NCREIF Accounting Committee – Thi lUdtTechnical …...NCREIF Accounting Committee – Thi...

NCREIF Accounting Committee –T h i l U d tTechnical Update

February 29 2012February 29, 2012

Darren Robb, Senior Manager, KPMG LLP

Peter Bloomfield, Partner, KPMG LLP

Discussion topics

Recent accounting standards updates

Ongoing standard setting activities

Current SEC and PCAOB developments

Registered investment advisor compliance

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 76174NYO

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Recent accounting standards updatesstandards updates

ASU 2011-04, Amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs

New Disclosures– Additional disclosures about Level 3 measurements:

f A quantitative disclosure of the unobservable inputs and assumptions used in the measurement

A description of the valuation control processes in place A qualitative discussion of the sensitivity of the fair value to changes in unobservable A qualitative discussion of the sensitivity of the fair value to changes in unobservable

inputs and any inter-relationships between those inputs that magnify or mitigate the effect on the measurement (public entities only)

– Measurement other than highest and best use– All transfers between Level 1 and Level 2 measurements (public entities only)– Hierarchy level for determining fair value disclosures (public entities only)

Period of adoption – disclose the change in valuation technique and related inputs resulting from application of the amendments and quantify the total effect, if practicable


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ASU 2011-04, Amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (continued)

Implementation guidance provides example disclosures for quantitative information about Level 3 fair value measurements for various financial and nonfinancial assets.

It di l d Items disclosed:– Valuation technique– Unobservable inputs

Range of each unobservable input including qualitative information about the range– Range of each unobservable input, including qualitative information about the range


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ASU 2011-04, Amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (continued)

Effective date:– Effective for interim and annual periods beginning on or after December 15, 2011 for

public companiespublic companies– Effective for annual periods beginning after December 31, 2011 for nonpublic companies. – Early adoption prohibited, except nonpublic companies may adopt for any interim period

beginning after December 15, 2011g g ,

Transition:– If different fair value measurements result – recognize the difference in income in the

period of adoption as a change in estimate– New disclosure requirements applied prospectively

CFO Financial Forum Webcast Amendments to Fair Value Measurements andCFO Financial Forum Webcast, Amendments to Fair Value Measurements and Disclosures held on May 20, 2011 available for replay on KPMG’s Financial Reporting Network at:

www.kpmginstitutes.com/financial-reporting-network


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ASU 2011-10, Derecognition of in substance real estate (EITF issue 10-E)

When a parent ceases to have a controlling financial interest (as described in ASC Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the parent is required to apply the guidance in ASC Subtopic y , p q pp y g p360-20 to determine whether it should derecognize in substance real estate

Effective Date and Transition:– Public companies – Fiscal years beginning on or after June 15, 2012 and interim periods

within those years– Nonpublic companies – Fiscal years ending after December 15, 2013, and interim and

annual periods thereafterEarly adoption permitted– Early adoption permitted

– Prospective application would be required

Based on the recommendation of the Task Force, the FASB added a research project to its agenda that will explore when an entity that consists of nonfinancial assets should beagenda that will explore when an entity that consists of nonfinancial assets should be accounted for as in-substance assets


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ASU 2011-11, Disclosures about offsetting assets and liabilities

Issued December 16, 2011

Result of a joint project between the FASB and the IASB to address a significant financial t t t t ti diff b t U S GAAP d IFRSstatement presentation difference between U.S. GAAP and IFRS:

– Boards could not agree on a converged offsetting model and decided to retain their existing offsetting models

– Instead Boards developed converged disclosure requirementsInstead, Boards developed converged disclosure requirements

Improves current disclosure requirements and allows comparability of balance sheets prepared under U.S. GAAP (where more netting is permitted) versus IFRS

Scope limited to recognized financial instruments (and derivatives) subject to master netting Scope limited to recognized financial instruments (and derivatives) subject to master netting arrangements or similar agreements

Disclosures are applicable for annual periods beginning on or after January 1, 2013 (and interim periods within those annual periods) with retrospective application required


