PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP Investment Funds News MARKET AND LEGAL UPDATE

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The Challenges for Banks and Their Investment Funds Under the “Volcker Rule”

ROBERT M. HIRSH, ROBERT D. GOLDBAUM AND MICHAEL S. HONG

INSIDE: Introduction On January 21, 2010, President Barack Obama - along with former Federal Reserve chairman, Paul Volcker - called for new restrictions on the size and scope of banks and other financial institutions to rein in excessive risk taking and to protect taxpayers. Often referred to as the “Volcker Rule,” the proposed qÜÉ=`Ü~ääÉåÖÉë=Ñçê=_~åâë=~åÇ restrictions mandate that “no bank or financial institution that contains a bank own, invest in or sponsor qÜÉáê=fåîÉëíãÉåí=cìåÇë=råÇÉê= a hedge fund or private equity fund.” íÜÉ="sçäÅâÉê= oìäÉ" On March 3, 2010, the White House released its draft of the proposed legislative amendments to the ^êÉ=vçìê=fåëáÇÉê=qê~ÇáåÖ=mçäáÅáÉë Bank Holding Company Act of 1956 that would put the Volcker Rule into effect. Among other provi- ^ÇÉèì~íÉ\ sions, the amendments define a “hedge fund” and a “private equity fund” as a company or other entity exempt from registration as an investment company under Sections 3(c)(1) or 3(c)(7) of the U.S. réÇ~íÉW=m~óJíçJmä~ó=oÉÖìä~íáçåë Investment Company Act of 1940 (the “Investment Company Act”) - the most common regulatory exemptions utilized by sponsors in the private investment fund industry. Further, the amendments define oÉÅÉåí=iáíáÖ~íáçå=^ÑÑÉÅíáåÖ=mêáî~íÉ “sponsoring” any such fund as: (i) serving as a general partner, managing member, or trustee of a fund; cìåÇë (ii) in any manner selecting or controlling (or having employees, officers or directors, or agents who con- stitute) a majority of the directors, trustees or management of a fund; or (iii) sharing with a fund, for cor- kÉïäó=bå~ÅíÉÇ=i~ïë=^ÑÑÉÅíáåÖ porate, marketing, promotional or other purposes, the same name or a variation of the same name. mêáî~íÉ=cìåÇë Related Volcker Rule-style proposals have taken the rule one step further, by barring the retention of any 1 equity, partnership or other ownership interest, or investment, in a hedge fund or private equity fund. mêçéçëÉÇ=iÉÖáëä~íáçå=^ÑÑÉÅíáåÖ mêáî~íÉ=cìåÇë Critics have attacked the Volcker Rule and these proposed legislative amendments for focusing unnecessarily on a business arena that had little to do with the current financial crisis, the genesis of which, they argue, was excessive exposure to real estate credit risk. According to the private equity research firm Investment Management Group Preqin, U.S. bank-sponsored funds raised a total of $80 billion in private equity capital commitments since qÜÉ= m~ìäI= tÉáëë= fåîÉëíãÉåí= j~å~ÖÉãÉåí= dêçìé 2006 - representing only 1% of the aggregate assets sitting on the balance sheets of Goldman Sachs, ÑçÅìëÉë= çå= íÜÉ= çêÖ~åáò~íáçåI= ÑìåÇ= ê~áëáåÖ= ~åÇ JPMorgan Chase, Citigroup, Morgan Stanley and Bank of America. Some commentators have also ã~áåíÉå~åÅÉ=çÑ=éêáî~íÉ=áåîÉëíãÉåí=ÑìåÇë=çÑ=ÉîÉêó attacked the Volcker Rule for its intrusiveness, assuming that its adoption would require banks to divest íóéÉI=áåÅäìÇáåÖ=Äìóçìí=ÑìåÇëI=ÜÉÇÖÉ=ÑìåÇëI=îÉåíìêÉ themselves of hedge fund and private equity fund businesses in fire sales resulting in losses of value as Å~éáí~ä=ÑìåÇëI=ÜóÄêáÇ=ÑìåÇëI=ÇáëíêÉëëÉÇ=ÑìåÇëI=ãÉòJ banks are forced to sell divisions to buyers armed with significant tactical leverage. The prospect of such ò~åáåÉ= ÑìåÇëI= ëéçåëçêëÜáé= ÑìåÇëI= áåÑê~ëíêìÅíìêÉ forced divestitures is all the more unappealing in an economic climate that is unlikely to support favorable ÑìåÇëI= ÅçJáåîÉëíãÉåí= ÑìåÇë= = ~åÇ= ÑìåÇë= çÑ= ÑìåÇëK valuations, and in light of the “fire sale” experience of many major financial institutions in 2008 after the qÜÉ= Öêçìé= áë= ~äëç= áåîçäîÉÇ= áå= ~ÅèìáêáåÖI= ãÉêÖáåÖ implementation of FAS 157. (continued on page 2) ~åÇ=~ÇîáëáåÖ=áåîÉëíãÉåí=ã~å~ÖÉãÉåí=ÄìëáåÉëëÉëK få=~ÇÇáíáçåI=íÜÉ=Öêçìé=êÉéêÉëÉåíë=~=ÇáîÉêëÉ=Öêçìé=çÑ 1 ÇçãÉëíáÅ=~åÇ=ÑçêÉáÖå=áåîÉëíçêë=áå=ÅçååÉÅíáçå=ïáíÜ For summaries of other legislative efforts that mirror the tenets of the Volcker Rule, see herein “Proposed Legislation íÜÉáê=áåîÉëíãÉåíë=áå=éêáî~íÉ=áåîÉëíãÉåí=ÑìåÇëK= Affecting Private Funds.”

© 2010 Paul, Weiss, Rifkind, Wharton & Garrison LLP. In some jurisdictions, this brochure may be considered attorney advertising. Past represenations are no guarantee of future outcomes.

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The Challenges for Banks and Their Investment Funds Under the “Volcker Rule” (continued from page 1)

In his written testimony before the Senate Blackstone Group’s sale of a 10% stake to the going to be sold, to whom and how? The second Committee on Banking, Housing and Urban China Investment Company in May of 2007 (one challenge is determining how to address the needs Affairs on February 2, 2010, Mr. Volcker argued month before listing its partnership units on the and concerns of the existing third-party investor that “hedge funds, private equity funds . . . unrelat- NYSE), Apollo Global Management’s sale of a base - what concerns will they have, and, ultimate- ed to customer needs and continuing banking rela- 20% stake to the Abu Dhabi Investment Authority ly, what obstacles will they, or could they, pose? tionships should stand on their own.” Based on and CalPERS in July of 2007 (one month before The third challenge is determining the needs and such statements and the overarching requirement listing its units on the Goldman Sachs Rule 144A concerns of the investment professionals that rep- set forth in the proposed amendments that “GSTrUE” platform) and Och-Ziff ’s sale of a resent the core asset housed within the alternative “appropriate Federal banking agencies shall jointly 10% stake to Dubai International in October of asset manager - how does one retain them, or what prohibit sponsoring or investment in hedge funds 2007 (one month before listing its shares on the role are they, or can they be, expected to play? We and private equity funds” by insured depository NYSE). These examples and the others that examine each of these challenges below. institutions, entities that control them or bank accompanied them over the last decade marked a holding companies, the practical implications of significant shift in the development of the once Structural Challenges the Volcker Rule, if enacted as law in its current secretive private investment fund industry. To the extent that the proposed legislative form, are that banks that sponsor hedge fund or amendments that attempt to codify the Volcker private equity fund businesses may need to sell Prior to the financial crisis, seller motivations Rule seek to prohibit banks or their affiliates from them. included personal diversification of founder “sponsoring” hedge funds or private equity funds wealth, employee incentivization, access to greater - that is, from assuming a position of control over New Motivations for Old distribution and other strategic resources, and any such funds - then the path to an exit from Transactions establishing a stronger acquisition currency. these activities is likely to take one of the follow- Although acquisitions and divestitures of Buyers were often motivated by the search for ing three forms. The first form is a relatively investment managers have become standard fare diversification of their revenue base and access to straightforward sale of 100% of the bank’s inter- in the world of traditional money management, additional asset management products. With the est in the fund and its related alternative asset man- until recently, they were less common in the onset of the financial crisis, however, the sell-side ager to an unaffiliated third party. Under this human-capital intensive and highly profitable, but motivations shifted dramatically. The motivations form, the buyer ends up owning 100% or a major- volatile, world of alternative asset managers. From included changes, sometimes fundamental, in fund ity of the interests of the manager, and the invest- 2000 to early 2008, a number of high-profile sales strategy, the need to dispose balance sheets of ment professionals behind the fund’s performance of significant stakes in both hedge fund and pri- non-core or even “toxic” assets and, of course, the end up with employment contracts and/or eco- vate equity fund firms were completed, through financial distress or bankruptcy of the fund spon- nomic incentives in the form of minority equity private sales, quasi-public and public offerings, and sor itself. Unlike their predecessors, these transac- stakes in the manager, the buyer or one of their combinations thereof. Prime examples of private tions were less about liquidity or expansion than affiliates. 3 sales of minority stakes include Morgan Stanley’s they were about exits. acquisition of a minority stake in Avenue Capital The second form of exit is the “sponsored” Group in October of 2006, Lehman Brother’s Banks or similar financial institutions that spin-off or spin-out - a transaction that results in acquisition of a minority stake in the D.E. Shaw actively own, operate or sponsor hedge fund or the buyer acquiring a minority interest in the Group in March of 2007, Affiliated Managers private equity fund businesses, then, have a wide divested manager, with the investment profession- Group’s acquisition of minority stakes in Blue array of precedent transactions to turn to when als taking the majority. In this scenario, the buyer Mountain Capital Management and ValueAct trying to anticipate what strategic, commercial and provides the necessary cash and liquidity to facili- Capital in the fourth quarter of 2007, and The legal issues a sale or other divestiture of those tate the transaction, but otherwise “invests” in the Carlyle Group’s sale of a 7.5% stake to the businesses might involve. The principal question management team and plays a supporting role, Mubadala Development Company, an affiliate of that looms, however, is what challenges are likely perhaps in the capacity of a key investor, a service the Government of Abu Dhabi, in December of to be most prevalent when those sales or other provider or some other source of strategic 2 2007. divestitures are motivated - indeed, compelled - by resources once offered by the existing sponsor. law. It is unlikely that such challenges will be dif- The third form is a variant of the second, but does Additionally, there are examples of private ferent from those that beset transactions that not involve a third party financing source. Instead, minority sales that served as value-setting precur- occurred at the height of the financial crisis, but the spin-off occurs to the investment profession- sors to quasi-public and public offerings. Such three challenges are likely to require the most als themselves, with the original sponsor retaining sales include Fortress Investment Group’s sale of a attention. a minority interest going forward. 15% stake to Nomura Holdings in December of 2006 (two months before listing its shares on the The first challenge is determining the desired Given the choice, it is safe to assume that New York Stock Exchange (the “NYSE”)), The structure of the divestiture itself - what exactly is banks - forced to sell their (continued on page 3)

2 Although less common than sales of minority stakes, sales of 100% stakes in alternative asset managers also occurred during the latter half of the last decade. Examples include Citi Alternative Investments’ acquisition of 100% of Old Lane Partners, which was announced in April of 2007, and J.P. Morgan Asset Management’s acquisition of Highbridge Capital Management in July of 2009. 3 Interestingly, JPMorgan’s spin-out of Bear Stearns Merchant Banking (now Irving Place Capital), following its acquisition of Bear Stearns in 2008, represents at least one example of an alter- native asset manager divestiture driven by the need to manage a business conflict with an existing alternative asset management business (One Equity Partners) following a larger acquisition.

