Lowenstein Sandler's Investment Management Group is pleased to provide you with a summary update regarding recent legislative and regulatory developments that could have a significant impact on the investment community, as well as information regarding upcoming events that may be of interest to investment professionals. For more information regarding any of these developments or events, please contact one of the attorneys listed or another member of the Investment Management Group.
NOTEWORTHY LEGISLATIVE AND REGULATORY DEVELOPMENTS
Lowenstein Sandler's Investment Management Group closely monitors legal and regulatory developments. Below is summary information regarding recent activity that could have a significant impact on the investment community. For additional information or if you have any questions regarding legal, regulatory or general compliance matters, please contact a member of the Investment Management Group.
Dodd Senate Proposal Sets Forth Broad Regulatory Changes Including Investment Adviser Registration Requirements with Key New Exceptions
Synopsis: Senate legislation proposed by Senator Chris Dodd (D-Connecticut), and known as the "Restoring American Financial Stability Act of 2009," proposes sweeping financial industry regulatory reforms including the establishment of a Consumer Financial Protection Agency and an Agency for Financial Stability, which are designed to regulate consumer financial transactions and to monitor systemic risk within the economy, respectively. The proposed legislation also includes provisions (i) requiring non-binding shareholder votes on executive compensation for certain issuers; (ii) establishing a federal fiduciary duty for broker-dealers; (iii) creating a single federal bank regulator; and (iv) requiring central clearing and exchange trading for certain derivatives products.
Of particular importance to our clients is that portion of the proposed legislation entitled the "Private Fund Investment Advisers Registration Act of 2009," which would eliminate the portion of Section 203(b)(3) of the Investment Advisers Act of 1940 that currently exempts from federal registration those investment advisers that have fewer than fifteen clients and do not hold themselves out to the public as investment advisers. The proposed legislation would instead add specific new exemptions from registration for certain "foreign private advisers," advisers to "venture capital funds," advisers to "private equity funds," and advisers who manage less than $100 million in assets, and would remove "family offices" entirely from the purview of the Advisers Act. The SEC would be directed to define "venture capital funds," "private equity funds" and "family offices" in future rulemaking, and the proposed legislation would still require private equity fund advisers to be subject to certain record keeping and reporting requirements. In addition, the proposed legislation contains numerous other directives, including: (i) directing the SEC to issue rules requiring all registered investment advisers to hold client assets with an independent custodian; (ii) specifying items to be included in private fund reports to the SEC; (iii) requiring the SEC to conduct investment adviser examinations according to a schedule established by the SEC; and (iv) potentially increasing the dollar thresholds in the "accredited investor" standard in Regulation D under the Securities Act of 1933 to reflect inflation.
Status: Proposed by Senator Chris Dodd (D-Connecticut) on November 10, 2009, and submitted to the Senate Committee on Banking, Housing and Urban Affairs on November 19, 2009. The full text of the proposed legislation is available here.
Kanjorski House Proposal, the "Private Fund Investment Advisers Registration Act of 2009," Would Require Previously Exempt Investment Advisers, Other than Advisers to Venture Capital Funds or Advisers Who Manage Less Than $150 Million in Assets, to Register with the SEC
Synopsis: House of Representatives Bill 3818, the "Private Fund Investment Advisers Registration Act of 2009," would eliminate that portion of Section 203(b)(3) of the Investment Advisers Act of 1940 that currently exempts from federal registration investment advisers with fewer than fifteen clients that do not hold themselves out to the public as investment advisers. The bill, however, exempts certain "foreign private advisers" from registration and, as amended by the House Financial Services Committee, the bill also provides for a new exemption from registration for investment advisers who advise "Venture Capital Funds" (as is to be defined in future rulemaking by the SEC). In addition, the bill would also generally exempt from registration investment advisers who manage less than $150 million in assets, unless the SEC determines that these advisers pose systemic risk to the financial system. The bill also imposes certain record-keeping and reporting requirements on registered investment advisers, advisers to Venture Capital Funds, and advisers deemed by the SEC to pose systemic risk to the financial system. If passed in its current form, there would be a one-year grace period (from the date of its passage) for compliance with all provisions of the bill.
Status: Introduced by Congressman Paul Kanjorski (D-Pennsylvania) on October 15, 2009, the bill was passed by the House Committee on Financial Services with amendments on October 27, 2009. The full House is expected to vote on the bill by the end of November. The full text of the bill, as amended, is available here. If passed by the House in its current form, it is expected that the bill would be modified in the Senate and reconciled with the current Senate proposal noted above.