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ASU 2011-05, Presentation of comprehensive income

Eliminates the option to report other comprehensive income and its components in the statement of changes in stockholder’s equity

N t i d th h i i b t d ith i Net income and other comprehensive income can be presented either in:– A single continuous statement; or– Two separate but consecutive statements

Does NOT change other recognition, measurement, and disclosure aspects of comprehensive income

Effective date and transition:Eff ti f bli titi f l i d b i i ft D b 15 2011 d– Effective for public entities, for annual periods beginning after December 15, 2011 and interim periods within those years

– Early adoption is permitted– Retrospective transitionRetrospective transition– ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of

Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05


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Ongoing standard setting activitiesactivities

Investment property entities and investment companies

Objectives:– Define investment property entities (IPEs)

f f– Require fair value measurement of investment properties held by IPEs– Provide accounting and financial reporting guidance for investments held by an entity that

qualifies as an IPEAmend current guidance to determine whether an entity is an investment company– Amend current guidance to determine whether an entity is an investment company

– Prohibit entities that qualify as an investment property entity from applying investment company accounting and financial reporting requirements

– Eliminate indefinite deferral of AICPA Statement of Position 07-1– Eliminate scope exception currently in Topic 946 prohibiting REITs from applying

investment company accounting

Comment period ended February 15, 2012


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Investment property entities

The proposed ASU would require an IPE to measure its investments as follows:

Consolidation Equity Method Other InvesteesConsolidate investees in which the IPE holds a controlling financial interest that are: Investment companies

Apply the equity method of accounting to investments in operating entities that provide services to the IPE if the IPE is

Measure at fair value interests in all other investees in which the IPE has a controlling financial Investment companies,

IPEs, or Operating entities that

provide services to the IPE

able to exercise significant influence over those investees

interest or the ability to exercise significant influence

Measure under other applicable U.S. GAAP

Investment properties:

interests in all other investees

– Initially measure at transaction price, including transaction costs– Subsequent measurement at fair value with all changes in fair value recognized in net

income


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Investment companies

Measurement:– Require an investment company applying U.S. GAAP to:

Consolidation Equity Method Fair ValueConsolidate investees in which the investment company holds a controlling

Apply the equity method of accounting to investments in operating entities that provide

Measure interests in all other investees at fair value

company holds a controlling financial interest that are: Investment companies in a

fund-of-funds structure, Investment property

operating entities that provide services to investment company if the investment company is able to exercise significant influence over

Investment property entities, or

Operating entities that provide services to the i t t

those investees, otherwise the equity method of accounting is prohibited

– A feeder fund would not be required to consolidate a master fund in which it holds a controlling financial interest because the FASB concluded the current presentation and disclosure requirements for ICs address concerns regarding transparency into the underlying investments and obligations of the master fund

investment company


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and obligations of the master fund.

Investment property entities – Summary of comment letters

A separate standard/topic is not necessary for Investment Property Entities– May be addressed through proposed Investment Company standard

f– Entities that qualify as investment companies should measure all investment assets and financial liabilities at fair value

Convergence with IAS 40 definition of Investment Property Asset based vs entity based definition– Asset-based vs. entity-based definition

– Investment property held by any entity may be reported at fair value

Nature of business activities and “substantially all” test N t lli i t t i titi th t l t t– Noncontrolling interests in entities that own real estate

– Other real estate investments (e.g., mortgage investments)– Specialty property types (e.g., hotels, assisted living, etc…)

Express business purpose and the exit strategy criterion may create inconsistencies in application of the proposed guidance


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Investment companies – Summary of comment letters

More judgment in determining whether an entity is within the scope of investment company accounting

Criteria in the proposed standard are generally appropriate considerations– Criteria in the proposed standard are generally appropriate considerations– More flexibility within the criteria

“Pooling of funds” criterion appears to exclude single investor entities from scope of investment company accountinginvestment company accounting

Consolidation of interests in other entities– Consolidation is not necessary in all circumstances where an investment company has a

controlling financial interest in another investment company subsidiaryg p y y– Consider the structure, user needs, and availability of financial information of investment

company subsidiaries

Retention of investment company accounting by a non-investment company parent


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Financial instruments project update