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The Challenges for Banks and Their Investment Funds Under the “Volcker Rule” (continued from page 2) hedge fund and private equity fund businesses - afforded in the language of the organizational concession sometimes sought by investors is a are likely to prefer the first and second options laid documents (usually limited partnership agree- straight reduction in the management fees and out above, rather than the third. Both options are ments) that govern most funds or under the U.S. incentive allocations - the so-called “carried inter- more likely to maximize their cash return in the Investment Advisers Act of 1940 (the “Advisers est” - that sponsors of such funds charge for their sale and are less likely to open a floodgate for other Act”). More often than not, these organizational services. In any event, in the absence of an other- management teams seeking to acquire a majority documents mandate investor approval or may wise clear path to consummating a divestiture of the businesses that they manage. Nevertheless, require significant amendments in order to accom- without investor support, banks faced with divest- particularly in the context of a compelled sale, the modate common sale transaction structures. For ing themselves of hedge fund or private equity reality is that bank sellers may have to settle for the instance, a change of control of a general partner sponsorship are likely to have difficult economic third option if neither the first nor second are or investment advisor, a transfer of a general part- negotiations ahead of them. readily practicable. The only buffer against this ner interest, a substitution of one general partner risk are the versions of the Volcker Rule that seek for another or the waiver of the contractual com- One route sponsors can take to manage and to prohibit banks from retaining any equity, part- mitment of the incumbent general partner to fund navigate through those challenges is seeking the nership or other ownership interest, or maintain- capital along with other investors, may require, views of the fund’s advisory board - usually com- ing an investment in, a hedge fund or private equi- whether by express contractual provision or by prised of representatives of the fund’s most signif- ty fund. In other words, if banks are truly required operation of applicable law, some percentage of icant investors. The advisory board is often con- to exit from the hedge fund or private equity fund the investors to agree (or at least not object). sulted by a fund’s general partner when the fund businesses entirely, then retaining an interest itself desires to take a course of action that deviates may not be a viable alternative. The effort to marshal that agreement, which from what is permissible under the terms of the is usually sought in the form of investor waivers or fund’s organizational documents. New investment In any event, understanding the impact of the consents, can be complicated by key investors who programs not originally contemplated, making Volcker Rule is to recognize that its mandate will enjoy the benefit of special arrangements, memo- investments that otherwise violate predetermined limit the transactional options that banks will have rialized in the form of so-called “side letters,” or investment limitations and a whole host of other in any effort undertaken in the pursuit of compli- fund structures that have investors sprinkled significant actions often require the approval, ance. Although those limitations may, in some across multiple parallel funds or separately man- binding or otherwise, of the advisory board. instances, obviate certain options that may be less aged accounts, each of which contain their own However, apart from their potential contractual favorable overall, those limitations are also likely to unique negotiated arrangements and challenges. dimensions, the practical reality is that the adviso- force banks to contend - perhaps more directly - All of this assumes that the sponsor is able to ry board represents yet another seat at the negoti- with the investor challenges and management chal- determine from whom and under what circum- ating table. Furthermore, advisory boards general- lenges discussed further below. stances such agreement is required under applica- ly do not show up at the table alone. In some ble law. The most common challenge is the recent sale transactions, they have retained coun- Investor Challenges deemed assignment provision of the Advisers Act sel, engaged financial advisers and were generally Investors usually place their money in the - the provision that treats certain managerial prepared to make their voices heard, though they hands of alternative asset managers based on the changes of control as investment advisory agree- often avoided making a formal decision either way. track record and performance history of the pro- ment “assignments” for purposes of the Advisers The advisory board thus represents an important fessionals that manage the assets and, often, the Act requiring “client” consent. Divestitures also conduit through which incoming general partners deal flow and other resources of the sponsoring often raise difficult questions under Delaware lim- and sponsors may be able to gauge what the firm. In the face of a sale that could result in a ited partnership laws, many of which have yet to investor base is likely to expect or requires in change of the managerial guard or in the separa- be tested in the courts. With this complex array of exchange for its blessing. tion of the team from its sponsoring institution, questions and potential pitfalls, it is no wonder that investors are likely to be concerned with the future investors want, and usually feel that they can ask But getting the advisory board on board with identity, stability and reliability of the fund itself. for, something in exchange for their agreement - a transaction sometimes only gets the transaction In other words, with a change in the fund sponsor whether it is an economic concession or otherwise. part of the way there. Sale transactions, especially and potentially its management base, where will those transacted under the type of duress one future business opportunities, deal flow and In the hedge fund context, some investors, might expect when they are compelled by force of resources come from, and can the new sponsor or especially those with pressing liquidity needs of law in times of financial distress, are likely to ele- managers deliver on the promise of their prede- their own, may be willing to furnish a waiver or vate and provide a forum for underlying differ- cessors? provide their consent in exchange for the ability to ences amongst the investors themselves. Large, withdraw their capital, whether partially or com- cash-strapped institutional investors, for example, Although a concerned client base is usually pletely, notwithstanding previously agreed-upon are more likely to seek economic concessions, such reason enough for a sponsor to understand the “lock-up” arrangements or suspensions of as withdrawal rights or reductions in unfunded challenge investors might pose in the context of a redemption rights that are in effect. Similarly, pri- commitments. Other investors, however, may pre- compelled hedge or private equity fund sale, the vate equity fund investors might offer their waivers fer to protect the value of their investment portfo- crux of that challenge is more specifically a func- or consents in exchange for reductions in their lios, including those held through their hedge fund tion of the legal leverage investors are often unfunded commitments. The other economic or private equity fund (continued on page 4)

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The Challenges for Banks and Their Investment Funds Under the “Volcker Rule” (continued from page 3) investments, in which case they are more likely to if key elements of the management team remain existing fund’s track record and historical perform- support the management team and sponsor going in place and support the transaction. That is, since ance, or at least a piece of it, and tough negotia- forward. The goals of institutional investors seek- the value of the business itself is inextricably tions are likely to result as different management ing liquidity and those investors seeking to protect linked to the people that operate it, a divestiture of groups fight for their right to use or claim owner- their portfolios can be diametrically opposed. Of an alternative asset manager that does not include ship of that important marketing device. Like the course, even investors seeking to protect their those people is likely to be highly value-destructive opportunistic buyer who uses the leverage of a portfolios may be keen to benefit from fee and (if achievable at all). compelled sale to its advantage when negotiating other concessions negotiated by the more dis- the terms of the transaction, disparate or conflict- tressed investors - getting opportunistic benefits in For this reason, the investment professionals ing groups within management may well seek to the process. themselves can take on a number of roles in these do likewise. transactions - whether as the prospective buyer or Then there are a host of other investor types as yet another constituency whose professional, as in between whose unique needs and interests well as economic, “happiness” is among the pri- Conclusion could serve to complicate or otherwise prevent mary considerations both former and future spon- The foregoing description of the challenges any divestiture from resulting in what might other- sors must address to get the transaction to the fin- likely to be faced by financial institutions sponsor- wise be a “clean” break. For example, though they ish line. Divestitures create periods of significant ing alternative asset managers in a post-Volcker are generally less significant by dollar size, disgrun- uncertainty and instability, and a group of man- Rule world is an attempt to inform the reader of tled retail investors can attempt to rebalance their agers concerned about their futures might be well the most significant commercial and legal issues relative importance through the threat or com- positioned (or well advised) to seek opportunities that are most likely to be encountered. This mencement of litigation against outgoing spon- elsewhere. In grappling with the ever present description, however, is not intended to be exhaus- sors, even where the management team in ques- retention issue, tough questions will abound. tive. Other challenges that will undoubtedly char- tion will continue to manage the fund post-closing. What will be the role of management going for- acterize these transactions include valuation chal- Recent lawsuits have charged, for example, that a ward from a decision-making and culture perspec- lenges. How does one value the stable manage- sale, even if permissible under the letter of the tive? What tools will be used to encourage man- ment fees versus the relatively volatile perform- fund’s organizational documents, represents a fun- agement to stay? Will management be offered an ance or incentive fees fund sponsors and advisers damental alteration to the security that was mar- equity interest, presumably subject to retention earn in the context of a compelled sale? How keted to the investor at the time the fund was tools such as vesting and forfeiture? How will should the incentive fees be valued when there is formed. Another distinct investor group can that equity interest compare, if at all, to their exist- uncertainty as to the underlying portfolio? Then, include employee security funds - vehicles capital- ing compensation and economic incentives? there are structural issues - not all hedge fund or ized with sponsor-employee money from hun- How will the separation of outgoing management private equity fund transactions must be consum- dreds or even thousands of sponsor employees be handled vis-à-vis their prior fund sponsors? mated through a sale or transfer of the ownership that invest in parallel with other sponsored funds How does one address the needs of the employ- stakes in the general partner or adviser. They may, but that are generally prohibited from being shift- ees or other professionals of the sponsor whose for instance, be accomplished through asset sales ed as part of a sale transaction. These funds knowledge is critical to facilitating the sale, but or some other combination of transaction steps. receive specific U.S. Securities and Exchange whose future in the business following the sale is With such variations, it is difficult to draw general Commission (“SEC”) orders enabling them to be less clear? The views of management on these conclusions of what can be expected or anticipat- exempt from the registration requirements of the issues can be critical, as a lack of perceived strate- ed, and it is important to seek experienced advis- Investment Company Act. Thus, a sale transac- gic or cultural fit can stop a transaction before it ers at an early stage. tion that purports to sever its ownership from the starts. The multiple variations of these questions bank sponsor whose employees’ money was used are often at the heart of what makes all sale trans- to fund the security fund when it was established actions, let alone those compelled by law, so chal- Nevertheless, if there is anything that can be in the first place is simply a non-starter. Employee lenging. said with certainty, it is that engaging in a divestiture security funds are invariably left behind, but enter compelled by law will likely amplify the issues that into sub-advisory arrangements with the incoming Attention must also be paid to the potential sellers of alternative asset managers have faced adviser. for inter-managerial conflicts. Hedge fund and throughout the last decade in the context of similar private equity fund management groups are rarely transactions. Accordingly, participants in these Management Challenges homogeneous. There can be generational issues transactions are more likely to achieve the most Apart from the government, investors are the between individuals or groups within management favorable result for their stakeholders by arming most important external constituency that a bank assigned to different asset classes, investment themselves with the knowledge of the suite of or similar financial institutional will likely face in strategies and geographic locations. Such differ- options, tools and other methods employed in the the context of a compelled hedge fund or private ences can result in sale transactions that produce past to address similar transactions completed equity fund sale transaction. The most important not one, but perhaps multiple resulting operations, under a wide range of circumstances. Such partici- internal constituency, however, are the investment with disparate management teams each going their pants would also be well served by maintaining their professionals who are actually behind the fund’s different ways and each representing a manage- vigilance in the face of the challenges described performance. It is for this reason that a sale or ment constituency whose needs may need to be above - challenges that will have a fundamental other divestiture of one type or another, com- addressed in the context of all of the other trans- impact on their ability to maximize value in the face pelled by law or otherwise, is typically only feasible actions. Each group may hold a valid claim to the of an ever-changing regulatory landscape. „

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Are Your Insider Trading Policies Adequate? RAPHAEL M. RUSSO AND JENNIFER A. SPIEGEL

Recent SEC enforcement activity and public Material Non-Public Information. In the fast ing. Many policies correctly and clearly set forth statements by enforcement officials have refo- moving world of frequent trading that is typical of the standard of liability for insider trading, but few cused the private fund community on the tension many hedge funds, assessing whether a trade is offer practical help to investment professionals in between using all legitimate means to ferret out based on material non-public information translating these standards into practical terms that unique investment opportunities and stepping (“MNPI”) may not always be obvious. can be implemented on a day-to-day real-time over the line into insider trading territory. Many basis. fund sponsors are asking whether their current „ Material Information. Material information insider trading policies are adequate and what they includes any information to which an investor Explaining Materiality. A good policy should can do to better protect themselves and their would reasonably attach importance in reaching educate the firm’s investment professionals about investment professionals from liability. a decision to buy, sell or hold securities of an the concept of “materiality” and provide a real- issuer. Significant developments concerning time consultation resource for a trader or other The Elements of Insider Trading the issuer’s business and operations, including investment professional who is assessing the mate- “Insider trading” is a serious offense with its financial condition and results (particularly if riality of information received. When a trader potentially severe penalties. Federal securities laws the results represent a new trend or marked consults with a firm’s chief compliance officer and and regulations do not explicitly define “insider change from what the investing public might relays the relevant facts to the officer, the fact that trading.” However, the general anti-fraud provi- expect based upon past performance), upcom- the trader consulted with the officer may help sions of Section 10(b) of the U.S. Securities ing earnings announcements and information demonstrate good faith and refute any accusation Exchange Act of 1934 (the “Exchange Act”) and with regard to proposed acquisitions or merg- of fraudulent intent. Rule 10b-5 (as promulgated by the SEC) have been ers are examples of information that is likely to interpreted by the federal courts to prohibit pur- be regarded as material. Ultimately, determin- Preventing Spread of MNPI. A good policy chasing or selling securities, either in the open mar- ing whether a particular piece of information is should not only prohibit trading on MNPI but also ket or in private transactions, while in possession material depends heavily on the circumstances prohibit the spread of MNPI and anyone else’s of material non-public information in violation of involved. trading thereon, whether intentionally or acciden- 1 a duty. If an insider cannot (or chooses not to) tally. This means that policies and procedures disclose material information, he or she must „ Public and Non-Public Statements. In should explain how one ensures that MNPI is kept abstain from buying or selling. addition to filing the periodic reports required confidential and that others are prohibited from under the Exchange Act, an issuer may disclose trading on such confidential MNPI. Prohibiting In addition to prohibiting insiders from trad- current information in a variety of ways, includ- the spread of MNPI involves developing proce- ing directly on inside information, Rule 10b-5 gen- ing public announcements, press releases, inter- dures around the handling of MNPI in the physi- erally prohibits insiders (“tippers”) from giving tips views with media representatives and discus- cal sense - making sure such information is secure to family members or third parties (“tippees”) - sion with groups whose members have a partic- in protected files - and by limiting communications either by revealing non-public information to ular interest in the issuer. Information is by those who possess MNPI with persons outside assist outside trading activities or by making buy or deemed to be “public” only after it has been the firm. sell recommendations with an expectation of widely disseminated to the marketplace through profiting, directly or indirectly, from such disclo- one or a combination of the methods men- The development of chat rooms (increasing- sure. Tippees who trade based on such inside tioned above. Public information includes all ly used by investment professionals to discuss information may also be subject to insider trading issuer statements that can reasonably be expect- investment ideas), blogs, Twitter, and PIN-to-PIN 2 liability. ed to reach investors and the trading markets, communication has added a new challenge to without regard to the intended primary audi- ensuring the confidentiality, and controlling the Insiders and Tippees. Insiders typically include ence. Any communication outside these recog- spread, of MNPI. The potential for multiple email directors, officers, employees and significant share- nized channels of communication may be aliases and the inability to track and record partic- holders of an issuer. Investment professionals assumed to be non-public. ipation in some Internet venues can exacerbate the may thus become “insiders” through an invest- compliance challenge. Although registered advis- ment stake and/or a board position taken in Considerations for Designing ers are already obligated to keep records of email respect of an issuer. In addition, they may have Insider Trading Policies and communications and typically have the infrastruc- occasion to interact with a wide variety of individ- Procedures ture to store such information, unregistered advis- uals who have access to, or are themselves, insid- In addition to ensuring that legitimate trading ers may not have such infrastructure, and thus may ers, including corporate officers, directors, industry activity is properly documented and thus less vul- not have the same means of monitoring invest- experts and other active traders. As such, there are nerable to challenge later on, fund sponsors must ment professionals’ communications. In addition, many contexts in which fund managers would find do what they can to prevent inappropriate or insid- participation in chat rooms and the use of person- themselves in contact with persons who have er trading. Registered and unregistered advisers al email cannot be tracked by a firm and should be material non-public information. may face liability for failure to prevent insider trad- prohibited. (continued on page 6) 1 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. 2 See 17 C.F.R. § 240.10b-5. PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 5 fksbpqjbkq=crkap=kbtp pmofkd==OMNM

