to obtain tax returns or securities

statements in order to verify accredited investor status An issuer can properly verify accredited investor status by any number of means,

depending on the particular facts and circumstances The investment amount itself may be indicative of accredited investor status

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Safe Harbors (continued)

Mr. Higgins went on to say that while the SEC Staff may not be in a position to provide guidance on what constitutes reasonable steps in particular circumstances “I also believe that staff will not be quick to

second-guess decisions that issuers and their advisers make in good faith that appear to be reasonable under the circumstances”

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CFTC Update on Rule 506(c) Another barrier to the use of Rule 506(c) has

been that fund managers relying on CFTC Regulation 4.7(b) or 4.13(a)(3) have been prohibited from marketing their funds publicly On September 9, 2014, the CFTC issued an

exemptive letter that harmonized Regulations 4.7(b) and 4.13(a)(3) with Rule 506(c)

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Rule 506(d) Adopted by the SEC on July 10, 2013, pursuant to Section 926 of

the Dodd-Frank Act Limits the availability of the Rule 506 safe harbor to offerings not

involving a Covered Person that is subject to an enumerated Disqualifying Event (a “Bad Actor”)

Issuers must conduct an inquiry and exercise “reasonable care” to determine whether a Bad Actor is involved in the offering

Effective for all Rule 506 offerings conducted after September 23, 2013

Disclosure to investors prior to subscription required for any disqualifying event occurring prior to September 23, 2013, involving a Covered Person

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Rule 506(d) – Disqualifying Events

“Disqualifying Events” include (among other things): Felony or misdemeanor convictions relating to

securities or false SEC filings SEC disciplinary orders Being subject to an order, judgment, decree,

suspension, expulsion, or bar of any court or state securities commission that restrains a Covered Person from participating in securities and other finance-related activities

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Rule 506(d) – Covered Persons “Covered Persons” include:

The issuer, any predecessor of the issuer, or any affiliated issuer Any director, executive officer, or other officer participating in the

offering A general partner or managing member of the issuer Beneficial owners of 20 percent or more of the issuer’s

outstanding voting equity securities (calculated on the basis of voting power)

Any promoter connected with the issuer in any capacity at the time of sale

Any person that has been paid or will be paid for solicitation of purchasers in connection with the sale and any director, officer, general partner, or managing member of any such solicitor

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Update on Rule 506(d) of Regulation D

One year has passed since the adoption of Rule 506(d)

The SEC published “Compliance and Disclosure Interpretations” clarifying a number of interpretive matters Confirmed a lookthrough for beneficial owners Defined “affiliated issuer”

Interpretive issues remain

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Rule 506(d) – 20% Beneficial Owners

SEC guidance requires that the issuer look through an investor to determine beneficial ownership of securities

Look-through considerations include: Voting power – includes the power to vote, or direct the voting of, the investor’s

interests in the issuer (e.g., a voting agreement) Investment power – includes the power to dispose of, or to direct the disposition

of, the investor’s interests in the issuer (e.g., discretionary investment management relationships)

Issuers cannot assume that there is no 20% beneficial owner simply because no single investor holds 20% or more of the issuer’s outstanding voting securities

Issuers should require each investor to disclose the existence of voting and investment power relationships

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Rule 506(d) – Reasonable Care Requires that the issuer make a factual inquiry into whether any

Covered Person is subject to a Disqualifying Event on an ongoing basis

SEC guidance indicates that the following would satisfy the reasonable care standard: Representations regarding Bad Actor status Contractual covenants to update Bad Actor representations Periodic renewal of Bad Actor representations and covenants through negative

response letters

Absent cooperation from Covered Persons, responsibility falls upon the issuer to verify Bad Actor status Research vendors offer background check tools, but, absent guidance from the

SEC, it is uncertain whether these tools would satisfy the reasonable care standard

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Rule 506(d) – Best Practices Identify all Covered Persons and those likely to become Covered

Persons Integrate Bad Actor representations into placement agreements and reserve the

right to terminate the agreement and payment of fees if placement agent and/or sub-agent becomes subject to a Disqualifying Event

Obtain Bad Actor representations from the fund’s “Covered Persons” Integrate Bad Actor representations into subscription materials and obtain Bad

Actor representations from existing shareholders

If any existing investor refuses to provide beneficial ownership and/or Bad Actor representations, consider consulting legal counsel to evaluate Rule 506(d) implications

Obtain annual renewal of Bad Actor representations by negative consent

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Rule 506(d) – Practical Guidance Depending on the issuer’s structure, the 20% beneficial

owner test may not apply Cayman funds that delegate voting rights to STAR Trusts are

typically exempt because shareholders do not own “voting securities”

Some domestic funds have adopted provisions in their organizational documents that prevent investors from acquiring 20% of the fund’s voting securities by shifting a portion of their investment into a class with no voting rights

Act quickly upon notice that a Bad Actor is involved in an offering

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Rule 506(d) – Practical Guidance SEC and State Regulatory Orders and Settlements

Funds and investment advisers continue to struggle with the 506(d) implications of regulatory orders and settlements

In light of the look-through guidance, all orders and settlements, where an issuer, its investment adviser, its GP, or any of their affiliates is a party, require a 506(d) analysis

If the settlement or order would result in disqualification, request waiver from the SEC or state regulator as part of the negotiations Or: not have that person participate in the offering, depending on that person’s

category

Or: remove the person

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Rule 506(d) – Outstanding Interpretive Issues

Recertification The SEC indicated periodic recertification of 506(d)

representations is necessary, but has not provided guidance on the frequency. Many industry participants view annual affirmation by negative consent to be sufficient

Ongoing Disciplinary Obligations The SEC considers a Disqualifying Event that limits the activities

of an entity to terminate when the obligation terminates or the required action is accomplished. Ongoing obligations (e.g., requiring a compliance specialist to review procedures periodically) may result in indefinite reporting under Rule 506(e) or indefinite disqualification, if not waived

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QUESTIONS?