Classification and Measurement Measurement categories: amortized cost, FV-OCI, FV-NI:

f– More financial assets and liabilities would be measured at amortized cost than under the ED– Financial instruments would be classified based on their characteristics and the business

activity the entity uses to manage those financial instruments, rather than the entity’s intent for an individual financial instrument

Expect reexposure and final ASU in 2012

Impairment Boards developing a “three-bucket” approach to impairment which would reflect the general Boards developing a three bucket approach to impairment which would reflect the general

pattern of deterioration of credit quality of financial assets Expect reexposure in the first half of 2012

Hedging ActivitiesHedging Activities IASB proposed model would allow for much broader use of hedge accounting FASB received feedback on IASB hedge accounting model for its consideration Redeliberations have not yet begun and timing of a final standard on hedge accounting


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y g g g gis unclear

Leases project update

Lessor Lessee

“Right to use” leased property

Lessor

Models

Lessee

Right-of-Use Model

Lease paymentsReceivable and Residual Model

Recognize “right of use” asset

Recognize liability to make estimated

future lease

p y

Recognize right to receive estimated

future leaseRecognize residual

asset

Receivable and Residual Model

right-of-use asset future lease payments

future lease payments

asset

Operating Lease Model

Do not recognize right to receive

estimated future Recognize leased

property


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lease payments

Revenue recognition project update

Revised EDQ4 2011

Comment letter

deadline

Final standard issued

SEC registrantsfirst retrospective period

Earliest effective date(2016 For Private

Companies)

1/1/20151/1/2012 1/1/2013

Q1 2012 2H 2012

1/1/2014

Companies)

1/1/2015 1/1/2012 1/1/2013

Monitor Implement Effective

1/1/2014

Assess

2012 2013 2014

Design


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Note: Dates are estimates based on current FASB project schedule as of February 2012

Revenue recognition – Significant practice change for real estate sales

Derecognize the asset when the counterparty obtains control of the asset

Eliminates the specific criteria in existing standards to recognize full profit on sale of real t testate

No explicit requirement for the buyer to have initial and continuing investment for full profit recognition

R iti d t i i l f th d ft l l t l f l Recognition and measurement principles of the exposure draft also apply to sales of real estate (even when that is not the entity’s ordinary business activity)


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Revenue recognition – Example management fee based on assets under management

An investment manager (Vendor) enters into a one-year contract with a nonregistered investment partnership (Fund or Customer) to provide investment management services. The Fund’s investment objective is to make long and short investments in large capitalization

it t k Th d i t l t f f 2% f tequity stocks. The vendor receives a quarterly management fee of 2% per annum for assets under management. The assets used to determine the management fee are the net assets at the end of the most recent quarter. The Vendor also receives a performance-based incentive fee of 20% of net new profits. The Vendor is the general partner in the Fund. The limited partners have the ability to remove the general partner with a simple majority votepartners have the ability to remove the general partner with a simple majority vote.

AnalysisThe transaction price would reflect the sum of the estimated quarterly payments (based on the fixed management fee and the uncertain value of the assets under management measured at ed a age e t ee a d t e u ce ta a ue o t e assets u de a age e t easu ed atthe end of each quarter). It also would reflect the Vendor’s estimate of the performance-based incentive fee at the end of the year. The transaction price would be allocated to the single performance obligation to provide investment management services for one year.

The Vendor concludes that it is not reasonably assured to be entitled to the incentive fee untilThe Vendor concludes that it is not reasonably assured to be entitled to the incentive fee until the end of the year. Although the vendor has experience with similar contracts, that experience is not predictive of the outcome of the current contract because the amount of consideration is highly susceptible to volatility in the market. In addition, the incentive fee has a high variability of possible consideration amounts.


