CFTC and SEC Finalize Key Dodd-Frank Product Definitions, Ushering in Implementation Phase of U.S. OTC Derivatives Regulatory Reforms

The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for comprehensive regulation of the swap and security-based swap markets. Dealers and major market participants will be required to register with either or both of the U.S. Commodity Futures Trading Commission and U.S. Securities and Exchange Commission, and comply with extensive regulatory requirements with respect to swaps and security-based swaps. Other market participants will also be subject to extensive regulation with respect to swaps and security-based swaps. The CFTC has finalized many of its Dodd-Frank implementing regulations, while the SEC has proposed, but not yet finalized, the majority of its Dodd-Frank implementing regulations. The CFTC and SEC recently finalized rules further defining “swap”, “security-based swap” and related terms used under Dodd-Frank. These final definitions represent an important step in the implementation of the Dodd-Frank derivatives reforms because they determine the scope of products to be regulated and in many cases trigger the effective dates of a number of key rules that will begin going into effect in the coming months.

See “CFTC and SEC Finalize Key Dodd-Frank ‘Entity Definitions’,” Entity Definitions Update (May 11, 2012).

July 25, 2012

CFTC Adopts Final End-User Exception to Mandatory Clearing and Proposes Exemption for Certain Cooperatives

On July 10, 2012 the Commodity Futures Trading Commission (the “CFTC”) adopted final regulations (the “Final Rules”) governing the “end-user exception” from mandatory clearing. The Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, gives the CFTC the authority to mandate that certain swaps must be cleared through a derivatives clearing organization. No such clearing mandate shall apply with respect to swaps entered into by persons able to rely on the so-called “end-user exception” to the clearing requirement. At this time, the CFTC has not identified any swaps that will be subject to the mandate, however we expect they may make this determination relatively soon. The Final Rules will go into effect September 17, 2012, though no clearing mandate is likely to be in place on that date. Also on July 10, 2012 the CFTC proposed a rule (the “Proposed Rule”) to extend the scope of the end-user exception to cooperatives meeting certain conditions. Comments on the Proposed Rule must be received before August 16, 2012.

July 20, 2012

SEC Staff Publishes Update to Form PF FAQs

The SEC’s Division of Investment Management, on July 19, 2012, updated its Form PF FAQs. Among other items of note, the updated FAQs indicate that the types of transactions reported as “borrowings” should include short sales, securities lending transactions and certain synthetic borrowings (among others) and provide guidance on the treatment of counterparty credit exposure.

July 18, 2012

Historic Opportunities for Foreign Hedge Fund Managers in Mainland China

A series of regulatory changes of historic significance are being introduced in China that will have wide-ranging implications for foreign fund managers. This Investment Funds update explains some of those changes.

July 17, 2012

CFTC Provides Registration Relief to CPOs and CTAs through the End of 2012

On July 10, 2012, the CFTC’s Division of Swap Dealer and Intermediary Oversight issued a No-Action Letter which, essentially, makes the 4.13(a)(4) exemption available to CPOs and the corresponding exemption available to CTAs, with respect to commodity pools launched on or after the date of the Letter, until December 31, 2012, provided the CPOs and CTAs comply with the conditions described in the letter.

June 27, 2012

CFTC Position Limits Rulemaking Revisions

On October 18, 2011, the Commodity Futures Trading Commission (the “CFTC”) adopted final regulations (the “Final Rules”) on position limits for futures and swaps contracts, including on certain energy-related futures and swaps. The new position limits regime created by the Final Rules will go into effect 60 days after the term “swap” is further defined by the CFTC in joint rulemaking with the Securities and Exchange Commission. On May 30, 2012 (the “Proposing Release”), the CFTC proposed amending the Final Rules to modify the “owned entity” aggregation threshold of 10% and to expand the position information sharing exemption to include foreign laws and state laws. This Sidley Update details how the Proposing Release modifies the Final Rules.

