2014: The Year Ahead for Hedge Funds

2014: The Year Ahead for

Hedge Funds Managed Funds Association | March 2014

Overview

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Financial legislative and regulatory reform is occurring at a

rapid pace globally.

Around the world, leaders are working to ensure that market

reform is consistent across jurisdictions.

This presentation gives a general overview of some of the

key dates – and expected actions – impacting the hedge

fund industry in 2014.

U.S.

Legislative

U.S.

Regulatory

EU

Legislative

EU

Regulatory

Key U.S. Legislative Dates and Issues

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This section provides a timeline and description of key legislative dates and

issues taking place in the United States (U.S.) in 2014:

2014 Key Legislative Dates

Key Dates in the U.S.

• March 4 – President Obama Released FY2015

Budget

• November 4 – Election Day

U.S. Legislative U.S. Regulatory EU Legislative EU Regulatory

Key U.S. Legislative Issues

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Here is a brief overview of key U.S. legislative issues with the potential to

impact the hedge fund industry in 2014:

Tax Reform: In the U.S. House of Representatives, Ways and Means Committee

Chairman Dave Camp (R-MI) released a comprehensive tax reform discussion draft in

February 2014. While the prospects for passage in 2014 are unlikely, elements of the

Camp plan will shape future discussions on the issue.

Transatlantic Trade and Investment Partnership (TTIP): U.S. and EU TTIP

negotiators are expected to continue working toward inclusion of financial services

issues within the agreement. U.S. policymakers are concerned that inclusion of

certain financial services issues could force reconsideration of certain provisions

included in previous legislation, such as the Dodd-Frank Act. EU lawmakers have

recently made a concerted effort to address these concerns, stating in a recent policy

paper that the objective is not to define (or re-define) the substance of international

standards for financial regulation, or negotiate prudential rules, but rather to create a

workable platform for EU and U.S. regulators to ensure their rules are consistent and

coordinated.

U.S. Regulatory EU Legislative EU Regulatory U.S. Legislative

Key U.S. Legislative Issues - Continued

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Here is a brief overview of key U.S. legislative issues with potential to impact

the hedge fund industry in 2014:

JOBS Act 2.0 and Beyond: While the Securities and Exchange Commission (SEC)

continues to implement the Jumpstart Our Business Startups (JOBS) Act, the House

Financial Services Committee continues to work on capital formation legislation,

including a bill to implement a tick-size pilot program, which passed the House of

Representatives in February 2014. Further work on capital formation could form the

basis of a “JOBS Act 2.0” effort for the remainder of the year.

Reform of Government Sponsored Enterprises (GSEs): The Senate Banking,

Housing and Urban Affairs Committee remains focused on housing finance reform.

The House Financial Services Committee has also expressed an interest in issues

related to the structure of the U.S. housing market. This is a sector that is watched

carefully by our industry.

Immigration Reform: To date, the House Judiciary Committee has considered

several individual issues related to immigration reform, while the Senate passed a

comprehensive bill in June 2013. Immigration is likely to remain a key legislative

priority in the House for the remainder of 2014 with a bill possibly reaching the full

House for consideration in the Fall.

U.S. Regulatory EU Legislative EU Regulatory U.S. Legislative

Key U.S. Regulatory Dates and Issues

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This section provides a timeline and description of key regulatory dates and


2014 Key Regulatory Dates

• March – CFTC Expects to Issue Rulings on the following issues:

• Finalize Rule on Governance and Mitigation of Conflicts of Interest of

Derivatives Clearing Organizations, Designated Contract Markets and

Swap Execution Facilities

• Finalize Rule on Market Co-Location Services

• Propose Rule on Part 190 Bankruptcy Rules

• Propose Rule on Block Trading for Futures and Options on Futures

Contracts and Centralized Market Trading on Designated Contract

Markets

• Propose Rule Amendments to Swap Data Recordkeeping and

Reporting Requirements

• Propose Rule on Allocation of Business Conduct Obligations by Swap

Dealers in a Prime Brokerage Arrangement

• May 1st – CFTC No-Action Relief Expires on the

Oral Recordkeeping Requirement under CFTC Rule 1.35(a).


