John A. Brunjes, Partner and Group Head Private Investment Management Group

1. The View from Washington: Survey of Major 2009 Fund Legislation and Enforcement TrendsStuarts 2010 International Funds ConferenceGrand CaymanJanuary 14, 2010 John A. Brunjes, Partner and Group Head Private Investment Management Group

2. Agenda • Major Proposed Bills Impacting US Fund Managers and Investors • SEC, IRS Enforcement Trends • Predictions for 2010 and Beyond . . . • Recap and Conclusions

3. Proposed Bills • By the numbers: • 22 pieces of major legislation impacting Investment Funds proposed in 2009 • 8 of these announced in January alone • Treasury/White House proposes "Private Fund Investment Advisers Registration Act of 2009" in July • Definitive Bills (Rep. Frank, Sen. Dodd) announced/voted on in Q4'09

4. Proposed Bills • Topics addressed: • Swaps/Derivatives Trading and Market Regulation • Adviser Registration and Disclosure • Fund Registration and Reporting • Enhanced Regulation of US Financial Markets • Protection of Pension Investors • Systemic Risk Control • Commodities Speculation • Taxation and Reporting of Offshore Accounts and Holdings • Tax Treatment of carried interest payments • Coordination with International Regulatory Authorities

5. Proposed Bills • 01/15/2009 S. 272 Senator Tom Harkin (IA) "The Derivatives Trading Integrity Act" Amends the Commodity Exchange Act to: (1) repeal the exemption or exclusion from regulation by the Commodity Futures Trading Commission (CFTC) of specified derivative transactions, swap transactions, and related electronic trading facilities (2) restrict futures trading to contract markets or derivatives transaction execution facilities; and (3) abolish exempt boards of trade.

6. Proposed Bills • 01/22/2009 S. 298 Senator Johnny Isakson (GA) "Financial Markets Commission Act" Establishes in the legislative branch the Financial Markets Commission to: (1) examine all causes, domestic and global, of the current financial and economic crisis in the United States, including the collapse of major financial and commercial firms and the deterioration of the credit and housing markets (2) investigate the role in the crisis, if any, of the SEC, nationally recognized statistical rating organizations, the CFTC, Fannie Mae and Freddie Mac, trading facilities for commodities and self-regulatory organizations, the federal banking agencies, any financial or commercial corporation, partnership, or entity, and any other governmental or non-governmental entity

7. Proposed Bills • 01/27/2009 H.R. 711 Congressman Michael Capuano (MA) "Hedge Fund Adviser Registration Act of 2009" To amend the Investment Advisers Act of 1940 to remove the registration exception for certain investment advisers with fewer than 15 clients.

8. Proposed Bills • 01/27/2009 H.R 712 Congressman Michael Castle (DE) "Pension Security Act of 2009" Amends Title I of the Employee Retirement Income Security Act of 1974 (ERISA) to require the financial statement filed with the annual report for a defined benefit pension plan covered by ERISA to include a separate schedule identifying: (1) each hedge fund (i.e., unregistered investment pool) in which plan funds are invested; and (2) the amount invested.

9. Proposed Bills • 01/27/2009 H.R. 713 Congressman Michael Castle (DE) "Hedge Fund Study Act" To require the President's Working Group on Financial Markets to conduct a study on the hedge fund industry to analyze: (1) the changing nature of hedge funds and what characteristics define a hedge fund; (2) the growth of hedge funds within financial markets; (3) the growth of pension funds investing in hedge funds; (4) whether hedge fund investors are able to protect themselves adequately from the risk associated with their investments; (5) whether hedge fund leverage is effectively constrained; and (6) the potential risks hedge funds pose to financial markets or to investors.