June 25, 2012

BEA Issues Revised Rules for Surveys of Direct Investment and International Trade In Services, and Further Extends Form BE-11 Reporting Deadline until July 31 for Sidley Fund Manager Clients1

The Bureau of Economic Analysis (“BEA”) recently amended its rules governing survey reporting requirements for direct investment abroad, foreign direct investment in the U.S. and U.S. international services transactions pursuant to the International Investment and Trade in Services Survey Act. Under the amended rules, only persons the BEA notifies of an obligation to complete such survey forms will be required to respond to a survey. If a person is not notified of a survey, it will not be required to complete that survey.

See “Private Fund Managers May Face BEA Reporting Requirements,” Sidley Investment Funds Update (May 25, 2012); and “BEA Issues Extension of May 31 Reporting Deadline for Sidley Fund Manager Clients,” Sidley Investment Funds Update (May 31, 2012).

1The BEA has subsequently extended the deadline for Sidley Austin clients to file both Form BE-11 and Form BE-15 (the Annual Survey of Foreign Direct Investment In the United States) until August 31, 2012.

May 31, 2012

BEA Issues Extension of May 31 Reporting Deadline for Sidley Fund Manager Clients

Sidley has obtained for our clients a broad based extension of the May 31 deadline for the filing of Form BE-11 from the Bureau of Economic Analysis (“BEA”). The extension is until at least June 29, and the BEA is willing to consider further extensions for particular clients.

See “Private Fund Managers May Face BEA Reporting Requirements,” Sidley Investment Funds Update (May 25, 2012); and “BEA Issues Revised Rules for Surveys of Direct Investment and International Trade In Services, and Further Extends Form BE-11 Reporting Deadline until July 31 for Sidley Fund Manager Clients,” Sidley Investment Funds Update (June 25, 2012).

May 25, 2012

Private Fund Managers May Face BEA Reporting Requirements

The Bureau of Economic Analysis (“BEA”) collects data on U.S. direct investment abroad, foreign direct investment in the U.S., and U.S. international services transactions through quarterly, annual and 5-year benchmark surveys. All U.S. persons that meet the reporting thresholds must provide survey reports, regardless of whether they are contacted by the BEA. U.S. investment advisers that manage hedge fund, private equity fund, or venture fund structures that involve non-U.S. entities may be covered, particularly through non-U.S. master funds. Although the BEA reporting requirements have been in place for years, many covered persons have not filed reports, and BEA staff have indicated they may increase enforcement efforts in the future.

See “BEA Issues Extension of May 31 Reporting Deadline for Sidley Fund Manager Clients,” Sidley Investment Funds Update (May 31, 2012); and “BEA Issues Revised Rules for Surveys of Direct Investment and International Trade In Services, and Further Extends Form BE-11 Reporting Deadline until July 31 for Sidley Fund Manager Clients,” Sidley Investment Funds Update (June 25, 2012).

May 15, 2012

Important ERISA 408(b)(2) Disclosure Deadline Approaching for Managers of Plan Assets (Including Hard-Wired Plan Assets Feeder Funds)

As you may know, regulations issued under Section 408(b)(2) of ERISA require that “covered service providers” provide certain fee disclosures to ERISA plans. Covered service providers include (a) managers of plan assets funds, (b) managers of hard-wired plan assets feeder funds, and (c) managers of separate accounts for ERISA plans. The deadline for providing these disclosures is July 1, 2012.

May 11, 2012

CFTC and SEC Finalize Key Dodd-Frank "Entity Definitions"

The Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission recently finalized the definitions of “swap-dealer,” “security-based swap dealer,” “major swap participant,” “major security based swap participant” and “eligible contract participant,” and the CFTC adopted final regulations treating commodity options similarly to swaps.” These so called “entity definitions” and the commodity option provisions are key elements of implementation of the OTC derivatives reforms mandated by the Dodd-Frank Act.

See “CFTC and SEC Finalize Key Dodd-Frank Product Definitions, Ushering in Implementation Phase of U.S. OTC Derivatives Regulatory Reforms,” Dodd-Frank Product Definitions Update (August 7, 2012).