Are Your Insider Trading Policies Adequate? (continued from page 5)

Limitations of Taking Board Seats. If a firm’s Well-established expert networks will take and any disclosures made to, any expert network strategy permits or encourages the firm’s taking measures to reduce the risk that its experts provide or consultant retained by the firm. board seats on any company, the policies should MNPI, including one or more of the following: (i) contemplate a clear mechanism whereby trading in requiring experts to covenant not to share any However, the fact that a fund manager relies that issuer will be limited and monitored. MNPI; (ii) requiring experts to represent that their on an expert network to implement these meas- participation in the network does not violate any ures in no way insulates a firm from charges of Issues Associated with Public/Private contractual arrangements (including employment insider trading to the extent an individual receives Investing. Investing in both public and private and confidentiality agreements) to which the MNPI and trades thereon. There is no “expert securities of the same issuer (e.g., publicly traded expert may be subject; (iii) prohibiting connections network” defense, and the risk of insider trading equity and privately traded debt) can raise complex between experts associated with a particular issuer charges remains. Fund managers are well-advised information sharing issues. If a firm’s strategy and a hedge fund contemplating an investment in not to assume that expert networks enforce or fol- permits private and public investments in the same such issuer (the efficacy of which is predicated on low through on the precautions outlined above issuer, the policies should address the conflicts a hedge fund’s willingness to either disclose a tar- and should consider confirming compliance with inherent therein, how the conflicts will be get or refuse communication (on a no-names each expert contacted. addressed, including either by implementing infor- basis) with an individual associated with the tar- mation barriers (which may not be practical given get); (iv) limiting the scope of conversations with Conclusion how investment decision-making is made at the experts to general industry trends and other non- Even the best designed compliance proce- firm), or determining upfront that the firm does issuer specific industry questions; (v) prohibiting dures cannot preclude outright fraud. However, a not wish to receive MNPI (and having the issuer experts from discussing with a hedge fund manag- well-designed compliance policy should be able to covenant not to provide any MNPI). er any issuer that may be on that manager’s better protect funds and their principals against restricted list; and (vi) prohibiting an expert from the possibility that their employees or third parties Update and Educate. New case law can affect discussing an issuer that employs the expert. will expose them and their firm to liability. The best practices and general counsel and compliance Before relying on any expert network, a fund man- issues outlined above are complex. Determi- officers need to not only update their policies to ager should examine precautions being taken to nations are very dependent on the particular cir- reflect these changes but educate their investment prevent MNPI-sharing via network participation. cumstances of each situation, and the enforce- professionals of these changes and have them cer- Measures such as those outlined above should be ment landscape is changing rapidly. Fund man- tify they have read any updated versions of a firm’s carefully considered and provided for in any reten- agers should encourage their investment profes- insider trading policies. tion arrangements with an expert or consultant. sionals to seek guidance whenever they are unsure The general counsel or outside counsel should be of how to handle potential MNPI and should seek 10b5-1 Defenses. Rule 10b5-1 under the involved in the documentation being signed with, advice from outside counsel as needed. „ Exchange Act provides a means of establishing an affirmative defense that a purchase or sale of a security took place without the possession of New Requirements for Powers of Attorney 3 inside information. This may be helpful for investment professionals that routinely have access Signed in New York by Individual Investors; to MNPI but who may legitimately trade prior to Amendments to Law Already Proposed receipt of such information. To establish such a defense, the person making the purchase or sale cìåÇë=ëÜçìäÇ=åçíÉ=íÜ~í=ÅÜ~åÖÉë=íÜ~í=ïÉåí=áåíç ëìÄëÅêáéíáçå= ~åÇ= ÑìåÇ= ~ÖêÉÉãÉåíëI= ~åÇ= íÜ~í must demonstrate that before becoming aware of ÉÑÑÉÅí=çå=pÉéíÉãÄÉê=NI=OMMV=íç=íÜÉ=kÉï=vçêâ ÅçãéäáÉë=ïáíÜ=íÜÉ=ÅÜ~åÖÉë=íç=íÜÉ=kvdliK==qÜÉ MNPI, the person had already either (i) entered dÉåÉê~ä= lÄäáÖ~íáçåë= i~ï= E±kvdli≤F= êÉèìáêÉ âÉó=êÉèìáêÉãÉåíë=~êÉ=íÜ~í=íÜÉ=éçïÉê=çÑ=~ííçêåÉó éçïÉêë=çÑ=~ííçêåÉó=íÜ~í=~êÉ=ÉñÉÅìíÉÇ=Äó=áåÇáîáÇJ into a binding contract with respect to such pur- ãìëí= Åçåí~áåI= áå= ëáòÉ= NO= éçáåí= ÑçåíI= ëí~íìíçêáäó chase or sale; (ii) instructed another person with ì~äë= áå= íÜÉ= pí~íÉ= çÑ= kÉï= vçêâ= íç= Åçãéäó= ïáíÜ ÅÉêí~áå=êÉèìáêÉãÉåíë=áå=çêÇÉê=íç=ÄÉ=ÉÑÑÉÅíáîÉK===^ë ã~åÇ~íÉÇ=Å~ìíáçå~êó=ä~åÖì~ÖÉ=Ñçê=íÜÉ=éêáåÅáé~ä respect to such purchase or sale; or (iii) adopted a ÅìêêÉåíäó= Çê~ÑíÉÇI= íÜÉ= ëí~íìíçêó= êÉèìáêÉãÉåíë ~åÇ=íÜÉ=~ÖÉåíI=~åÇ=íÜ~í=íÜÉ=ëáÖå~íìêÉë=çÑ=ÄçíÜ written plan with respect to the purchase or sale of áå~ÇîÉêíÉåíäó= ~ééäó= íç= éçïÉêë= çÑ= ~ííçêåÉó= íÜ~í íÜÉ= éêáåÅáé~ä= ~åÇ= íÜÉ= ~ÖÉåí= ãìëí= ÄÉ= åçí~êáòÉÇ the issuer’s securities. Having such contracts in ~êÉ=Åçããçåäó=ìëÉÇ=áå=~=ïáÇÉ=ê~åÖÉ=çÑ=ÅçããÉêJ EåçíÉ=íÜ~í=ìåíáä=íÜÉ=éçïÉê=çÑ=~ííçêåÉó=áë=~ÅÅÉéíJ writing and irrevocable and ensuring the contract Åá~ä=íê~åë~ÅíáçåëI=áåÅäìÇáåÖ=ÑìåÇ=~ÖêÉÉãÉåíë=~åÇ ÉÇ= Äó= íÜÉ= ~ÖÉåí= íÜêçìÖÜ= áíë= ëáÖå~íìêÉ= çÑ= íÜÉ ëìÄëÅêáéíáçå=~ÖêÉÉãÉåíëI=ÉîÉå=íÜçìÖÜ=íÜÉó=Çç is entered into in a timely manner can strengthen a ë~ãÉ=~åÇ=íÜÉ=åçí~êáò~íáçå=çÑ=áíë=ëáÖå~íìêÉI=áí=áë åçí=~ééÉ~ê=íç=Ü~îÉ=~åó=êÉäÉî~åÅÉ=íç=íÜÉëÉ=íóéÉë 10b5-1 defense. åçí=ÉÑÑÉÅíáîÉFK==få=~ÇÇáíáçåI=ÄÉÅ~ìëÉ=íÜÉ=kvdli çÑ=íê~åë~ÅíáçåëK==lå=j~êÅÜ=NVI=OMNMI=~=Äáää=ï~ë áåíêçÇìÅÉÇ=áå=íÜÉ=kÉï=vçêâ=pí~íÉ=^ëëÉãÄäó=íÜ~í éêçîáÇÉë=Ñçê=~=éêÉëìãéíáçå=íÜ~í=~=ä~íÉê=Öê~åíÉÇ Expert Networks and Consultants. Many ïçìäÇI= ~ãçåÖ= çíÜÉê= íÜáåÖëI= ÉñÉãéí= éçïÉêë éçïÉê=çÑ=~ííçêåÉó=êÉîçâÉë=~ää=éêáçê=Öê~åíÉÇ=éçïJ hedge funds rely on expert networks and individ- Öê~åíÉÇ= áå= íÜÉëÉ= íê~åë~Åíáçåë= Ñêçã= Ü~îáåÖ= íç Éêë= çÑ= ~ííçêåÉóI=áí= ïçìäÇ= ÄÉ= éêìÇÉåí= íç= áåÅäìÇÉ ual consultants to make industry diligence more Åçãéäó= ïáíÜ= íÜÉ= åÉï= êÉèìáêÉãÉåíëK= = eçïÉîÉêI éêçîáëáçåë=íç=íÜÉ=ÉÑÑÉÅí=íÜ~í=íÜÉ=éçïÉê=çÑ=~ííçêJ cost and time efficient. In its ideal form, an expert ìåíáä=íÜÉ=äÉÖáëä~íáîÉ=ÑáñÉë=~êÉ=~ÇçéíÉÇI=ÑìåÇë=íÜ~í åÉó=ÇçÉë=åçí=êÉîçâÉ=~åó=éêáçê=Öê~åíÉÇ=~ííçêåÉó ~ÅÅÉéí=ëìÄëÅêáéíáçåë=çÑ=ÑìåÇ=áåíÉêÉëíë=Ñêçã=áåÇáJ network will give a hedge fund access to individu- ~åÇ= íÜ~í= íÜÉ= åÉïäó= Öê~åíÉÇ= éçïÉê= çÑ= ~ííçêåÉó als with industry expertise and insights without îáÇì~ä= áåîÉëíçêë= EáKÉKI= å~íìê~ä= éÉêëçåëF= ëÜçìäÇ ÅçåëáÇÉê=Çê~ÑíáåÖ=~=ëÉé~ê~íÉ=éçïÉê=çÑ=~ííçêåÉó ïáää= åçí= ÄÉ= ~ìíçã~íáÅ~ääó= êÉîçâÉÇ= Äó= ~= ä~íÉê exposing the fund or any individual to any MNPI. íç= ÄÉ= Öê~åíÉÇ= Äó= ëìÅÜ= áåîÉëíçêë= íÜ~í= Åçåí~áåë Öê~åíÉÇ=éçïÉê=ìåäÉëë=íÜÉ=ä~ííÉê=ëéÉÅáÑáÅ~ääó=êÉÑÉêJ 3 ÉåÅÉë=íÜÉ=ÑçêãÉêK=„ 17 C.F.R. § 240.10b5-1. íÜÉ= éçïÉêë= çÑ= ~ííçêåÉó= íóéáÅ~ääó= ÑçìåÇ= áå= íÜÉ