Key U.S. Regulatory Dates and Issues

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This section provides a timeline and description of key regulatory dates and


2014 Key U.S. Regulatory Dates – Continued

• October – The U.S. Securities and Exchange Commission (SEC) Expects to

Issue the Final Ruling on the following issues:

• Implementing the JOBS Act

• Capital, Margin and Segregation Requirements for Security-Based

Swap Dealers

• Registration and Regulation of Security-Based Swap Execution

Facilities

• Prohibition Against Fraud, Manipulation, and Deception in connection

with Security-Based Swaps

• Ownership Limitations and Governance Requirements for Clearing

Agencies, Security-Based Swap Execution Facilities, and National

Exchanges

• Regulation Systems Compliance and Integrity

U.S. Legislative EU Legislative EU Regulatory U.S. Regulatory

Key U.S. Regulatory Issues

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Here is a brief overview of key U.S. regulatory issues with potential to impact


Commodity Futures Trading Commission (CFTC) Reauthorization: The House

and Senate Agriculture Committees are expected to turn their attention to CFTC

reauthorization in 2014. Action in this area could also bring about proposed

amendments to Title VII of the Dodd-Frank Act and the Commodity Exchange Act,

both of which help determine regulations governing the hedge fund industry.

CFTC Nominations: The Senate Agriculture Committee will also be tasked with

addressing three nominations to fill positions at the CFTC in 2014. Currently Mark

Wetjen is serving as the Acting Chairman of the Commission, and will continue to do

so until Chairman-nominee Timothy Massad is confirmed by the Senate. Two other

nominees are also pending confirmation as Commissioners – Ms. Sharon Bowen and

Mr. J. Christopher Giancarlo. Their confirmation hearings are expected to occur in the

first quarter of 2014.


Key U.S. Regulatory Issues

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Adviser Regulation: In July 2013, the SEC adopted final rules implementing the

JOBS Act by removing the bank on general solicitation for offerings made under the

new Rule 506(c) of Regulation D. At the same time, the SEC also proposed additional

requirements that would apply to issuers who raise capital through general solicitation

activities under Regulation D. The SEC is now considering how to proceed with the

proposals and indicated in its semi-annual agenda that it intends to finalize the

rulemaking by October 2014.

Accredited Investor Definition: As part of the SEC’s release proposing new rules for

entities engaged in general solicitation, the agency requested comment on whether it

should revise the definition of “accredited investors” under Regulation D.

Derivatives: The SEC has yet to finalize a number of key rulemakings related to Title

VII of the Dodd-Frank Act, particularly those related to mandatory clearing and

reporting of security-based swaps (SBS). IN the fourth quarter of 2014, it is expected

to finalize rules addressing: (1) capital, margin and segregation requirements for SBS

dealers; (2) registration and regulation of SBS execution facilities (SBSSEFs); (3) the

prohibition against fraud, manipulation, and deception in connection with SBS; and (4)

ownership limitations and governance requirements for clearing agencies, SBSSEFs

and national exchanges.


Key U.S. Regulatory Issues - Continued

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Market Structure: In 2013, the SEC proposed Reg SCI, requiring self-regulatory

organizations and other market utility-type market participants to implement policies,

procedures and testing to ensure their systems are able to maintain operational capability,

promote the maintenance of fair and orderly markets, and operate in the manner intended.

Reg SCI was proposed after a series of systems mishaps in the equities markets, and

meant to ensure that key market participants have comprehensive policies and procedures

in place surrounding their technological systems. The SEC estimates that it will adopt final

rules in October 2014.

Tick Size Pilot Program: The SEC may also propose a tick size pilot program in 2014.

The tick size pilot program is a test program in which stocks would be traded in larger

increments in order to determine whether this change might make it easier for investors to

trade some shares. In 2013, along with some congressional pressure to implement a tick

size pilot program, the SEC held a roundtable on decimilization and tick sizes and began

considering how to construct a tick size pilot program. However, in January 2014, the

SEC’s Investor Advisory Committee issued draft recommendations urging the SEC to

maintain its current decimal pricing policy and not to engage in a pilot program.



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Regulation of Commodity Pool Operators / Commodity Trading Advisers: The

CFTC and / or the National Futures Association (NFA) could address the following

issues in 2014:

• CFTC will likely consider providing no-action relief to the industry with respect to the

ability of certain entities, such as general partners, managing member and board

directors, to delegate CPO functions to a registered CPO.

• CFTC staff will likely propose or issue guidance on compliance with the CFTC’s

rule 4.13 (a)(3) de minimis trading exemption from CPO registration for fund-of-

funds and other funds that invest in products that happen to be CPOs.