Proposed "Investor Protection Act of 2009" Would Require Investment Advisers Who Manage More than $100 Million in Assets to Register with the SEC, and Impose a Federally Mandated Fiduciary Duty on Broker-Dealers
Synopsis: House of Representatives Bill 3817, the "Investor Protection Act of 2009," would require the registration with the SEC of investment advisers who manage more than $100 million in assets. The bill also authorizes the SEC to align the fiduciary duties of broker-dealers and investment advisers, and to impose limitations on the use of mandatory arbitration clauses in certain broker-dealer and investment advisory agreements. Finally, the bill would also allow the SEC to provide FINRA with regulatory authority over federally registered investment advisers who are affiliated with a registered broker-dealer.
Status: Introduced by Congressman Paul Kanjorski (D-Pennsylvania) on October 15, 2009, the bill was passed by the House Committee on Financial Services with amendments on November 4, 2009. The full House will now consider the bill. The full text of the bill, as amended, is available here. Initially introduced by Congressman Kanjorski as a companion to the Private Fund Investment Advisers Registration Act noted above, the bill underwent substantial debate and amendment in committee and, the current version of the bill contains conflicting investment adviser registration requirements.
NASAA Calls for Increased State Role in the Regulation of Investment Advisers
Synopsis: The North American Securities Administrators Association (NASAA) issued a press release on October 28, 2009 calling for an increase in state regulation of investment advisers. Responding to pending Congressional legislation, NASAA also indicated that it supports a $100 million assets under management exemption from federal investment adviser registration requirements. The NASAA press release stated that increased state regulation, including additional state registration requirements, would conserve the SEC's regulatory resources.
Status: NASAA’s press release is available here.
Proposed "Over-the-Counter Derivatives Markets Act of 2009" Would Increase Regulatory Oversight of Certain Derivatives Transactions and Market Participants
Synopsis: House of Representatives Bill 3795, the "Over-the-Counter Derivatives Markets Act of 2009," would amend the Commodity Exchange Act to place certain specified derivatives, swaps, securities-based swaps, swap dealers, and swap participants under the jurisdiction of a to-be-determined prudential regulator (which, depending upon a participant’s activities, could include the Federal Reserve, the FDIC, or the OCC). The bill would also require that certain derivatives transactions between "major swap participants" be cleared and traded on an exchange or electronic platform. The bill directs the CFTC and the SEC to work jointly to promulgate uniform regulations implementing the provisions of the bill, with the SEC having jurisdiction over security-based swaps, and with the CFTC having jurisdiction over all other swaps.
Status: Introduced by Congressman Barney Frank (D-Massachusetts) on October 13, 2009, the bill was passed with amendments by each of the House Committee on Financial Services and the House Committee on Agriculture on October 15, 2009 and October 21, 2009, respectively. The full House will now consider the bill. The full text of the bill, as amended, is available here.
Proposed "Foreign Account Tax Compliance Act of 2009" Would Impose Additional Withholding and Reporting Requirements on Foreign Entities that Enter into Transactions with U.S. Persons
Synopsis: Senate Bill 1934 (and companion House Bill 3933), the "Foreign Account Tax Compliance Act of 2009" would impose a 30% withholding tax on certain U.S. source payments made to foreign financial institutions (including offshore funds) unless they comply with certain disclosure and certification requirements relating to their U.S. account holders (including certain U.S.-owned foreign entities). The bills would also require advisors who assist with the formation of, or acquisition of, interests in foreign entities by U.S. individuals to report such formations or acquisitions to the IRS. Additionally, unless reduced by treaty, the bills would subject dividend equivalent payments (such as payments pursuant to a notional principal contract) paid to a foreign person to a 30% U.S. withholding tax, as if such payment were an actual dividend payment.
Status: The bills were introduced on October 27, 2009 by Senator Max Baucus (D-Montana) and Representative Charles Rangel (D-New York), chairmen of the respective Congressional tax writing committees, and were referred to the Senate Finance Committee and the House Committee on Ways and Means, respectively, for consideration. The full text of the Senate bill is available here, and the full text of the House bill is available here. Both President Barack Obama and Treasury Secretary Timothy Geithner have issued statements giving their unqualified support for the bills.
Enforcement of Red Flags Rule Postponed Until June 1, 2010
Synopsis: On October 30, 2009, the Federal Trade Commission announced that it would postpone enforcement of its "Red Flags Rule" until June 1, 2010. The rule, which requires the development and implementation of written identity theft prevention programs by creditors and financial institutions, was promulgated pursuant to the Fair and Accurate Credit Transactions Act of 2003. The Red Flags Rule may require advisory firms and broker-dealers to strengthen their current privacy policies and implement effective identity theft programs. The Lowenstein Sandler Investment Management Group Client Alert issued January 6, 2009 analyzes the Red Flags Rule and its potential applicability to broker-dealers. The Federal Trade Commission has provided a website containing helpful resources relating to the Red Flags Rule. The website is available here.
