Month: January 2009

When Markets Turn

The EconomistThe Economist ran a special report on the future of finance last week. One item caught my eye – When Markets Turn: A Parable of How Modern Finance Can Go Wrong. The story looks back at the collapse of the Long-Term Capital Management in 1998. The article puts some of the lessons of that funds collapse to the current collapse of the credit markets.

They identify the theory put forth by Mr. Soros on “reflexivity.” Once people come to believe that an economic theory is true, they over invest in that economic theory. “Once people come to believe that house prices never fall, they will buy too much property—and house prices will fall. When they believe that shares always do well in the long run, they will buy too many shares—and the market will do badly for years.”

Relexivity makes financial markets more dangerous than the casinos. “The numbers on a roulette wheel never change, but markets offer no guarantee that yesterday’s odds will be the same tomorrow.”

Hedge Fund Transparency Act of 2009

Senators Chuck Grassley and Carl Levin introduced the Hedge Fund Transparency Act (S.344). Instead of amending the Investment Advisers Act of 1940 (as Senator Grassley tried with S.1402 in the 110th Congress), this bill would amend the Investment Company Act of 1940.

The first step is defining a “hedge fund.” (Not an easy task)

Rather than trying to define a hedge fund, the proposed law instead applies to any investment company that has at least $50 million in assets or assets under management and relies on Sections 3(c)(1) or (7) as an exemption from the requirements under the Investment Company Act.

The proposed law will not require full compliance with Investment Company Act, but instead submit to a limited regulatory regime:

  1. Register with the SEC.
  2. Maintain books and records that the SEC may require.
  3. Cooperate with any request by the SEC for information or examination.
  4. File an information form with the SEC electronically, at least once a year. This form must be made freely available to the public in an electronic, searchable format. The form must include:
    • The name and current address of each individual who is a beneficial owner of the investment company.
    • The name and current address of any company with an ownership interest in the investment company.
    • The primary accountant and primary broker used by the investment company
    • An explanation of the structure of ownership interests in the investment company.
    • Information on any affiliation with another financial institution.
    • The name and current address of the investment company’s primary accountant and primary broker.
    • A statement of any minimum investment commitment required of a limited partner, member, or investor.
    • The total number of any limited partners, members, or other investors.
    • The current value of the assets of the company and the assets under management by the company.
  5. Establish an anti-money laundering program and report suspicious transactions

This bill is far from becoming law. BUT, there is a groundswell of support in Washington to increase the regulation of private investment funds. We will keep an eye on this legislation.

See also:

First Report of the Walker Guidelines Monitoring Group

The Guidelines Monitoring Group has published its First Report (.pdf) on the UK private equity industry’s conformity with the Walker Guidelines.

The Guidelines are intended to have funds enhance their reporting and the reporting by their large portfolio companies. They define a portfolio company as one with a market capitalization (prior to be acquired) was in excess of £300 million, more than 50% of the revenues were generated in the UK and the UK employees totaled in excess of 1,000 full-time equivalents.

The Guidelines propose that the portfolio companies should annually disclose:

  • the identity of the private equity fund (or funds) that own the company
  • the composition of the portfolio company’s board
  • a financial review of its risk management and uncertainties facing the company
  • a business review in compliance with Section 417 of the Companies Act.

The Guidelines propose that a private equity firm should publish a description of its investment approach, investment holding periods, leadership of the firm, arrangements for dealing with conflicts of interest, and categorization of its limited partners/investors.

Thirty two firms made reports. (see Appendix 1 of the Report) and 54 portfolio companies (See Appendix 2 of the Report).

Recommended Annual Review for Hedge Funds and Other Private Fund Managers

bingham_logoBingham McCutchen has put together a Recommended Annual Review for Hedge Funds and Other Private Fund Managers.

