DC-#9872361-v1-Washington DC Investment Management Conference … · File by the 5th business day...

DC 9736275 v1

Overview of the Investment Company ComplexFatima S. Sulaiman

OVERVIEW OF FEDERAL AND STATE REGULATION OF INVESTMENT COMPANIES

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Principal Regulatory Statutes Applicable to Investment Companies Securities Act of 1933 Securities Exchange Act of 1934 Investment Company Act of 1940 Investment Advisers Act of 1940 State Corporate Laws State Securities Laws – “Blue Sky” Internal Revenue Code of 1986 Employee Retirement Income Security Act of 1974 Sarbanes-Oxley Act of 2002 Others (e.g., USA Patriot Act, Dodd-Frank Act)

Principal Governmental Authorities Applicable to Investment Companies Securities and Exchange Commission State Securities Commissions Internal Revenue Service Commodity Futures Trading Commission

Self-Regulatory Organizations Financial Industry Regulatory Authority Stock Exchanges

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Typical Structure of Fund Complex

FOREIGNSUBCUSTODIANS& DEPOSITORIES

LAW FIRMSINVESTMENT ADVISER

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

FUND ACCOUNTINGAGENT

TRANSFER AGENT

ADMINISTRATOR

CUSTODIAN BANK

BROKER-DEALERSTHIRD-PARTYADMINISTRATORS

FUNDBOARD OF DIRECTORS

• Management • Independent Directors

INVESTORS

PRINCIPAL UNDERWRITER(DISTRIBUTOR)

CONSULTANTS

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Securities Act of 1933 Regulates public offerings of securities,

including investment company shares Purpose: “to provide full and fair disclosure…

and to prevent frauds… .” Registration of Securities Prospectus Delivery Requirements Liability for False or Misleading Registration

Statement

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Securities Exchange Act of 1934 Purpose: “to provide for the regulation of securities

exchanges and over-the-counter markets … and… to prevent inequitable and unfair practices on such exchanges and markets.”

Registration of certain Issuers, Exchanges, Broker-Dealers and Transfer Agents

Disclosure Requirements Proxy Solicitation material Periodic Reports to SEC Periodic Reports to Shareholders Other Reports

Anti-fraud Provisions – Rule 10b-5

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Investment Company Act of 1940 Background and Objectives: prevention of enumerated

abuses Definition of Investment Company Types of Investment Companies Broad Scope of Substantive Regulation, including:

Registration and reporting Transactions between investment company and its “affiliated persons” Contracts with investment adviser and principal underwriter Offering and redemption of fund shares Capital structure and investment policies and practices Responsibilities of investment company Board of Directors/Trustees,

including its disinterested directors or trustees

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Investment Advisers Act of 1940 Registration: the investment adviser to an

investment company registered under the Investment Company Act must be registered under the Advisers Act Performance Fee Requirements Compliance Program Requirements

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State Law State Corporate or Trust Law – source of various

requirements relating to: Organization Governing documents Dividends and other distributions Directors/Trustees and Officers Shareholders and shareholder meetings Reorganizations

State Securities Laws – impact of National Securities Markets Improvement Act of 1996

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OVERVIEW OF INVESTMENT COMPANY SERVICE PROVIDERS AND BASIC

AGREEMENTS

FOREIGNSUBCUSTODIANS& DEPOSITORIES

INVESTMENT ADVISER• Develop Products• Manage Portfolios• Place Trades• Compliance• Monitor Sub-Advisers

FUND ACCOUNTING AGENT• Pricing of Portfolio

Assets• Fund Accounting• Share Price

Calculations

TRANSFER AGENT(REGISTRAR)• Shareholder Records• Process Orders• Confirmation Statements• Monthly Statements

ADMINISTRATOR• Office Space• Corporate Officers• Board Meetings• Minutes• Preparing SEC

Documents and reports• Compliance

CUSTODIAN BANK• Safekeeping for Assets• Deposit Accounts• Fed Wire Orders• Securities Loans• Dividend Disbursing• Repurchase Agreements• Line of Credit

BROKER-DEALERS• Sales and Redemptions

of Fund Shares• Execute Portfolio

Brokerage Orders• Research• Clearance and Settlement• Settlement Pricing Assistance

THIRD-PARTYADMINISTRATORS• Sales and Redemptions

of Fund Shares• Shareholder RecordsINVESTORS

PRINCIPAL UNDERWRITER(DISTRIBUTOR)• Advertising• Marketing• Wholesaling

LAW FIRMS• Legal• Consulting

INDEPENDENTREGISTERED PUBLICACCOUNTANTS• Audit• Internal Controls• Tax Returns• Consulting