April 24, 2012

Federal Reserve Clarification of Volcker Rule Conformance Period

On April 19, 2012, the Board of Governors of the Federal Reserve System (the “Board”) announced that banking entities subject to Section 13 of the Bank Holding Company Act of 1956, the so-called “Volcker Rule,” would have the full two-year period provided by statute to come into conformance with the Volcker Rule’s restrictions on proprietary trading and investment in and sponsorship of covered funds. The announcement was part of a joint statement released by the Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Securities and Exchange Commission.

April 24, 2012

New York City Lobbying Bureau Issues Advisory Opinions Clarifying Registration Obligations For Hedge Funds and Investment Managers

In December 2011, the New York City Lobbying Bureau issued two advisory opinions clarifying the application of exceptions to the obligation to register as a lobbyist for marketing to the New York City pension funds and other activities by many types of investment managers, including hedge funds. The opinions were placed on the Lobbying Bureau’s website with no announcement, and the industry press has not commented on them. When taken together, the two opinions provide considerable guidance regarding marketing activities that do not require registration. In addition, the opinions make clear which contract administration activities also do not require registration. This Sidley Update will outline the policy clarifications and identify unanswered questions.

April 23, 2012

EU OTC Derivatives Regulation Under EMIR – An Analysis of the Final Agreed Text

The European Market Infrastructure Regulation ("EMIR") was adopted by the European Parliament on 29 March 2012. The technical standards that will provide the detailed rules that give effect to EMIR are to be published by the European Securities and Markets Authority ("ESMA") by no later than 30 September 2012. Nevertheless, the provisions of EMIR, which is expected to become effective during 2013, provide the framework for affected firms to prepare, if they have not already done so, for the new regulatory regime that will shape the over-the-counter ("OTC") derivative markets (comprising derivative contracts which are not traded nor executed on a "regulated market"). In this update we highlight the anticipated impact of EMIR on participants in such markets.

See “U.S. and EU OTC Derivatives Regulation – a Comparison of the Regimes,” Sidley Derivatives Update (April 23, 2012).

April 23, 2012

Proposed Regulations Defining “Predominantly Engaged in Financial Activities” for the Dodd-Frank Act

On April 2, 2012, the Board of Governors of the Federal Reserve System (the “Board”) issued a supplemental notice of proposed rulemaking and a request for comment that would amend the Board’s Regulation Y to establish the criteria for determining whether a company is “predominantly engaged in financial activities” for purposes of Title I of the Dodd-Frank Wall Street Reform and Consumer Protection of 2010 (the “Dodd-Frank Act”). The Board had previously published a notice of proposed rulemaking on February 11, 2011, which, inter alia, sought to define when a company is “predominantly engaged in financial activities.” Based upon comments received primarily raising questions as to whether the conduct of certain financial activities that did not comply with the conditions applicable to bank holding companies should still be considered to be financial activities for purposes of the Dodd-Frank Act, the Board issued the present supplement to the February release. Comments are due by May 25, 2012.

April 23, 2012

U.S. and EU OTC Derivatives Regulation – a Comparison of the Regimes

On 29 March 2012 the European Parliament adopted the European Markets Infrastructure Regulation (EMIR). The Regulation, which is expected to become effective during 2013, provides a new regulatory framework for the trading of standardized OTC derivative contracts. Attached is an update on EMIR which provides an analysis of the anticipated impact of EMIR on market participants.

EMIR is one of several initiatives taking place in the European Union and in multiple jurisdictions globally reforming OTC derivatives trading. For market participants with global trading operations and therefore potentially subject to regulation in multiple jurisdictions, it is possible that difficult compliance and choice of law questions will arise as the new global regulatory landscape for OTC derivatives evolves. The second update attached provides a high level comparison of the new rules for OTC derivatives regulation in the United States (US) and the European Union (EU).

See “EU OTC Derivatives Regulation Under EMIR – An Analysis of the Final Agreed Text,” Sidley Derivatives Update (April 23, 2012).

