PODCAST TRANSCRIPT

Episode 1: What you need to know about U.S. and EU

Proposed Legislation: New Regulation Requirements and
Assessing Systemic Risk

Speaker: Kelli Moll, Partner, Schulte Roth & Zabel LLP

Moderator: James Hilliard, former business and technology reporter and editor

» James: During the last six months, proposals to regulate hedge funds and private equity firms have been
introduced in the United States (U.S.) and the European Union (EU). The EU introduced the Directive on
Alternative Investment Fund Managers while Congress drafted the Private Fund Investment Advisers
Registration Act of 2009. In addition, the Managed Funds Association (MFA) published Sound Practices for
Hedge Funds to establish best practices for creating transparency between funds and their investors. Since
it's a foregone conclusion that the alternative fund industry will be regulated, various players have been
jockeying to shape the final regulation. This includes the SEC, FSA, MFA, Alternative Investment
Management Association (AIMA), and government officials from virtually every country in the EU.

I’m James Hilliard. I’m a former technology and business reporter and I’ll be your moderator for today. We
are sponsored by IntraLinks, the industry-leading provider of enterprise-class solutions, which facilitate the
secure, compliant and auditable exchange of critical information. Our goal is to bring you up to speed on
the debate, discuss the areas facing opposition and highlight what it could mean to you and your fund.
Today, in Episode 1, we are going to discuss the regulations on both sides of the Atlantic and spotlight
what they say about systemic risk. Episode 2 will cover establishing transparency with your investors and
the selective disclosure of information.

To help bring the debate into focus, we're turning to an expert, Kelli Moll, who is a partner at Schulte, Roth
and Zabel who advises U.S.- and European-based firms on fund information, and marketing and regulatory
issues as well. Kelli has advised many hedge fund managers on compliance issues and registration under
the Investment Advisers Act of 1940.

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Kelli, in 2006, the hedge fund industry fought regulation. Now, funds and advocacy groups like the MFA
support the proposed regulation. So the question is, what's changed?

» Kelli: The change really was that the writing was on the wall. With the collapse of the financial industry
last fall and with scandals like Bernie Madoff taking place, hedge funds and those managers in the industry
knew that it could no longer stand against regulation. And the MFA has come out in ways looking to
support certain aspects of regulation of hedge fund managers seeking a role in terms of trying to shape
what that regulation looks like.

What has come about recently is Congress has enacted a bill called the Private Fund Investment Adviser
Registration Act. What that is looking to do right now is two things. First, requiring all managers of both
hedge funds and private equity funds to become registered investment advisers; this is something that the
MFA actually supports because they really wanted a level playing field for hedge funds and private equity
firms and that's what the legislation is intended to do if it gets enacted. And secondly, this new proposed
legislation involves increased reporting line managers so that the government can focus on systemic risk to
try to avoid the kind of market collapse that we saw at the end of 2008.

» James: You bring up systemic risk, and the proposed act really tries at this stage to require fund
managers to share confidential information with regulators. And again, the goal is to help the regulators
assess if the fund poses a systemic risk to the financial system. What information, then, would fund
managers need to report to regulators and how often would they need to do that?

» Kelli: Some of the details of the law are a little fuzzy, but what the act currently is proposing is that the
managers report their assets under management on a per fund basis; their use of leverage, including off-
balance-sheet leverage; their counterparty credit risk exposures — and what form that will take and how
often that needs to be reported still needs to be flushed out in regulation; their investment positions, which
is really full transparency to the government of your underlying portfolio, which is quite controversial for
many hedge fund managers and their trading practices. Again, this is seen as a really confidential trade
secret like information, but the government is now asking for this information so that it can, hopefully,
impose whatever thoughtful regulation it wants to have in order to control the markets in a better place to
avoid the kind of highs and lows that we've seen.

» James: You brought up the idea that fund managers would be registered and once they are registered,
the understanding now is that they might be subject to periodic SEC examinations. If that is included in the

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final legislation, how should managers organize and prepare themselves for this to be coming down the
line?

» Kelli: Hedge fund managers as well as any manager will be subject to periodic SEC examinations. The
SEC has an entire inspection process and a manager can expect to be examined every five years. And
what hedge fund managers as well as other managers will want to do is really organize their materials to
be readily accessible in electronic format so that that information is at their fingertips in an organized
fashion so that when the regulators come in, you can get those regulators in and out of your offices in the
shortest amount of time. You don't want the regulators waiting for information. You want to be able to
present yourself to the SEC in terms of having a clean well-run shop where you have access to the
information that you need and can be able to deliver in a quick, organized fashion.

» James: So a lot of transparency, a lot of forethought shown that you're taking care of business, you are
watching out and being aware of these regulations.

» Kelli: Absolutely, that's exactly what they're looking for.

» James: The U.S. is not the only government that's looking to regulate areas of finance. The EU has a
directive that's actually been called unworkable by AIMA, that's the Alternative Investment Management
Association. What areas of that directive does AIMA want to see changed?

» Kelli: The EU directive is actually a broad sweeping regulatory regime change for hedge fund managers.
It does everything from requiring managers to be registered, which isn't so bad, to requiring a certain
amount of capital to be in business, which is a very new requirement and really tough on start-up managers
in terms of getting going if you need to have a large amount of regulatory capital even to be in business.
There are limits they want to impose on your ability to use leverage, which will affect certain investor's
trading strategies. They want extensive disclosures to local regulators of your practices as well as other
changes in terms of how you actually deal day-to-day with your investors and the way you handle
evaluations. So there are pretty broad changes that are met with a lot of criticism by managers outside of
the EU. And some of what the EU is proposing has a protectionist flavor to it and so it'll be, I think, a long
time in terms of getting that piece of legislation through us that's going to actually come out in this particular
format.

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» James: Since we're still dealing with future legislation, we don't know the final language. Do you have
any insights based on how that directive is now or might come out in final form of how that directive could
impact U.S.-based funds and their ability to establish and then market a fund over in the EU?

» Kelli: I think it will severely restrict not only the U.S., but any non-EU manager's ability to market in the
EU. Right now, both U.S. hedge fund managers and Asia hedge fund managers are able to use the private
placement regime in Europe in order to raise capital. One of the most significant aspects of the EU
regulation is that it provides a much easier ability to market in the EU, but only for EU-based managers.
Mangers based in the U.S. or Asia are going to have to set up either funds in the EU or presence or place
of business in the EU before they are able to even take advantage of this marketing regime. This is the
most criticized area; it is an incredibly protectionist piece of legislation in terms of protecting businesses in
the EU and putting non-EU players at a distinct disadvantage.

» James: Kelli, obviously a lot more conversations to be had at the legislative level on whether or not either
the U.S. regulation or the directive in the EU are going to move forward. Do you have a timeline? Do you
have any sense of when legislation might be enacted here in the U.S. and when it might actually go into
effect over in the EU?

» Kelli: We expect that congress will likely enact the Private Fund Investment Advisers Registration Act by
the end of 2009. And I think that the compliance, typically, in terms of being in compliance with the act, is
anywhere between six to 12 months after the act is passed by Congress. I think the EU directive will have a
much longer timetable. It usually will take a while with all the various countries having a say in this
legislation and I think this legislation is far more controversial than what the U.S. has proposed.

» James: A big thanks to our listeners for tuning in. This episode of the hedge fund report podcast series
was sponsored by Intralinks If you found this information useful, and would like to hear or learn more about
how to implement transparent investor reporting practices, please visit
www.intralinks.com/hedge-fund-reporting.

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