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Update: Pay-to-Play Regulations MICHAEL E. GERTZMAN, MARCO V. MASOTTI AND ERIC ALAN STONE

In the past year, investment managers have charged, New York Attorney General Andrew The New York Code: come under increasing scrutiny for “pay-to-play” Cuomo announced that his Office had issued „ bans fund managers from using placement practices. Public investigations of egregious subpoenas to more than 100 managers that con- agents or lobbyists to establish a relation- alleged conduct have caused private self-examina- ducted business with New York public pension ship or gain access to a public pension plan; tion and changed behavior. State legislatures and plans. „ prohibits fund managers from continuing Attorneys General across the country have pro- with an existing investment by a public pen- posed codes of conduct. Public pension funds Attorney General Cuomo’s investigation has sion plan if the fund manager, its executives have adopted their own, plan-specific regulations led to guilty pleas, including from former Chair of or their immediate family make a political and rules to guide and restrict the managers who the Liberal Party, Raymond Harding; founding contribution to an official of that pension seek to advise them. Additionally, in July of partner of Aldus Equity, Saul Meyer; Chairman plan, unless such fund manager, its execu- 2009, the SEC proposed new rules seeking to of Markstone Capital Group LLC, Elliott Brody; tives or their immediate family are entitled impose significant restrictions on investment and most recently former chief investment offi- to vote at the time of contribution and the managers to curb pay-to-play practices. cer of the New York state comptroller’s office, contribution does not exceed $300 in the David Loglisci. All pled guilty to felony charges. aggregate per election; We have already reported on these investiga- Markstone Capital itself agreed to return $18 mil- „ requires fund managers to disclose actual tions, regulations and proposed regulations in our lion to the New York State Common Retirement and apparent conflicts of interest to the Summer 2009 issue of Investment Fund News Fund. public pension plan (and, in some circum- and in our August 11, 2009 client alert entitled stances, to the New York Attorney General “SEC Proposes ‘Pay-to-Play’ Rule Regarding Political The SEC has publicly announced its inten- or other law enforcement officer), including Contributions by Certain Investment Advisers.” Both tion to prosecute pay-to-play violations, and has information regarding company contribu- remain available on our Firm’s website, and pro- begun to do so. The SEC joined in charging tions and payments to placement agents; vide useful background. Hank Morris. Director of the Division of and Enforcement Robert Khuzami cited the Hank „ increases the fiduciary standard of care gov- It is now time to provide an update about Morris case and another SEC pay-to-play prose- erning the fund manager’s interaction with subsequent developments since then, and to offer cution in his December 9, 2009 testimony before the public pension plan, including a two- some thoughts about what investment managers the United States Senate Committee on the year ban in some circumstances on hiring 1 should be doing now to protect themselves in Judiciary regarding the “Financial Meltdown.” former plan officials. this environment. As we describe below, state SEC Chairman Mary Schapiro cited the Attorneys General have continued to prosecute Commission’s pay-to-play prosecutions in the Since last summer, pay-to-play regulations - pay-to-play violations, as has the SEC. State and prepared remarks for her February 5, 2010 often modeled on the New York Code - have local laws and pension plan rules have only speech, “Looking Ahead and Moving Forward,” been debated in state and local legislatures across expanded. While the SEC has not yet enacted its at the annual Practicing Law Institute “SEC the country. The difficulties of balancing com- 2 pay-to-play regulations, the Commission contin- Speaks” conference in Washington, D.C. peting incentives here are recapitulated in the dif- ues to accept comments and to meet with con- ferent outcomes that these legislatures have cerned parties as recently as the first week of State Laws and Codes of Conduct reached. Everyone wants to ban bribery and cor- February 2010. While many of the comments New York Attorney General Cuomo’s ruption, but everyone also wants public pension have urged the SEC to relax some proposed pro- much-publicized Public Pension Plan Reform plans, even their small, local plan, to have access visions, and while industry scuttlebutt suggests Code of Conduct (the “New York Code”) to the best investment managers around. that the rules may change somewhat, it seems remains a prominent feature of the pay-to-play 3 likely that some form of the rules will be enact- regulatory landscape. It has been adopted by the This played out in microcosm in New Jersey. ed. New York State Teachers’ Retirement System. As Governor Chris Christie extended pay-to-play laws to labor unions on his first day in office. of March 2010 - eleven investment managers However, municipalities within Morris County Recent Pay-to-Play Prosecution have signed on to the New York Code, including alone split over how to address pay-to-play prac- the Carlyle Group, Riverstone Holdings LLC, and Investigations tices, with the Parsippany council adopting a pay- In our Summer 2009 issue, we reported on Pacific Corporate Group Holdings, LLC, HM to-play ban and the Morris Township committee the much-publicized indictment against Henry Capital Partners I, Levine Leichtman Capital rejecting one. County seat Morristown faces the “Hank” Morris, a chief political aide and Partners, Access Capital Partners, Falconhead dilemma in real terms: a Newark firm that had fundraiser for former New York State Capital, Markstone Capital (whose Chairman’s been performing municipal bond work for the Comptroller Alan Hevesi. The Morris prosecu- guilty plea we noted above), Wetherly Capital town for years made a $500 campaign contribu- tion has been the most visible pay-to-play prose- LLC and, most recently, Ares Management LLC tion to the successful mayoral candidate. Must cution. Although no investment manager was and Freeman Spogli & Co. that longtime adviser now (continued on page 8)

1 Testimony Concerning Mortgage Fraud, Securities Fraud, and the Financial Meltdown: Prosecuting Those Responsible. See http://www.sec.gov/news/testimony/2009/ts120909rk.htm 2 Speech by SEC Chairman: “Looking Ahead and Moving Forward.” See http://www.sec.gov/news/speech/2010/spch020510mls.htm. 3 See http://www.ag.ny.gov/media_center/2009/sep/sep17a_09.html

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Update: Pay-to-Play Regulations (continued from page 7) be banned from working for the town? „ In February 2010, New York City which an investment adviser may apply for Comptroller John C. Liu imposed regula- an exemption from the two-year ban. These are the everyday issues that may be lost tions limiting campaign contributions and Notably, the proposed rule has no scienter amid the zeal to punish obvious wrongdoers. For prohibiting gifts to employees of the requirement: the ban is automatically trig- the most part, states are moving toward increased Comptroller’s Office and New York City gered by a covered political contribution, regulation, not away from it. Some recent exam- pension systems, and limiting the use of even if the employee making the contribu- ples include: tion has no intent to influence investment placement agents in connection with those 9 decisions. pension systems. „ In October 2009, Governor Arnold „ Ban on Bundling and Soliciting Contri- Schwarzenegger signed a California law that The SEC’s Proposed Pay-to-Play butions. The SEC would prohibit fund will require California public pension plans Rules managers and certain executives and and retirement systems to develop and The SEC also appears to be preparing to reg- employees from soliciting or coordinating implement, before June 30, 2010, a policy ulate pay-to-play practices. Last Summer, we political contributions to officials or candi- requiring the disclosure of payments to described the SEC’s proposed regulations, enti- dates for office where the fund manager is placement agents, and imposing a five-year tled “Political Contributions by Certain seeking to provide investment services. ban on new investments for any investment Investment Advisers,” under Rule 206(4)-5 of the 10 manager or placement agent that violates Advisers Act. The SEC’s comment period for the new pro- the disclosure policy.4 posed rule began in July of 2009, and was sup- „ In September 2009, Pennsylvania’s Munici- The SEC’s proposed rule has three principal posed to end in October of 2009. Comments, pal Pension Plan Funding Standard and components: however, have continued to be submitted, includ- Recovery Act was amended to adopt a code „ Ban on Use of Placement Agents. The ing most recently a comment on February 2, 2010 of conduct requiring limited disclosure of SEC would prohibit fund managers from by Senator Christopher J. Dodd. Many of the the use of third parties, including place- paying third parties to solicit government comments have been favorable. Nearly all are at ment agents and lobbyists, to communicate entities for investment business. least partly favorable, as many commentators with municipal pension systems or their „ Two-Year Restriction on Compensation. with criticisms of aspects of the proposed rule employees, and imposing a two-year ban on The SEC would prohibit fund managers nevertheless applaud the desire to curb the most new investments or accepting carried inter- from receiving compensation for providing extreme pay-to-play practices. est on a previous investment after an affili- advisory services to a government entity for ate of an investment manager makes a two years after the fund manager (or certain Many of the comments have centered on - political contribution to a municipal office persons employed by or associated with it) and are critical of - the proposed ban on the use 5 or candidate for municipal office. makes a political contribution to a public of placement agents. While most commentators „ In September 2009, New York State Comp- official or candidate for state, local or favor increased disclosure of the use of place- troller Thomas DiNapoli signed an execu- municipal public office who is in a position ment agents, many oppose banning their use out- tive order prohibiting the New York State to influence the award of advisory business. right. Pension plans themselves have champi- Common Retirement Fund from doing The compensation ban, if triggered, applies oned the role of placement agents in providing business for two years with any investment not only to new investments, but to receiv- needed access to fund managers for smaller, or adviser who has made a political contribu- ing compensation (including carried inter- more isolated plans. Financial institutions have tion to the comptroller or a candidate for est) on investments that preceded the polit- made the same observation. Senator Dodd wrote 6 the Comptroller’s Office. ical contribution. The ban also applies to to “share the concern that a ban on placement „ In September 2009, the board of the contributions made by new employees agents could reduce the amount of information Arizona Public Safety Personnel Retirement before they were hired by the investment available to public funds about the full range of System discussed policies regarding place- manager. There are exceptions for contri- investment opportunities.” ment agent fees, and that discussion butions of $250 or less, per employee per 7 appears to be ongoing. election, to candidates for whom the Other commentators have expressed con- „ In December 2009, the board of the Los employee is permitted to vote, and for con- cerns about the effect that an immediate, two- Angeles City Employees Retirement System tributions of $250 or less, in the aggregate, year ban will have on existing plan-adviser rela- adopted principles requiring disclosure of per election, that otherwise violate the rule tionships. The National Conference of State political contributions to trustees or elected but that the investment manager returns Legislatures, the National Association of officials by placement agents or investment within certain time limits. The proposed Counties, the National League of Cities and 8 managers. rule also provides limited circumstances in other similar (continued on page 9)

4 See Assembly Bill No. 1584 (October 11, 2009), http://leginfo.ca.gov/pub/09-10/bill/asm/ab_1551-1600/ab_1584_bill_20091011_chaptered.pdf. 5 See Act 2009-44 (September 18, 2009), House Bill 1728, Printer’s No. 2638, 53 P.S. §§ 895.101 et seq. 6 See http://www.osc.state.ny.us/reform/politicalcontribution.pdf. 7 See http://www.psprs.com/Admin_common/FundManager/Fund_Manager_Meetings/Minutes/2010/PSPRS%20-Fund%20Manager%20Sept%2023,%202009.pdf. 8 See http://www.lacers.org/AboutLACERS/Board/BoardDocs/2009/2009%20Investment%20Committee/20090428/ITEM%20III%20%20CONSIDERATION%20OF%20THIRD%- 20PARTY%20MARKETING%20AND%20REFERRALS%20DISCLOSURE%20POLICY.pdf 9 See http://comptroller.nyc.gov/press/2010_releases/pr10-02-021.shtm