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Revenue recognition – Example management fee based on assets under management (continued)

Because the Vendor is not yet reasonably assured to be entitled to the incentive fee, the cumulative amount of revenue recognized during the year is limited to the quarterly management fees. Therefore, using the guidance on measuring progress, the Vendor directly g , g g g p g , ymeasures the value of the services provided to the Fund to date by reference to the quarterly management fees for which the Vendor has a right to invoice. The quarterly management fee serves as an appropriate depiction of the amount of consideration to which the Vendor expects to be entitled in exchange for the services provided. The following table depicts the g p g pcalculations and the amount of revenue recognized each period under the proposed standard:

Period Assets Base Fees Billed and Collected Incentive Fee *

Revenue Recognized under

Each QuarterEach Quarter

Beginning $200,000

Q1 $175,000 $875 $0 $875

Q2 $225,000 $1,125 $5,000 $1,125

Q3 $150,000 $750 $0 $750

Q4 $205,00 $1,025 $1,000 $2,025

Total $4,775


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Note: *Calculated on an as if liquidated basis.

Consolidations: Principal vs. agent analysis

Significant proposed changes to U.S. GAAP:– Would amend consolidation guidance for VIEs and non-VIE corporations, partnerships,

and similar entitiesand similar entities Would provide new guidance on evaluating whether a decision maker is a principal or an

agent that would apply to VIEs and non-VIE partnerships and similar entities Would revise the criteria for determining whether an entity is a VIEg y Would revise definition of participating rights for all non-VIEs (i.e., non-VIE corporations,

partnerships, and similar entities) to align it with the definition for VIEs– Would eliminate deferral of ASU 2009-17 (FAS 167) for reporting enterprises with interests

i t i i t t i d i il titiin certain investment companies and similar entities


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Potential implications of proposed principal vs. agent guidance

Reassessment of previous consolidation conclusions:– All previous VIE conclusions for which the outcome depends on the evaluation under ASC

810 10 15 14(b)(1) (previously FIN 46R ¶5(b)(1)) would need to be reconsidered810-10-15-14(b)(1) (previously FIN 46R ¶5(b)(1)) would need to be reconsidered– All previous VIE consolidation conclusions would need to be reconsidered using the

principal-agent guidance– All previous consolidation conclusions for non-VIE limited partnerships and similar entities p p p

would need to be reconsidered using the principal-agent guidance– All previous consolidation conclusions for non-VIE corporations in which the noncontrolling

interest holders have participating rights would need to be reconsidered using the revised definition of participating rightsdefinition of participating rights

Related-party considerations in principal-agent guidance may facilitate structuring interests of affiliates under common control so as to avoid consolidation of entities that are not VIEs in the affiliates’ stand-alone financial statements


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Potential implications of proposed principal vs. agent guidance (continued)

In general, less likely that limited partnerships and other investment entities will be consolidated

More likely that the GP would consolidate non VIE partnerships and similar entities that– More likely that the GP would consolidate non-VIE partnerships and similar entities that have a large number of unrelated investors if the GP has a significant economic interest

Ongoing reassessment of consolidation conclusions likely to be more challenging in a judgment framework


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FAF plan to establish the private company standards improvement council

Developed in response to report of the Blue-Ribbon Panel

Objective – Develop recommendations on whether exceptions or modifications to U.S. GAAP h ld b d t dd th d f f i t fi i lGAAP should be made to address the needs of users of private company financial statements

Recommendations subject to FASB ratification

PCSIC ld i t f 11 15 b l FASB b h i PCSIC would consist of 11 – 15 members plus a FASB member as chairperson:– Selected and appointed by FAF Board of Trustees– Users, preparers, and practitioners with significant private company financial reporting

experienceexperience

Meetings held four to six times per year:– All FASB members would participate

Open to the public– Open to the public

Oversight by FAF Board of Trustees – Private Company Review Committee

FAF to hold three public roundtables during January – March 2012


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FAF plan to establish the PCSIC – Critical responsibilities

Develop a set of specific criteria to determine whether and, if so when, exceptions or modifications to U.S. GAAP are warranted for private companies:

Jointly with the FASB– Jointly with the FASB

Evaluate existing U.S. GAAP to identify exceptions or modifications for private companies using the criteria developed