• CFTC staff will work on revising and updating CPO recordkeeping rules and eligible

third party record keepers (e.g., Rules 1.31 and 4.23).

• CFTC staff will consider proposing JOBS Act equivalence rules for the CFTC.

• CFTC staff will continue working on providing guidance on Forms CPO-PQR and

CTA-PR.

• The NFA will review responses to its request for comments on capital requirements

for CPOs and CTAs and other customer protection measures; and consider

whether to propose rulemaking in these areas.



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Derivatives: According to the CFTC’s semi-annual regulatory agenda, in 2014, it also

expects to finalize rules addressing the governance and mitigation of conflicts of

interest of derivatives clearing organizations, designated contract markets (DCMs) and

swap execution facilities (SEFs). They are also expected to propose new rules

regarding:

• Part 190 Bankruptcy Rules

• Block trading for futures and options on futures contracts and centralized market

trading on DCMs

• Amendments to swap data recordkeeping and reporting requirements

• Allocation of business conduct obligations by swap dealers in a prime brokerage

arrangement

Position Limits: The CFTC requested comments to its proposed regulations on

position limits and aggregation of limits by February 10, 2014. Rulemaking on this

issue is expected throughout the year.



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Foreign Account Tax Compliance Act (FATCA): The Internal Revenue Service

(IRS) and the Department of the Treasury expect to continue releasing guidance and

finalizing relevant forms and documents to implement FATCA. Beginning in June, the

IRS will begin posting the list of foreign financial institutions that have registered and

receive a global intermediary identification number. Treasury continues to enter into

inter-governmental agreements with regulators in jurisdictions around the world and

further agreements are expected in 2014.

871(m) Regulations on Dividend Equivalent Payments: The IRS is expected to

work on finalizing its re-proposed regulations to implement Section 871(m) of the

Internal Revenue Code, which imposes withholding taxes on non-U.S. investors that

receive dividend equivalent payments on U.S. source income.

Systemic Risk Regulation: The Office of Financial Research (OFR) is expected to

continue its review of Form PF data. Further, the Financial Stability Oversight Council

is expected to monitor other global regulators’ recommendations with respect to

shadow banking and global systemically important financial institutions.


Key EU Legislative Dates and Activities

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This section provides an overview of key legislative dates and issues expected

in the European Union (EU) in 2014:

Key Legislative Dates in the EU

• April 14-17 –Final Plenary Session of the 2009-2014 European

Parliament

• May 22-25 –European Parliamentary Elections

• July 1 – First Plenary Session of the 2014-2019 European Parliament;

Italy Assumes the European Council Presidency

• November 1 - New European Commission Takes Office


Key EU Legislative Issues

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Here is a brief overview of key EU legislative issues with potential to impact the

hedge fund industry in 2014:

EU Commissioner Selections: The European Commission will undertake its selection

process immediately following the Parliamentary elections, first with European Heads of State

selecting a President of the European Commission. This selection is subject to the approval of

the European Parliament (expected action July 14-17). Following that, each EU Member State

will put forward one candidate for a Commissioner position, which will then be assigned to the

various European Commission offices by the European Commission President. After final

approval of all Commissioners by the European Parliament, the new European Commission

will begin its term on November 1.

EU Banking Union: The European Banking Union – actually a number of pieces of legislation,

including the Asset Quality Review (AQR), i.e., stress tests, the Single Resolution Mechanism

(SRM), and the Bank Recovery and Resolution Directive (BRRD) – has remained one of

Europe’s significant issues over the last two years, progressing at a rapid pace despite the

complexity of its scope. These issues will continue to dominate the discussion between the

European Parliament and the Council of the EU in order to meet the goal of implementation by

2015.

Liikanen Follow Up – Europe’s Volcker Rule: On January 29, the European Commission

released a proposal on banking structure reform, colloquially referred to as the Liikanen Follow

Up. This proposal would force the “separation of certain trading activities from credit

institutions and their parents.” Not technically part of the EU Banking Union debate, the

Liikanen Follow Up represents a major legislative undertaking linked to other legislation like the

Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism

(SRM). Furthermore, a proposal on transparency of securities financing transactions

accompanies the Liikanen Follow Up. The final legislation will likely affect transparency

requirements for investment funds as well as the funds’ relationship with banks.