10 See 74 Fed. Reg. 3840 (Aug. 7, 2009).

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Update: Pay-to-Play Regulations (continued from page 8) Recent Litigation organizations wrote to suggest that an “abrupt with the SEC rule pending but not implemented. Affecting Private Funds termination of . . . long standing investment Each investment adviser is differently situated, adviser relationships ...would likely take place as and thus there will never be a one-size-fits-all a result of the implementation of the two-year approach; however, we can offer some general time-out as currently set forth in the proposed thoughts, which investment advisers may wish to REDEMPTIONS rule,” and that the SEC “did not give adequate discuss with their own counsel: Aris Multi-Strategy Fund, L.P. et al. v. consideration to how the termination of these relationships would affect state and local plans „ Stay aware. New regulations are being debat- Accipiter Life Sciences Fund II (QP) et al. and governments.” Members of these organiza- ed and passed, and many of them apply imme- lå= g~åì~êó= ONI= OMNMI= íÜÉ= kÉï= vçêâ= pí~íÉ tions expressed concern “that the abrupt termi- diately to pre-existing investments. pìéêÉãÉ= `çìêí= EíÜÉ="`çìêí"F= ÇáëãáëëÉÇ= áå= áíë nation of the fund or government’s long-stand- „ Assess your investments. How much of the ÉåíáêÉíó=~=Åçãéä~áåí=ÄêçìÖÜí=~Ö~áåëí=^ÅÅáéáíÉê=iáÑÉ ing investment professional that might result in money that you manage came from public pÅáÉåÅÉë= cìåÇ= ff= EnmFI= iKmKI= ^ÅÅáéáíÉê= iáÑÉ order to comply with the proposed rule could pension and retirement plans or from other pÅáÉåÅÉë= cìåÇ= ffI= iKmKI= ^ÅÅáéáíÉê= iáÑÉ= pÅáÉåÅÉë undermine the fiduciary duty or authority of the government entities? When were those invest- cìåÇ= ff= ElÑÑëÜçêÉFI= iíÇK= EÅçääÉÅíáîÉäóI="^ÅÅáéáíÉê"FI plan’s Board of Trustees.” ments made? Can you demonstrate how much íÜÉ=ÖÉåÉê~ä=é~êíåÉê=çÑ=íÜÉ=^ÅÅáéáíÉê=çåëÜçêÉ=ÑìåÇë you received, from whom, and how long ago, E"`~åÇÉåë"FI íÜÉ= ã~å~ÖÉãÉåí=Åçãé~åó=E"^`j"F Still other commentators have expressed to ensure that you can calculate and demon- ~åÇ=çåÉ=çÑ=áíë=éêáåÅáé~äë=EíÜÉ="^`j= mêáåÅáé~ä"F= Äó concerns about the rights of investment advisers. strate the effect of any ban on compensation? íïç= ÑìåÇ= çÑ= ÑìåÇë= áåîÉëíçêë= E"^êáë"F= ïÜçëÉ One commentator asked whether an automatic „ Assess your use of placement agents. Do two-year ban subverts due process by punishing you need them? What disclosure has already êÉÇÉãéíáçå= êÉèìÉëíë= ïÉêÉ= ÇÉåáÉÇ= ÑçääçïáåÖ= ~ the investment adviser without first providing been made? Are you using placement agents ÇÉíÉêãáå~íáçå= Äó= ^ÅÅáéáíÉê= íç= ëìëéÉåÇ= êÉÇÉãéJ notice and an opportunity to be heard. Another to solicit business from any pension plans that íáçåëK==aìêáåÖ=íÜÉ=íÜáêÇ=èì~êíÉê=çÑ=OMMUI=~ééêçñáJ asked whether, in light of the U.S. Supreme do not know your identity, the placement ã~íÉäó=SMB=çÑ=íÜÉ=áåîÉëíçêë=áå=íÜÉ=^ÅÅáéáíÉê=ÑìåÇë Court’s recent decision in the Citizens United agent’s identity and any compensation EÉñÅäìÇáåÖ= ^êáëF= Ü~Ç= ëìÄãáííÉÇ= êÉÇÉãéíáçå 11 case, a ban on political contributions by invest- arrangements with the agent and/or plan? êÉèìÉëíë= ~ë= çÑ= pÉéíÉãÄÉê= PMI= OMMUK= = få= É~êäó ment advisers might violate the First „ Assess your political contributions. Do you lÅíçÄÉê= OMMUI= ^êáë= ëìÄãáííÉÇ= ~= êÉÇÉãéíáçå Amendment. have a policy limiting, prohibiting or permit- êÉèìÉëí= áå= êÉëéÉÅí= çÑ= áíë= áåîÉëíãÉåíë= áå= íÜÉ ting the political contributions by your çåëÜçêÉ= ^ÅÅáéáíÉê= ÑìåÇëI= ÉÑÑÉÅíáîÉ= ~ë= çÑ Thus far, the SEC has not implemented the employees and officers? Do you have record- aÉÅÉãÄÉê=PNI=OMMUI=~åÇ=ëÜçêíäó=íÜÉêÉ~ÑíÉê=ã~ÇÉ proposed rule or changed its text. It is clear, keeping requirements for those contributions? ~=ëáãáä~ê=êÉèìÉëí=áå=êÉëéÉÅí=çÑ=áíë=áåîÉëíãÉåíë=áå however, that the SEC’s work continues. SEC Is your firm regularly solicited by others - staff met with representatives of the Investment clients, prospective clients, important col- íÜÉ=çÑÑëÜçêÉ=^ÅÅáéáíÉê=ÑìåÇK==qÜÉ=ÑìåÇ=ÇçÅìãÉåíë Adviser Association, Legg Mason, and T. Rowe leagues - to participate in group or bundled éêçîáÇÉÇ= Ñçê= èì~êíÉêäó= êÉÇÉãéíáçåëI= íç= ÄÉ= ÉÑÑÉÅJ Price on January 13, 2010 to discuss the issue, political contributions? Do you solicit such íáîÉ= ~ë= çÑ= íÜÉ= ÉåÇ= çÑ= É~ÅÜ= Å~äÉåÇ~ê= èì~êíÉêK and Chairman Mary Schapiro, Commissioner contributions yourself? pÜçêíäó= ~ÑíÉê= ^êáë= ëìÄãáííÉÇ= áíë= êÉÇÉãéíáçå Elisse Walter and SEC staff met with representa- „ Assess your hiring practices. When you hire êÉèìÉëíëI=^ÅÅáéáíÉê=~ÇîáëÉÇ=áåîÉëíçêë=íÜ~í=áí=ïçìäÇ tives of the Ohio Public Employees’ Retirement a new employee or officer, do you ask her to ÄÉ= äáèìáÇ~íáåÖ= áíë= ÑìåÇë= ~åÇ= íÜ~í= êÉÇÉãéíáçå System on February 4, 2010. tell you what political contributions she has êÉèìÉëíë= êÉÅÉáîÉÇ= çå= çê= ÄÉÑçêÉ= pÉéíÉãÄÉê= PMI made in the past two years? OMMU= ïçìäÇ= ÄÉ= ÜçåçêÉÇX= ÜçïÉîÉêI= ~ää= êÉèìÉëíë What Should a Fund Manager Some or all of these questions may prove êÉÅÉáîÉÇ=~ÑíÉê=ëìÅÜ=Ç~íÉ=ïçìäÇ=ÄÉ=ëìÄàÉÅí=íç=ëìëJ Do Now? éÉåëáçåK==få=êÉëéçåëÉI=ÅçìåëÉä=Ñçê=^êáë=ïêçíÉ=íç With the SEC continuing to consider a new important in the coming months. Some, but likely ^ÅÅáéáíÉê= ~ëëÉêíáåÖ= íÜ~í="íÜÉó= ãìëí= íêÉ~í= ~ää pay-to-play rule, and codes of conduct and legis- few, will turn out to have been irrelevant. With reg- áåîÉëíçêë= Éèì~ääó= ~åÇ= Üçåçê= íÜÉ= éä~áåíáÑÑë' lation being debated and implemented across the ulation looming, it is a good time for investment country, what is an investment adviser to do? advisers to assess and perhaps address their own êÉÇÉãéíáçå= êÉèìÉëíëK"= = pÜçêíäó= íÜÉêÉ~ÑíÉêI= ^êáë behavior before having to justify it elsewhere. „ ÅçããÉåÅÉÇ= áíë= ä~ïëìáí= ~Ö~áåëí= ^ÅÅáéáíÉêI There is no one right answer, particularly not `~åÇÉåëI=^`j=~åÇ=íÜÉ=^`j=mêáåÅáé~ä=~ëëÉêíáåÖI

11 ~ãçåÖ= çíÜÉê= íÜáåÖëI= ÄêÉ~ÅÜ= çÑ= ÑáÇìÅá~êó= ÇìíóI Citizens United v. Federal Election Commission, 2010 WL 183856 (U.S.). êÉÅâäÉëëåÉëëLÖêçëë= åÉÖäáÖÉåÅÉI= ÄêÉ~ÅÜ= çÑ= íÜÉ çêÖ~åáò~íáçå~ä= ~åÇ= çÑÑÉêáåÖ= ÇçÅìãÉåíë= çÑ Welcome Philip Heimowitz ^ÅÅáéáíÉê'ë= ÑìåÇë= ~åÇ= åÉÖäáÖÉåÅÉI= ~åÇ= ëÉÉâáåÖ ÇÉÅä~ê~íçêó=~åÇ=áåàìåÅíáîÉ=êÉäáÉÑK==få=áíë=Åçãéä~áåíI ^êáë=~äëç=~ääÉÖÉÇ=íÜ~í=^ÅÅáéáíÉê=çîÉêJî~äìÉÇ=ÅÉêí~áå tÉ=~êÉ=éäÉ~ëÉÇ=íç=~ååçìåÅÉ=íÜ~í=mÜáäáé=eÉáãçïáíò=àçáåÉÇ=m~ìäI=tÉáëë=çå=g~åì~êó=ORI=OMNM= çÑ=áíë=ÑìåÇë∞=~ëëÉíëI=Ñ~áäÉÇ=íç=éêÉé~êÉ=éêìÇÉåíäó=Ñçê ~ë=`çìåëÉä=áå=íÜÉ=fåîÉëíãÉåí=cìåÇë=dêçìé=~åÇ=íÜÉ=pÉÅìêáíáÉë=dêçìéK==mÜáä=êÉÅÉáîÉÇ=~å=iiKjK êÉÇÉãéíáçåëI= éìêÅÜ~ëÉÇ= ä~êÖÉ= áåîÉëíãÉåí= éçëáJ áå=í~ñ~íáçå=Ñêçã=kÉï=vçêâ=råáîÉêëáíó=pÅÜççä=çÑ=i~ï=áå=NVUSI=~=gKaK=Ñêçã=_Éåà~ãáå=`~êÇçòç íáçåë= áå= pÉéíÉãÄÉê= ~åÇ= lÅíçÄÉê= OMMU= ~åÇ pÅÜççä=çÑ=i~ï=áå=NVUNI=~åÇ=~=_K_K^=Ñêçã=_Éêå~êÇ=_~êìÅÜ=`çääÉÖÉ=áå=NVTUK==jçëí=êÉÅÉåíäóI=mÜáä ÉãéäçóÉÇ= äÉîÉê~ÖÉ= áå= ÉñÅÉëë= çÑ= íÜÉ= éÉêãáëëáÄäÉ ï~ë=péÉÅá~ä=`çìåëÉä=áå=íÜÉ=fåîÉëíãÉåí=j~å~ÖÉãÉåí=J=oÉÖáëíÉêÉÇ=cìåÇë=dêçìé=~í=pÅÜìäíÉ äáãáíë=ëÉí=ÑçêíÜ=áå=íÜÉ=ÖçîÉêåáåÖ=ÇçÅìãÉåíë=çÑ=íÜÉ ÑìåÇëK (continued on page 10) oçíÜ=C=w~ÄÉä=iimK