April 13, 2012

FSOC Issues Final Rule on Oversight of Nonbank Financial Companies

On April 3, 2012, the Financial Stability Oversight Council (the “FSOC”) approved a final rule and accompanying guidance to establish criteria by which the FSOC will determine which nonbank financial companies, if in a state of material financial distress or due to their attributes (e.g. their nature, scope, or size), could “pose a threat to the financial stability of the United States,” and thus should be subject to oversight and regulation by the Board of Governors of the Federal Reserve System. This Client Update summarizes those procedures and criteria the FSOC will use in making those determinations, which it will begin this year.

March 30, 2012

Congress Liberalizes Securities Offering Regulation

On March 27, 2012, Congress approved the JOBS (for “Jumpstart Our Business Startups”) Act. President Obama is expected to sign the measure quickly. Once in force, the JOBS Act will significantly liberalize communication practices allowed under the Securities Act in both registered and exempt offerings. Reduced disclosure requirements and certain other benefits under both the Securities Act and the Exchange Act will be available for certain smaller companies. The new law substantially increases the number of record holders a private company may have before it is required to register its equity securities under the Exchange Act.

See “U.S. Congress Enacts JOBS Act, Increasing 499 Investor Limit for Private Funds to 1,999 and Eliminating Prohibition Against General Solicitation in Connection with Certain Private Offerings,” Sidley Investment Funds Update (March 28, 2012).

March 28, 2012

U.S. Congress Enacts JOBS Act, Increasing 499 Investor Limit for Private Funds to 1,999 and Eliminating Prohibition Against General Solicitation in Connection with Certain Private Offerings

On March 27, 2012, Congress approved the so-called JOBS (for “Jumpstart Our Business Startups”) Act and President Obama is expected to sign it in the coming days. Once in effect, the JOBS Act will, among other things, (1) eliminate the prohibition against general solicitation and general advertising in connection with private offerings to accredited investors conducted in reliance on Rule 506 of Regulation D under the Securities Act of 1933, (2) apply elimination of the prohibition against general solicitation to other federal securities laws, and (3) raise the investor threshold for registration under the Securities Exchange Act of 1934 from 500 to 2,000 “holders of record” for most issuers.

See “Congress Liberalizes Securities Offering Regulation,” Sidley Securities Update (March 30, 2012).

March 26, 2012

Analysis of Final EU Short Selling and CDS Regulation

On 24 March 2012 the final text of the new EU Regulation on Short Selling and Certain Aspects of Credit Default Swaps was published in the Official Journal of the European Union. The Regulation sets out notification requirements and restrictions relating to short positions in shares and sovereign debt and, separately, a prohibition on uncovered sovereign credit default swaps. This Update provides a description, and considers the implications, of the main provisions of the Regulation.

March 23, 2012

New German Notification and Publication Requirements for Net Short Positions from 26 March 2012

Germany adopted new notification and publication requirements for net short positions effective as of 26 March 2012. Clients may, via the internet, register with BaFin’s electronic notification platform and with the electronic Federal Gazette's publication platform in order to submit relevant notifications and publications.

March 20, 2012

Recent IRS Guidance on Electronic K-1s

The IRS has provided detailed requirements for providing electronic K-1s to partners.

March 5, 2012

UK Supreme Court Rules in Favour of Non-Segregated Clients in Lehman Client Money Case

The UK Supreme Court’s judgment in the ‘Lehman Client Money’ case was handed down on 29 February 2012. The judgment concerns the scope of protection afforded to client money upon the insolvency of firms offering investment services and is significant, in particular, for creditors of LBIE and for creditors of affiliate Lehman companies such as Lehman Brothers Inc. and Lehman Brothers Finance AG. The judgment also has implications for the administration of present and future insolvencies of firms offering investment services where client money is both received from and paid out of the firm’s house accounts.

