Cordium's Annual Regulatory Forum full presentation 2014

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Information about Cordium's Annual Regulatory Forum full presentation 2014

Published on March 4, 2014

Author: Cordiumgroup



Welcome to the Cordium Annual Regulatory Forum 2014: What Lies ahead - A Compelling Year for Regulation? 2


Agenda o o o o Regulatory landscape OCIE National Exam Program (“NEP”) Types of SEC Exams Presence Exams o Key Areas of Focus o Recent SEC Enforcement/Common Deficiency Themes 4

Agenda continued o What to Expect from a SEC Exam o Timeline: o Document Production o Timing/Duration o Onsite Visit o After the Onsite o How Best to Prepare o Identification of SEC Examination Priorities for 2014 5

Regulatory Landscape o As of February 2014: o There were over 4,000 private fund advisers registered with the SEC. o Close to 40% of all RIAs manage one or more private funds. o Of these 4,000 private fund advisers: o Over 2,000 registered with the SEC since July 21, 2010, when the President signed the Dodd-Frank Act into law. o Of these private fund advisers, 352 (8%) are domiciled in a foreign country o Most of these are domiciled in the United Kingdom. 6*

OCIE National Exam Program (“NEP”) o Andrew J. Bowden - Director of the agency's Office of Compliance Inspections and Examinations (“OCIE”) o Mission o Improve Industry Compliance o Local and national outreach seminars, risk alerts, recruitment of industry experts, etc. o Identify and Prevent Fraud o Focused, risk-based examinations of registered advisers, specialized working groups, coordination across SEC offices and Divisions of Risk, Strategy and Financial Innovation and Enforcement o Monitor Risk o Specialized units (Office of Risk Analysis and Surveillance, Office of Large Firm Monitoring and Quantitative Analytics Unit, etc.) o Inform Policy o Utilize results/findings to inform future rulemaking and provide guidance to the industry 7

Different Types of Exams o Routine Exams o May be based on the passage of time since last exam o Presence Exams o Risk-based, focused examinations of newly registered advisers o Usually average 90 days, ½ as long as typical exam o Industry Sweeps o Focus on a narrow issue and seek to determine how the industry is handling that issue o Recent examples include firm use of social media and disaster recovery preparedness o For Cause Exams o May be based on a tip or investor complaint o Typically unannounced 8

Examinations by the Numbers o RIA Exams o FY 2012: The SEC was able to examine only about 8% of registered investment advisers. o As of April, 2013, over 40 percent of advisers (including relatively recently registered advisers) have never been examined. o As of April, 2013, an estimated 20% of all advisers that have been registered for more than three years have never been examined. o Focus throughout 2013 was on conducting Presence Exams. 9*

Presence Exam Initiative o As of January 2014 o Over 250 presence exams completed o On pace to meet goal of 15-25% of new registrants by March 2014 o Participation from EVERY regional office o Many issues in the five target areas being noted o Contributed to developments in: o Guidance from Division of IM on Custody Rule o Guidance/caution on broker-dealer registration requirements 10

Examination Focus Areas o 5 “High Risk” Target Areas Identified for Presence Exams Initiative o Conflicts of Interest o How does the firm address conflicts such as: fees and compensation, personal trading, allocation of expenses? o Marketing/Performance Advertising o Are disclaimers adequate/accurate? o Is appropriate back-up in place to substantiate performance/claims made? o Are there inconsistences between documents? o Cherry-Picking? 11

Examination Focus Areas continued o Portfolio Management o Style drift? o How are portfolio decision-making/objectives being reviewed? o Custody o Does the adviser recognize when it has custody? o Are proper procedures in place to safeguard client assets and abide by the Custody Rule (e.g., surprise exams where required)? o Valuation o Are procedures adequate/consistently followed? o What documentation is in place to evidence difficult to value securities? o How are numbers being presented to investors? 12*

Recent SEC Enforcement o During 2013 - SEC brought 686 enforcement actions o Recent Conviction: o Former SAC Capital portfolio manager Matthew Martoma was found guilty of insider trading on February 6, 2014 o The verdict was the eighth insider trading conviction of a current or former employee at SAC Capital o SEC intends to continue to direct its focus on insider trading cases o 44 such cases were initiated in 2013 o New Enforcement Strategies: o “Broken Windows” – pursuing “smaller” violations as a deterrent (Minor violations can feed bigger ones..) o Aberrational Performance Risk Analytics – using advanced technologies to identify issues o Increased Expertise 13

