2.2 - Global Regulation Flashcards
Explain
2 Theories
of Regulation
2.3 - Global Regulation
- Public interest theory of regulation is the idea that regulation should benefit society and reduce the collateral damage caused by free markets to competition and the environment, for example.
- Private interest theories of regulation consider that legislators, businesses, and industry groups may protect self-interests through regulation (e.g., limiting competition, limiting imports).
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Explain
How increased regulation
can be viewed as a
positive or a negative
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Negative:
* Restricts the activities of a business.
Positive:
* Creates new activities that are less regulated.
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Define
Qualified opportunity zones
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tax cuts that are offered to investors for private equity and real estate investments
in certain areas of the U.S.
As a result, there was a surge in such investments after the legislative change.
2.3 - Global Regulation
List
4 Main US regulatory bodies
and their jurisdictions
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-
SEC => Securities, markets, investors
Securities and Exchange Commission - has the main oversight and regulatory authority in the U.S. securities markets. Responsibilities consist of safeguarding investors’ interests, promoting capital investment, and ensuring the smooth functioning of markets. The SEC has principles-based disclosure requirements, which means investors must be provided with crucial information about securities prior to investing. -
FINRA => broker-dealers (self-regulated - SRO)
Financial Industry Regulatory Authority - is managed by the SEC. FINRA oversees the activities of broker-dealers (both individuals and firms) to ensure that they conduct business ethically and within the stated rules. FINRA is also responsible for developing those rules. -
CFTC => Commodities Derivatives
U.S. Commodity Futures Trading Commission - is the oversight body for the commodity derivatives market (both individuals and firms) to prevent any participants from suffering harm caused by fraud and other unethical behavior. -
NFA => Derivatives (self-regulated - SRO)
National Futures Association (NFA) is a self-regulating body that oversees individuals and firms involved in trading futures.
Blue-sky laws - State Laws
50 State securities commissions - act jointly with SEC
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List
5 important
US regulatory frameworks
(Acts)
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-
Securities Act of 1933 (Securities Act)
Regulates => Securities offerings
mandates securities (including private funds) registration with the SEC. -
Securities Exchange Act of 1934 (Exchange Act)
Regulates => Exchange transactions / broker dealers
oversees the trading activity in the secondary market with regulations for exchanges and broker-dealers. -
Investment Advisers Act of 1940 (Advisers Act)
Regulates => Investment Advisers
deals with registering and regulating those who offer investment advice on securities. An investment adviser is a paid individual or entity who provides investment advice and/or publishes analyst reports on securities. -
Investment Company Act of 1940 (1940 Act)
Regulates => Investment funds
covers companies that invest and trade in securities and whose own securities are publicly traded. The 1940 Act includes mutual funds. -
Dodd-Frank Act came into effect in 2010
Regulates => Systemic risk to promote financial stability
after the major financial crisis. The objective was to shield customers from predatory practices by financial institutions, as well as disallowing taxpayer-funded bailouts for financial firms that were formerly deemed too large to fail.
2.3 - Global Regulation
List
Conditions that requires
Investment Adviser registration
(SEC / State)
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SEC registration exemptions:
* VC adviser - The adviser advises on venture capital funds.
* Private fund < $150m adviser - The adviser advises on private funds with under $150 million in AUM.
Others
* AUM < $25m: usually no need to register with state or SEC
* AUM $25-100m and has a permanent establishment in a state that requires registration: registration with state
* AUM $25-100m and has a permanent establishment in a state that does not require registration: registration with SEC
* AUM $25-100m and has a permanent establishment in state that does not require examination by the state securities commissioner: registration with SEC
* AUM > 100m and has managed accounts: registration with SEC
* AUM > 150m and no managed accounts: registration with SEC
SEC registration: 2 specific situations
* The fund manager operates a registered investment or business development company.
* (Non US HF) + (> 15 US clients) + (AUM > $25m) - A non-U.S. hedge fund has more than 15 U.S. clients and investors with AUM exceeding $25 million (SEC registration requirements for non-U.S. hedge funds).
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Identify
Investment advisor
obligations
within private fund regulations
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- Comply with 12 matters regulated under the Advisers Act
1. Adviser agreement terms
1. Performance fees
1. Client solicitation
1. Political contributions
1. Trading practices
1. Advertising
1. Recordkeeping
1. Personal securities reporting
1. Custody
1. Proxy voting
1. Compliance program
1. Gifts and entertainment - Fill out and file Form ADV with the SEC
Part 1 => fund admin details + staff.
