c cc


m? The Dodd-Frank Act, or as introduced to the House of Representatives as the ͞Wall Street
Reform and Consumer Protection Act͟ during July 2010 was a product of the financial regulatory
agenda of the Democratically controlled Congress and the Obama Administration.
m? Gt was named after two members of congress, Barney Frank, and Chris Dodd and was a direct
response to the capital markets recession we faced starting in 2007 and was constructed to be
the most sweeping change to financial regulation in the United States since the Great
Depression. Gt was intended to represent a paradigm shift in the American financial regulatory
environment, affecting all financial regulatory agencies and almost every aspect of the financial
services industry in the country.
m? The Act was most keen on preventing another systemic collapse of the financial markets and
therefore, one of their biggest tasks was to create a new oversight council to evaluate systemic
(or market) risk in the economy. Other goals were increased transparency of derivatives (bring
them from OTC markets into exchanges), consumer protection reforms (for example, working
with the major credit card companies to reduce fees for consumers), give more powers to a
͞resolution regime͟ to orderly wind down bankrupt firms, provide the ability for the Fed to
receive authorization from the Treasury to extend credit to agencies and financial firms that are
in unusual circumstances etc. Overall, because of the overarching extent and reach of the
proposed reforms, some of which may take years to implement, this is an Act that Companies
must consider in specific buckets for years to come.
m? G will now talk about specific aspects of the Dodd Frank Act as it specifically relates to
Gnvestment Advisors as we are all in the Asset Management space:

g? Focus on market stability and systemic risks:

‰? As G described before, aspects of these include creating an Orderly Liquidation
Authority to assist with liquidating in an orderly fashion, financial companies
identified by the government as a major systemic risk at present or in the
future. An Orderly Liquidation Fund would have to be created over the next few
years, with contributions from major financial companies, to assist with bailing
out one of their own if the time comes. The SEC͛s budget will be doubled over
the next 5years, they can tap into a $100M ͞reserve fund͟ to supplement its
budget, they will recruit specialists with specialized knowledge of financial and
capital market regulation and financial market surveillance, and they have
enhanced whistleblower reward programs for individuals providing the SEC with
original information that leads to successful prosecution of securities cases.

g? Registration Obligations:
‰? For the first time, registration for most advisors becomes mandatory. Advisors
to hedge and PE funds with more than $100M in assets are required to register
with the SEC. Exemptions exist for VC funds and family offices (even though the
SEC hasn͛t defined what those mean yet) and advisors to solely private funds
 with less than $150M in assets. The caveat is though they have a registration
exemption, they still are subject to the same record keeping and reporting
requirements, and to have their records inspected by the SEC.

g? Those required to register with the SEC͙

‰? Yeed to do so by 21st July 2011, designate a chief compliance officer, establish a
rigorous compliance program, including the adoption and implementation of
written policies and procedures designed to prevent violations of law and
regulatory requirements, and annually assess the compliance program.

g? Reporting and Record-Keeping Requirements:

‰? SEC adopted rules that require advisors, registered or not, to maintain records
and file reports each private fund it advises to assist the SEC in its overall
assessment of systemic risk. These include assets under management ʹ how
much do they have and how much are they growing by, how much leverage is
used ʹ a highly leveraged fund has greater potential of risk obviously, because
of the debt it incurs, counterparty credit risks if any ʹ for example, if the fund is
the buyer of protection in a credit default swap, if they do end up on the
winning side, will the seller of protection actually pay me? Didn͛t happen during
the credit crises.., all trading and investment positions , valuation policies ʹ do
they fair value all their investments? What % is level 1 vs. 2 vs. 3? What % of
their portfolio is privately valued vs getting market quotes etc.., types of assets
held ʹ do they have mostly equities? High yield debt? Derivatives? The riskier
the types, the more inquisitive the SEC is going to be͙, side letter arrangements
if any ʹ which investors are getting preferential treatment if any, and trading
practices ʹ how open is the Fund to outside regulation and oversight?

g? Our clients are going to be concerned:

‰? The SEC is mandated to share this information with other federal agencies so
naturally companies are concerned their proprietary trading strategies are not
going to be non-public anymore. Some of the stuff that could be shared with
entities like the FSOC (Financial Stability Oversight Council) include͙Trading
strategies (big issue here ʹ this is what differentiates one fund͛s return from
another), Analytical/research methodologies, and hardware/software that
contains trading information like models etc. Companies are naturally upset
about this because trade secrets are going to be hard to maintain͙

g? SEC Enforcement Unit:

‰? Because of the Madoff scandal that played its part in the capital crises, the SEC
set up 5 specialized enforcement units, including one on asset management to
focus specifically on investigations on hedge funds, private equity and managed
accounts. The goal is for them to develop industry expertise so they can
 evaluate potential future issues before problems occur. They will focus on
valuation practices, redemption policies ʹ do they have lock up provisions? Do
they restrict redemptions? Restricted redemptions are def a cause for concern
because it could highlight something fishy..conflicts of interest if any, risk
management and reporting, insider trading ʹ lots of insider trading cases being
brought up by the SEC these days, the role of administrators ʹ what are the
internal controls at administrators like SEG and CGTCO?, misrepresentation of
information in offering docs, and fund of fund due diligence ʹ this is key. Fund
of funds usually have two sets of due diligence documents ʹ initial due diligence
when they initially invest in an underlying fund and ongoing due diligence,
maintained usually on an annual basis ʹ the SEC is concerned as to how detailed
these documents are and if the diligence gathered is appropriate enough.

g? Timeline:
‰? These requirements are not effective immediately, and therefore gives our
clients an opportunity to review and upgrade their current practices, especially
related to operations, technology, and compliance functions.
‰? We should recommend clients look at this situation proactively and build their
compliance infrastructure now so as to avoid complications down the road upon
SEC investigation.
‰? Some of these proactive measures is to ensure they hire a Chief Complaince
Officer if they don͛t have one yet, draft detailed and rigorous compliance
manuals, conduct mock examinations similar to what the SEC will perform to
note if they have any issues they can fix, and also train their staff to be more
compliance focused and detailed in their documentation.

That͛s about it. Do you guys have any questions? Dodd Frank isn͛t going anyway sometime soon so
clients should be focused on it.