CONSULTANTS• Marketing Plans• Contract

Review Data• Performance

Data• Board

Governance Advice

FUNDBOARD OF DIRECTORS

• Management• Independent Directors

Service Providers

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INVESTMENT COMPANY SERVICE PROVIDERS AND THE BASIC AGREEMENTS

Investment Advisers and Investment Advisory Contracts

Scope of investment adviser’s responsibilities Contract requirements, including: Written contract Manner of approval and amendment Description of compensation Manner of continuance Termination

Other advisory contract considerations

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Principal Underwriters and Underwriting Contracts

Responsibilities – Marketing and Distribution of Fund Shares Contract requirements, including: Written contract

Manner of approval and amendment

Termination

Other underwriting contract considerations14

Administrators and Administration Arrangements

Responsibilities – Corporate Matters, Regulatory Filings Contract considerations

Transfer Agents and Providers of Related Shareholder Servicing Responsibilities Contract considerations

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Custodians and Custody Arrangements

Safekeeping of the Fund’s Assets General Investment Company Act requirements

applicable to types of custody arrangements: Bank custody Broker-dealer custody Self-custody Central depositories and book-entry systems Margin for futures contract transactions Foreign custody

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Insurance Contracts Required fidelity bond Amount Form of bond Annual consideration Filing of bond

Directors and officers/errors and omissions liability insurance Industry practice Form of policy

Supplemental coverage for disinterested directors/trustees

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Independent Auditors Selection of Accounting Firm Independent directors Shareholders Rule 32a-4

Defining the Scope of Services Sarbanes-Oxley Act imposes additional

requirements regarding auditor independence

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DC 9736284 v1

Organizing A Mutual FundNicole Trudeau

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1. Organizing a Mutual Fund

2. Registering with the SEC

3. Maintaining a Continuous Offering

Overview

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Time and Responsibility Schedule Decide form and content early Allow appropriate review time Reviewers include: Internal Personnel

Portfolio Managers Legal/Compliance Operations

Fund Counsel (Tax Counsel) Directors/Independent Director Counsel Independent Accountants (consent required)

Organizing a Mutual Fund

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Form of Organization Corporations (Maryland, Delaware)

Business/Statutory Trusts Massachusetts Business Trusts Delaware Statutory Trusts


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Governing State Law Maryland Corporate Law A well-developed and detailed statute

Massachusetts Business Trust Law Virtually no substantive statutory provisions

Delaware Statutory Trust/Corporate Law Highly developed case law


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Organizational and Corporate Documents Charter (Declaration of Trust, Trust Instrument

or Articles of Incorporation) Name Number of Directors Powers Clause Purpose Clause

Bylaws Election of Directors Board Committees Duties of Officers Conduct of Board and Shareholder Meetings Indemnification


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Organizational Meeting Approving the Charter and Adopting the By-laws Formal election of directors and officers Establishing Board Committees (e.g., Audit,

Nominating, Valuation) Ratification of prior actions Business transactions (e.g., approve

arrangements with fund service providers) Authorization to file the fund’s registration

statement


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Structure and Distribution Separate Fund Entities Series Funds Multiple Class Master-Feeder Arrangements


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Primary Laws Governing Federal Registration Securities Act of 1933 (the ’33 Act)

Section 5 – Registration of Securities Section 10 – Information Required in a Prospectus Regulation C – Rules 421, 480-486 and 495-497 Sections 11 and 12 – Liability

Investment Company Act of 1940 (the ’40 Act) Section 8 - Registration of Investment Companies

SEC Registration

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The Registration Process Notification of Registration (Form N-8A)

Registers entity as an investment company

Registration Statement (Forms N-1A and N-2) Registers the fund and its shares SEC Staff Review Registration Statement ordered “effective” by SEC File definitive prospectus and SAI within 5 days of

effectiveness XBRL (15 business days after effectiveness)

SEC Registration

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Form N-8A: Notification of Registration Registers entity as investment company Short Form (file concurrent with Form N-1A)

Long Form (file Form N-1A within 3 months)

SEC Registration

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Form N-1A: Registration Statement Facing Sheet Part A: Prospectus Part B: Statement of Additional Information (SAI) Part C: Other Information Signature Pages Exhibit Index/Exhibits Transmittal Letter

SEC Registration

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Cover/Back Page Fund Summary