Propose modifications to standards that are not currently under consideration by the FASB: Propose modifications to standards that are not currently under consideration by the FASB:– Subject to ratification by the FASB and due process, including public comment– Super majority (two-thirds) vote by PCSIC would be required to propose modifications to

the FASB– PCSIC’s modifications and exceptions would be subject to ratification by the FASB

Participation in ongoing standard-setting activities:– Recommend exceptions and modifications for private companies for issues under activeRecommend exceptions and modifications for private companies for issues under active

consideration by the FASB


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FAF plan to establish the PCSIC – Comment letters

AICPA advocates an autonomous standard-setting board as recommended by the Blue-Ribbon Panel

L ti fi ll t th FAF l Larger accounting firms generally support the FAF plan:– Emphasize importance of a single standard setter– U.S. GAAP should be based on same conceptual framework

Midsize and smaller accounting firms generally support the concept of a separate board, similar to the Blue-Ribbon Panel recommendation

NASBA, IMA, and FEI support the FAF plan

State CPA societies are mixed


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FAF plan to establish the PCSIC – Comment letters (continued)

United States Senate opposes FAF plan on the basis exceptions to U.S. GAAP made for private companies would weaken U.S. GAAP, reduce transparency, and conflict with international standards with few benefits for financial statement users

Limited responses from preparers and users of private company financial statements:– Majority of those were not in favor of the FAF plan– Some believe that there should not be differences in U S GAAPSome believe that there should not be differences in U.S. GAAP

Comment letters available on the FAF Web site – www.accountingfoundation.org


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Current SEC and PCAOB developmentsdevelopments

Convergence of U.S. GAAP and IFRS

SEC will need a few additional months to determine whether to adopt IFRS:– SEC fieldwork is in the final stages of completion

Key FASB/IASB convergence projects are still open

Elements of a strong framework in the U.S.:– Support development of IFRS– Maintains authority over U.S. standards– Provides strong U.S. voice in IFRS standard setting– Responsive to change– Retains “U.S. GAAP” label


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Use of third-party pricing services

Management may use third-party pricing services to assist in estimating and disclosing the fair value of financial instruments.

SEC h i d t’ ibiliti l t d t f i l t SEC emphasized management’s responsibilities related to fair value measurements and disclosures:– Complying with U.S. GAAP– Maintaining appropriate ICFR to prevent or detect material misstatementsMaintaining appropriate ICFR to prevent or detect material misstatements– Assessing ICFR

ICFR in this area should be responsive to risk determined by:Nature and complexities of securities– Nature and complexities of securities

– Level of market activity of securities– Availability of market data

Management and auditors should understand the valuation techniques models Management and auditors should understand the valuation techniques, models, assumptions, and other inputs used by the third-party pricing service


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Audit quality and audit committee involvement

Audit quality:– Objectivity and skepticism

f f– Root cause analysis of audit deficiencies– Improve audit and quality control standards

Role of audit committees:– Auditor selection– Ask questions

Independence and audit firm rotation:– PCAOB is seeking ways to enhance auditor objectivity, independence, and skepticism

Auditor’s reporting model:– Alternatives presented in PCAOB’s concept release


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Registered investment adviser complianceadviser compliance

Registered investment adviser compliance in the Dodd-Frank Era

Real estate investment advisers required to register must:

Develop a compliance program, including developing and implementing policies and d bl d i d t t i l ti f th iti l d tprocedures reasonably designed to prevent violations of the securities laws, conduct an

annual review of those policies and procedures, and designate a Chief Compliance Officer

Establish, maintain, and enforce a Written Code of Ethics, which must apply to the investment adviser’s personnel and must include provisions on standards of businessinvestment adviser s personnel and must include provisions on standards of business conduct, compliance with the federal securities laws, reporting of personal securities transactions, and reporting violations of the Code

Maintain books and records, including substantial records relevant to the investment d i ’ b iadviser’s business

Follow specific rules when entering into advisory contracts

Disclose information about their advisory business, advisory personnel, fee arrangements, i d t ffili ti d t lindustry affiliations, and control persons

Additionally, investment advisers have a fiduciary duty with respect to their relationships with clients and will be subject to examination by the SEC


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Overview of form PF

Data collection “follows the lessons learned during the financial crisis – lessons about the importance of monitoring and reducing the possibility that a sudden shock or failure of a financial institution will cascade through the entire financial system,” Mary L. Schapiro (SEC Open Meeting, 26 Oct 2011).