10. Proposed Bills • 01/29/2009 S. 344 Senator Chuck Grassley (IA) and Carl Levin (MI) "The Hedge Fund Transparency Act" Exempts an investment company with assets, or assets under management, of at least $50 million from ordinary registration and filing requirements only if that company: (1) registers with the SEC; (2) files with the SEC a specified annual electronic information form, made available to the public, concerning ownership structure, investors, primary accountant and broker, and current assets value; (3) maintains such books and records as the SEC may require; and (4) cooperates with any request for information or examination. Would not impose restrictions on leverage and short selling on such Funds.

11. Proposed Bills • 01/29/2009 S. 344 Senator Carl Levin (MI) and Chuck Grassley (IA) "The Hedge Fund Transparency Act" Requires any investment company meeting such exemption requirements to establish an anti-money laundering program, according to rules prescribed by the Secretary of the Treasury, and report suspicious transactions. Requires such rules to require exempted investment companies to use risk-based due diligence policies, procedures, and controls reasonably designed to ascertain the identity of, and evaluate, any foreign person that supplies funds, or plans to supply funds, to be invested with the investment company's advice or assistance. Requires such rules also to require exempted investment companies to comply with the same requirements as other financial institutions for producing records requested by a federal regulator, particularly within 120 hours of receiving such a request.

12. Proposed Bills • 02/11/2009 H.R. 977 Congressman Collin Peterson (MN) "The Derivatives Markets Transparency and Accountability Act" Requires the CFTC, to the extent information is available, to disaggregate and make public monthly: (1) the number of positions and total notional value of index funds and other passive, long-only and short-only positions in all markets; and (2) data on speculative positions relative to bona fide physical hedgers in those markets. Subjects persons involved in derivative and swap transactions, as well as large traders in over-the-counter contracts, to reporting and recordkeeping requirements.

13. Proposed Bills • 02/13/2009 H.R. 1068 Congressman Peter DeFazio (OR) "Let Wall Street Pay for Wall Street’s Bailout Act of 2009" Amends the Internal Revenue Code to require securities trading facilities to pay an excise tax on a specified percentage of the value of securities and commodities transactions sufficient to recoup the net cost of carrying out the Troubled Asset Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008

14. Proposed Bills • 03/02/2009 S. 506 Senator Carl Levin (MI) "Stop Tax Haven Abuse Act" Amends Internal Revenue Code provisions relating to tax shelter activities: (1) establishes legal presumptions against the validity of transactions involving "offshore secrecy jurisdictions" (i.e., foreign tax havens identified in this Act and by the Secretary of the Treasury) (2) imposes restrictions on foreign jurisdictions, financial institutions, or international transactions that are of primary money laundering concern or that impede U.S. tax enforcement (3) treats certain foreign corporations managed and controlled primarily in the United States as domestic corporations (4) increases the period for IRS review of tax returns involving offshore secrecy jurisdictions

15. Proposed Bills • 03/02/2009 S. 506 Senator Carl Levin (MI) "Stop Tax Haven Abuse Act" (5) requires tax withholding agents and financial institutions to report certain information about beneficial owners of foreign-owned financial accounts and accounts established in offshore secrecy jurisdictions; (6) disallows tax advisory opinions validating transactions in offshore secrecy jurisdictions; (7) subjects dividend equivalents and substitute dividends to the 30% tax on foreign income; and (8) imposes reporting requirements for transactions involving a passive foreign investment company.

16. Proposed Bills • 03/02/2009 S. 506 Senator Carl Levin (MI) "Stop Tax Haven Abuse Act" Amends the Securities Exchange Act of 1934 and other federal enactments to impose a penalty for failure to disclose holdings or transactions involving a foreign entity. Requires the Secretary of the Treasury to publish a final rule requiring unregistered investment companies, including hedge funds or private equity funds, to establish anti-money laundering programs, and to submit suspicious activity reports. Increases penalties for promoting abusive tax shelters and for aiding and abetting the understatement of tax liability. Denies tax deductions for certain fines and penalties for violations of law and for interest paid on certain understatements of tax.