Objectives, Performance, Fee Table, Summary of Investments, Risks, Fund Management Information, Purchase/Sale Information, Tax Information and Financial Intermediary Compensation

Fund Details Investment Objectives, Principal Investment Strategies, Related Risks

and Disclosure of Portfolio Holdings Fund Management, Organization and Capital Structure

Adviser Portfolio Managers

Shareholder Services Shareholder Information including Valuation, Purchase/Sale and Tax

Information and Policies about Frequent Purchases and Sales Distribution Arrangements

Financial Information

Part A: Prospectus

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Detailed description of fund matters (incorporated into prospectus)

Investment Policies and Limitations Investment Descriptions Fund Management/Board of Directors/Service Providers Description of the Trust/Corporation Control Persons Portfolio Transactions Valuation Tax Information Performance Portfolio Holdings Disclosure Financial Statements

Part B: Statement of Additional Information (SAI)

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Exhibits: Organizational documents Fund contracts Legal opinions and consents Rule 12b-1 Plan(s) Rule 18f-3 Plan Code of Ethics

Indemnification, Business Connections of Adviser and Underwriter, Recordkeeping, Undertakings

Signature Pages

Part C: Other Information

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Signature Pages (Directors, certain Officers) Powers of Attorney Section 11 of the 1933 Act

Civil remedy for purchasers Liability for content of registration statement Liability extends to:

Each person that signs the registration statement (directors are required to sign)

Each person that provides an expert opinion (attorney and accountants)

Underwriter Any controlling person

SEC Registration

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SEC Staff Review Division of Investment Management Selective Review Comments (typically oral, within 30 days) Responses (oral, supplemental letter or pre-effective

amendment) Tandy Representations

Order of Effectiveness Delaying amendment Definitive prospectus and SAI (file within 5 days of receipt

of the Order of Effectiveness) Summary Prospectus (file on day of first use)

SEC Registration

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Maintain good standing with the State of organization Annual update of registration statement

Update no later than 16 months (stale financials) 120 days for 1940 Act compliance

Rule 485(a): Non-routine “material” changes Automatically effective 60 days after filing 75 days for new series

Rule 485(b): Non-material “routine” changes Automatically effective upon filing May use to update 485(a) filing

Rule 497(c) stickers: Update material changes

Post-Effective Requirements

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Due Diligence Checklist for Post-Effective Amendments Updated copy of Form N-1A New SEC rules not yet incorporated into Form N-1A Board materials and resolutions Proxy statements Stickers/Supplements Shareholder reports Exemptive Orders/No-Action Letters Sign-off (portfolio managers, counsel, accountants)


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Useful Resources Plain English Handbook Proposing and Adopting Releases of

Disclosure Rules Generic Comment Letters, “Dear Registrant”

and “Dear Financial Officer” Letters Old N-1A Disclosure Guidelines SEC Staff No-Action and Interpretive Letters


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Shareholder Reports Annual and semi-annual delivered to shareholders

within 60 days of period end date

Form N-CSR Used to file shareholder reports with the SEC within

10 days such reports are sent to shareholders Sarbanes-Oxley Act certifications Includes additional information


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Form N-Q File complete portfolio holdings with the SEC within

60 days of the end of the first and third fiscal quarter No delivery to shareholders, but available to

shareholders upon request Sarbanes-Oxley Act certifications

Form 24F-2 Filing fees File notice within 90 days of fiscal year end Fees based on shares sold less shares redeemed


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Form N-SAR Filed with the SEC within 60 days of the end of a fund’s semi-

annual period and fiscal year end Not distributed to shareholders

Form N-PX Record of proxy votes for 12-month period ending June 30 Due no later than August 31 for all funds

Form N-MFP Applies only to money market funds Shows all portfolio holdings File by the 5th business day of each month


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Questions? Keep a time and responsibility chart when

organizing a mutual fund

Keep a compliance calendar of ongoing reporting, filing and amendment requirements

DC 9567389 v5

Advertising and Social Media for Mutual FundsChris HealeyMeg Laurent

Demonstrating Product

(Infomercials)

Changing Perceptions

Examples of “Real” Advertising

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Building Image

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Example of a Typical Mutual Fund Advertisement

This ad is not an offer to sell nor solicitation of

an offer to purchase.

The offer is only made by the prospectus.

ABC Fund

Copies of the prospectusmay be obtained by calling

800-555-1212 or bygoing to abcfund.com

Past performance is not indicative offuture results

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Q: Why is mutual fund advertising so different from regular advertising?