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Recent Litigation Affecting Private Funds Newly Enacted Laws Affecting Private Funds (continued from page 9) qÜÉ=`çìêí=Ñáêëí=ÅçåëáÇÉêÉÇ=^êáë'=Ä êÉ~ÅÜ=çÑ=ÑáÇìÅá~êó ÇìíóI= ÄêÉ~ÅÜ= çÑ= Åçåíê~Åí= ~åÇ= åÉÖäáÖÉåÅÉ= Åä~áãë Amendments to Rule 206(4)-2 statements, prepared in accordance with generally ~Ö~áåëí=íÜÉ=^ÅÅáéáíÉê=ÑìåÇëX=~åÇ=ÇáëãáëëÉÇ=É~ÅÜ Under the Advisers Act accepted accounting principles (“GAAP”), to all Å~ìëÉ=çÑ=~ÅíáçåK==táíÜ=êÉëéÉÅí=íç=^êáë'= ÄêÉ~ÅÜ=çÑ of the fund’s investors within 120 days of the ÑáÇìÅá~êó= Çìíó= Åä~áãI= íÜÉ= `çìêí= ëí~íÉÇ= íÜ~í= íÜÉ aÉä~ï~êÉ= oÉîáëÉÇ= råáÑçêã= iáãáíÉÇ= m~êíåÉêëÜáé On December 30, 2009, the SEC published a fund’s fiscal year-end (or within 180 days for funds ^Åí="ÇáÇ= åçí=ÅêÉ~íÉ=~=ÑáÇìÅá~êó=Çìíó=~ãçåÖ=ÅçåJ release adopting certain amendments to the cus- of funds); (ii) conducted by an independent public ëíáíìÉåí=äáãáíÉÇ=é~êíåÉêë"= E~äíÜçìÖÜ=íÜÉ=`çìêí=ÇáÇ tody and recordkeeping rules applicable to regis- accountant that is registered with, and subject to åçí=Éñéä~áå=Üçï=íÜÉ=~ÄëÉåÅÉ=çÑ=~=ÑáÇìÅá~êó=Çìíó=áå tered investment advisers under the Advisers Act regular inspection by, the PCAOB as of the com- 1 íÜáë=ÅçåíÉñí=~äëç=êÉëìäíÉÇ=áå=áíë=Çáëãáëë~ä=çÑ=^êáë' and related forms (the “Release”). Newly amend- mencement of the professional engagement peri- ÄêÉ~ÅÜ=çÑ=Åçåíê~Åí=~åÇ=åÉÖäáÖÉåÅÉ=Åä~áãëFK ed Rule 206(4)-2 under the Advisers Act (the od and as of each calendar year-end; and (iii) upon “Amended Rule”) requires a registered investment liquidation of the fund and distributes its audited qÜÉ= `çìêí= åÉñí= ÅçåëáÇÉêÉÇ= ^êáë'= Åä~áãë= ~Ö~áåëí adviser that has “custody” of client assets to, financial statements, prepared in accordance with `~åÇÉåëI=^`j=~åÇ=íÜÉ=^`j=mêáåÅáé~ä=Ñçê=ÄêÉ~ÅÜ among other things: (i) undergo an annual sur- GAAP, to all of the fund’s investors promptly after çÑ=ÑáÇìÅá~êó=Çìíó=J=~Ö~áåI=ÇáëãáëëáåÖ=É~ÅÜ=Å~ìëÉ=çÑ prise examination by an independent public the completion of such audit (the “Annual Audit ~Åíáçå= áå= êÉäá~åÅÉ= çå= íÜÉ= ÉñÅìäé~íçêó= ä~åÖì~ÖÉ accountant to verify client assets (subject to certain Provision”). In addition, under existing Rule Åçåí~áåÉÇ= áå= íÜÉ= ÖçîÉêåáåÖ= ÇçÅìãÉåíë= çÑ= íÜÉ enumerated exceptions, including an exception for an invest- 206(4)-2(a)(1), a registered investment adviser that ÑìåÇëI= ïÜáÅÜ= ÉñéêÉëëäó= éêÉÅäìÇÉÇ= äá~Äáäáíó= çÑ= íÜÉ é~êíáÉë=áå=íÜÉ=~ÄëÉåÅÉ=çÑ=Öêçëë=åÉÖäáÖÉåÅÉ=çê=ïáääJ ment fund that provides annual audited financial statements has “custody” of client assets (with certain limited as more fully described below); (ii) have a reasonable 2 Ñìä=ãáëÅçåÇìÅíK==qÜÉ=`çìêí=~äëç=åçíÉÇ=íÜ~í=ìåÇÉê exceptions ) must maintain such client assets with basis after due inquiry, for believing that the “qual- íÜÉ=ÖçîÉêåáåÖ=ÇçÅìãÉåíë=çÑ=íÜÉ=ÑìåÇëI=`~åÇÉåëW a “qualified custodian” in either a separate account ified custodian” maintaining client assets sends EáF= Ü~Ç= ±ëçäÉ= ÇáëÅêÉíáçå≤= íç= éìêÅÜ~ëÉ= ~åÇ= ëÉää for each client under that client’s name, or alterna- áåîÉëíãÉåíëX= EááF= ï~ë= ÖáîÉå= ÉñéêÉëë= ~ìíÜçêáíó= íç account statements directly to the advisory clients; tively, in accounts that contain only the adviser’s ëìëéÉåÇ= êÉÇÉãéíáçåëX= ~åÇ= EáááF= ï~ë= êÉèìáêÉÇ= íç and (iii) unless client assets are maintained by an clients’ funds and securities, under the adviser’s éêçÅÉëë=êÉÇÉãéíáçåë="çå=~=Ñáêëí=áåI=Ñáêëí=çìí=Ä~ëáëK" independent custodian (i.e., a custodian that is not name as agent or trustee for the clients. The få= ~ÇÇêÉëëáåÖ= ^êáë'= Åä~áã= çÑ= êÉÅâäÉëëåÉëëLÖêçëë the investment adviser itself or a related person of Amended Rule establishes an additional require- åÉÖäáÖÉåÅÉ=~Ö~áåëí=íÜÉëÉ=é~êíáÉëI=íÜÉ=`çìêí=äáãáíÉÇ the investment adviser), obtain, or receive from its ment where an investment fund’s assets are main- áíë=~å~äóëáë=íç=^êáëD=~ääÉÖ~íáçåë=êÉÖ~êÇáåÖ=íÜÉ=çîÉêJ related person, an annual report of the internal tained with a qualified custodian that is either the î~äì~íáçå=çÑ=ÅÉêí~áå=~ëëÉíë=~åÇ=íÜÉ=Ñ~áäìêÉ=íç=äáèìáJ controls relating to the custody of those assets investment adviser to the fund or a related person Ç~íÉ= ëìÅÜ= ~ëëÉíë= áå= ~= íáãÉäó= ã~ååÉêI=ïÜáÅÜ= íÜÉ from an independent public accountant that is reg- `çìêí=êÉÅçÖåáòÉÇ=~ë=é~íÉåíäó=áåëìÑÑáÅáÉåí=íç=Éëí~ÄJ of the investment adviser. In these circumstances, istered with and subject to regular inspection by äáëÜ="~å=ÉñíêÉãÉ=ÇÉé~êíìêÉ=Ñêçã=íÜÉ=çêÇáå~êó=ëí~åJ the investment adviser must obtain, or receive the Public Company Accounting Oversight Board Ç~êÇ=çÑ=Å~êÉK" from its related person, no less frequently than (the “PCAOB”). once each calendar year, a written, internal control få= ÇÉåóáåÖ= ^êáë∞= êÉèìÉëí= Ñçê= ÇÉÅä~ê~íçêó= ~åÇ report prepared by an independent public áåàìåÅíáîÉ= êÉäáÉÑI= íÜÉ= `çìêí= êÉÅçÖåáòÉÇ= íÜ~í= íÜÉ The Amended Rule provides special rules for reg- accountant. The accountant issuing the internal ÖçîÉêåáåÖ= ÇçÅìãÉåíë= çÑ= íÜÉ= ÑìåÇë= ÉñéäáÅáíäó istered investment advisers to pooled investment control report must be registered with, and subject ~ìíÜçêáòÉÇ=^ÅÅáéáíÉê=íç=ëìëéÉåÇ=êÉÇÉãéíáçåë=~åÇ vehicles such as limited partnerships, limited liabil- to regular inspection as of the commencement of íÜ~í=áåàìåÅíáîÉ=êÉäáÉÑ=ï~ë=åçí=~î~áä~ÄäÉ=áå=~å=~Åíáçå ity companies and other similar investment vehi- the engagement period, and as of each calendar Ñçê=ãçåÉó=Ç~ã~ÖÉëK==qÜÉ=`çìêí=~äëç=ÇáëãáëëÉÇ cles, including private investment funds. A sum- year-end, by the PCAOB. The Amended Rule ^êáë∞=Åä~áã=Ñçê=ìåàìëí=ÉåêáÅÜãÉåíI=ÅáíáåÖ=íÜÉ=ÉñáëJ mary of these rules follows. became effective March 12, 2010. íÉåÅÉ= çÑ= ~= Åçåíê~Åí= ÖçîÉêåáåÖ= íÜÉ= êÉä~íáçåëÜáé ÄÉíïÉÉå=íÜÉ=é~êíáÉë=ÖáîáåÖ=êáëÉ=íç=ëìÅÜ=Åä~áã=~ë Under the Amended Rule, an investment adviser íÜÉ=êÉ~ëçå=Ñçê=áíë=Ñ~áäìêÉI=~ë=ïÉää=~ë=^êáëD=Åä~áã=Ñçê Please see our January 8, 2010 client alert entitled shall be deemed to have complied with the annual éìåáíáîÉ= Ç~ã~ÖÉëI= êÉÅçÖåáòáåÖ= íÜ~í= ïáíÜçìí= ~åó “How Will the Recently Amended Investment Adviser surprise examination requirement with respect to ëéÉÅáÑáÅ=~ääÉÖ~íáçå=çÑ=ÅçåÇìÅí=íÜ~í=ï~ë=±é~êíáÅìä~êJ Custody Rule Affect Investment Funds?” for further an investment fund that is subject to an audit: (i) äó=êÉéêÉÜÉåëáÄäÉI≤=íÜÉ=åÉÅÉëë~êó=éäÉ~ÇáåÖ=êÉèìáêÉJ information on this topic. (continued on page 11) at least annually and distributes its audited financial ãÉåíë=ïÉêÉ=åçí=ë~íáëÑáÉÇK=„

1 http://www.sec.gov/rules/final/2009/ia-2968.pdf. On March 15, 2010, the SEC posted responses to certain frequently asked questions regarding the new custody rule. See http://www.sec.gov/divisions/investment/custody_faq_030510.htm. 2 Importantly, an investment adviser is not required to maintain custody of client assets with a “qualified custodian” with respect to certain “privately offered securities;” provided, that such adviser complies with the annual audit requirement. In such circumstances, the investment adviser will not be subject to the internal control report requirement.

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Newly Enacted Laws Affecting Private Funds (continued from page 10)

Final Model Privacy Form commodity pool annual reports for fiscal years exemptions the CFTC has provided to Under the Gramm-Leach- ending December 31, 2009 and later. CPOs that operate offshore funds that elect- Bliley Act „ Non-unitized 4.7 Pools. The amendments ed not to use GAAP in the preparation of clarify that the periodic account statements pool financial statements. On November 16, 2009, eight federal regulatory for non-unitized pools operating under Rule „ 4.13 Funds. The amendments delete the agencies, including the SEC and the Federal Trade 4.7 must disclose either the net asset value requirement that any annual reports provid- Commission, released a final rule that adopts an per outstanding participation unit in the pool ed by pools exempt under Regulation 4.13 optional model privacy notice form that will make or the total value of a participant’s interest or must be presented and computed in accor- it easier for consumers to understand how finan- share in the pool. dance with GAAP and audited by a certified cial institutions collect and share personal infor- „ independent public accountant. 3 Multiple Series Pools. The amendments mation about consumers. Under the Gramm- specify detailed information that must be Leach-Bliley Act (the “GLB Act”), financial insti- included in the periodic account statements New York State Comptroller tutions must notify consumers of their informa- and annual reports for commodity pools Bans Pension Fund tion-sharing practices and inform consumers of 4 with more than one series or class of owner- Pay-to-Play their right to opt out of certain sharing practices. ship interest. Pools with different series or On September 23, 2009, New York State The final rule provides that a financial institution classes may limit periodic reporting to the Comptroller Thomas P. DiNapoli banned pay-to- that chooses to use this model form obtains a legal series or class being reported only if the pool play practices related to the New York State “safe harbor” and will satisfy the disclosure has limited liability among the various series Common Retirement Fund (“CRF”) by issuing an requirements for notices. The GLB Act broadly or classes. Pools with cross series or class lia- executive order that prohibits CRF from doing defines “financial institution” to include private bility must report the required information business with any investment adviser who has investment funds. As a result, such funds are made a political contribution to the State for both the pool as a whole and for each 6 required to provide an initial privacy notice, as well series or class of ownership. Comptroller or a candidate for State Comptroller. as annual privacy notices, to their investors that „ Fund of Funds Annual Reports. The The ban, which closely parallels proposed SEC regulations, will last for two years from the date of accurately reflect the funds’ privacy policies and amendments extend the time period for a the political contribution. practices, unless an exception applies. Financial CPO to file and distribute annual reports of institutions are not required to adopt the model commodity pools that invest in other funds California Passes Placement form; however, if a financial institution decides to 180 days after the end of the pool’s fiscal Agent Law not to adopt the model form, it should review its year. The amendments allow a CPO to On October 13, 2009, California Governor current privacy notices to determine whether revi- claim an automatic extension of 90 days, Arnold Schwarzenegger passed Cal. Gov. Code §§ sions are required in order to comply with the final rather than 60 days. The extension also 7513.85 and 7513.9, which will require all rule. Please see our February 2, 2010 client alert includes CPOs that operate Rule 4.7 exempt California state and local pension funds to disclose entitled “New Privacy Policy Rule May Require Private funds of funds. any fees paid by managers to placement agents in Funds to Modify Their Privacy Notices” for further „ Profit Allocations. The amendments codify connection with securing business from such pen- information on this topic. existing CFTC interpretations of disclosure sion fund. Managers that violate the disclosure requirements for: (i) special allocations; (ii) Amendments to Reporting requirements will be prohibited from seeking busi- combined gains and losses for regulated and ness from the pension fund for two years. The law Requirements for Commodity non-regulated transactions; and (iii) investee Pool Operators also requires placement agents to disclose any fund expenses. campaign contributions made to pension fund On November 9, 2009, the U.S. Commodity „ Liquidating Pools. Liquidating Pools. The board members in the 24 months prior to solicit- Futures Trading Commission (“CFTC”) adopted amendments streamline annual reporting ing pension fund money. The law also extends to amendments to its regulations regarding periodic requirements for pools ceasing operation. five years (from two years) the period of time that and annual reporting requirements applicable to Generally, a CPO is required to provide a liq- pension fund board members and employees have commodity pool operators (“CPOs”) under uidating pool’s final report to investors and to wait before pitching business to the pension 5 Regulation 4.22. The amendments became effec- the National Futures Association (“NFA”) fund if they defect for the private sector. State and local pension funds have to adopt the enhanced tive on December 9, 2009. Changes that affect within 90 days of cessation of trading. disclosure requirements by June 2010. „ annual reporting requirements will be applicable to „ Offshore Pools. The amendments codify

3 http://www.sec.gov/rules/final/2009/34-61003fr.pdf.