Bingham put together a laundry list of regulations, policies and filings that you should review on at least an annual basis:

  • Compliance Policies and Procedures
  • Form ADV Part 1 and Form ADV Part II
  • Form SH
  • Anti-Fraud Rule Adopted by the SEC for Naked Short Sales
  • Blue Sky Filings and Amendments to Form D
  • Form 13F
  • Schedule 13D/13G
  • Forms 3, 4 and 5
  • Audited Financial Statements
  • Offering Document Updates
  • Ongoing ERISA Compliance
  • Section 457A
  • Section 409A
  • CFTC Requirements
  • Liability Insurance
  • Employee Training
  • Privacy Policy

Disclosure: The Wife is an attorney at Bingham.

Decoding the Science of Compliance — Are you Ready for 201 CMR 17.00?

Compliance Week broadcast a webcast on the new Massachusetts data privacy regulations: Decoding the Science of Compliance — Are you Ready for 201 CMR 17.00? (and sponsored by Iron Mountain).

Garry Watzke, Esq., Senior Vice President Legal & Business Development at Iron Mountain, Inc. started with the basics which I have noted in several other places:

John Jamison, Vice President Consulting Services at Iron Mountain, Inc. moved on to implementation challenges. He points out that this is not a pure IT project. There is no single tool that provides coverage across the multiple platforms in most businesses. There is IT, but there is also a business-wide program that needs to be in place and maintained.

Garry points out that you need to maintain employee compliance and have a way to detect and prevent system failures.

See also these prior posts:

Trading in Distressed Debt

Richard G. Mason, Steven A. Cohen, Ian Boczko, Sarah A. Lewis, and David Gruenstein of Wachtell, Lipton, Rosen & Katz, have prepared a memorandum concerning the possession and use of information when buying and selling distressed debt (an abridged version of which was published in The New York Law Journal): Trading in Distressed Debtpdf_logo .

  • Although bonds are generally considered securities, interests in bank debt are typically not considered securities. (see Banco Espanol de Credito v. Security Pacific National Bank, 973 F.2d 51, 55–56 (2d Cir. 1992). There is not universal agreement on this position.
  • Knowledge of bank debt can lead to insider trading in other securities.

Insider Trading by Congress

Apparently members of Congress and their staff can make trades using non-public information obtained through their official positions.

House Rules Committee Chairwoman Louise M. Slaughter, D-N.Y., and Brian Baird , D-Wash., are sponsoring what they call the Stop Trading on Congressional Knowledge Act (HR 682) that would prohibit Members of Congress and their staffers from using nonpublic information obtained through their official positions to benefit themselves financially.

In a statement, the two said the legislation  is more important now, given the amount of money Congress has authorized to help right the economy under the financial services bailout program.

See also:

U.S. Senate Hears About Madoff

On Tuesday, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the background and implications of the Madoff scandal: Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform.

Video Archive

Member Statements

Witness Testimony

International Data Privacy Day

data-privacy-day09-logo-web-resJanuary 28, 2009 is International Data Privacy Day. [Intel’s Collection of data privacy materials]. The United States, Canada, and 27 European countries will celebrate Data Privacy Day together for the second time. One of the primary goals of Data Privacy Day 2009 is to promote privacy awareness and education among teens across the United States. Data Privacy Day also serves the important purpose of furthering international collaboration and cooperation around privacy issues.

What can you do?:

  • Show a recent theater movie that addresses the issue of privacy, such as “The Net,” “Swordfish,” or any of a large number of others, then afterward discuss the privacy and information security issues from within the movie and how they relate to your employees’ lives and/or work.
  • Make a podcast available to your personnel that discusses privacy in general, or a specific privacy issue.
  • Have a contest for your employees that incorporates privacy. For example give an award/prize to the person who can identify the most significant employee privacy concern within your organization
  • Hold a “Privacy Jeopardy” event on 1/28 during lunchtime, perhaps right outside your cafeteria, and give small prizes or recognitions to the people who correctly answer a privacy related question.
  • Distribute some privacy related articles, or make them available on your information security and privacy intranet sites.