Derrick D. Cephas, the head of Weil’s Financial Institutions Regulatory practice, published an interesting article with Bank Director magazine detailing how banks can approach new industry regulations in a constructive manner and how the new rules have changed the regulatory landscape.

Full-Text Article from Bank Director Magazine

Weil’s David Elphinstone has written an interesting article exploring a resolution passed last month by the European Parliament adopting, with amendments, the European Commission’s proposal for a regulation relating to short selling and certain aspects of credit default swaps.

Download the full-text PDF.

Weil’s Marcia L. Goldstein, Heath P. Tarbert, and Kathlene M. Burke authored a column for The New York Law Journal discussing the recently finalized implementing rule in connection with resolution plans, or “living wills,” concluding that the regulations still leave a substantial degree of uncertainty as to what exactly it will take to ensure a plan is “credible.”

Access Full-Text Article from The New York Law Journal (may require subscription)

The October 25, 2011 webinar titled “The Volcker Rule’s Impact on Private Funds: Recent Rulemakings and Market Trends” is now available on demand.

The program featured Weil’s Harvey Eisenberg, Derrick Cephas, and Heath Tarbert and addressed recent and forthcoming rules pursuant to the Dodd-Frank Act’s Volcker Rule (Section 619) whereby large, systemically important banks will have to divest certain fund operations.

The Financial Stability Board (FSB) has identified the institutions that it will designate as Globally Systemically Important Financial Institutions (G-SIFIs). The announcement was made today around the G-20’s Cannes Summit. In a related communication, the FSB stated:

“The FSB today identifies the initial group of 29 G-SIFIs for which the resolution-related requirements will need to be met by end-2012. Going forward, the list of G-SIFIs will be updated each year in November. The additional loss absorbency requirement will apply from 2016, initially to those banks identified in November 2014 as G-SIFIs. These banks will also have to meet the higher supervisory expectations for data aggregation capabilities by January 2016.”

The list of G-SIFIs is as follows:

Belgium

Dexia SA

China

Bank of China

France

Banque Populaire

BNP Paribas SA

Credit Agricole SA

Societe Generale SA

Germany

Deutsche Bank AG

Commerzbank AG

Italy

Unicredit Group SA

Japan

Mitsubishi UFJ FG

Mizuho FG

Sumitomo Mitsui FG

Netherlands

ING Groep NV

Spain

Banco Santander SA

Sweden

Nordea AB

Switzerland

UBS AG

Credit Suisse AG

United Kingdom

Royal Bank of Scotland PLC

Lloyds Banking Group PLC

Barclays PLC

HSBC Holdings PLC

United States

Bank of America

Bank of New York Mellon

Citigroup

Goldman Sachs

J.P. Morgan (JPM)

Morgan Stanley

State Street

Wells Fargo

Systemic Risk: The Age of SIFIs and GSIBs

The Clearing House’s First Annual Business Meeting & Conference

November 9-10, 2011, New York Palace Hotel, New York, NY | Register Now

Weil’s Heath Tarbert is scheduled to appear as a panelist at The Clearing House’s First Annual Business Meeting & Conference, to be held on November 9-10 at the New York Palace Hotel in New York, NY. The conference will examine the commercial banking regulatory and payments landscape in the post-Dodd-Frank era, as well as other related legal and tax issues. Mr. Tarbert’s panel will discuss current Dodd-Frank rulemakings pertaining to the Orderly Liquidation Authority, Title II, Early Remediation, and resolution planning, or “living wills.”

Preparing for a New Environment for Compliance & Enforcement

New York Bankers Association Financial Services Forum

November 9-11, 2011, New York, NY, Waldorf-Astoria Hotel | Register Now

Derrick Cephas will be a speaker on the panel “Preparing for a New Environment for Compliance & Enforcement,” on Wednesday, November 9, 2011 at the New York Bankers Association Financial Services Forum. The event will take place at the Waldorf-Astoria Hotel in New York, NY.

by David E. Wohl and Kira F. Stanfield

The Commodity Futures Trading Commission (the “CFTC”) and the Securities and Exchange Commission (the “SEC”) have announced the adoption of new rules under the Commodity Exchange Act and the Investment Advisers Act of 1940 (the “Advisers Act”) requiring SEC-registered investment advisers to private funds (including private equity funds, hedge funds and liquidity funds) to periodically file Form PF with the SEC.  The stated purpose of the new rules is to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) designed to assist the Financial Stability Oversight Counsel (the “FSOC”) in monitoring potential systemic risks to the United States financial system.  As discussed below, the timing and types of information that an adviser is required to disclose on Form PF depends on whether such adviser manages private equity funds, hedge funds or liquidity funds and the size of those funds.