17. Proposed Bills • 04/02/2009 H.R. 1935 Congressman Sander Levin (MI) (Untitled) To amend the Internal Revenue Code of 1986 to provide for the treatment of partnership interests held by partners providing services as income taxable at ordinary rates. Defines "investment services partnership interest" as any interest in a partnership held by a person who provides services to a partnership by: (1) advising the partnership about investing in, purchasing, or selling specified assets; (2) managing, acquiring, or disposing of specified assets; or (3) arranging financing with respect to acquiring specified assets.

18. Proposed Bills • 05/04/2009 S. 961 Senator Carl Levin (MI) "Authorizing the Regulation of Swaps Act" Amends the Gramm-Leach-Bliley Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Commodity Futures Modernization Act of 2000, the Legal Certainty for Bank Products Act of 2000, and the Commodity Exchange Act to repeal prohibitions against regulation of credit default swaps and other swap agreements, whether traded on an exchange or over-the-counter, including commodity, equity, foreign currency, and interest rate swaps. Grants the SEC sole oversight authority over: (1) any exchange or clearing agency; and (2) any swap agreement traded on or cleared through such exchange or clearing agency.

19. Proposed Bills • 06/16/2009 S. 1276 Senator Jack Reed (RI) "Private Fund Transparency Act of 2009" Amends the Advisers Act to: (1) repeal the exemption from its registration requirements for private investment advisers; and (2) continue to exempt from such requirements only foreign private advisers. Authorizes the SEC to require any registered investment adviser to maintain and submit records for federal supervision of systemic risk. Shields the SEC from any compulsion to disclose any supervisory report or information that is required to be filed with the SEC. Empowers the SEC to ascribe different meanings to terms (including the term "client") used in different sections of the Act.

20. Proposed Bills • 07/22/2009 H.R. 3300 Congressman Michael E. McMahon (NY) "The Derivatives Trading Accountability and Disclosure Act of 2009" Establishes within the Department of the Treasury the Office of Derivatives Supervision (Office) to: (1) implement this Act and oversee the registration of derivatives traders; (2) coordinate with the SEC and the CFTC in developing comprehensive, standardized regulations for derivatives transactions; and (3) facilitate information exchange among specified agencies regarding the development of derivatives regulations. Prescribes registration requirements for derivatives traders. Makes it unlawful for any unregistered derivatives trader to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of any type of derivative.

21. Proposed Bills • 12/02/2009 H.R.4173 Congressman Barney Frank (MA) "Wall Street Reform and Consumer Protection Act of 2009" Latest Major Action: 12/11/2009 passed/agreed to in House. Status: On passage passed by recorded vote: 223 - 202 (Roll no. 968). To provide for financial regulatory reform, to protect consumers and investors, to enhance Federal understanding of insurance issues, to regulate the over-the-counter derivatives markets, and for other purposes.

22. Proposed Bills • 12/02/2009 H.R.4173 Congressman Barney Frank (MA) "Wall Street Reform and Consumer Protection Act of 2009" Increases Consumer Protections: Creates the Consumer Financial Protection Agency (CFPA), a new, independent federal agency solely devoted to protecting Americans from unfair and abusive financial products and services. Creates a Financial Stability Council: Increases oversight, standards, and regulation of financial firms that are so large, interconnected, or risky that their collapse would put the entire financial system at risk. Ends Taxpayer Bailouts and “Too Big to Fail”: Establishes an orderly process for shutting down large, failing financial institutions.

23. Proposed Bills • 12/02/2009 H.R.4173 Congressman Barney Frank (MA) "Wall Street Reform and Consumer Protection Act of 2009" Reins in Executive Compensation: Gives shareholders an advisory vote on pay practices. It also enables regulators to ban inappropriate or imprudently risky compensation practices, and it requires financial firms to disclose incentive-based compensation structures. Safeguards Investors: Strengthens the SEC and orders a study of the entire securities industry that will identify needed reforms and force the SEC and other entities to further improve investor protection.

