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The Global Regulatory Environment. Randy Kraft, Partner. The Global Regulatory Environment. Investment advisers in Canada have historically been subject to a high level of regulation Recent registration reform

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The Global Regulatory Environment

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The Global Regulatory Environment

  • Randy Kraft, Partner

The Global Regulatory Environment

Investment advisers in Canada have historically been subject to a high level of regulation

Recent registration reform

Recent surveys/inspections by the securities regulators of hedge fund and other advisers

As a result of the Dodd-Frank Act, Canadian asset managers may have to register with the SEC in order to advise U.S. investors in certain funds

Even if exempt from actual registration, there are still certain reporting and other requirements

As a result of the Alternative Investment Fund Managers Directive, Canadian asset managers may have to register with individual E.U. states in order to accept E.U. based investors

Even if exempt under third country rules, there are still certain reporting and other requirements

If you’re a Canadian asset manager with U.S. or E.U. investors (or plans to have some) your operating model is about to change significantly

Where We Are Today…in Canada

Passage of the Dodd-Frank Act and the resulting SEC rule proposals will have a profound impact on the regulation of the investment adviser industry

The broad scope of the Dodd-Frank Act and the SEC rules reaches beyond traditional investment advisers to managers of all asset classes, including private equity fund advisers, real estate managers, collateral managers for structured products, and others

Regulatory developments outside of Dodd-Frank have also affected the regulatory environment for investment advisers

The political support that drove passage of the Dodd-Frank Act, and continued demands for investor protection, are likely to maintain the current focus on robust financial regulation

Regulators are responding to these demands with a new sense of empowerment and purpose in all areas of the financial industry, which will include private equity funds, real estate funds and other structured product

The broad mandate to the SEC, CFTC, and other regulators for the implementation of the Dodd-Frank Act likely will contribute to a prolonged focus on financial regulation

Where We Are Today…in the U.S.

The Act provides limited exemptions on which some advisers may be able to rely:

Investment advisers that solely advise private funds with less than $150 million in U.S. Assets Under Management (AUM)

Foreign private adviser exemption

Investment advisers that solely advise venture capital funds

Investment advisers to family offices

Investment Adviser Registration in the Dodd-Frank Era

Investment advisers required to register must:

Develop a compliance program, including developing and implementing policies and procedures reasonably designed to prevent violations of the securities laws, conduct an annual review of those policies and procedures, and designate a Chief Compliance Officer

Establish, maintain, and enforce a Written Code of Ethics, which must apply to the investment adviser’s personnel and must include provisions on standards of business conduct, compliance with the federal securities laws, reporting of personal securities transactions, and reporting violations of the Code

Maintain books and records, including substantial records relevant to the investment adviser’s business

Follow specific rules when entering into advisory contracts

Disclose information about their advisory business, advisory personnel, fee arrangements, industry affiliations, and control persons.

Additionally, investment advisers have a fiduciary duty with respect to their relationships with clients and will be subject to examination by the SEC

Investment Adviser Compliance in the Dodd-Frank Era

Large portions of the Dodd-Frank Act are dedicated to provisions designed to help ensure the financial stability of the U.S. economy.

Investment advisers to private funds will be required to retain records and make them available for inspection. These records, specific to each private fund advised by the investment adviser, will be required to include descriptions of:

AUM and use of leverage, including off-balance-sheet leverage

Counterparty credit risk exposure

Trading and investment positions

Valuation policies and practices of the fund

Types of assets held

Side arrangements or side letters whereby certain investors in a fund obtain more favorable rights or entitlements than other investors

Trading practices

Other information deemed necessary and appropriate

Investment Adviser Compliance in the Dodd-Frank Era: Systemic Risk

Robert Khuzami, director of the Division of Enforcement for the SEC, has stated: “As head of the SEC's Division of Enforcement, the staff and I will relentlessly pursue and bring to justice those whose misconduct infects our markets, corrodes investor confidence, and has caused so much financial suffering.”

Since Khuzami took office, SEC efforts have included:

In fiscal 2009, netted more than $2.0 billion in disgorgement of gains (an increase of 170% over fiscal 2008); in fiscal 2010, $1.53 billion in disgorgements

In 2009, ordered penalties of $345 million (an increase of 35% over fiscal 2008); in 2010, $968 millionin penalties

In 2009, obtained 71 emergency temporary restraining orders (TROs) to halt ongoing misconduct and prevent further investor harm (an increase of 82% over fiscal 2008); in 2010, obtained 45 TROs

In 2009, obtained 82 asset freezes to preserve funds for the benefit of investors (an increase of 78% over fiscal 2008); in 2010, obtained 56 asset freezes

In 2009, levied 496 orders opening formal investigations (an increase of over 100% over fiscal 2008); in 2010, 634 enforcement actions

Source: Remarks at 2009 AICPA National Conference on Current SEC and PCAOB Developments by Robert Khuzami;

SEC’s Enhanced Scrutiny/Enforcement of Investment Advisers

Other provisions of the Dodd-Frank Act that may affect investment advisers:

Changes to the Accredited Investor Standard

Compensation Disclosure

Qualified Clients


Other recent regulatory developments have also had a profound effect on the regulation of investment advisers:

Amended Custody Rule

Changes to Form ADV Part 2

Adoption of Pay-to-Play Rules

Other Developments Affecting Investment Advisers

What is the AIMFD?

EU law introducing enhanced regulation to alternative investment fund managers in the EU, including hedge funds, private equity funds and real estate

When is it applicable?

Expected to be implemented by EU members states in 2013

How does it impact Canadian managers?

Coverage includes non-UE alternative investment fund managers with EU funds or non-EU funds with EU investors

Third country rules effectively allow for continued distribution to EU investors by non-EU managers under existing private placement regimes until 2018

Alternative Investment Fund Managers Directive (AIFMD) – The Big Picture

Alternative Investment Fund Managers Directive (AIFMD) – The Timeline

Earlier drafts had very restrictive measures limiting the distribution of non-EU funds to EU investors

Final rules effectively allow for continued distribution under existing private placement regimes of individual EU member states until at least 2018

Regulatory exchange agreement must be in place between domicile of fund and manager and respective EU member state(s)

Domicile of fund and manager cannot be on FATF blacklist

Final rules introduce reporting and disclosure requirements even for non- EU funds

Alternative Investment Fund Managers Directive (AIFMD) – What to think about

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