A: Securities Regulation

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SEC Regulation Section 5 of 1933 Act: Limitations in Advertising Omitting Prospectus – Rule 482 Standardized Performance Disclosures Money Market Fund Disclosures Prominence and Disclaimer Requirements

Supplemental Sales Materials – Rule 34b-1 Generic Advertising – Rule 135a Advertising Standards – Rule 156 Profile/Summary (Short form prospectus)

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Use of Related Performance in Advertising

SEC No-Action Letters and required conditions for use

FINRA ban on use

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FINRA Regulation and Review NASD/FINRA Rules

FINRA Advertising Review Rules

General FINRA Standards – Rule 2210 Consolidation / Reorganization of rules about

communication with the public

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EXAMPLES OF NON-COMPLIANT ADVERTISEMENTS

The following slides include examples of advertisements that are non-compliant for the following reasons:

1. Includes Promissory Language2. Includes Misleading Images3. Inappropriate Presentation and Proximity of Performance Information4. Problematic Graphics

Can you guess which number goes with which slide?

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EXAMPLE ALAURENT SMALL CAP FUND

The Laurent Small Cap Fund seeks to achieve its investment objective by investing at least 80% of its net assets in the equity securities of smaller companies with market capitalizations at the time of investment between $400 million and $1.5 billion.

Past performance is not indicative offuture results

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EXAMPLE B

Are you ready to maximize your returns? Are you ready to invest with peace of mind? Then invest in the Laurent Extraordinary Returns Fund.

Laurent Extraordinary Returns Fund = Guaranteed Returns.

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EXAMPLECPERFORMANCE TABLE

K&L Top Notch Fund -10.0% Benchmark Index - 9.2%

The equity market performed well during the first half of this year and positive security selection in the Industrials and Financials sectors benefited the performance of the K&L Top Notch Fund as compared to its benchmark. Looking ahead, the Fund remains overweight in both of these sectors as they will certainly perform exceptionally.The performance data quoted represents past performance of the Fund’s primary class and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent performance data or the prospectus for the Fund, please call 1-800-555-5555.

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EXAMPLE DMEG’S LARGE CAP FUND(projected performance)

0

5

10

15

20

25

30

2011 2012 2013 2014

Meg's FundFUND A

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Ideal investment to maximize returns with zero risk.

Risk? What risk? We will generate at least 15% total

return this year. Ranks first against comparable funds!

The performance data quoted represents past performance of the Fund’s primary class and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent performance data or the prospectus for the Fund, please call 1-800-555-5555.

Healey-Laurent Awesome Commodities FundGoal: Guaranteed Returns.

PERFORMANCE TABLEHealey-Laurent Awesome Commodities Aggressive

Growth Fund - 25.6%MCSI China Index - 9.2%

The Healey-Laurent Awesome Commodities Aggressive Growth Fund always achieves its investment objective by investing in commodity-linked instruments and fixed income instruments or equity securities of smaller companies.

The team at Healey-Laurent Awesome Commodities Fund made me a ton of money last year!

- K.L. Gates, current investor

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The Use of Social Media By Investment Companies, Investment

Advisers and Broker-DealersI. What is Social Media and Why is it Important?

II. Legal Framework and Regulatory Guidance

III. Third-Party Posts and Content

IV. Drafting Social Media Policies

WHAT IS SOCIAL MEDIA?WHY IS IT IMPORTANT?

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From SEC National Exam Risk Alert“Social media is an umbrella term that encompasses various activities that integrate technology, social interaction and content creation. Social media may use many technologies, including, but not limited to, blogs, microblogs, wikis, photos and video sharing, podcasts, social networking and virtual worlds.”

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Common Uses of Social Media: Marketing Expanding brand awareness Promoting firm’s website Building customer loyalty Connecting with clients and potential clients Educating clients/potential clients Servicing clients Customer/market research

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@HealeyLaurant AdvisersTwo attorneys trned financial advisers who want to manage your money.

Potomac Capital Management@potomaccap

Potomac Capital Management is an investment management firm with an unyielding focus on helping investors achieve their long-term goals.

@potomaccapCall us to learn more about our financial products!

@potomaccapWhen it comes to investment advice, there’s no substitute for our personal service.

@potomaccapAt Potomac Capital Management, we strive to meet our clients’ needs every day.

Follow @potomaccap

@potomaccapThinking about a student loan? Go to our website for some helpful tips.

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Grand Slam Investment Advisers LLP

A Prospectus is available at http://gsia.pro.com/qwerty.