February 22, 2012

SEC Adopts Revised Qualified Client Standards for Performance Fees, Including Exclusion of Primary Residence From Net Worth Calculation

On February 15, 2012, the SEC adopted amendments to Rule 205-3 under the Investment Advisers Act of 1940, the rule that permits SEC-registered advisers to charge performance-based fees to “qualified clients.” The amendments (i) revise the net worth test in the definition of qualified client to exclude the value of a natural person’s primary residence; (ii) include “grandfathering” provisions that allow advisers to maintain certain existing performance fee arrangements; and (iii) codify the higher dollar amount thresholds for qualified client status (at least $1 million under management with the adviser immediately after entering into the advisory contract or a net worth of more than $2 million at the time of entering the advisory contract) that were previously set by order and took effect on September 19, 2011. The amendments will be effective 90 days after publication in the Federal Register, but advisers may rely on the grandfathering provisions in the meantime.

February 17, 2012

The Einhorn/Greenlight Insider Dealing Case – EU/US Differences Highlighted

This client update examines the recent decision of the UK Financial Services Authority to fine David Einhorn and Greenlight Capital Inc. £7.2 million for insider dealing and highlights the important differences between the insider dealing laws of the United Kingdom and those of the United States.

February 16, 2012

The UK Financial Conduct Authority: How Will the New Supervisory Regime Affect Investment Firms?

The new Financial Conduct Authority (FCA) will, along with the new Prudential Regulation Authority, be taking over the functions of the existing Financial Services Authority in 2013. This Update focuses on the new powers that have been proposed for the FCA, the plans for its supervisory approach and the ways in which firms can prepare for the transfer of powers that is set to take place.

February 15, 2012

New CFTC CPO/CTA Rules May Impact Family Offices

On February 9, 2012, the Commodity Futures Trading Commission (“CFTC”) issued final rules eliminating a number of exclusions and exemptions relied on by commodity pool operators (“CPOs”) and commodity trading advisers (“CTAs”) and increasing the reporting requirements for registered CTAs and CPOs. In making these changes, the CFTC declined to provide specific exemptions for family offices. Accordingly many family offices will be impacted by these rules.

February 14, 2012

CFTC Adopts Final Rules Amending CPO/CTA Registration and Compliance Obligations

On February 9, 2012, the Commodity Futures Trading Commission (“CFTC”) issued final rules (the “Final Rules”) eliminating a number of exclusions and exemptions relied on by commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”) in connection with many privately offered funds and investment companies registered under the Investment Company Act of 1940 (“RICs”). The Final Rules (a) eliminate the exemption from CPO registration that is currently available under CFTC Rule 4.13(a)(4) for CPOs of certain privately offered funds, (b) reinstate prior trading criteria for RICs under CFTC Rule 4.5 (adding an alternative trading threshold and including CFTC-regulated swaps in the trading criteria), (c) require that under CFTC Rule 4.7 CPOs may no longer claim an exemption from the requirement of including certified financial statements in pool annual reports, (d) require the filing of annual reaffirmation notices to claim relief under CFTC Rules 4.5, 4.13 or 4.14, (e) require additional reporting on Forms CPO-PQR and CTA-PR and (f) amend the boilerplate risk disclosure statements required by CPOs and CTAs to include risks posed by the trading of swaps, among other changes.

See “CFTC Finalizes Significant Dodd-Frank Swap Regulations and Proposes Long-Awaited Regulations Implementing Volcker Rule,” Sidley Securities & Futures Regulatory Update (January 30, 2012); and “CFTC Issues Final Rules Amending CPO and CTA Registration and Compliance Obligations,” Sidley Investment Funds Update (February 10, 2012).

February 14, 2012

Four Critical Issues Affecting Public Commodity Pools and Derivative Transactions under Proposed Regulations Implementing the Volcker Rule

This Sidley update highlights significant issues affecting both public commodity pools and derivative transactions, as well as the CFTC's February 14, 2012 Volcker Rule proposal.