The Dodd-Frank Act of 2010, required the SEC and CFTC to create new reporting for Registered Investment Advisers (RIAs), primarily to address the systemic risk reporting needs of the newly created Financial Stability Oversight Council.

The SEC and CFTC finalized rule 204(b)-1 on October 31 2011 requires impacted RIAs to file Form PF The SEC and CFTC finalized rule 204(b) 1 on October 31, 2011 requires impacted RIAs to file Form PF on a quarterly or annual basis beginning as early as July 2012.

Form PF applies to all RIAs managing funds that rely upon the 3(c)(7) or 3(c)(1) exemptions to the Investment Company Act (e.g., hedge funds, private equity funds, real estate funds, and liquidity funds), regardless of domicileregardless of domicile.

Form PF requires advisers to disclose comprehensive fund information to the SEC which can also be used in SEC examinations, investigations, investor protection efforts, and other regulatory programs.

The breadth of information required from large hedge fund advisers is unprecedented for a regulatory filing, covering performance, investor, counterparty, and portfolio data along dimensions that include concentration, risk, and liquidity.

Data submitted to the SEC will not be made public; only regulators including the Financial Stability Oversight Council will have access to it.


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Form PF – Filing criteria

The following criteria were adopted by the SEC to identify the funds in scope for Form PF:

Reporting Entity Qualifiers Reporting

FrequencyInitial FilingPeriod End

Reporting Timeframe

Required Sections

Private Fund Adviser

Adviser manages private funds Adviser & related persons had at least $150M in

private fund regulatory AUM at most recent FYE and does not qualify as a Large Fund Adviser

Annual December 31, 2012 120 Days Sec 1a, 1b & 1c*

Meets criteria as Pri ate F nd Ad iserAdvisers with> $5B Reg.

AUM in hedge funds: Sec 1a, 1b, 1 * 2Large Hedge

Fund Adviser

Meets criteria as Private Fund Adviser Adviser & related persons had at least $1.5B in

hedge fund regulatory AUM at most recent FYEQuarterly

AUM in hedge funds: June 30, 2012 60 Days

1c*, 2a& 2b for

qualifying hedge funds

All others:December 31, 2012

Adviser has one or more liquidity funds at most Advisers with > $5B Reg. AUM in liquidity & money

Large Liquidity Fund Adviser

q yrecent FYE

Adviser and related persons had at least $1B in combined money market and liquidity fund regulatory AUM at most recent FYE

Quarterly

AUM in liquidity & money market funds: June 30, 2012 15 Days Sec 1a, 1b & 3

All others:December 31, 2012

Advisers with > $5B Reg

Large Private Equity Fund Adviser

Adviser and related persons had at least $2B in private equity regulatory AUM at most recent FYE Annual

Advisers with > $5B Reg. AUM private equity funds:

FYE following June 15, 2012 120 Days Sec 1a, 1b & 4

All others:FYE following


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gDecember 15, 2012

*1c is only applicable to Hedge Funds.

Form PF – Reporting requirements

Form PF represents a new and complex regulatory reporting requirement with respect to private funds of SEC Registered Investment Advisers. It requires private fund advisers to report on multiple data points with increased granularity. Key requirements include:

All private fund advisers:– Section 1a requires general information on the adviser including regulatory AUM and net AUM by fund type.

– Section 1b requires fund specific information including: NAV/GAV, performance, borrowing, derivatives activity, balance sheet assets/liabilities, investor concentration, and categorization.

– Section 1c is required to be completed for each hedge fund in scope. Information to be provided includes: strategy identification, top counterparty exposure, and trading and clearing activities.