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Ty LannisterPortfolio Manager/Kings Landing Debt Fund

WesterosCurrent: Kings Landing Capital Management, Inc.Previous: Casterly Rock Advisors LLC

LEGAL FRAMEWORK AND REGULATORY GUIDANCE

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Federal Securities Laws and SEC/FINRA Rules Applicable to Investment Advisers, Broker-Dealers and Private Funds

Anti-Fraud Provisions: Section 206 of the Investment Advisers Act (“IAA”)

Section 17(a) of the Securities Act of 1933 (“Securities Act”)

Section 10(b) and Rule 10b-5 under the Securities Exchange Act of 1934 (“Exchange Act”)

Section 34(b) of the Investment Company Act (“ICA”)

FINRA Rule 2210

CFTC Regulation 180.1

NFA Compliance Rules 2-29 and 2-36

Advertising Rules: Rule 206(4)-1 under the IAA

FINRA Rule 2210

Securities Act Rules 482 and 156

Rule 34b-1 under the ICA



Compliance/Supervision Rules: Rule 206(4)-7 under the IAA

Rule 38a-1 under the ICA

FINRA Rule 3130

NASD Rule 2010 (FINRA Rule 3110 effective December 1, 2014)



Recordkeeping Rules: Rule 204-2 under the IAA

Exchange Act Rules 17a-3 and 17a-4

FINRA Rules 2210 and 4511

Section 31 and Rule 31a-2 under the ICA

CFTC Regulations 1.31, 4.7(b), 4.12, 4.23 and 4.33


Suitability: FINRA Rule 2111

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General: IAA Rule 206(4)-1 Advertising is any written communication addressed to more than one

person or any notice or announcement in any publication or by radio or television which offers any analysis, report or publication regarding securities; any graph, chart, formula or other device for making securities decisions; or any other investment advisory services regarding securities May include emails, websites or social media posts

Investment advisers are prohibited from using advertisements that contain “untrue statements of material fact” or are “otherwise misleading”

Investment advisers are generally prohibited from publishing, distributing or circulating advertisements with: Testimonials Past specific recommendations Graphs, charts and formulas Free reports and services Untrue statements of material fact

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SEC Guidance – OCIE National Examination Risk Alert, Investment Adviser Use of Social Media

(January 2012)

Social media is subject to the advertising rules, including recordkeeping and production requirements

Firms should identify risk exposure given their operations

Firms should test if their compliance policies and procedures effectively address risks

Firms may be responsible for third-party content

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National Examination Risk Alert (continued)

Rule 204-2 and Recordkeeping: Records relating to a firm’s “advisory business” must

be kept If records are kept in electronic format, must be

arranged and indexed to promote easy access Conduct employee training regarding required

records and periodically test to make sure employees are not destroying required records

Consider use of third-party vendors to keep records

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FINRA Guidance Targeted Examination Letter, June 2013 Re: Spot-Check of Social Media

Communications FINRA Regulatory Notice 11-39 (Aug. 2011) – Social Media Websites and

the Use of Personal Devices for Business Communications FINRA Regulatory Notice 10-06 (Jan. 2010) – Guidance on Blogs and Social

Networking Web Sites FINRA Regulatory Notice 07-59 (Dec. 2007) – Supervision of Electronic

Communications

Key Topics from FINRA Guidance Recordkeeping Suitability Prior approval vs. supervision

Static vs. interactive content

Third-party posts

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Suitability (FINRA Rule 2111)

Recommending a specific investment product or investment strategy in a social media post can trigger “suitability” requirements

Must “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer” This belief must be based on “reasonable diligence of the member or associated

person to ascertain the customer’s investment profile”

Best practice to require pre-approval by a registered principal of any recommendations of a specific investment product or investment strategy

Some firms prohibit references to specific investment products or strategies due to these issues

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Prior Approval vs. Supervision (FINRA Rule 2210)

Static Communications Interactive Communications Social Media Profiles Comments Blogs Status Updates Message Boards Retail communications require pre-

approval by a registered principal Retail communications may not

require pre-approval May become static communications

if reposted, thus trigging the pre-approval requirement

Recordkeeping requirement apply equally to both types of communications(Retail communications are those made available to more than 25 people)

THIRD-PARTY POSTS AND CONTENT

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Testimonials and Endorsements Includes an explicit or implicit statement of a client’s experience with,

or endorsement of, an investment adviser

Testimonials are prohibited under Rule 206(4)-1 under the Advisers Act because they may suggest that all of the adviser’s clients or investors have the same favorable experience as described in the testimonial

SEC Risk Alert: Social “plug-ins,” Facebook Likes and LinkedIn Recommendations could be testimonials depending on facts and circumstances

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Our 128,877 “Likes” are a testament to the services we provide.

