Dodd-Frank Compliance and Technology Summer Meeting 2013

Dodd-Frank Compliance and Technology Summer Meeting

WoodbineAssociates, Inc.

Presented by Daniel G. ViolaRegulatory Defense and Compliance Sadis & Goldberg, LLP

Part I: What is the Dodd-Frank Wall Street Reform and Consumer Protection Act?

Dodd-Frank• Dodd-Frank Wall Street Reform and Consumer Protection

Act was signed into law on July 21, 2010.

• Purpose: Create a sound economic foundation to grow jobs, protect consumers, rein in Wall Street, end bailouts, end “too big to fail” corporations and prevent another financial crisis.

• Dodd-Frank Act represents a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and affecting almost every aspect of the nation’s financial services industry.

• The Dodd-Frank Act provides for new regulations affecting U.S. banks, securities, derivatives, executive compensation, consumer protection and corporate governance.

Dodd-Frank• It contains approximately 1,500 provisions, including

about 398 rule-making requirements. 279 deadlines for finalized rules passed as of June 3, 2013.

• Title IV and IX • Title IV – Regulation of Advisers to Hedge Funds

and Others or “Private Fund Investment Advisers Registration Act of 2010”• Calls for Securities and Exchange Commission (SEC)

registration, reporting and record keeping obligations

for investment advisers to “private funds” and limits the ability of these advisers to exclude information in reporting to the various Federal government agencies.

Dodd-Frank• Title IX – Investor Protections and Improvements

to the Regulation of Securities or “Investor Protections and Improvements to the Regulation of Securities”• Revises the powers and structure for the SEC, credit

rating organizations, and the relationships between customers and broker-dealers or investment advisers.

Annual Review of Compliance ProceduresBooks and Records

Financials

Registration• ADV, U4, Firm, IARs, ADV Delivery

Fees

Advertising• Ads, Websites, Business Cards,

Seminars, RFPs, Pitch books

Privacy Policies

Supervisory/Compliance• Supervisory Procedures,

Compliance Procedures, Policies, Code of Ethics

Investment Activities• Adherence to Investment Policy,

Fairness, Conflicts

Trading & Brokerage PracticesPerformance ReportingCustodySolicitorsPooled Investment Vehicles (Hedge Funds)Insider TradingProxy VotingBCPAMLUnethical Business Practices• Section 206• Unsuitable Recommendations• Contracts• Unauthorized trades• Excessive Fees• Borrowing from client• Valuation

Best Practices for Investment Advisers

• Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information.

• Review and update all contracts.

• Prepare and maintain all required records, including financial records.

• Prepare and maintain client profiles.

• Prepare a written compliance and supervisory procedures manual relevant to the type of business.

• Prepare and distribute a privacy policy initially and annually.

Best Practices for Investment Advisers

• Keep accurate financials. File timely with the jurisdiction. Maintain surety bond, if required

• Calculate and document fees correctly in accordance with contracts and ADV.

• Review all advertisements, including website and performance advertising, for accuracy.

• Implement appropriate custody safeguards, if applicable.

• Review solicitor agreements, disclosure, and delivery procedures.

SEC Comments on Broker-Dealer Registration by Private Fund Advisers

Davis W. Blass, Chief Counsel, Division of Trading and

Markets, SEC, recently gave a speech before the American

Bar Association on April 5, 2013. The topic: whether and

when investment advisors to private funds are required to

register with the SEC as broker-dealers.

• With regard to soliciting and retaining investors, a

dedicated sales force of employees carrying out a

marketing function “may strongly indicate that they are

in the business of effecting transactions in the private

fund.”

SEC Comments on Broker-Dealer Registration by Private Fund Advisers

• If employees who solicit investors have no other duties, or

if they spend the great majority of their time carrying out

the investors solicitation function, then the adviser might

be a broker-dealer.

• Compensating employees who solicit investors in any way

(bonuses, etc.) that is linked to successfully investments

may indicate broker-dealer status.

• If a private equity fund executing a leveraged buyout

strategy, collects fees other than advisory fees that are

linked to an acquisition or disposition – then the transaction

based compensation threshold may be triggered.

SEC Comments on Broker-Dealer Registration by Private Fund AdvisersHe also addressed three strands of push-back the SEC has received from private fund advisers seeking to avoid broker-dealer registration

• Advisers are not engaging in broker-dealer activity when

the transaction-based payments offset or reduce the

amount of the advisory fee. In this instance the

transaction-based compensation is merely another way of

paying the advisory fee.

SEC Comments on Broker-Dealer Registration by Private Fund Advisers

• When the general partner of the fund is also the adviser

to the fund or an affiliate of the adviser to the fund, then

the general partner should be viewed as the same person

as the funds such that the advisers is not engaging in

securities transactions “for the account of others.” Mr.

Blass did not see this as plausible, he notes that if the

general partner and the fund are the same person, then

there is no need to pay the fee to any person other than

the fund.

SEC Comments on Broker-Dealer Registration by Private Fund Advisers

• The SEC should not spend it’s time taking on registration

of private fund advisers as broker-dealers without an

underlying policy objective. Mr. Blass sees the situation

as dependent on the activities of the private fund

advisers, rather than the SEC. If private fund advisers are

not prepared to register as broker-dealers, then they

should avoid in engaging in broker-dealer activity.

