The Potential Impact Of Regulatory Reform On Investors

1. The Potential Impact Of RegulatoryReform On Investors October 13, 2009 Ida Wurczinger Draim, Partner Schulte Roth & Zabel LLP 1152 Fifteenth Street, NW, Suite 850Washington, District of Columbia 20005 +1 202.729.7462 | ida.draim@srz.com New York Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022+1 212.756.2000 +1 212.593.5955 fax Washington, DC Schulte Roth & Zabel LLP 1152 Fifteenth Street, NW, Suite 850 Washington, DC 20005 +1 202.729.7470 +1 202.730.4520 fax London Schulte Roth & Zabel International LLP Heathcoat House 20 Savile Row, London W1S 3PR +44 (0) 20 7081 8000 +44 (0) 20 7081 8010 fax

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3. Overview • Backdrop of Proposed Legislation: • Availability of “private adviser” exemption under SEC Rule 203(b)(3) for advisers with fewer than 15 clients/year • 2004: SEC adoption of “Hedge Fund Rule,” which re-defined “client” as “fund investor” • 2006: Goldstein decision invalidating Hedge Fund Rule; Court holds fiduciary duty owed to funds (clients), not investors • Many funds halt SEC registration process or withdraw from registration

4. Overview • Reform Proposals: • Hedge Fund Adviser Registration Act (Jan. 2009) • H.R. 711 (Reps. Capuano and Castle) • Eliminates fewer-than-15 clients exemption • Private Fund Transparency Act (June 2009) • S 1276 (Sen. Reed) • Removes exception for 15 or fewer clients/year • Introduces “foreign adviser” exemption • Private Investment Advisers Registration Act (July 2009) • Treasury Dept. proposal • Eliminates fewer-than-15 clients exemption • “Foreign adviser” exemption • Fund disclosure/filing requirements

5. Overview • Reform Proposals (continued): • Hedge Fund Transparency Act of 2009 (Jan. 2009) • S. 344 (Sen. Grassley) • Eliminates ICA 3(c)(1) and 3(c)(7) registration exemptions • Investment cos w/ $50 million or more must register • Investor Protection Act of (July 2009) • Treasury Dept. proposal • Enhanced regulation of IAs and BDs • Strengthened SEC Enforcement powers • Corporate and Financial Inst’n Comp Fairness Act (July 2009) • H.R. 3269 (Rep. Frank) • Regulatory authority over financial institution compensation

6. Overview • Conclusions: • Managers rather than funds will have to register • There will be direct or indirect regulation of funds • “Investor” as “client” is not likely to resurface

7. Private Investment Advisers Registration Act • SEC registration for managers of hedge and private equity funds with $30 million under management • Elimination of “fewer than 15 clients” Exemption • Partial elimination of Commodity Trading Adviser Exemption • New Exemption for “Foreign Private Advisers” • New Fund Disclosure and Filing Requirements • Confidentiality of Fund Reports

8. Private Investment Advisers Registration Act • Ramifications for Investors: • Greater transparency regarding fund managers through Form ADV disclosures • Unfit advisory personnel pre-screened by manager/SEC and removed or restricted • SEC policing of manager’s disclosure and handling of conflicts of interest

9. Private Investment Advisers Registration Act • Ramifications for Investors (continued): • SEC scrutiny of best execution, handling of trade errors, trade allocations, valuation, front-running by personnel • Potential greater transparency regarding funds’ use of leverage (incl. off-balance sheet), counterparty credit risk, positions and trading practices • SEC scrutiny of side letter agreements and other differences in treatment of investors

10. Investor Protection Act of 2009 • Broad Rule-Making authority to SEC on various aspects of relationship between investment professionals and clients • Uniform Fiduciary Duty Standard • New RIA/BD Disclosures re:Terms of Customer Relationship • Focus on Conflicts of Interest arising out of Compensation • New Point of Sale Disclosures • Limits on Mandatory Arbitration Agreements • Investor Advisory Committee and Consumer Testing

11. Investor Protection Act of 2009 • Expanded SEC Enforcement Powers: • New aiding and abetting provision, Advisers Act Rule 209(f), is broadest to date • Collateral bars and suspensions could be extended across BD, RIA, MSD, NRSRO lines if requested by SEC • Whistleblower incentives and protection under which SEC could make monetary awards of up to 30% of fines collected over $1 million

12. Investor Protection Act of 2009 • Ramifications for Investors: • Heightened focus on “Accredited Investor” Certification/Back-up Documentation • Less flexibility for investment professionals to vary terms of client relationship • Restrictions on incentive compensation could chill innovation of fund managers • Changes to Fund Offerings/Manner of Distribution

13. Corporate and Financial Institution Compensation Fairness Act of 2009 • Enhanced compensation structure reporting requirements for “covered financial institutions” • Disclosure to appropriate Federal regulator of incentive-based compensation arrangements for purposes of risk analysis • Regulatory authority to prohibitcompensation arrangements that “encourage inappropriate risks” • No reporting of actual compensation of individuals – just compensation terms and formulas • Exemption for financial institutions with assets of less than $1 billion

14. Corporate and Financial Institution Compensation Fairness Act of 2009 • Ramifications for Investors: • Flight of large fund complexes overseas • Loss of talent to overseas complexes • Proliferation of under-$1billion fund complexes

15. QUESTIONS