Large hedge fund advisers:– Section 2a requires the aggregation of all hedge funds in scope for data including: hedge fund exposure by asset type,

turnover duration and geographical concentrationturnover, duration, and geographical concentration.

– Section 2b applies for hedge funds with NAV of at least $500 million—alone or in combination with parallel funds or dependent separate accounts—as of the end of any month in the prior fiscal quarter (a qualifying hedge fund). Information required includes data such as exposure by asset class, portfolio liquidity, VaR, investor liquidity, unencumbered cash, borrowings, and portfolio concentration.

Large liquidity fund advisers:– Section 3 asks for information on NAV, valuation, WAM, market-based NAV, % of NAV w/maturities > 397 days, maturity

profile by instrument, portfolio concentration, financing liquidity, and investor liquidity.

Large private equity fund advisers:


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g p q y– Section 4 asks for information on activities of private equity funds including their investments in portfolio companies and

creditors involved in financing private equity transactions.

Other key provisions of the Dodd–Frank Act

Other Provisions of the Dodd-Frank Act that have affected alternative investment advisers include:

Changes to the Accredited Investor Standard Investors seeking to qualify as– Changes to the Accredited Investor Standard – Investors seeking to qualify as accredited investors are no longer able to count the value of their primary residence when calculating their net worth. These investors will, however, be able to exclude any mortgage debt outstanding on their primary residence when making the same calculation. This change to the accredited investor standard came into force immediately after passage ofchange to the accredited investor standard came into force immediately after passage of the Dodd-Frank Act.

– Compensation Disclosure – The SEC has issued regulations which will require investment advisers, including advisers to alternative investment funds, to disclose their i ti b d ti t d hi h ill hibit i ti b dincentive-based compensation arrangements and which will prohibit incentive-based compensation that encourages “inappropriate risks.”

– Studies – The SEC continues to evaluate whether it would be appropriate to form a self-regulatory organization specifically for the oversight of private funds, the impact of short g y g p y g p pselling on the markets, and issues around the reporting of short-selling activities, whether there is a need for additional examination and enforcement resources for investment advisers, and the costs associated with compliance with the Custody Rule.


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Other developments outside of the Dodd–Frank Act

Notwithstanding passage of the Dodd-Frank Act, regulatory developments over the past year have also had a profound effect on the regulation of the alternative investment management sector. These additional developments include:g p– Amended Custody Rule – After adoption of amendments to the Custody Rule in December

2009, and after release of additional SEC guidance on the amended rules in May of 2010, questions remain about its applicability to certain situations involving a number of alternative investment productsalternative investment products.

– Changes to the Form ADV Part 2 – New SEC rules require registered investment advisers to provide more detailed disclosure about their activities and to provide this disclosure in a “plain English” format. These enhanced disclosures will now be available publicly on the SEC’ W b itSEC’s Web site.

– Adoption of Pay-to-Play Rules – The SEC adopted rules which will restrict the use of third-party placement agents in soliciting government plans and impose limitations on certain campaign contributions.p g


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What to expect as a registered investment adviser: Current focus areas of the Office of Compliance Inspections and Examinations (OCIE)

Insider trading and information barriers Personal and proprietary trading

Risk assessment Pay-to-play; use of solicitors

G f Expense allocation Custody Disclosure

P tf li t (“ t l d ift”)

Gifts and entertainment Use of social media Proxy voting

A ti l d i Portfolio management (“style drift”) Leverage Counterparty/credit risk

P i

Anti-money-laundering Disaster recovery and business continuity Books and records (including

electronic communications) Privacy Pricing and valuation Performance advertising

electronic communications) Competence and effectiveness of the

Chief Compliance Officer Strategic investors and relationships


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Thank you

Presenter’s contact details

Darren Robb

Phone: 212-909-5814

Email: [email protected]

Peter BloomfieldPeter Bloomfield

Phone: 617-988-1173

Email: [email protected]


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Th i f ti t i d h i i f l t d i tThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thoroughwithout appropriate professional advice after a thorough examination of the particular situation.


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