U.S. Legislative U.S. Regulatory EU Regulatory EU Legislative

Key EU Legislative Issues

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Here is a brief overview of key EU legislative issues with potential to impact the

hedge fund industry in 2014:

Markets in Financial Instruments Directive (MiFID II) Level 1 (Legislation): MiFID II

represents one of the EU’s most significant pieces of financial reform following the 2008

financial crisis. It included new rules on a number of areas, including high-frequency /

algorithmic trading, over-the-counter derivatives, third-country registration, and position limits,

among others. Negotiators from the three European Institutions (European Commission,

European Parliament, and Council of the European Union) reached agreement on the

legislation in mid-January. After finalization, the legislation will likely enter into force by the

middle of 2014.

Markets in Financial Instruments Directive (MiFID II) Level 2 (Implementation): Once the

legislation enters into force, the European Markets regulator, the European Securities and

Markets Authority (ESMA), and EU Member States will begin their implementation or

rulemaking phase (Level 2). This phase is expected to last into 2015.

Financial Transaction Tax (FTT): In the EU, taxation issues are decided by individual

Member States, not the European Parliament or the European Commission. In mid-January,

the Greek Presidency circulated its first draft of the tax as well as a working document

discussing the links between taxation and regulation of the financial sector. The document also

provided an overview of legislation relevant to ensure proper implementation of the FTT. EU

Member State Fiscal Attachés resumed discussions on the issue in January. These talks are

expected to continue at regular intervals throughout the year.

U.S. Legislative U.S. Regulatory EU Regulatory EU Legislative

Key EU Regulatory Dates and Activities

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This section provides an overview of key regulatory dates and issues expected

in the European Union (EU) in 2014:

2014 Key Regulatory Dates

Key Dates in the EU

• February 12 – Start Date for Reporting under the European Markets

Infrastructure Regulation (EMIR)

• March – European Supervisory Authorities to Issue Joint Draft

Regulatory Technical Standards on Risk Mitigation Techniques for OTC

Derivatives Contracts Not Cleared by a Central Counterparty

• March / April – UK Financial Conduct Authority (FCA) to Publish Final

Policy Statement of the Use of Dealing Commissions


Key EU Regulatory Issues

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Here is a brief overview of key EU Regulatory issues with potential to impact


Alternative Investment Fund Managers Directive (AIFMD): Member state regulators are

expected to continue finalizing rules and related guidance to adopt and implement the AIFMD

prior to a July 2014 deadline. Member states and the European Securities and Markets

Authority (ESMA) are also working to provide more clarity regarding how managers should

complete the reporting form required under the Directive.

European Markets Infrastructure Regulation (EMIR): The EU is focused on implementing

the EMIR clearing and reporting mandates. Mandatory reporting for derivatives began on

February 12 for EU entities. Further, ESMA expects to issue both a consultation paper and

final regulatory technical standards for clearing in 2014. ESMA is working toward a goal of

implementing EU clearing in the fourth quarter of 2014 or the first quarter of 2015. In early

March, the European Supervisory Authorities (which includes ESMA, EIOPA, and EBA) also

expect to issue joint regulatory technical standards to address margin requirements and other

risk mitigation techniques for uncleared derivatives to align with the Basel-IOSCO international

standards. ESMA is also expected to continue issuing updated questions and answers

covering matters such as the extraterritorial application of EMIR.


Resources

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As you can see, there are a wide range of legislative and regulatory initiatives underway in 2014

that will shape the further evolution of the global alternative investment industry.

Please click here for additional information on how hedge funds are regulated in the U.S.

Please click here for more information on how hedge funds are regulated in the EU.

Regulatory Agencies:

Securities and Exchange Commission (SEC)

www.sec.gov

Commodity Futures Trading Commission (CFTC)

www.cftc.gov

Internal Revenue Service (IRS)

http://www.irs.gov/

European Securities and Markets Authority

www.esma.europa.eu

Follow MFA on Twitter @MFAUpdates

And visit our webpage at www.managedfunds.org

http://www.slideshare.net/ManagedFunds/us-regulation-101-guide-to-us-oversight-of-the-hedge-fund-industry

http://www.slideshare.net/ManagedFunds/mfa-eu-regulation-101

http://www.sec.gov

http://www.cftc.gov

http://www.irs.gov/

http://www.irs.gov/

http://www.esma.europa.eu

https://twitter.com/MFAUpdates

http://www.managedfunds.org

Economy & Finance

2014: The Year Ahead for Hedge Funds