Massachusetts Extends Deadline for Compliance with Privacy Regulations to March 1, 2010
Synopsis: Privacy regulations adopted by the Massachusetts Office of Consumer Affairs and Business Regulation (201 CMR 17.00: Standards for the Protection of Personal Information of Residents of the Commonwealth) require that any person or entity (including private investment funds based outside of Massachusetts) maintaining personal information of a Massachusetts resident, whether in paper or electronic form, develop and implement a written information protection and security program, as well as adhere to certain other privacy guidelines. The deadline for compliance with the regulations has been extended from January 1, 2010 to March 1, 2010. To assist persons or entities in complying with the regulations, the Massachusetts Office of Consumer Affairs and Business Regulation has provided a website containing helpful resources, including a compliance checklist. The website is available here.
Status: The privacy regulations were originally adopted on September 19, 2008 and subsequently modified to the form described above and in the referenced material, including extending the deadline for implementation. The current deadline for compliance is March 1, 2010.
New York Legislation Changes Requirements for Effectiveness of Powers of Attorney Executed by Individuals
Synopsis: Recent legislation in the state of New York amended the New York General Obligations Law pertaining to powers of attorney, effective as of September 1, 2009. The legislation requires that powers of attorney executed by individuals in the state of New York be signed by both the principal and the agent (with each signature being notarized) and contain certain conspicuous legends noting both warnings to the principal and duties of the agent in order to be valid. The legislation does not affect powers of attorney executed by entities. Although the legislation also does not impact the validity of individual powers of attorney previously executed in New York, the legislation does currently provide that execution of any power of attorney after September 1, 2009 will revoke all prior powers of attorney unless expressly provided otherwise. However, this provision is currently the subject of further pending legislation (as noted below under "Status").
Status: The legislation became effective on September 1, 2009. There is additional pending legislation in the New York Senate (S. 5910), which the New York Assembly has already passed (8392-A), that would further amend the legislation to provide that the execution of a power of attorney after September 1, 2009 would only revoke any prior power of attorney if expressly provided for by the principal. A link to the New York General Obligations Law, containing the power of attorney legislation, is available here. A link to the pending Senate amendment is available here.
European Commission's Proposed Directive on Alternative Investment Fund Managers Would Increase Regulatory Oversight of Investment Advisers Operating in the EU
Synopsis: The EC's proposed Directive would provide increased regulatory standards for all alternative investment fund managers (AIFMs) under its purview. The stated goal of the Directive is to enhance the transparency of the activities of AIFMs and the funds they manage, and help to overcome gaps and inconsistencies in existing regulatory frameworks at the national level. The key provisions of the Directive include: (i) restrictions on non-EU fund managers managing EU-based funds or marketing to EU investors; (ii) limitations on the ability of fund managers to delegate portfolio management and risk management outside of the EU; (iii) limitations on the ability of funds to use non-EU service providers, such as administrators and prime broker custodians; and (iv) leverage limitations and capital requirements.
Status: Published on April 30, 2009, the Directive is currently under consideration by the European Parliament and the European Council. If approved by the end of 2009, the Directive could be effective as early as 2011. The Directive is available here.
RECENT PUBLICATIONS AND COMMENTARY
Below are titles and links to certain recent articles and Investment Management Group publications that may be of interest to members of the investment community. For additional information, please contact a member of the Investment Management Group.
- Financial Industry Regulatory Reforms Begin to Take Shape: What Has Happened and What It Means for Investment Management Firms and Professionals
Bloomberg Law Reports, Risk & Compliance, August 2009
Scott Moss, Cole Beaubouef
Below is information regarding upcoming events that may be of interest to investment professionals. For more information regarding any of these events, please contact firstname.lastname@example.org or a member of the Investment Management Group.
- Trading Best Practices and Legislative Initiatives Webcast
Available on CD by contacting email@example.com
Lowenstein Sandler's Investment Management Group recently hosted an in-depth discussion of trading best practices and recent legislative initiatives that could have a significant impact on investment professionals, including investment advisers, hedge funds and broker-dealers. In this 60-minute webcast, Lowenstein Sandler attorneys Scott Moss and Matthew Magidson, and CPA Nancy Grimaldi, Financial Services Partner, Eisner LLP, provided updates on important
- Preventing the misuse of material non-public information and recent SEC enforcement actions
- Plus private equity and hedge fund networking group. Attendees include representatives from private equity firms, hedge funds, family offices and financial institutions.
- a lunch and CLE for the members of the NYSBA Derivatives and Structured Products Committee.