4 15 U.S.C. §§ 6801 et seq.

5 http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/e9-26789a.pdf.

6 See http://www.osc.state.ny.us/reform/politicalcontribution.pdf.

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Proposed Legislation Affecting Private Funds

The “Volcker Rule” tion” (as defined in section 23A of the Federal described below); Reserve Act to include loan-making, purchase or „ any adviser that is a “foreign private fund On January 21, 2010, President Obama, joined by investment in securities, purchase of assets, guar- adviser” defined as an investment adviser Paul Volcker and others, proposed new measures antee, etc.) with such hedge fund or private equity that: (a) has no place of business in the calling for new restrictions on the size and scope fund; and (iii) impose additional capital require- United States; (b) during the preceding 12 of banks and other financial institutions to rein in ments and additional quantitative limits on non- months has had (i) in total, fewer than 15 excessive risk taking and to protect taxpayers. On bank financial companies supervised by the clients and investors in the United States in March 3rd, President Obama sent a draft of the Federal Reserve pursuant to its oversight authority private funds advised by such investment legislation to Congress entitled “Prohibitions on under the bill (see Financial Stability Oversight adviser; and (ii) aggregate AUM attributable Proprietary Trading and Certain Relationships Council below) that engage in proprietary trading to clients and investors in the United States with Hedge Funds and Private Equity Funds.” or sponsoring and investing in hedge funds and in private funds advised by such investment Among other things, the proposal would prohibit private equity funds. Again, the defined terms adviser of less than $25 million; and (c) nei- banks from “sponsoring” (defined as serving as “hedge fund,” “private equity fund” and “sponsor- ther holds itself out generally to the public in the general partner, managing member or trustee ing” track the definitions set forth in President the United States as an investment adviser, of a fund; in any manner selecting or controlling a Obama’s proposal. nor acts as an investment adviser to any majority of the directors or management of a investment company registered under the fund; or sharing with a fund, for corporate, mar- Private Fund Investment Investment Company Act; and keting, promotional or other purposes, the same Adviser Registration (House „ any adviser to small business investment name or a variation of the same name) and invest- Version) companies, which are regulated by the Small ing in hedge funds and private equity funds Business Administration. (defined as any entity exempt from registration as On December 11, 2009, the U.S. House of an investment company pursuant to either Section Representatives passed “The Wall Street Reform Such SEC-registered advisers would be required to 3(c)(1) or 3(c)(7) of the Investment Company and Consumer Protection Act of 2009.” The bill maintain such records of and file with the SEC Act). Banks also would be prohibited from acting sets forth a comprehensive set of financial regula- such reports regarding the private funds that they as a prime broker to funds they advise. tory reforms, including the “Private Fund advise as “are necessary or appropriate in the pub- Investment Advisers Registration Act of 2009,” lic interest and for the protection of investors or On March 10th, Senators Jeff Merkley, Carl Levin, which would eliminate the “private adviser exemp- for the assessment of systemic risk as the SEC Ted Kaufman, Sherrod Brown and Jeanne tion” from registration under Section 203(b)(3) of determines,” including for each private fund: the Shaheen introduced their version of the “Volcker the Advisers Act, and, instead, require any invest- amount of AUM; the use of leverage (including Rule” entitled the “Protect our Recovery Through ment adviser to a “private fund” to register with off-balance sheet exposures); counterparty credit Oversight of Proprietary Trading Act.” The bill, the SEC (subject to certain exemptions) and sub- risk exposures; trading and investment positions; among other things, would bar banks, bank hold- ject the private funds advised by such SEC-regis- and other important information relevant to deter- ing companies, and their affiliates and subsidiaries tered advisers to substantial regulatory reporting mining potential systemic risk. All records of a from taking or retaining any equity, partnership or requirements. A “private fund” is defined as an private fund maintained by a SEC-registered advis- other ownership interest in or sponsoring a hedge issuer that would be an “investment company” er would be subject at any time to such periodic, fund or a private equity fund. The defined terms under Section 3(a) of the Investment Company special and other examinations by the SEC. “hedge fund,” “private equity fund” and “sponsor- Act, but for the exception provided from that def- ing” track the definitions set forth in President inition by either Section 3(c)(1) or Section 3(c)(7) In addition, in prescribing regulations (including Obama’s proposal. of such Act. registration and examination procedures) relating to advisers of “mid-sized private funds,” the SEC On March 15th, Senate Banking Committee Importantly, the bill provides the following must take into account the size, governance and Chairman Christopher Dodd introduced his ver- exemptions (among others) from registration as an investment strategy of such funds to determine sion of the “Volcker Rule” entitled “Restrictions investment adviser with the SEC: whether they pose systemic risk; however, the bill on Capital Market Activity by Banks and Bank does not provide a definition of “mid-sized private Holding Companies” as part of his financial over- „ any private fund adviser that “acts solely as funds.” haul bill. Senator Dodd’s version would, among an adviser to private funds and has AUM in other things: (i) prohibit banks, bank holding the United States of less than $150 million” The SEC would be permitted to share copies of companies, and their affiliates and subsidiaries (such an adviser would still be subject to cer- all reports and documents filed with or provided from “sponsoring or investing in a hedge fund or tain recordkeeping and annual reporting to it by an SEC-registered adviser with the Board a private equity fund;” (ii) bar banks, bank holding requirements described below); of Governors of the Federal Reserve System and companies, and their affiliates and subsidiaries, or „ any adviser to “venture capital funds” (which to Oversight Council as necessary for the purpos- companies that serve as the investment manager is to be defined by the SEC) (such an advis- es of assessing the systemic risk of a private or investment adviser to a hedge fund or private er would still be subject to certain record- fund. In addition, a registered adviser must pro- equity fund from entering into a “covered transac- keeping and annual reporting requirements vide reports to investors, (continued on page 13)

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Proposed Legislation Affecting Private Funds (continued from page 12) prospective investors, counterparties and credi- with the SEC’s prior exemptive orders); broker dealers and investment advisers. tors of any private fund advised by such adviser. „ does not contain a provision regarding regu- The SEC may not compel a private fund to dis- lation of “mid-sized private funds;” Executive Compensation close certain proprietary information to counter- „ provides an aggregate AUM registration (House Version) parties and creditors, including sensitive, non- threshold of $100 million; The omnibus Wall Street Reform and Consumer public information regarding the investment „ requires disclosure to the SEC of any “side Protection Act also included the “Corporate and adviser’s investment or trading strategies, analyti- arrangements or side letters whereby certain Financial Institution Compensation Fairness Act cal or research methodologies, trading data, com- investors in a fund obtain more favorable of 2009,” which would, among other things, puter hardware or software containing intellectual rights or entitlements than other investors;” require certain “covered financial institutions” - property. „ requires an investment adviser to take steps including investment advisers and broker-dealers - as the SEC may prescribe to safeguard client with assets of at least $1 billion to disclose to the The bill gives the SEC broad authority to issue, assets over which it has custody, including appropriate Federal regulator the structures of all amend and rescind such rules and regulations as verification of such assets by an independent incentive-based compensation arrangements. The are necessary or appropriate to carry out the intent public accountant; disclosures must allow regulators to determine of the bill, including the ability to: (i) classify per- „ generally requires investment advisers to whether such structures are aligned with sound sons and matters within its jurisdiction based maintain the same types of records as noted risk management and their potential to have seri- upon, but not limited to, size, scope, business in the description of the House bill above; ous adverse effects on economic conditions or model, compensation scheme or potential to cre- however, there is no requirement to file such financial stability. Federal regulators would have ate or increase systemic risk; (ii) prescribe different records with the SEC; the SEC may issue the authority to prescribe rules preventing incen- requirements for different classes of persons or rules requiring each investment adviser to a tive-based compensation arrangements that regu- matters; and (iii) ascribe different meanings to private fund to file such reports containing lators determine pose “serious adverse effects on terms (including the term “client,” except that the such information as the SEC “deems neces- economic conditions or financial stability.” SEC cannot define the term “client” to include an sary and appropriate in the public interest investor in a private fund). and for the protection of investors or for the assessment of systemic risk;” and Executive Compensation Please see our December 16, 2009 client alert enti- „ does not contain third-party disclosure (Senate Version) tled “House Passes Bill Requiring Most Private Fund requirements. Senator Dodd’s financial overhaul bill contains a Investment Advisers to Register” for further informa- modified version of regulatory requirements on tion on this topic. Investor Protection; Broker incentive-based compensation arrangements; Dealers (House Version) however, this provision only applies to companies Private Fund Investment with securities listed on a national securities Included in the passage by the House of the Adviser Registration (Senate exchange. Version) omnibus Wall Street Reform and Consumer Protection Act was the “Investor Protection Act On March 15, 2010, Senate Banking Committee of 2009.” Of significance to investment advisers, Financial Stability Oversight Chairman Christopher Dodd introduced a sweep- the bill provides that, with respect to a broker or Council (House Version) ing financial regulatory bill that included the dealer, when providing personalized investment The Wall Street Reform and Consumer Protection “Private Fund Investment Advisers Registration advice about securities to a retail customer, the Act passed by the House also included the Act of 2010.” The Senate Banking Committee standard of conduct for such broker or dealer will “Financial Stability Improvement Act of 2009,” had released an earlier discussion draft in be the same standard as applicable to an invest- which would create an inter-agency Financial November 2009. On March 22nd, following ment adviser under the Advisers Act. Stability Oversight Council that would be respon- Committee discussions of these drafts, the Senate sible for identifying financial companies that are so Banking Committee adopted an amended version large, interconnected or risky that their collapse of Senator Dodd's bill, which is substantially sim- Investor Protection; Broker Dealers (Senate Version) would put the U.S. economy at risk. These system- ilar to the House bill, with the following key differ- ically risky firms would be subject to heightened ences: Senator Dodd’s financial overhaul bill included a oversight, standards and regulation. The bill also version of the “Investor Protection Act of 2009,” establishes an orderly process for shutting down „ provides an exemption from registration (but which would require the SEC to conduct a study large, failing financial firms. Any costs associated not from certain recordkeeping and report- to evaluate (i) the effectiveness of existing legal or with dismantling a failed firm would be paid first ing requirements) for any adviser to a “pri- regulatory standards of care for broker dealers and from the company’s assets at the expense of share- vate equity fund” (which is to be defined by investment advisers for providing personalized holders and creditors. Any additional costs will the SEC); investment advice and recommendations about then be covered by a $150 billion dollar “Systemic „ provides an exclusion from the definition of securities to retail customers; and (ii) whether there Dissolution Fund,” which would be capitalized by “investment adviser” under the Advisers Act are legal or regulatory gaps or overlap in the legal fees assessed on financial companies with more for any “family office” (which is to be or regulatory standards in the protection of retail than $50 billion in assets, on a consolidated basis, defined by the SEC in a manner consistent customers relating to the standards of care for and by “financial companies (continued on page 14)