Common Deficiency Themes o Cases where CCOs were charged – four main themes: o Deficient/nonexistent compliance programs (or “off the shelf” and not tailored to firm) o No annual review, no Code of Ethics adopted o Recidivism – Firm/CCO was warned by the SEC staff or an outside consultant and did not fix the issue o Consultiva case – 5 years of failure to address deficiencies o Egregious behavior – alteration of documents o Omni case – CCO backdated signature 14

What to Expect from a SEC Exam o How Does it Start? o Notification – usually by phone/email o Request Letter o What Does Life of Presence Exam Look Like? o o o o Document Production – often on a rolling basis Timing/Duration Onsite Visit After the Onsite 15

What to Expect from a SEC Exam o Document Production o Usually 15 to 25 requests in the initial request (normal exam could be from 40 to 50 requests in initial request) o Example of Information Requested: o Org charts – including ownership % and list of affiliates o List clients, type, AUM, name of custodian, type of strategy, types of fees (in EXCEL) o List of private funds, number of investors, domicile, master/feeder, nature of lock-up, amount of leverage, etc. (in EXCEL) o QTRs and all other personal trading records (in EXCEL if you use software to track) o Trade blotter/ ten most and least profitable trades o List of JVs (this should include outside business activities of key employees) o Written policies and procedures o Violations of Policies o Investor complaints o Committee minutes (if any) o ADV Part 2Bs, marketing materials, Pitchbooks, etc. 16

What to Expect from a SEC Exam o Document Production o Could be 5 to 10 additional requests (could be another 20 to 30 in a normal exam) o If you don’t understand something on a request list - call and ask o Should Consider; o Attorney Client Privilege o Freedom of Information Act o Bates Stamping and other Logistics o Timing/Notice o SEC can request information that pre-dates registration o Notice Periods could be as short as 4-7 days 17

What to Expect from a SEC Exam o Onsite Visit o Typical Presence Exam onsite time ranges from 2-3 days o Helpful Tips: o Do not try to delay the visit o Present your “story” to the SEC on day 1 o Prepare your partners and key people – the SEC will want to talk with certain people (CCO, CFO, IR, Head Trader, etc.) o Keep the office clean, file cabinets locked, no papers out o Set up a room for the examiners o Make yourself available o Discuss potential issues with counsel/compliance consultants in advance! o It’s ok to say “let me get back to you on that” o Ask for it in writing if they have follow-up document requests 18

What to Expect from a SEC Exam o After the Onsite o Exit Interview o Clarify questions/correct any perceived inaccuracies during the call o Be proactive – if an issue is identified– work to remedy it ASAP o Consider responding with the manner in which you have corrected or are in the process of correcting any issues identified o A proactive written response to the Exit Interview may affect the content/substance of your firm’s Deficiency Letter o Could be additional requests for information o Potential for Deficiency/”Findings” Letter o Generally received within 120 days of the exam (although not required) o Generally have 30 days to respond o Next examination will likely address issues raised by examiners – Need to followthrough on corrections! 19

What to Expect from a SEC Exam o How Should You Prepare? o When Preparing for an Actual Audit: o Prepare a written response to each requested item o Gather and Organize requested documents o Prep team for possibility of interviews o Things to Start Doing NOW: o o o o o Create a “First Day” presentation Proactively identify conflicts, gaps and possible problems Critically review Compliance Manual – are policies in line with practices? Test P&P throughout the year Beef up Annual Reviews – SEC is concerned that firms may only be doing cursory annual reviews of policies and procedures o Consider conducting Audit Prep or Mock Audit exercise o Conduct periodic trainings 20

