Investment Funds Regulatory Update
March 5, 2009
White & Case's Investment Funds Regulatory Update provides a brief overview of some of the latest legislative, regulatory and judicial actions, policy statements and decisions affecting investment funds.
Anti-tax haven bills introduced in House and Senate, endorsed by Obama
Sen. Carl Levin (D-Mi.) introduced the Stop Tax Haven Abuse Bill of 2009 (the "Bill") in the Senate on Monday, Mar. 2. Rep. Lloyd Doggett (D-Tex.) concurrently introduced an identical bill in the House of Representatives. Treasury Secretary Timothy Geithner announced the administration's strong support for the legislation at a House Ways and Means Committee meeting the following day.
Sen. Levin introduced a similar bill, which was co-sponsored by then-Senator Barack Obama, in 2007. The Bill, like its 2007 predecessor, contains numerous provisions generally intended to prevent U.S. taxpayers from holding assets in accounts of financial institutions located in so-called tax havens without disclosing the existence of those accounts to the Internal Revenue Service. The Bill, however, contains several important additions to its predecessor which, if enacted, would significantly affect hedge funds, CDO and CLO vehicles, many other businesses operated through offshore entities and investors in those entities. We will distribute a more thorough analysis of this topic by early next week.
AIMA backs formal disclosure to national regulators
The Alternative Investment Management Association ("AIMA") announced on Tuesday, Feb. 24, it supported full transparency and disclosure of systematically significant holdings and risk exposure. AIMA Chief Executive Andrew Baker said AIMA "can see which way the wind is blowing and [wants] to exercise leadership."
AIMA, which represents more than 75 percent of hedge fund assets worldwide, announced the position as part of its new policy platform. The platform also includes supporting disclosure of aggregate short positions, new policies to reduce settlement failure, a global manager supervision model based on the FSA's, and unified global standards for the hedge fund industry based on those previously proposed by AIMA and other groups such as the Hedge Fund Standards Board and the U.S. President's Working Group on Financial Markets.
SEC reviews custody practices
The Securities and Exchange Commission has launched a review of how investment advisers and broker/dealers care for client assets. The review is likely to lead to rules that either limit investment advisers' ability to hold client assets or boost the transparency of client asset accounts, say industry experts.
The SEC's Office of Compliance Inspections and Examinations has sent letters asking investment advisers and broker/dealers to produce a range of documents and submit to on-site interviews. According to the letters, the SEC is seeking to understand these firms' custodial arrangements and verify that client assets exist and are being kept safe.
Investment advisers are currently permitted under Rule 206(4)-2 of the Investment Advisers Act to have self-custody of client assets or to use an affiliate, provided the adviser or the affiliate is a registered broker/dealer, futures commission merchant or bank. Several authorities have stated that the Madoff Ponzi scheme would not have been possible had he been required to hold customer assets at an independent custodian.
European Commission proposes regulating private equity; European private equity leaders accept oversight, propose supervisory model
The European Commission announced Wednesday, Mar. 4 that it would introduce a legislative proposal on alternative investments that will include private equity and venture capital. The legislation will likely cover all forms of alternative investment, be based on a registration regime, and include high level principles on transparency and disclosure, a unified code on these areas based on existing industry codes, some restrictions on leverage at the manager/general partner level and a set of supervisory arrangements.
The Commission's announcement follows a hearing on Thursday, Feb. 26 in which the European Private Equity and Venture Capital Association ("EVCA"), Europe's private equity trade body, proposed a oversight and enforcement regime that would shift from a system of self-regulation to a supervisory model. The EVCA offered to create a pan-European code of conduct to cover reporting, valuation, transparency and disclosure, governing principles and corporate governance guidelines. The EVCA also offered to establish an enforcement regime subject to oversight by the appropriate EU or national bodies.
The Commission's proposal is expected by April 22. While the EVCA's submission will likely not be reflected in the Commission's proposal, it will likely "help shape the Commission's thinking of the proposed legislation," said EVCA Chairman Jonathan Russell in a letter to members. "The legislative process could take up to two years to complete and the industry will have considerable opportunity to influence this process and the legislative outcome," said Russell.
The head of the Commission has stated that regulatory initiatives will focus on "gaps" not currently covered by national legislation or industry codes.
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