24. Proposed Bills • 12/02/2009 H.R.4173 Congressman Barney Frank (MA) "Wall Street Reform and Consumer Protection Act of 2009" Regulates Derivatives: Requires all standardized swap transactions between dealers and “major swap participants” to be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring.

25. Proposed Bills • 12/02/2009 H.R.4173 Congressman Barney Frank (MA) "Wall Street Reform and Consumer Protection Act of 2009" Outlaws Predatory Mortgage Lending Practices: Incorporates the tough mortgage reform and anti-predatory lending bill the House passed earlier this year, outlawing many of the egregious industry practices that marked the subprime lending boom, and ensure that mortgage lenders make loans that benefit the consumer. Requires the Registration of Hedge Funds: Closes a regulatory exemption that allows hedge funds and their advisors to escape regulation. This bill requires almost all advisers to private pools of capital to register with the SEC, and they will be subject to systemic risk regulation by the Financial Stability regulator.

26. Proposed Bills • 11/10/2009 Senator Chris Dodd (CT) "Restoring American Financial Stability Act of 2009" Creates Consumer Financial Protection Agency: Creates an independent watchdog to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.

27. Proposed Bills • 11/10/2009 Senator Chris Dodd (CT) "Restoring American Financial Stability Act of 2009" Ends Too Big to Fail: Prevents excessively large or complex financial companies from bringing down the economy by: 1) creating a safe way to shut them down if they fail 2) imposing tough new capital and leverage requirements and requiring they write their own “funeral plans” 3) requiring industry to provide their own capital injections 4) updating the Fed’s lender of last resort authority 5) establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

28. Proposed Bills • 11/10/2009 Senator Chris Dodd (CT) "Restoring American Financial Stability Act of 2009" Protects Against Systemic Risks: Creates an independent agency to identify and address systemic risks posed by large, complex companies, products, and activities, with the power to require companies that threaten the economy to divest some of their holdings. CreatesSingle Federal Bank Regulator: Eliminates the convoluted system of multiple federal bank regulators; keeps in place the healthy dual banking system that governs community banks. Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations.

29. Proposed Bills • 11/10/2009 Senator Chris Dodd (CT) "Restoring American Financial Stability Act of 2009" Closes Loopholes in Regulation: Eliminates loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders. Protects Investors: Provides tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies. Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system.

30. Proposed Bills Provisions specific to Private investment Funds: • Private Fund Adviser Registration and Reporting: Similar to the Frank Bill, Senator Dodd's Bill, if enacted as proposed, would eliminate the "private adviser exemption" from SEC registration • SEC Exams and Inspections: Dodd Bill would require "private funds" to keep records and make reports that would be subject to SEC exams, and would also be subject to periodic SEC inspections in accordance with a schedule established by the SEC.

31. Proposed Bills • "Private Funds" subject to legislation: • Frank Bill would define the term "private funds" to include both domestic and offshore funds relying on section 3(c)(1) or section 3(c)(7) • Dodd's Bill would define "private funds" to include only domestic funds and offshore funds with 10% or more of their securities owned by U.S. persons relying on section 3(c)(1) or section 3(c)(7)

32. Proposed Bills • Record-keeping: The private funds records and reports would include the following information: • assets under management • use of leverage • counterparty credit risk exposures • trading positions and practices

33. Proposed Bills • Unlike the Frank Bill, Senator Dodd's Bill would require the following additional information in the private fund records and reports: • valuation methodologies • investment positions • types of assets held • side arrangements or letters • such additional information as the SEC, in consultation with the Agency for Financial Stability (the systemic risk regulator that would be created under Dodd's proposed Financial Stability Act of 2009), deems necessary and appropriate in the public interest and for the protection of investors, or for the assessment of systemic risk