Headline Review of SEC Examination Priorities for 2014 o o On January 9, 2014, the NEP published its 2014 examination priorities o Contains areas that the staff perceives to have heightened risk in part based on (i) information reported by registrants, (ii) information gathered through examinations and (iii) comments and tips NEP-Wide Initiatives o Fraud Detection and Prevention o Utilize and enhance its quantitative and qualitative tools and techniques o Corporate Governance/Conflicts o Evaluate firms’ control environment and “tone at the top” o Understand firms’ approach to conflict and risk management o Technology o Examine governance and supervision of information technology systems, operational capability, market access, information security and preparedness to malfunctions/outages o Noted as a big focus area for 2014 during January 30, 2014 SEC Compliance Outreach Program 21

Headline Review of SEC Examination Priorities for 2014 o Core Risks Identified for RIAs o Safety of Assets and Custody – Failing to realize the firm has custody and/or failing to comply with Rule 206(4)-2 o Noted as the #1 Core Risk by OCIE o Conflicts of Interest – Putting interests of the firm ahead of client interests or failing to identify and mitigate conflicts (e.g., compensation arrangements, allocation of investment opportunities, etc.) o Marketing/Performance – Accuracy and completeness of claims/performance information, hypothetical and back-tested performance, use of composite performance figures, record-keeping, compliance oversight, cherry-picking, etc. o New and Emerging Issues and Initiatives for RIAs o Never-Before Examined Advisers – Focused, risk-based exams for advisers that have been registered for more than three years and have never been examined o Quantitative Trading Models – Are policies tailored to address compliance issues and risks of relying on such models? o Presence Exams – continue 2012 initiative 22

Panel Session What to expect, when expecting the SEC Moderator: Bill Mulligan Panellists • Abrielle Rosenthal, Senior Principal and Senior Compliance Counsel, TowerBrook Capital Partners • Jillian Timmermans, Vice President and Partner, Cordium US • John Heard, Executive Partner and General Counsel, Abingworth Management LLP • Michael Perry, Chief Operating Officer and Chief Compliance Officer, COMAC Capital LLP 23


Welcome to the Cordium Annual Regulatory Forum 2014: What Lies ahead - A Compelling Year for Regulation? 25


2014 UK Regulatory agenda o What did the FCA say a year ago? o What has it been like: o Supervisory themes o Enforcement action o FCA forward agenda and supervisory approach o Impact on alternatives? March 4, 2014 27

What did the FCA say a year ago? o “Make markets work” o “A fair deal” o “Meeting fair and reasonable (consumer) expectations” o Business model - new threshold condition o The end of caveat emptor o More assertive and interventionist o Act to protect a wider range of client relationships 3/4/2014 28

What has it been like? Supervisory themes o TR13/10 - Outsourcing in the asset management industry o TR14/1 – Transition Management Review o Regulation round up: o UCIS financial promotion rules o Enforcement trends 3/4/2014 29

FCA forward agenda and supervisory approach o Shaping the future in asset management: (Martin Wheatley, 30 October 2013) o Fair, transparent and competitive: the FCA’s vision for the asset management sector (Clive Adamson, 30 October 2013) o Looking ahead to 2014 (Martin Wheatley 9 December 2013) o CP13/17 – The Use of Dealing Commissions o Market Watch 45 o Best Execution: A reminder of the basics o 3/4/2014 30

Implications for Alternative Managers? o o o o o Corporate access and use of dealing commission Execution and transaction cost analysis Charging costs to the funds Fund raising and disclosures Investment strategy and consistency with marketing communications o Quality of periodic reporting o Independence of risk management o Valuation 3/4/2014 31

Conclusion o o o o A year of cultural transition Trusted Agents Business model and culture Regulatory fundamentals o The rules are there to protect investors o Is the best interest of your investors at the heart of what you do? 3/4/2014 32

Panel Session To AIFMinity and Beyond Moderator: Jonathan Wilson Panellists • • • • • • Neil Robson, Special Counsel, Schulte Roth & Zabel Lucy Millar, Director Legal Services, Hermes Fund Managers Simon Thomas, Partner, MacFarlanes LLP Jonathan Mott, Managing Consultant, Cordium Adam de Domenico, CEO, Cordium Malta Kevin Tomlin, Director, Relationships, Royal Bank of Scotland Group 33


Using Software to Streamline Your Compliance Program 25th February 2014 Bill Mulligan, Cordium US CEO 35

Agenda o o o o o o Introduction Benefits of compliance automation Specific Applications of Technology Cordium Tools Closing Remarks Q&A 36