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Proposed Legislation Affecting Private Funds (continued from page 13) that manage hedge funds” with $10 billion or able years beginning after December 31, 2009, mined price (tax rate = 0.02%); more of assets under management on a consoli- would apply to carried interests in partnerships „ swaps between two firms on certain benefits dated basis. Such fee assessments would be based where the partner holds an “investment services of one party’s financial instrument for those upon individual risk assessments as determined by partnership interest.” An investment services of the other party’s financial instrument (tax the Council. partnership interest is an interest held by a person rate = 0.02%); who provides advisory, management, financing „ credit default swaps where a contract is Financial Stability Oversight and other supporting services with respect to the swapped through a series of payments in Council (Senate Version) acquisition, holding or disposing of securities, exchange for a payoff if a credit instrument rental real estate, interests in partnerships, com- goes into default (tax rate = 0.02%); and Senator Dodd’s financial overhaul bill would simi- modities, or options or derivatives with respect to „ options. larly create an inter-agency Financial Stability any of the foregoing. To ensure the tax is appropriately targeted to spec- Oversight Council. Significantly, in addition to ulators and has no impact on the average investor collecting information from various agencies to In related news, on March 10, 2010, the Senate and pension funds, the tax would be refunded for identify and assess risk to the U.S. economy, the passed a tax extenders package; however, the tax-favored retirement accounts, mutual funds, Financial Stability Oversight Council would have Senate’s version does not use carried interest as its education savings accounts, health savings the authority, following certain procedures, to main revenue offset. Instead, the Senate’s version accounts and the first $100,000 of transactions require certain U.S. and foreign nonbank financial replaced carried interest with “black liquor” and annually that are not already exempted. companies to register with and be supervised by “codification of economic substance doctrine” the Federal Reserve. “Nonbank financial compa- offsets. California: An Act to Amend ny” is defined as a company other than a bank the Political Reform Act of holding company or a subsidiary thereof that is Amendment to the Bank 1974: Placement Agents substantially engaged in activities that “are finan- Secrecy Act Regulations; cial in nature.” This definition may include hedge Reports of Foreign Financial On February 8, 2010, California Assemblyman Ed funds and private equity funds. Senator Dodd’s Accounts Hernandez introduced a bill requiring placement bill would also establish an Orderly Liquidation agents to register as lobbyists before pitching Authority Panel that supervises the liquidation of On February 26, 2010, the Internal Revenue investment ideas to public pension plans in large, failing financial firms. An “Orderly Liquida- Service (the “IRS”) and the Financial Crimes California. The legislation, AB 1743, would define tion Fund” would be established to cover relevant Enforcement Network of the Department of the placement agents as lobbyists in accordance with costs, which would be capitalized by fees assessed Treasury issued current guidance and Proposed the state’s Political Reform Act. Placement agents on certain bank holding companies, nonbank Regulations covering a number of important would be subject to strict gift limits, campaign con- financial companies supervised by the Federal issues with respect to the requirement to file Form tribution prohibitions, and be prohibited from Reserve and potentially other financial companies TD F 90-22.1, Report of Foreign Bank and receiving compensation contingent upon any with more than $50 billion in assets on a consoli- Financial Accounts (“FBAR”). Most significantly investment decision by the California Public dated basis. for private investment funds, the IRS guidance Employees’ Retirement System (“CalPERS”). The provides that an FBAR filing is not required with placement agents, their firms and employers would Taxation of Carried Interest respect to interests in offshore private equity and be required to report quarterly on their fees and hedge funds for 2009 and earlier calendar years. compensation and on any honoraria or gifts. The On February 1, 2010, the White House released Please see our March 1, 2010 client alert entitled bill is sponsored by CalPERS, state Controller President Obama’s FY 2011 Budget proposal. “FBAR Filing Not Required for Interests in Offshore John Chiang and Treasurer Bill Lockyer. Among the many proposals contained in the Private Equity and Hedge Funds for Calendar Years 2009 budget were proposals to tax carried interest and Earlier” for further information on this topic. Connecticut: An Act received in connection with a “service partnership Concerning Transparency interest” and any gain recognized on the sale of Let Wall Street Pay for the and Disclosure the SPI (i.e., sale of the business) as ordinary Restoration of Main Street income. On March 11, 2010, the Connecticut State Senate On December 3, 2009, Representative Peter Banks Committee approved CT State Bill No. On December 9, 2009, the U.S. House of DeFazio, Chairman of the U.S. House of 5053 entitled “An Act Concerning Transparency Representatives approved the “Tax Extenders Act Representatives Subcommittee on Highways and and Disclosure.” The bill would require any of 2009.” The primary purpose of the legislation Transit, introduced legislation entitled “Let Wall investment adviser to a hedge fund to “disclose to is to extend for one year (through 2010) more than Street Pay for the Restoration of Main Street” that each investor or prospective investor in such hedge 40 tax relief provisions that were scheduled to would assess a tax on certain securities transac- fund, not later than thirty days before any such expire at year-end. The legislation also contained tions, including: investment, any financial or other interests the several revenue provisions, including a provision „ stock transactions (tax rate = 0.25%); investment adviser may have that conflict with or that would tax certain carried interest income at „ futures contracts to buy or sell a specified are likely to impair the investment adviser’s duties ordinary income rates rather than at capital gains commodity of standardized quality at a cer- and responsibilities to the fund or its investors.” rates. The bill, which would be effective for tax- tain date in the future, at a market deter- Although the bill is intended (continued on page 15)

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Proposed Legislation Affecting Private Funds (continued from page 14) to target hedge funds, as currently drafted, the lan- sibilities and qualifications of investment sion systems. guage of the bill potentially picks up all private fund personnel and any payments by invest- „ Fund managers must certify that they have funds, including private equity funds and venture ment firms to third parties in connection not given any gifts to any employees of the capital funds. According to the bill, a hedge fund with public pension fund matters. Comptroller’s Office, nor to any employees is located in CT if such fund has an office in CT Investment firms would be required to or trustees of the NYC pension systems. where employees regularly conduct business on promptly publish such information on their „ Fund managers must disclose all contact with behalf of the hedge fund. websites. employees of the Comptroller’s Office „ Hold investment firms to a higher standard regarding new investments, as well as all con- New York: Taxpayers’ Reform of conduct that avoids even the appearance tact with pension trustees and other individ- for Upholding Security and of impropriety. The legislation would pro- uals involved in the investment decision- Transparency hibit: (i) improper relationships between making process. pension fund officials and an investment „ Fund managers must disclose all fees and On October 8, 2009, New York State Attorney firm’s personnel or agents; (ii) “revolving terms relating to any firm retained to pro- General Andrew Cuomo proposed legislation enti- door” employment by investment firms of vide marketing or placement services, and tled, “Taxpayers’ Reform for Upholding Security former public pension fund officials and that any such fees are fully paid by the fund and Transparency” (“T.R.U.S.T”), which would employees; and (iii) improper gifts by invest- manager. institutionalize Mr. Cuomo’s Public Pension Fund ment firms to public pension fund employ- „ Fund managers must agree that the pension Reform Code of Conduct, announced earlier this ees and officials. system(s) may terminate or rescind a con- year, and provide additional civil, criminal and „ Require investment firms to promptly dis- tract or commitment for investment and administrative penalties and sanctions to ensure close and cure any actual, potential and recoup all management and performance firms and individuals are held accountable for vio- apparent conflicts of interest to public pen- fees for violation of these requirements. lations of the new law. The legislation would: sion fund officials or law enforcement „ The current ban on private equity placement „ Replace the sole trustee that currently man- authorities where appropriate. agents will be expanded to include place- ages the New York State Common „ Require investment firms to certify annually ment agents and third-party marketers for all Retirement Fund (“CRF”) with a Board of that they are in compliance with key disclo- types of funds, where such agents and mar- Trustees composed of 13 members. The sure requirements. keters are exclusively providing “finder” or Comptroller would chair the Board and „ Institute comprehensive and tough enforce- introduction services. serve alongside six members appointed by ment provisions by creating tough new civil, „ The current ban on private equity placement the Governor, Attorney General, Temporary criminal and disciplinary penalties and sanc- agents will be relaxed to allow use of place- President of the Senate, Speaker of the tions, and by requiring licensed professionals ment agents who provide legitimate value- Assembly, the Senate Minority Leader and to report to law enforcement evidence of added services such as due diligence and the Assembly Minority Leader. The Board’s violations of the law. The legislation would similar professional services on behalf of other six members would be selected by the also provide as a basis of criminal prosecu- prospective investors. members of CRF. tion the theft of property and honest servic- „ Such agents and marketers must demonstrate „ Prohibit investment firms from using place- es from the retirement system, and would the ability to raise capital outside NYC by ment agents, lobbyists, or any other third- extend the statute of limitations for a person establishing that they raised $500 million in party intermediaries to communicate or acting in concert with a public servant. at least two of the past three years from enti- interact with New York public pension ties other than the NYC pension systems. funds for any purpose. The prohibition New York City: Restrictions „ A full description of value-added services would not apply to the use of consultants Regarding Placement Agents provided as well as resumes of key profes- and investment banks to otherwise directly sionals and employees who contact individu- assist investment firms by, for example, On February 18, 2010, New York City (“NYC”) als involved in the decision-making process preparing marketing materials or performing Comptroller John Liu proposed new rules regard- regarding a proposed investment will be due diligence. ing the use of placement agents in connection required. „ Prohibit investment firms (and their princi- with investments by NYC pension funds. Mr. Liu „ Registration with either the SEC or the pals, agents, employees and family members) seeks to make a distinction between “legitimate Financial Industry Regulatory Authority will from doing business with a public pension placement agents who provide value-added servic- be required. fund for two years after the firm makes a es” and those that seek to influence decision mak- campaign contribution to any board mem- ers for a designated fee. These new restrictions IOSCO Publishes Systemic ber. The prohibition would also apply to must be approved by the various NYC pension Risk Data Requirements for candidates for such positions, but would not boards. Here is a brief summary of the proposals Hedge Funds apply to contributions of $300 or less to taken from Mr. Liu’s press release: elected officials or candidates for whom the „ Comptroller Liu will decline any campaign On February 25, 2010, the International person making the contribution can vote. contributions from investment managers Organization of Securities Commissions’ „ Require rigorous, ongoing disclosure of and their agents doing business with, or (“IOSCO”) Technical Committee published information relating to the identities, respon- seeking to do business with, the NYC pen- details of an agreed template (continued on page 16)

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Proposed Legislation Affecting Private Funds (continued from page 15) for the global collection of hedge fund informa- al information at a domestic level. The 11 pro- the SEC agrees to adopt the principles of tion that it believes will assist in assessing possible posed categories are: general manager and advis- IOSCO. The press release states specifically, systemic risks arising from the hedge fund sector. er information; performance and investor infor- “IOSCO is publishing the template now to help The purpose of the template is to enable the col- mation related to covered funds; assets under inform any planned legislative changes being lection and exchange of consistent and compara- management; gross and net product exposure considered in various jurisdictions, as well as pro- ble data amongst regulators and other competent and asset class concentration; gross and net geo- viding securities regulators the type of informa- authorities for the purpose of facilitating interna- graphic exposure; trading and turnover issues; tion authorities could gather. The Task Force has tional supervisory cooperation in identifying pos- asset/liability issues; borrowing; risk issues; cred- recommended that the first data gathering exer- sible systemic risks in this sector. The template is it counterparty exposure; and other issues such as cise should be carried out on a best efforts basis not a comprehensive list of all types of informa- complexity, number of open positions and con- (given pending legislation in many jurisdictions) tion and data that regulators might want; so, reg- centration. The SEC is a member of the in September 2010.” „ ulators are not restricted from requiring addition- Executive Committee of IOSCO. As a member,

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Philip A. Heimowitz Amran Hussein Investment Funds News Editors: ONOJPTPJPRNU ONOJPTPJPORT éÜÉáãçïáíò]é~ìäïÉáëëKÅçã ~ÜìëëÉáå]é~ìäïÉáëëKÅçã Marco V. Masotti Karen J. Hughes Stephanie R. McCavitt Jennifer A. Spiegel ONOJPTPJPRRU ONOJPTPJPTQU Michael S. Hong ëãÅÅ~îáíí]é~ìäïÉáëëKÅçã àëéáÉÖÉä]é~ìäïÉáëëKÅçã Please contact [email protected] to be added to our mailing list or for further LONDON Mark S. Bergman David K. Lakhdhir information. ^äÇÉê=`~ëíäÉ EQQJOMF=TPSTJNSMN EQQJOMF=TPSTJNSMO NM=kçÄäÉ=píêÉÉí ãÄÉêÖã~å]é~ìäïÉáëëKÅçã Çä~âÜÇÜáê]é~ìäïÉáëëKÅçã içåÇçå=b`Os=Tgr råáíÉÇ=háåÖÇçã qÉäW=EQQJOMF=TPSTJNSMM c~ñW=EQQJOMF=TPSTJNSRM= This alert is not intended to provide legal advice, and no legal or business decision should be based on its content. HONG KONG John E. Lange NOíÜ=cäççê= EUROF=OUQSJMPPP *IRS Circular 230 disclosure: To ensure eçåÖ=hçåÖ=`äìÄ=_ìáäÇáåÖ àä~åÖÉ]é~ìäïÉáëëKÅçã compliance with requirements imposed by the IRS, we inform you that any U.S. feder- P^=`Ü~íÉê=oç~ÇI=`Éåíê~ä al tax advice contained in this document is eçåÖ=hçåÖ not intended or written to be used, and qÉäW=EUROF=OUQSJMPMM cannot be used, for the purpose of (i) c~ñWEUROF=OUQMJQPMM avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any TOKYO Kaye N. Yoshino transaction or matter that is contained in cìâçâì=pÉáãÉá=_ìáäÇáåÖ EUNJPF=PRVTJSPMP this document. OJO=rÅÜáë~áï~áÅÜç=OJÅÜçãÉ âóçëÜáåç]é~ìäïÉáëëKÅçã `ÜáóçÇ~JâìI=qçâóç=NMMJMMNN g~é~å qÉäW=EUNJPF=PRVTJUNMN c~ñW=EUNJPF=PRVTJUNOM © 2010 Paul, Weiss, Rifkind, Wharton & Garrison LLP

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