In Focus: MFA Policy

Highlights Managed Funds Association | October 2014

Introduction

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In 2014, regulators in the U.S. continue to implement the Dodd-Frank Act, the most comprehensive overhaul of the regulation of financial markets and participants since the 1930s. MFA continues to be guided by principled support for “intelligent” reform and will remain engaged with legislators and policy makers as it demonstrates this industry’s commitment to meaningful financial regulatory reform.

Table of Contents

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Promoting Non-Discriminatory Tax Policy

(Enterprise Value)

Keeping America Competitive (Financial

Transaction Tax)

Taxation of Partnerships

CFTC Reauthorization

Regulating Systemic Risk

Financial Reporting and Systemic Risk

Protecting Investors

Promoting the Stability of Markets through

Central Clearing of Derivatives

Protecting Customer Assets for Fair and Stable

Swaps Markets

Capital Formation – JOBS Act Implementation

Equity Market Structure

MFA References

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MFA Tax Policy Highlights

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1 Promoting Non-Discriminatory Tax Policy

(Enterprise Value)

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Congress continues to consider various proposals to change the tax treatment of carried interest, but which also would selectively change the tax treatment for a sale of a business’ “enterprise value” – from a capital gains rate to the ordinary income rate – when the stake in the business belongs to an investment adviser. MFA is opposed to this discriminatory tax, and believes that an entrepreneur who builds an investment management business is entitled to the same tax treatment as anyone else when selling that business.

2 Keeping America Competitive

(Financial Transaction Tax)

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• MFA opposes legislative proposals that would significantly increase the cost of capital and reduce the availability of credit in the United States.

3 Taxation of Partnerships

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• Under longstanding federal income tax law, partnerships have not been subject to tax at both the entity and the individual level, but instead partners pay tax on their allocable share of the partnership’s income in the year the partnership receives the income, irrespective of whether the income is distributed to the partners. This is called “pass through” taxation. Pass through taxation applies to millions of U.S. businesses, including real estate, oil and gas, venture capital, private equity, hedge funds, agriculture, family and small businesses, and others.

• As Congress debates comprehensive tax reform, MFA believes that changing

the “pass through” tax treatment of partnerships to two levels of taxation would have a negative impact on millions of businesses and the process of capital formation and job creation across the U.S.

CFTC Reauthorization

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CFTC Reauthorization

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• MFA supports the efforts of the Senate and House Committees on Agriculture to address reauthorization of the Commodities and Futures Trading Commission (CFTC).

• Among its priorities, MFA encourages Congress to:

- streamline and reduce unnecessary duplication of the regulatory oversight of commodity pool operators (CPOs) and commodity trading advisors (CTAs);

- amend the Commodity Exchange Act to adopt “Dodd-Frank like” protections for confidential, sensitive, and intellectual property of asset managers;

- and, promote global regulators to work continuously towards harmonization of global regulation impacting areas under the jurisdiction of the CFTC and the oversight of the Agriculture Committees.

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U.S. Financial Regulatory Reform

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Regulating Systemic Risk

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• The Dodd-Frank Act authorizes the Financial Stability Oversight Council (FSOC) to subject a nonbank financial company to supervision by the Federal Reserve and prudential standards if the FSOC determines the firm is “systemically relevant.”

• MFA’s view is that regulators should take an “intelligent” approach to the issues of systemic risk prudential supervision and that it is highly unlikely any hedge fund is systemically important at this time, if regulators measure systemic relevance by quantitative metrics including account size, concentration, and leverage on a fund-by-fund basis.

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6 Financial Reporting/ Systemic Risk

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• The SEC and the CFTC jointly approved a final version of Form PF, the systemic risk information reporting form for private fund advisers.

• MFA supports regulators’ efforts to collect information from fund managers

through periodic, confidential reports, but MFA believes that the scope of Form PF be focused on a more targeted set of data points that are better designed to measure and monitor systemic risk.

7 Protecting Investors

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• The Dodd-Frank Act directed the SEC to: (1) complete a study examining the effectiveness of existing legal or regulatory standards of care for brokers, dealers, and investment advisers that provide personalized investment advice to retail customers, whether there are any gaps, shortcomings, or overlaps in these standards, and permits rulemaking to address the study’s findings; and (2) complete a study, review, and analyze the need for enhanced examination and enforcement resources for investment advisers.

• MFA strongly believes that the existing SEC regulatory framework for

non-retail private fund managers, as enhanced in a number of respects by the Dodd-Frank Act and regulatory implementation of the Act, is effective in fulfilling the SEC’s mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.

8 Promoting the Stability of Markets

Through Central Clearing of Derivatives

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• The Dodd-Frank Act requires clearing for all swaps that are able to be cleared and also requires the CFTC and SEC, on an ongoing basis, to review swaps to determine if they should be required to be cleared – allowing for public comment on those determinations.

• MFA supports the timely implementation of the clearing requirements in the Dodd-

Frank Act, which require certain market participants to clear swaps that are eligible for clearing with a registered clearing organization, and provides regulators with the authority to exempt a swap or class of swaps.

9 Protecting Customer Assets for Fair

and Stable Swaps Markets

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• The Dodd-Frank Act requires futures commission merchants (FCMs), brokers, dealers, and security-based swap dealers to account for and not commingle cleared swaps customers’ margin with their own funds, or use that property to margin, secure, or guarantee trades or contracts of other persons.

• MFA supports robust margin segregation and portability protections for cleared

swaps. • Swaps dealers and major swap participants are also required, at the request of a

counterparty to an uncleared swap, to segregate initial margin for the counterparty’s benefit at an independent third-party custodian. MFA supports the segregation of collateral framework set forth in the Dodd-Frank Act because we believe it will both provide adequate protection for customer assets and mitigate counterparty and systemic risk.

10 Capital Formation – JOBS Act

Implementation

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• MFA supported the underlying intent of the JOBS Act to improve access to capital and enhance economic growth by reducing unnecessary regulatory burdens. In particular, MFA strongly supports provisions in Section 201 that eliminate the Regulation D ban on general solicitation and advertising in Rule 506 for offerings by hedge funds.

• MFA believes that the SEC’s 2013 final rule implemented the JOBS Act in a manner

consistent with the underlying goals of the legislation. We continue to engage with the SEC on its pending rules, in particular with respect to the parts of the proposals that would create overly restrictive procedures that we believe are inconsistent with the purposes of Title II of the JOBS Act.

• In September 2014 the CFTC issued exemptive relief. MFA continues to track this

issue.

Equity Market Structure

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• MFA believes that advancements in technology have empowered investors to better implement their investment strategies through the use of algorithmic trading and low latency execution techniques, and that as a result of these market structure changes, many aspects of equity markets – spreads, fees, execution speed, efficiency, and pricing transparency/reliability – have steadily and drastically improved over the last several years to the benefit of investors.

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MFA Resources:

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Information on the global hedge fund industry is available at the Managed Funds Association.

(www.managedfunds.org)

Executive Agencies / Departments:

• U.S. Department of the Treasury

www.treasury.gov

www.treasury.gov/initiatives/fsoc

• U.S. Federal Reserve System

http://www.federalreserve.gov/

Regulatory Agencies:

• Securities and Exchange Commission (SEC)

www.sec.gov

• Commodity Futures Trading Commission (CFTC)

www.cftc.gov

Self-Regulatory Organizations (SROs)

• National Futures Association

www.nfafutures.org

• Financial Industry Regulatory Authority (FINRA)

www.finra.org