Part 2 => range of services provided, fees, and conflicts of interest -
Deliver Form ADV Part 2 to clients (part of adviser’s legal obligation)
D0 (beggining) Annually when it changes -
Deliver Form CRS to clients
When? => before investing
What? fees + conflicts of interest + firm’s disciplinary history - Cybersecurity - Policies and procedures in place for cybersecurity threats
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List
Private Placements conditions
(Rule 506 of Securities Act)
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Registration of securities = onerous process
-
No general advertising => (< 35 nonaccredited investors + nonaccredited have enough skills to assess their suitability)
or - General advertising => All investors are accredited
Accredited investors:
* Net worth > $1m (ex residence)
or
* Last 3 years: income > $200k (300k if with spouse)
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List
2 Tests (conditions)
for the Private Investment Fund
Exemption
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- < 100 beneficial owners
- No Public Offerings
- Only Qualified Purchasers
Qualified purchaser:
* Individual > $ 5m in investments
* Institution > $25m in investments
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List
CCO activities
(Chief Compliance Officer)
CCO PPP MM
1. Policies & Procedures Periodic testing - Perform periodic testing of policies and procedures
2. Review marketing materials
3. Test recordkeeping at least annually
The CCO has the following key duties:
* Establish compliance - Establish the tone from the top, in terms of the firm’s commitment to compliance from senior management down to the employees
* Compliance testing (e.g., testing effectiveness of policies and procedures)
* Report to senior management
* Review documents that provide investment information to investors to ensure nothing is false or misleading
* Ensure all supervisors know their responsibilities for maintaining books and records and testing such policies and procedures at least annually
Define
Access persons
and
their obligation (according to code of ethics)
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Persons who have access in MNPI
- firm’s directors
- officers
- partners
- other persons
who would be privy to material nonpublic information on securities
‘–
Obligation
- Get approval to invest + report personal securities frequently
Report personal securities transactions and holdings at fixed intervals and to receive approval from the firm prior to investing in reportable securities like IPOs
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Define
SEC exams
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SEC exams
Who?
* done by the Office of Compliance, Inspections and Examinations (OCIE), most commonly on an announced basis
When?
* Normal periodic inspections focus on the marketing materials and the Form ADV to check for any false or misleading statements.
* Cause exams arise from specific tips and complaints.
* Sweep exams arise because of a compliance problem that the SEC has noted in numerous firms.
2.3 - Global Regulation
List
7 situations that
Requires Reporting
(by US private funds)
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-
> 5% public equity
Significant acquisition and ownership positions (Section 13(d) of the Exchange Act). Ownership of more than 5% of a class of public equity securities with voting rights may need to provide details on the acquisition—source and amount of funds, purpose. -
> $100m public equity
Discretion over $100 million in public equity (Section 13(f) of the Exchange Act). Disclosure of holdings and voting power held by manager. -
> $150m private fund + details => Form PF
Form PF. AUM in private funds greater than $150 million must file Form PF with the SEC with details such as fund size, leverage, investor types, liquidity, and performance. Additional information is required for hedge funds, such as strategy and risk. -
CTA or CPO => Form CPO-PQR
Form CPO-PQR. Filed with the CFTC by commodity pool operators or commodity trading advisers. - Regulation D and blue-sky renewal filings. For private funds with private offerings greater than one year.
- Pay-to-play and lobbyist registration laws. For private fund advisers who lobby U.S. state or local governments.
- Short selling reporting. Required in some countries for short positions in specific investments.
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List
4 European Regulatory Bodies
and
state who is responsible for the stability of financial system
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oversight and convergence objectives within EU member countries
* ESMA - stability of the financial system. European Securities and Markets Authority (ESMA): focused on maintaining the stability of the financial system
* EBA European Banking Authority (EBA)
* EIOPA - European Insurance and Occupational Pensions Authority (EIOPA)
-
* ESRB - financial system macro - European Systemic Risk Board (ESRB): focused on macroeconomic aspects of the financial system
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Contrast
UCITS
x
AIF
characteristics
(in european vehicles / funds)
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UCITS - Undertakings for Collective Investments in Transferable Securities
* Retail investors
* Leverage limit
* open-ended
* liquid
* public traded investments
AIF - Alternative Investment Fund
* Larger investors
* leverage is limited by manager (AIFM)
* compensation cap for managers
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