Who Must File? 

Rule 204(b)-1 under the Advisers Act and Form PF require investment advisers with at least $150 million of assets under management attributable to private funds (as of the end of such adviser’s most recently completed fiscal year) that are registered or required to be registered with the SEC to file a Form PF with the SEC.[1]  A “private fund” is defined as an issuer that would be an investment company under the Investment Company Act of 1940 but for the exceptions contained in Section 3(c)(1) or (7) of that Act.  The $150 million threshold differs from the rule as proposed (the “Proposed Rule”), which required all registered advisers to private funds (regardless of assets under management) to file Form PF.  “Exempt reporting advisers” (generally, advisers to private funds with assets of less than $150 million in the United States, as described in Rule 203(m)-1 under the Advisers Act) are not required to file Form PF.

Form PF Requirements

The types of information required to be disclosed on Form PF and the frequency of filing depends on whether the investment adviser is (i) an adviser to private equity funds, hedge funds or liquidity funds and (ii) a “large private fund adviser.”  As discussed below, private equity fund advisers generally have less burdensome reporting requirements than both hedge fund advisers and liquidity fund advisers.  The SEC stated that distinctions among types of advisers and amounts of assets under management will allow the FSOC to monitor the private fund industry without placing an undue burden on private fund advisers that pose less systemic risks.

Types of Private Funds

Form PF defines a “private equity fund” as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course.

Form PF defines a “hedge fund” generally as any private fund (other than certain securitization vehicles) that (i) pays a performance fee or allocation calculated by taking into account unrealized gains, (ii) may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital) or (iii) may sell securities or other assets short.  For purposes of Form PF, reportable commodity pools are considered “hedge funds.”

Form PF defines a “liquidity fund” as any private fund that seeks to generate income by investing in a portfolio of short term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors.

Large Private Fund Advisers

Form PF defines a “large private fund adviser” as (i) an adviser with at least $2 billion in assets under management attributable to private equity funds as of the last day of the adviser’s most recently completed fiscal year, (ii) an adviser with at least $1.5 billion in assets under management attributable to hedge funds as of the last day of any month in the adviser’s fiscal quarter immediately preceding its most recently completed fiscal quarter or (iii) an adviser with at least $1 billion in assets under management attributable to liquidity funds and registered money market funds as of the last day of any month in the adviser’s fiscal quarter immediately preceding its most recently completed fiscal quarter.  Any investment adviser that does not meet such thresholds is considered a “smaller private fund adviser” and is subject to reduced reporting requirements as described below. [2]

The thresholds for large private equity and hedge fund advisers were raised from $1 billion in the Proposed Rule and were designed to capture a relatively small group of advisers that represent a substantial portion of assets under management in their respective industries.  The SEC also decreased the frequency for testing whether these thresholds were met to monthly for hedge funds and liquidity funds and annually for private equity funds (as opposed to daily for hedge funds and liquidity funds and quarterly for private equity funds as contained in the Proposed Rule).

What Information are All Private Fund Advisers Required to Report?

Each investment adviser that must file a Form PF is required to provide basic information in Section 1 of Form PF regarding itself and the private funds that it advises, including identifying information concerning the adviser and its private funds, information about each private fund’s gross and net assets, the fund’s performance, types of investors in the fund and information about the fund’s borrowing and liquidity.  The SEC has included questions relating to a fund’s investments in other private funds and parallel managed accounts.  Additionally, Section 1 requires hedge fund advisers to disclose information about strategy, credit risk and use of trading and clearing mechanisms.

What Information are Large Private Fund Advisers Required to Report?

Private Equity Funds.  In addition to the basic information required by Section 1, the nature of the additional information required to be disclosed on Form PF by large private fund advisers depends on the type of funds an adviser manages.  A large private equity fund adviser is required to complete Section 4 of Form PF for each private equity fund it advises.  The information required pursuant to Section 4 includes certain information regarding guarantees by the adviser of portfolio company obligations and the debt-to-equity ratios of the fund’s controlled portfolio companies.  Additional required information includes (i) an overview of controlled portfolio companies’ debt, (ii) the portion of that debt that is comprised of payment-in-kind or zero coupon securities and (iii) whether the fund or any controlled portfolio company has experienced an event of default on any debt during the reporting period.  The amount and identity of lenders of any controlled portfolio company bridge financing must also be disclosed.  Form PF also requires that large private equity fund advisers disclose whether a fund controls a portfolio company in the financial industry and provide additional detailed information about such investments (including percentage of ownership).  Large private equity advisers will be required to disclose a breakdown of investments by industry and geography.  The SEC noted that it has reduced the burden of certain disclosures by limiting reporting requirements to controlled portfolio companies.  Furthermore, large private fund advisers have the option of reporting feeder fund and parallel fund structures either in the aggregate or separately.