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Grandpa Ty is the best. He is super friendly and does a lot of community service! I have absolutely no idea how good he is at his job and that doesn’t matter to me because he is a good person…

Tommy BaratheonKing of the Seven Kingdoms



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I have invested in the Kings Landing Debt Fund for over ten years and think that Ty is a great portfolio manager. The Fund’s average annual returns are always above the Lipper benchmark and the Fund frequently outperforms the other funds in its peer group…

James FallonComedian and Investor



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Adoption and Entanglement Theories Advisers are responsible for the content that

they or their representatives put on their webpage

An adviser may also be responsible for content that it did not author if: The adviser had some responsibility for its creation

(entanglement) The adviser has somehow endorsed it (adoption)

after the content was created

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Examples of Entanglement: A firm pays for an industry study Soliciting a recommendation on LinkedIn A firm employee posts a review of the firm

Examples of Adoption: Selectively removing content, such as

unfavorable material “Retweeting” a post from a third party

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Potomac Capital Management@potomaccap

Check out this article about how emerging markets funds are guaranteed to have the best returns this quarter: www.badadvice.com

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Links to third-party sites: The SEC has employed adoption and

entanglement theories in the context of a company’s responsibility for third-party information that is hyperlinked to its Website

Firm can’t know or have reason to know that the site contains false or misleading information

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SEC Guidance on the Testimonial Rule and Social Media(March 2014)

Genuine third-party social media commentary can be useful to investors

Linking to commentary on third-party social media sites does not implicate the testimonial rule if three conditions are met:

The social media site provides independent content

There is no material connection to the independent site that could jeopardize its independence or the independence of the commentary posted on the site

All testimonial commentary from the site is included

For example:

See us on or

Entanglement and adoption may implicate the testimonial rule

Placing advertisements on the third party site does not jeopardize the site’s independence

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Commenting Guidelines No personal information or information about your accounts

No testimonials about how well you have done by investing with the firm

No investment advice or recommendations about specific stocks or funds

No attacks on the firm or fellow viewers

No offensive or defamatory comments

No illegal information, such as material, non-public information (insider trading)

No customer-service related questions – contact us directly

Read [third-party social media site’s] terms of service and privacy policy, as they apply to communications through the page/account

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Disclaimers Firm is not affiliated with [third-party social media site] - use at your own risk Firm is not responsible for and does not endorse any content, advertising,

advice, opinions, recommendations or other information from third parties, including [the social media site]

Opinions, comments expressed by [friends or followers] are those of the persons submitting them and do not represent the views of the firm or its management

Firm does not endorse or approve content submitted by third parties, or endorse individuals or organizations, by using any features on this site

Firm reserves the right to block any third-party content deemed illegal, inappropriate or offensive

Firm may block any posts that are testimonials, advice, recommendations, advertisements for specific products or services

DRAFTING SOCIAL MEDIA POLICIES

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Social Media Use by Investment Advisers

As of 2013, 83% of firms had adopted formal written policies and procedures to govern the use of social networking by the firm and/or employees (another 6% had informal policies)

As of 2013, 49% of firms prohibited the use of personal social networking websites for business purposes

28% of firms report that the firm’s social media testing has increased in the past year

Approximately 5% of firms reported finding material social media-related compliance issues in the past year

Sources: 2013 and 2014 Investment Management Compliance Testing Surveys (The Investment Adviser Association, ACA Compliance Group, IM Insight and Old Mutual Asset Management)

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Key Takeaways in Drafting Social Media Policies

Identify business purposes for which firm wants to use social media, identify risks and draft procedures around purposes and risks

Perform cost-benefit analysis and identify resources available

Coordinate legal/compliance, IT, privacy departments on enterprise-wide basis to ensure policy addresses applicable laws.

Be specific about permitted or prohibited sites and permitted/prohibited features of those sites, and who can represent the firm

Specify account ownership, particularly for accounts used mostly for business purposes

Monitor changes to features/settings on permitted sites and modify policy, as appropriate

Incorporate regular training and education into the policy

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Key Takeaways in Drafting Social Media Policies (continued)

Organize and identify the process for pre-approving required content and monitoring interactive content/consider live monitoring

Make sure employees separate business and personal accounts

Establish the extent to which personal use is permitted during business hours

Identify inappropriate personal uses of social media (e.g., defamatory or illegal content, disparagement of competitors, use of company logo or other suggestions of endorsement, etc.)