Introduction o About Cordium Software Development o Why we know good software! o Developing innovative software for 8+ years o Combines the expertise of compliance staff with talented programmers o Allows us to see things from all angles and a global perspective in terms of what we develop and when analyzing other products in the marketplace 37

Increasing international regulatory pressures 38

Benefits of Compliance Automation o As managers continue to become more global in nature, firms face an unprecedented level of regulatory scrutiny. o Using an effective compliance management system will enable you to: o meet the global demand placed on your compliance team o evidence due process 39

Benefits of Compliance Automation o Automating parts of your compliance program with the use of technology will allow you to: o o o o o Keep up with the ever changing regulatory environment Focus more time on other parts of your business Better handle investor due diligence queries Allow for easier reporting, both internal and external Build a more efficient compliance infrastructure 40

Benefits of Compliance Automation o Specifically, technology can help with: o o o o o Managing your day-to-day compliance responsibilities Tracking and documenting adherence to your procedures Dealing with employee compliance issues Monitoring risk Understanding the compliance regimes in different jurisdictions 41

Specific Applications of Technology o A solid compliance program is about disclosure, organization, and preparedness. o There are lots of moving parts which can become burdensome if not organized properly: o o o o o o o Compliance manual Code of ethics Monitoring programme Registration documents (Form ADV, etc.) Fund documents DDQs Investor communications, etc. 42

Specific Applications of Technology o The key to organization is building out solid internal processes – technology can help! o We will look at several examples of where software tools can make your life as a compliance manager easier. 43

Specific Applications of Technology o Managing Your Policies & Procedures o Your compliance manual and code of ethics may be the most important compliance document that you have. But, how do you ensure that you are doing what your manual outlines for you? o Create a compliance calendar o An electronic compliance calendar let’s you track, monitor and archive your compliance program. o Reminders can ensure that you never forget a task. o Create an audit trail and document archive so you can easily retrieve and evidence your various compliance tasks. o Certain tools can also provide you with background regulatory information on compliance tasks to help you though their completion. 44

Specific Applications of Technology o Code of Ethics Compliance o One of the biggest burden’s for compliance teams is code of ethics compliance. o PA dealing monitoring, gifts & entertainment, antibribery, etc. o The review of broker statements and PA dealing can take hours of time, even for a small firm. o Technology solutions can help alleviate that burden by automating the PA dealing review process and creating an electronic portal for all employee filings. 45

Specific Applications of Technology o o o o o Electronic links to employee brokerage accounts Automated trade review and screening processes Electronic pre-approval of trades Electronic gift & entertainment reporting Electronic attestations o Moving to an electronic system for employee compliance, frees up time for the compliance personnel to focus on other tasks. 46

Specific Applications of Technology o Record-Keeping o Email archiving tools are affordable and easy to use o Makes email screening and record keeping much easier o Workflow Management o All firms have specific business processes o Compliance departments often rely on other business units for certain tasks. o By creating business process workflows for common tasks, you can reduce the time spent, and put the information at your fingertips. 47

Cordium Tools o Compliance ELF (Employee Level Filing) was designed to create an electronic portal for all employee compliance issues o Personal dealing o Trade pre-approvals o Affirmations / Questionnaires o Fit and Proper o Conflict Questionnaires, etc. o Training and Competency Record Keeping o Conflicts Management o Annual Sign Offs o SEC Code of Ethics Issues 48

Cordium Tools o Customisable application gives you flexibility o Easy to use interface for employees and admin users o Puts one-click reporting capabilities at your fingertips 49

Cordium Tools o ComplianceTrak o Interactive Compliance Calendar o Built in knowledgebase for FCA and SEC compliance tasks o Updated as regulations change o Monitor and report on risk 50

Cordium Tools o Coming Soon: Pilot o o o o Enhanced workflow management Complex user permissioning Multiple calendars Complex search and reporting functions 51

Closing Remarks o The future of global compliance o Staying ahead of the curve 52

Questions & Answers 53



10 Top Tax Tips for 2014 LAURENCE PARRY Director/Head of Private Client Tax 56

Tip 1 o LLP changes o Ensure that you know whether your LLP members are ‘salaried’ or not o Check tests o Capital contribution o Profit sharing o Significant influence o Awaiting update from HMRC 57

