Compliance for Hedge Funds

A. Compliance for Hedge Funds

B. Regulatory Arbitrage Opportunities

Hedge Funds - Compliance Training and Presentations. Fully tailored training, presented exclusively for your own people.
Spectramind is pleased to offer an exciting range of training and consulting services. We can help your organization understand better the Compliance challenges for the Hedge Funds in the context of the UCITS iii Directive, the Markets in Financial Instruments Directive (MiFID) and the Financial Services Action Plan (FSAP) of the European Union.
What we can do for you:
In-company Awareness, Training and Presentations.
1. Presentations
60 - 180 minutes
2. Overview of the directives and the new Compliance challenges and opportunities
60 minutes to one day
3. Tailor made presentations and training
Let us know what you need
The courses are intended for:
Hedge Fund Managers and Portfolio Managers
Hedge Fund and Fund of Funds Prime Brokers
Institutional Brokerage Houses
Investment Professionals
Wealth Management Firms
Professionals responsible for the structure and marketing of
financial products

Regulatory Arbitrage
Arbitrage is the practice of taking advantage of a difference (usually price difference) between two or more markets.
In order to have arbitrage opportunities, we need to find a difference.
Regulatory Arbitrage is the practice of taking advantage of a regulatory difference between two or more markets.
Two examples - can you see the opportunities?
A. Basel ii framework
B. The 8th Company Law Directive (the European Sarbanes-Oxley)
A. Basel ii is a mandatory framework which is full of differences
(different approaches, different deadlines, different options, different national discretions etc. )
When we have all these different approaches and options by design(Basel ii is proud of that), we also have "flexible" countries that create
opportunities…… and "non-flexible" countries (Spectramind is just an obligation).
Hedge Funds select the more favorable jurisdictions, playing one government off against another. Is it fair? Absolutely!
The "flexible" countries know that. They have a plan, to retain or attract foreign direct investments. They know that hedge fund managers likeshopping, especially "regulator shopping". They try to find the friendliest regime to do business.
The "non-flexible" countries complain. They say that a general easing of regulations is a "race to the bottom". And, they continue to lose money,jobs, investments.
Basel ii is supposed to be the framework that attempts to align economic and regulatory capital more closely to reduce the scope for regulatoryarbitrage. At least, this is what they say.But, you can not have so many differences (approaches, deadlines,options and national discretions) and the same time to say that you try toreduce the scope of regulatory arbitrage! This is an oxymoron.

Example: By providing at least three alternative capital calculation methods, Basel II creates differences that do not exist in Basel I. The
treatment of non-investment-grade credits under the standardized approach is so different from the treatment under the foundation or
advanced internal ratings based (IRB) approach.
B. The 8th Company Law Directive (the European Sarbanes-Oxley) After the passage of the US Sarbanes-Oxley Act in 2002, US and non-US companies listed in a US stock exchange have the difficult task to comply with the Sarbanes-Oxley Act. After the passage of the European Union's 8th Company Law Directive on Statutory Audit (Directive 2006/43/EC), European and non- European companies listed in any country of the EU have to comply with the 8th company law directive.
The 8th directive is considered the European post Sarbanes-Oxley regulatory retaliation. And, like in the US SOX, there are extremely
important extraterritorial consequences.
The Offshore Financial Centers (OFCs) for example must immediately enact legislation to prove that they have an "equivalent level of
regulation", to protect their auditors that audit offshore companies with EU listings from being subject to a tough European oversight regime. Otherwise, auditors and audit firms from "third countries" have to be registered in the EU and to be subject to oversight, quality assurance and sanctions.
Under Article 45(1) of Directive 2006/43/EC the competent authorities of the Member States are required to register third-country auditors and audit entities that conduct a statutory audit on certain companies incorporated outwith the Community whose transferable securities are
admitted to trading on a market regulated within the Community.
Article 45(3) of Directive 2006/43/EC requires Member States to subject such registered third-country auditors and audit entities to their systemsof oversight, quality assurance systems and systems of investigations and penalties.
The European Commission is required under Article 46(2) of Directive2006/43/EC to assess the equivalence of third country oversight, quality assurance and investigation and penalties systems in cooperation with Member States and make a determine on it. If those systems are recognised as equivalent, Member States may exempt third country auditors and audit entities from requirements of Article 45 of the
Directive on the basis of reciprocity.
But… The European Commission has carried out a preliminary assessment of audit regulation in relevant third countries. The assessments have not allowed final equivalence decisions to be taken
GROUP 1: Australia, Canada, Japan, Singapore, South Africa, South Korea, Switzerland and the United States have a system of public
oversight in place, although for the time being the information about the systems is not sufficient for final equivalence decisions to be taken.
GROUP 2: Brazil, China, Croatia, Guernsey, Jersey, the Isle of Man, Hong Kong, India, Indonesia, Israel, Morocco, New Zealand, Pakistan,
Russia, Taiwan, Thailand, Turkey and Ukraine, does not have such systems of public oversight but appears to offer a perspective of moving towards them within a reasonable timeframe.
GROUP 3: Argentina, Bahamas, Bermudas, Chile, Colombia, Kazakhastan, Mauritius, Mexico, Philippines, United Arab Emirates and
Zambia, has in place an audit regulatory framework offering also a perspective of moving towards a system of public oversight in a longer
timeframe.
For the second and third groups of third countries, further equivalence assessments WILL take place once each of such third countries has
made a public commitment to comply with equivalence criteria. Auditors and audit entities from the third countries should be able to
continue their activities in relation to audit reports concerning annual or consolidated accounts for financial years starting during the period from 29 June 2008 to 1 January 2011.
REGULATORY ARBITRAGE OPPORTUNITIES - The environment
ARTICLE 45.4. DIRECTIVE 2006/43/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 May 2006
"Audit reports concerning annual accounts or consolidated accounts issued by third-country auditors or audit entities that are not registered
in the Member State shall have no legal effect in that Member State".
Have a look at companies incorporated in Guernsey, Jersey, the Isle of Man - countries that have NOT equivalent system.
There are several firms incorporated in countries from Group 2 and 3 and listed in Europe. The European regulators have a surprise for them:
Their auditors are not recognized in Europe, and their opinion has no legal effect in Europe.
Here the excitements starts… Just an example:
A. How shareholders react when something has happened (they never understand what) and we can not have consolidated financial
statements?
B. What about the Basel ii obligation - the home country is responsible for the consolidated financial statements - when the home country is
non-European and the host country is European?
Differences = regulatory arbitrage opportunities
Our key goal is to generate alpha, "excess return" over market performance. "Alpha" has always to do with the skill of the hedge fund
manager. Skill-based investing makes the real difference.

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