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

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

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

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

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

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

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

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

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

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

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

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

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

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