Consider issues related to personal devices (e.g., monitoring, recordkeeping, unauthorized access, ability to separate business and personal communications)

Monitor whether employee usage complies with policies and procedures and consider employee certifications

If budget permits, use vendors for monitoring, site-blocking and recordkeeping

DC 9736039 v4

Financial Regulatory Reform and the New World OrderDaniel F. C. Crowley

U.S. POLITICAL AND POLICY LANDSCAPE

3

114th Congress: House Financial Services Committee

Jeb Hensarling (R-TX)Chairman

Maxine Waters (D-CA)Ranking Member

4

114th Congress: Senate Banking Committee

Sherrod Brown (D-OH) Richard Shelby (R-AL)Tim Johnson (D-SD)

Chairman, 113th Congress

Mike Crapo (R-ID)Ranking Member,

113th Congress

5

Executive Branch Officials

Treasury Secretary Jack Lew

SEC ChairMary Jo White

FRB ChairJanet Yellen

CFTC Chairman

Tim MassadCFPB

Director Richard Cordray X

?

CURRENT EVENTS IN U.S. POLITICS

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The Perception OfWashington Activity…

99

Legislative Gridlock…

8

Hamstrung By Extremely High Political Polarization…

100

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Issue Approve Disapprove

Overall 44% 52%

Economy 42% 56%

Foreign Affairs 42% 54%

Health Care 42% 56%

Source: CNN/Opinion Research as of September 29, 2014

Public’s Disapproval of President Obama’s Performance Covers Broad Range Of Issues

Obama Administration's Competency Questioned As Management Failures Multiply Affordable Care Act (Obamacare) Rollout VA Hospital Patient Treatment Delays IRS Targeting Of Select Political Groups Benghazi Terrorist Attack Missteps Secret Service Failures Underestimation of ISIS Terrorist Threat Guantanamo Prisoner Swap NSA Spying on Foreign Leaders AP Phone Records Scandal

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Congress: The Most Unproductive Year Ever

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Source: Steve Benen, Maddow Blog as of 9/18/14

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Election Projections Republicans must win six seats to control

Senate Poll averages show Republicans leading for

eight Senate seats currently held by Democrats Runoffs possible in Louisiana and Georgia, with

elections not until December and January Slim majorities may affect with which party

independent senators choose to caucus

FINANCIAL SERVICES IN THE POST DODD-FRANK ERA

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Context Of U.S. Regulatory Reform

Unprecedented government intervention Apprehension about “systemic” risk Concern about regulatory gaps and redundancies

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Unprecedented Rulemaking Activity

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The New World Order Looking at financial

services through a new global lens

Regulators collaborating in some instances and conflicting in others

Understanding regulatory reform is key

Institutions must consider whether to influence the direction of reform

THE DODD-FRANK ACT

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Systemic risk Bank regulatory structure Consumer financial protection Private funds OTC derivatives Investor protection Municipal securities Risk retention Credit rating agencies Executive compensation and corporate governance Federal insurance regulation

Key Areas To Reform

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Secretary of the Treasury

NEW INSTITUTION –Financial Stability Oversight Council

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Key Members Of FSOC

SEC ChairMary Jo White

FRB ChairJanet Yellen

CFTC ChairmanTim Massad

OCC ChairmanTom Curry

FDIC ChairmanMarty Gruenberg

Treasury SecretaryJack Lew

MAJOR FINANCIAL SERVICESISSUES

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FSOC designates significant firms as SIFIs Federal Reserve regulation of bank holding companies with assets

> $50B and designated SIFIs Prudential, reporting, and disclosure requirements Required reports to assess financial system risks

2013: AIG, Prudential, and GE Capital designated SIFIs MetLife requested an oral hearing on its proposed SIFI designation in

October 2014 Still no final SIFI enhanced prudential standards from Federal

Reserve

FSOC And SIFI Designations

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Asset Management Review The regulators’ dilemma: regulate risky activities

or largest firms? OFR Asset Management report (October 2013) Data gaps prohibit optimal regulatory responses Reviews sources of instability and risk in industry

(interconnectedness, “search for yield”)

OFR Asset Management conference (May 2014) FSOC staff studying activities of asset managers

to determine whether they pose systemic risk

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Most major rulemakings now complete Unresolved issues:

Position limits Margin requirements for uncleared swaps (reproposed Sept. 2014) Cross-border regulation of derivatives (clearing, substituted compliance)

CFTC subject to legal challenge ISDA v. CFTC (vacated original position limits rule) ICI v. CFTC (upheld CPO / CTA registration) Bloomberg LP v. CFTC (dismissed, margin requirements for cleared swaps

and futures) SIFMA v. CFTC (dismissed, upheld cross border guidance issued by CFTC)

Derivatives“In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

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The Volcker Rule Prohibits proprietary trading and

sponsorship/ investment in hedge funds and private equity funds

After considerable delays, Rule finally published in December 2013

Response: banks are divesting from “covered funds” under the Rule, including private equity and hedge funds

Will investment shift to the non-bank space and alternative sources of funding?

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Qualified Residential Mortgage Rule

“QRM” loans will be exempt from 5% lender risk retention requirement in Dodd-Frank Act (“skin in the game”)

Revised proposal for QRM definition includes 2 options: Option 1: QRM = QM as published by the CFPB Option 2: Only includes loans with 30% down payments and loans

insured by FHA, VA, and USDA Final rule adopted on October 22

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Money Market Mutual Fund Reform New rules finalized in August 2014

Require use of floating NAV by “prime” money market funds; retail and certain government funds exempt from floating NAV requirement

Allow funds to impose liquidity fees and temporarily suspend redemptions

Impose new disclosure, diversification, and stress testing obligations

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Housing Finance Reform First steps in government-sponsored enterprise reform

process:

Senate: Corker-Warner, Johnson-Crapo Replace GSEs with FDIC-modeled government guarantee

More robust role for private capital in assuming mortgage credit risk

House: PATH Act Eliminates GSEs and government guarantee in mortgage market

Movement in 114th Congress unlikely without Senate support

Next steps depend heavily on new Senate leadership

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2015 Regulatory Agenda Harmonization of fiduciary duty rule for investment

advisers and broker-dealers

Total loss absorption capital and SIFI “surcharge” bank capital rules

Executive compensation rules

Credit rating agency reform?

New SEC stress testing rules for asset managers?

INTERNATIONAL FINANCIAL SERVICES OUTLOOK

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New Leadership in the EU

European Commission President Jean-Claude

Juncker (S&D)

European Parliament Economic and Monetary

Affairs Committee Chair Roberto Gualtieri

(S&D)

European Commission Financial Services

Commissioner Jonathan Hill (Conservative)

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Financial Stability Board

Mark Carney, Chair, Financial Stability Board,

and Governor of the Bank of England

Composed of global central bankers, treasury officials (including the Federal Reserve Board and Treasury), and international regulators (IOSCO, IAIS, BCBS, etc.)

Key areas of focus Systemic risk (G-SIFIs, G-SIBs, G-SIIs, FMIs) Shadow banking (Repo markets, securitizaiton) Recovery and resolution plans Financial benchmarks

Finalized consultation papers incorporated into domestic law

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A Torrent of Legislative and Regulatory Activity Since the Crisis

In Europe alone: Markets in Infrastructure Directive / Regulation (“MiFID / MiFIR”) European Market Infrastructure Regulation (“EMIR”) Capital Requirements Directive / Regulation (“CRD IV / CRR”) Alternative Investment Fund Managers Directive (“AIFMD”) Packaged Retail Investment and Insurance Products (“PRIIPs”) Undertakings for Collective Investments in Transferable Securities

(“UCITS”) Directives on benchmarking, money market reform, “shadow

banking”

“Rulemaking” continues at FSB, IOSCO, and BCBS

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2015 EU Regulatory Agenda Consumer protection (including PRIIPs)

Review of financial conglomerates

Anti-money laundering

Credit rating agency reform

Securitization

Benchmark reform and supervision

Possible directive on non-bank recovery and resolution (which may extend to asset managers)

NEXT STEPS: GLOBAL GOVERNMENT ENGAGEMENT

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No geographic barriers exist for financial services

Regulators compare foreign regulatory schemes and dialogue on domestic and international financial services regulatory policy

A coordinated effort is necessary to achieve policy success for multinationals

Best strategy is worldwide proactive engagement

Government Relations Strategy

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Captures US and EU financial services regulation

Weekly updates on notices, comment periods, and agency meetings

Subscriber access to dedicated website

Comprehensive resource on regulatory developments

QUESTIONS?

DC-#9872361-v1-Washington DC Investment Management Conference … · File by the 5th business day...

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