Presented by Sean OwensConsultant, Capital Markets Research and ConsultingWoodbine Associates

Part II: Are You Really Ready for the New OTC Framework?

WoodbineAssociates, Inc.

Fragmentation• Multiple SEFs/DCMs for each product and asset class

(overcapacity likely to abate over time)• Multiple CCPs for each product and asset class (will

further segregate liquidity on each platform)

Connectivity• SEFs via API or web interface, direct or sponsored access• Aggregation platforms (dealer or third-party, ex:

SwapsHub) and OMS systems• Middleware needs for trade affirmation with CCP, block

allocations

Market Structure Related Issues

WoodbineAssociates, Inc.

Relationships• FCMs are key relationship - multiple relationships

needed• CCPs, Prime Brokers, Outsourced providers

Credit line management• Initial credit lines and intra-day updates will determine

trading limits

Post-trade margin and collateral management• Intra-day calls, IM acceptable collateral

Market Structure Related Issues

WoodbineAssociates, Inc.

Incremental costs will impact pricing and trading• IM, capital, netting, clearing cost• Vary by CCP & FCM

Product selection • Swap, future, cash, ETF, unwind/novation

Liquidity• Vary by venue, product, destination CCP

Pre-trade Analysis / Post-trade Processing are Key

WoodbineAssociates, Inc.

Credit allocation• Intra-day management of credit, risk and margin

Risk position with FCM , CCP and dealer

Dealer risk position (outright market risk and cleared position with CCP)

Collateral and margin management

Pre-trade Analysis / Post-trade Processing are Key

WoodbineAssociates, Inc.

Integration across functional areas (operations, risk management and trading)

Real time capabilities• Intra-day data and capabilities• Positions, risk, margin, credit, collateral

Scalable systems and STP for increased ticket volume

Middleware for connectivity, communications, workflow management

Capabilities & Technology Needed

WoodbineAssociates, Inc.

Internally manage or mirror outsourced solutions for collateral management and credit allocation

Pre-trade:• Analytics, credit allocation, aggregation

Post-trade:• Collateral and margin management, automated

processing

Funding, securities financing and liquidity management

Capabilities & Technology Needed

WoodbineAssociates, Inc.

WoodbineAssociates, Inc.

Presented by Phil HunterChairmanCPSII

Part III: The Advanced Technology Needed for Dodd-Frank Compliance

Federal Agencies and Financial Firms

• SEC• FINRA• Treasury• FDIC• FIO*• OFR*• BCFP*• Federal Reserve• CFTC• GAO• OCC

* Formed by The Dodd Frank Act

• Hedge Funds• Asset Managers• RIA’s• Prime Brokers• Broker/Dealers• Banks• Insurance Companies• Insurance Brokers• Commodity Traders

Dodd Frank Compliance LevelsLevel One:

• CPS II records and archives all calls, instant messages, emails, cell phones and text messages.

Level Two:

• CPS II captures all trade transactions from the execution system or the daily DTCC trade log.

Level Three:

• CPS II securely stores the data in accessible formats should the firm request that it be released.

Level Four:

• CPS II reports to the agencies in an approved format upon request and approval of the firm.

Compliance ProcessingCompliance DiscoveryDiscovery provides an assessment of the network, technology and applications at the start of an engagement. The status of compliance is documented throughout the process.

Compliance PlanningPlanning covers the design and architecture of a solution that meets compliance requirements. Timeframes and milestones are developed by CPS II and the company.

Compliance ProcessingProcessing can include any customized work necessary to do the actual storing, archiving, auditing and reporting of transactions to the government agencies.

Dodd Frank Critical Success Factors • Learn the Dodd Frank requirements

• Identify government agency reporting requirements

• Identify mandatory dates for compliance

• Initiate a compliance discovery process

• Set a date for completing compliance preparation

• Determine budget requirements

• Get senior management approval

• Apply for necessary agency extensions

Presented by Phil Hunter, ChairmanCPSII

Part IV: Things To Do Now

Dodd-Frank’s particulars are still in flux, but it can’t be ignored. All financial institutions fall under its provisions.

Compliance is impossible without appropriate technology• Technology budgets will increase by 35% • Data collection will require new systems architecture• Small / medium financial firms will struggle• New technology solutions will be needed

Penalties for non-compliance are severe• Maximum jail terms• Maximum fine of $25 Million• CEOs and CCOs are held responsible

Compliance resources will be limited as deadlines approach• Mandatory compliance by 2015• Applications for three 1-year extensions are allowed• Technology providers will contract early with premiere firms• Firms that are unprepared will not be excused

Consequences and Actions: Dodd-Frank is the Law of the Land

Part V: Closing Remarks, Q&A

• Be sure to sign up for The Dodd-Frank Compliance and Technology Fall Meeting in September• Features an expanded, more in-depth agenda

• Speakers will include Congressman Jim Himes, co-author of the Dodd-Frank Wall Street Reform and Consumer Protection Act

• Call 1-855-Dodd Frank (1-855-363-3372) for any questions, or if you wish to talk to one of our presenters today to talk about taking the next steps towards Dodd-Frank compliance

Sign up for the Fall Meeting