February 10, 2012

CFTC Issues Final Rules Amending CPO and CTA Registration and Compliance Obligations

On February 9, 2012, the U.S. Commodity Futures Trading Commission (“CFTC”) released final rules that will have a significant impact on registered and exempt commodity pool operators (“CPOs). Many fund managers will soon find themselves within the CPO definition due to the expansion of the CFTC’s mandate to cover non-security-based swaps (i.e., “swaps”), once the CFTC and the Securities and Exchange Commission finalize the definition of “swap” in the coming months.

See “CFTC Finalizes Significant Dodd-Frank Swap Regulations and Proposes Long-Awaited Regulations Implementing Volcker Rule,” Sidley Securities & Futures Regulatory Update (January 30, 2012); and “Four Critical Issues Affecting Public Commodity Pools and Derivative Transactions under Proposed Regulations Implementing the Volcker Rule,” Sidley Financial Institutions Regulatory Update (February 14, 2012).

January 30, 2012

CFTC Finalizes Significant Dodd-Frank Swap Regulations and Proposes Long-Awaited Regulations Implementing Volcker Rule

On January 11, 2012, the Commodity Futures Trading Commission (“CFTC”) held an open meeting and approved (i) three final rule releases, (ii) a delegation of authority and (iii) one proposed rule release, all relating to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The three final rules relate to (a) the registration of swap dealers and major swap participants, (b) business conduct standards for swap dealers and major swap participants and (c) the protection of cleared swaps customer contracts and collateral. The CFTC also (d) delegated authority over registration of swap dealers and major swap participants to National Futures Association and (e) proposed a rule on prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds (i.e., the so-called “Volcker Rule”).

See “CFTC Issues Final Rules Amending CPO and CTA Registration and Compliance Obligations,” Sidley Investment Funds Update (February 10, 2012); and “Four Critical Issues Affecting Public Commodity Pools and Derivative Transactions under Proposed Regulations Implementing the Volcker Rule,” Sidley Financial Institutions Regulatory Update (February 14, 2012).

January 30, 2012

FTC Announces HSR Premerger Notification and Clayton Act § 8 Thresholds

The Federal Trade Commission has announced the most recent annual adjustments to the Hart-Scott-Rodino Act premerger notification thresholds (effective February 27, 2012) and the thresholds that apply to interlocking directorates under Section 8 of the Clayton Act (effective January 27, 2012).

January 26, 2012

SEC Issues Much Anticipated Investment Adviser “Umbrella” Registration Guidance

On January 18, 2012, the Division of Investment Management of the Securities and Exchange Commission issued a no-action letter updating guidance on “umbrella” registration and the circumstances in which affiliated investment advisers may rely on a single registration on Form ADV. This update describes the conditions on such reliance set forth in the letter and their implications for investment advisers and their affiliates.

January 12, 2012

SEC Finalizes Net Worth Standard for Natural Person Accredited Investors

On December 21, 2011, the Securities and Exchange Commission adopted certain amendments to the “accredited investor” standards to implement Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This update describes these amendments and includes suggestions for compliance, which must occur before February 27, 2012.

The Investment Funds Practice of Sidley Austin LLP

Sidley has a premier, global practice in structuring and advising investment funds and advisers. We advise clients in the formation and operation of all types of alternative investment vehicles, including hedge funds, fund-of-funds, commodity pools, venture capital and private equity funds, private real estate funds and other public and private pooled investment vehicles. We also represent clients with respect to more traditional investment funds, such as closed-end and open-end registered investment companies (i.e., mutual funds) and exchange-traded funds (ETFs). Our advice covers the broad scope of legal and compliance issues that are faced by funds and their boards, as well as investment advisers to funds and other investment products and accounts, under the laws and regulations of the various jurisdictions in which they may operate. In particular, we advise our clients regarding complex federal and state laws and regulations governing securities, commodities, funds and advisers, including the Dodd-Frank Act, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, the Securities Exchange Act of 1934, the Commodity Exchange Act, the USA PATRIOT Act and comparable laws in non-U.S. jurisdictions. Our practice group consists of approximately 120 lawyers in New York, Chicago, London, Hong Kong, Singapore, Shanghai, Tokyo, Los Angeles and San Francisco.