Hedge Funds and Liquidity Funds.  Section 2 of Form PF requires that large hedge fund advisers disclose aggregate information regarding their hedge funds, including information regarding exposures by asset class and geographical concentration and portfolio turnover.  The Form further requires large hedge fund advisers to disclose information relating to exposures, borrowings, collateral practices, risk profiles, liquidity, trading and financing for each hedge fund with a net asset value of at least $500 million.  Section 3 of Form PF requires that large liquidity fund advisers disclose information relating to each liquidity fund’s assets, risk profile and investor base.

When are Private Fund Advisers Required to File Form PF?

The Proposed Rule would have required large private fund advisers to file Form PF on a quarterly basis within 15 days after the end of each fiscal quarter.  After the SEC received significant comments on this point, “smaller private fund advisers” (i.e., hedge fund, liquidity fund and private equity fund advisers that do not meet the thresholds to be considered “large private fund advisers”) as well as large private equity fund advisers must now file Form PF annually within 120 days after the end of each fiscal year.  The SEC similarly extended the time period by which large hedge fund advisers must file their Form PF from within 15 days after the end of each fiscal quarter to within 60 days after the end of each fiscal quarter.  Consistent with the Proposed Rule, large liquidity fund advisers are still required to file Form PF within 15 days after the end of each fiscal quarter.

No Certification Required

The SEC has eliminated the requirement contained in the Proposed Rule that an authorized individual of the investment adviser certify that the statements in Form PF are “true and correct.”  Form PF as adopted only requires a signature confirming that Form PF is filed with proper authority.

Confidentiality

The SEC recognizes the confidential nature of the information disclosed on Form PF and has stated that it does not intend to make such information public (although it may be used in enforcement actions).  Nevertheless, the SEC may disclose the information gathered from Form PF to (i) the FSOC pursuant to requirements of Dodd-Frank, (ii) the CFTC and (iii) Federal departments and agencies or self-regulatory organizations for purposes within the scope of their jurisdiction.  Any information disclosed by the SEC will be subject to applicable confidentiality provisions of Dodd-Frank and the Advisers Act and generally will not be subject to Freedom of Information Act requests.  The SEC intends to implement certain controls to safeguard the confidentiality of Form PF information and will consider whether to delay the compliance date (as described below) in order to develop and deploy such controls.

Effective and Compliance Dates

Rule 204(b)-1 and Form PF become effective on March 31, 2012.  The SEC has implemented a two-stage phase-in period for private fund advisers to comply with the Rule.  The compliance date is June 15, 2012 for (i) private equity fund advisers with at least $5 billion in assets under management as of the last day of their first fiscal year to end on or after June 15, 2012, (ii) hedge fund advisers with at least $5 billion in assets under management as of the last day of the fiscal quarter most recently completed prior to June 15, 2012 and (iii) liquidity fund advisers with at least $5 billion in assets under management as of the last day of the fiscal quarter most recently completed prior to June 15, 2012.  Such investment advisers must file Form PF (within the applicable 15, 60 or 120 period discussed above) following the end of their first fiscal quarter or fiscal year, as applicable, that ends on or after the June 15, 2012 compliance date.  Any other private fund advisers must file Form PF within the applicable time period following the end of the first fiscal quarter or fiscal year, as applicable, after December 15, 2012.  An adviser is not required to file Form PF with respect to any fiscal quarter or fiscal year prior to its Advisers Act registration being effective.

As noted today in Weil’s Bankruptcy Blog, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation published notice yesterday in the Federal Register that they are adopting the final rule to implement the Dodd-Frank Act’s requirement concerning resolution plans, which are commonly referred to as “living wills”.

New ‘Living Will’ Requirements for Banks and Resolution Powers for Regulators

Institute of International Bankers

November 30, 2011, Harold Proshansky Auditorium, CUNY Graduate Center, New York, NY | Register Now

Weil’s Derrick Cephas will appear at the IIB conference Implementation of the Dodd-Frank Act – Key Issues for International Banks. Mr. Cephas’ panel is titled “New ‘Living Will’ Requirements for Banks and Resolution Powers for Regulators” and will commence at 1:45 p.m.