34. Proposed Bills • Exemptions: Significant differences between Dodd's Bill and the Frank Bill with respect to exceptions to, and exemptions from, registration and reporting. • Frank Bill would exempt from both registration and reportingadvisers to SBICs licensed under the Small Business Investment Act of 1958 • Dodd Bill would exempt from both registration and reporting advisers to "venture capital funds" (to be defined by the SEC) • Dodd Bill would except from the definition of "investment adviser" any "family office" (to be defined by the SEC), which would alleviate family offices from registration and reporting as well as federal investment adviser regulation generally

35. Proposed Bills • Both proposals provide exemptions from registration for certain advisers that would not be exempt from reporting. • Frank Bill would exempt from registration, but not reporting, advisers to private funds with AUM in the U.S. of less than $150 million. • Dodd's Bill would exempt from registration, but not reporting, advisers to "private equity funds" (to be defined by the SEC within 6 months after enactment).

36. Proposed Bills • State-Federal Responsibilities: Dodd's Bill would raise the current $25 million threshold for federal responsibility of investment adviser regulation to $100 million • Rep. Paul Kanjorski (D-Pa.), Chairman of the House Financial Services Committee’s Capital Markets Subcommittee, is expecting a similar proposal in the House to raise the $25 million threshold for federal responsibility of investment adviser regulation to $100 million.

37. Proposed Bills • Third-party Disclosures: • Under the Frank Bill, private fund advisers would be required to disclose such reports, records or other information to investors, prospective investors, counterparties, and creditors, as the SEC deems necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk. • Dodd's Bill does not include these third party disclosure obligations. However, like the Frank Bill, Dodd's Bill would eliminate Section 210(c) of the Advisers Act, which currently restricts the SEC's ability to require advisers to disclose the identity, investments, or affairs of any client.

38. Proposed Bills • Information Sharing: • Similar to the Frank Bill, Dodd's Bill would authorize the SEC to share the records and reports of registered private fund advisers for the purpose of assessing systemic risk. • The proposals assume different systemic risk regulators as the recipients of the shared information: • Frank Bill authorizes the SEC to share information with the Federal Reserve and any entity that the SEC identifies as having systemic risk responsibility. • Dodd's Bill would authorize the SEC to share information with the would-be-created Agency for Financial Stability, with an agreement of confidentiality for such information to be provided to Congress. The SEC would also have to report annually to Congress on how the SEC has used the data collected to monitor the markets for the protection of investors and the integrity of the markets.

39. Predictions for 2010 and beyond . . . • Legislative and Regulatory: • Elimination of Private Adviser exemption in 2010 • possible effective date of January 1, 2011 • Increase in threshold for State-federal registration to $50-$100MM AUM • Increased reporting requirements on larger "systemically significant" funds • Exchange requirements for Swaps and Derivatives Trading • Protective provisions specific to Pension Plans • Higher Accredited Investor standards for investors in pooled capital • Segregation and reporting of Client Account assets • Regulation of Credit Rating Agencies • Possible re-enactment of Glass-Steagall type separation of banking and investment/brokerage functions at large institutions

40. Predictions for 2010 and beyond . . . • Enforcement: • Insider Trading • Market Manipulation Practices • Abusive Short-selling • Anti-fraud Actions against Managers • Emergency Actions/Fund Seizures • FBAR Tax Reporting and Prosecutions

41. Predictions for 2010 and beyond . . .

42. Recap and Conclusions • Momentum for regulatory reform from 2009 will carry-over into 2010 with elements of many Bills being enacted • Increased budgets and staffing at SEC, IRS • Federal agencies will continue efforts to broaden regulatory reach with new regulations • Other political issues (healthcare, job growth, war on terror) may upstage the pace of process

43. Recap and Conclusions • Big picture: Absent the enactment of legislation or adoption of regulations significantly curtailing use of leverage and trading techniques like short-selling, the fundamental characteristics that define private investment funds as a distinct asset class will remain intact

44. Recap and Conclusions • Thank you to our friends at Stuarts Walker Hersant and members in attendance representing the Cayman Islands Government • Questions and Answers