Tip 1 – profit sharing arrangements o Must be related to profit of LLP as a whole o HMRC’s view = % of total profit o But, why not stratify profit? Want to pay partner £100k o A) 20% on profits up to £500,000; + o B) 5% on profit s above £500k. o As long as HMRC would accept 5% as a share overall, then should be no issue; o As long as the % in B) is less than the employers’ NIC rate still cheaper o Must be reasonable – A) cant be too high, nor B) too low! 58

Tip 1 – ‘significant influence’ o If a member has ‘significant influence’ then wont be a salaried member o Influence over running of LLP (not just their bit, or portfolio); o Equates to board of directors; o If don't have a management committee – perhaps could? o If business capable of disaggregation, consider separate LLPS – eg branches o Watch regulation and cost 59

Tip 2 – corporate partners o o o o Decide! LLP – if going to take profits out; Limited – if profits to be retained Influencing factors: o new equity holders? o potential changes to dual contracts o If early years, losses available through LLP o watch restriction 60

Tip 3 – corporate partners o If Limited? o Incorporation can give benefits o Sale at Market value – may benefit from ER o Amount payable for business left outstanding and repaid from future cash flows o Need to watch reg cap o ‘Dry’ tax charge – 31/1 tax year following sale o Cannot sell to existing corporate member – needs to be a Newco 61

Tip 4 – liquidate existing corporate partner o May get ER o Activities must be 80% trading o Cash on deposit not an ‘activity’ o Risk if invested o If ER in doubt, consider retaining and investing without dry tax charge o Cost of liquidation perhaps £5k - £10k 62

Tip 5 – non-doms and remittances o Be careful! o HMRC nudge letters o Use of credit cards in UK paid for overseas; o Payment for service in UK – eg advice in relation to offshore investments o Overseas travel booked in UK o HMRC aware of back to back loan arrangements o Private Eye article – Oct 13 63

Tip 6 – non-doms and IHT o Inheritance tax charged on UK assets o For UK doms charged on worldwide assets o Non-doms become ‘deemed domiciled’ once resident for 17/20 years o (doesn't apply to Indian, Pakistani or French domiciled) o Consider moving assets from personal to trust/company ownership in year 16 64

Tip 7 – overseas workday relief o Non-dom comes to UK o For the rest of that tax year and two following: o Income that relates to overseas work, paid AND retained overseas, not subject to UK tax o Calculated on a days worked basis o HMRC check most day calculations o HMRC checking not ‘ordinarily resident’ in year 3 o Less of an issue going forward because of SRT, but may apply for 12/13 – get info sorted! 65

Tip 8 – watch losses o Use of losses now restricted o Capped at higher of £50k and 25% of income o Sideways loss relief; carry back of losses; interest relief; loss on unquoted company shares o Doesn't apply to VCT/EIS/Gift aid o If think there may be losses, need to plan 66

Tip 9 – Gift aid o o o o Reduces tax Can be carried back to prior year Keeping records difficult! If donations significant, consider personal charitable trust o If smaller, consider Charities Aid Foundation o Gifts into both allowable, and easy to track! o Need to watch restrictions (benefits received) and sufficient income 67

Tip 10 oTalk to us o It will save the headache later! LAURENCE PARRY Director/Head of Private Client Tax 68

Questions 69

Panel Session FCA current priorities and what firms should look out for in 2014 Moderator: Philip Naughton Panellists • Eve Ellis, Partner, Charles Russell LLP • Bobby Johal, Managing Consultant, Technical, Cordium • Simon Morris, Partner, Financial Services, CMS Cameron McKenna LLP • Arjun Singh-Muchelle, Senior Advisor, Regulatory Affairs (Wholesale and Capital Markets), Investment Management Association • Jennifer Wood, Director, Head of Asset Management Regulation, AIMA 70

Panel Session FCA current priorities and what firms should look out for in 2014 Moderator: Philip Naughton Topics: • • • • • • FCA current priorities and what firms should look out for in 2014 Thematic reviews and attestations EMIR Marketing Supervision Enforcements 71

Closing Remarks 72

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