dodd-frank compliance and technology summer meeting 2013
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Atlas Communications Technology recently co-sponsored the Dodd-Frank Compliance and Technology Summer Meeting. The presentation was an introduction to the complexities of the Dodd-Frank Wall Street Reform and Consumer Protection Act, what firms need to do to bring themselves into compliance, and the technology that can help enterprises meet the stringent demands of the act. For more information about this conference, or to learn about our Fall meeting in September featuring one of the authors of the act, Congressman Jim Himes, please 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 Atlas Presentation 2013 07-09 dodd-frank summer meeting v1-0 (for online)TRANSCRIPT
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