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Hedge Fund Regulation: Legal and Technology Considerations

By Kaleigh Brousseau | Friday, August 20th, 2010

The hedge fund industry is still trying to sort out the intricacies of the newly signed Dodd-Frank Wall Street Reform and Consumer Protection Act – the legislation that is widely considered the most sweeping in recent memory.

To help break down the new law, Eze Castle Integration recently hosted a webinar, and we asked Jeff Blumberg, Partner at Drinker Biddle & Reath LLP, a law firm based in Chicago, to give an overview of the Dodd-Frank Act and provide attendees with details on what aspects of the law will directly affect them.

After Jeff broke down the law, our own Managing Director Bob Guilbert examined the key technology areas where firms should be in compliance, in accord with this and other regulations as well as industry best practices. Let’s take a look back at a few of their key points:

Cyber plan for regulationsThe Legal Side

  • Financial reform has come significantly later than originally expected, but will affect the breadth of the financial services industry

  • Hedge funds and private equity firms will be required to register with the SEC if they have greater than $150 million AUM

  • If you are a foreign private adviser, you are exempt if you have:

    • No U.S. place of business

    • Fewer than 15 direct or indirect U.S. clients

    • Less than $25 million AUM for U.S. clients

  • The effect on venture capital firms is still unknown; the SEC has tasked itself with properly defining what a venture capital firm is within one year

  • Investment firms are subject to periodic SEC inspections of records, including AUM, use of leverage, counterparty risk, trading and investment positions, valuation, types of assets held, side agreements, trading practices, and other information related to investor protection or systemic risk assessment

  • All registration and reporting requirements will go into effect one year after the signing of the bill (July 2011)

  • It is still unclear how individual states will respond to the new regulations

The Technology Side

  • In addition to the Dodd-Frank Act, there are several existing regulations that require firms to employ certain technology practices or solutions, including NASD Rule 3500 Series, NYSE Rule 4370 and Massachusetts state law 201 CMR 17.00

  • Having a business continuity plan and disaster recovery solution in place will ensure your firm remains functional and operational in the event of a disruption or disaster – and it is also something investors like to see!

  • Identify your firm’s Recovery Point Objective (RPO) and Recovery Time Objective (RTO) to understand what the best disaster recovery solution is for you

  • Disaster recovery can be managed in-house or outsourced to a third-party; DR can also be traditional and server-based or a managed/virtualized service

  • The SEC currently advises hedge funds to retain all internal and external email and IM business communications

  • Tape backup is not an adequate means of archiving

  • Earlier this year, Massachusetts enacted one of the most stringent data privacy laws, requiring all firms with employees or investors in the state to secure personal information (PI) that is stored on servers, PCs and mobile devices and encrypt all transmitted records containing PI that travel over public networks

  • Eze Castle Integration expects that future financial reform, at both a state and federal level, will continue to enforce best practices around busine ss continuity, disaster recovery, archiving and data privacy compliance.


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