Specifically, in a notice issued on February 26, 2010, the IRS said that investors in offshore hedge funds, private equity funds and venture capital funds  do not have to file FBAR reports for foreign accounts held during 2009.

The notice (IRS Notice 2010-23) states that the IRS will not apply its enforcement authority adversely in the case of persons with financial interests in, or signature authority over, commingled funds other than foreign mutual funds for calendar year 2009 and earlier years. As a result, investors in these funds will not need to file FBARs (which otherwise would have been due on June 30, 2010) for 2009 and earlier years with respect to such investments.

Concurrently with Notice 2010-23, the  IRS and Treasury Department issued Announcement 2010-16, which continues a suspension of FBAR filing requirements for non-U.S. persons (i.e., persons who are not United States citizens, residents, or domestic entities) for 2009 and earlier years.

Finally, the Treasury Department issued proposed regulations through its Financial Crimes Enforcement Network (FinCEN) that would apply the relief in the IRS pronouncements described above to future years, and would provide additional relief in certain situations.  We note, however, that FinCEN indicated that they would continue to study the private investment fund industry and reserved the right to require FBAR reporting for these types of funds.  As FinCEN stated in the proposed regulations:

“Treasury remains concerned about the use of, for example, hedge funds to evade taxes and FinCEN will continue to study this issue.”

FinCEN is accepting comments on the proposed regulations until April 27, 2010.

The template (a copy of which is attached for your reference) was designed to create a comparable and consistent set of data to be collected by regulators from local hedge fund managers to monitor systemic risks and prevent gaps in regulatory reporting requirements. The data can then be exchanged amongst regulators and other competent authorities for the purpose of facilitating international supervisory cooperation in identifying possible systemic risks in the hedge fund sector.

The template, which was developed by the Task Force on Unregulated Financial Entities, contains eleven proposed categories of information. The proposed categories incorporate both supervisory and systemic data, and build on the data collection recommendations set out in the IOSCO Technical Committee’s Final Report on Hedge Fund Oversight, which was released in June 2009.

The list of data includes basic information such as the manager’s name, number of funds and equity owners; as well as the names of auditors, custodians, recent performance, redemptions, total assets under management and the value of long and short positions in different assets. Geographic spread, liquidity of a fund’s assets, the value of borrowings, net credit counterparty risk and the top 10 positions are also included.

The IOSCO Task Force has recommended that the first data gathering exercise should be carried out on a best efforts basis (given pending legislation in many jurisdictions) in September 2010.

Although the IOSCO Technical Committee recognizes that the legislative process is currently ongoing in many jurisdictions, it is publishing the template now to help inform any planned legislative changes currently being considered. As stated by IOSCO Technical Committee Chairman Kathleen Casey (who is also a U.S. SEC Commissioner):

“We recognize that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector, as well as who collects the data. Nonetheless, setting out these categories of information may help regulators in the assessment of systemic risk and help to inform the relevant legislative debates.”

It is unclear at this time whether or how the IOSCO disclosure template will inform or affect the ongoing Congressional debate on financial and regulatory reform, including whether it will impact the proposed hedge fund adviser legislation that was passed by the House in December and is currently pending in the Senate.

The agency plans to hire 18 people on the enforcement side, where it currently employs about 150 people in New York, and add 15 people to its examinations staff, which currently numbers about 210 in New York, Mr. Canellos said at the Reuters Private Equity and Hedge Funds Summit in New York.

The push to hire more lawyers, accountants and even former traders comes at a time that the agency is seeking to become more aggressive in going after the bad guys on Wall Street.

This comes on the heels of comments made by Bruce Karpati, the co-chief of the SEC’s asset management unit, pushing for hedge fund registration.   Mr. Karpati is hoping for more disclosures by hedge fund managers and stated at a recent conference:

“When you have more (hedge fund advisers) that are registered, we will have more access to information,”

As congress makes slow progress on its regulatory reform bill, the SEC is clearly gearing up for the expected registration of hedge fund managers.

Not to long after the SEC announced its new regulations on short sales, we have learned that the Securities and Futures Commission of Hong Kong (the “SFC”) that it will be introducing a short-position reporting regime to enhance transparency of short selling activities in Hong Kong.   There is little doubt that this stems from industry feedback and the SFC’s view of the current domestic market situation.

The SFC’s CEO, Mr. Martin Wheatley, claims that the “build-up of large short positions may be potentially disruptive to market stability” and that this “short-position reporting regime will not only complement Hong Kong’s robust short-selling regulatory framework but will also provide a more complete picture of short-selling activities in our market.”

Under the proposed regime, the reporting obligation will be triggered if a short position is equal to or exceeds, 0.02% of the issued share capital of a listed company, or a market value of $30 million, whichever is lower. Weekly reports must be submitted to the SFC until the short position falls below both trigger levels. The SFC will publish aggregated short positions of each stock on an anonymous basis a week later.

Managers should particulary note that only the constituent stocks of the Hang Seng Index, the H-shares Index, financial stocks and other stocks specified by the SFC will come under this new reporting regime.  Derivatives will not be included.

This post summarizes the basic elements of the new rule, which represents the first short sale price restriction adopted by the SEC since it eliminated the former “uptick rule” in 2007.

The basic elements of the new rule are as follows:

• Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day’s closing price.

• Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.

• Securities Covered by Price Test Restriction: The rule generally applies to all equity securities that are listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.

• Implementation: The rule requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a prohibited short sale.

• Effective Date and Compliance Date: The rule will become effective 60 days after the date of publication of the release in the Federal Register, and then market participants will have six months to comply with the requirements.

As noted in previous posts, this rule is the result of a long and deliberative process by the SEC.  The SEC first proposed a set of alternative price test restrictions for public comment in April 2009.  The SEC held a Roundtable on the subject on May 5, 2009, and in August 2009 it extended the comment period for the April 2009 proposal, in particular to seek additional comment on the “above national best bid” price test.  That test, which would only allow short selling at a price above (as opposed to at or above) the current national best bid, is in fact the price test contained in the new rule adopted by the SEC last week.

As mentioned above, this new rule represents the first short sale price restriction adopted by the SEC since 2007, when it eliminated former Rule 10a-1, commonly known as the “uptick rule”.  That rule, which was enacted by the SEC in 1938, prohibited investors from short selling an exchange-listed security unless the sale price of the security had previously ticked upward.  The rule remained virtually unchanged until the SEC authorized a study in 2004 to assess the functionality and necessity of the price tests restrictions in place at that time.  Following the year-long pilot study, the Commission ultimately eliminated all short sale price test restrictions in 2007.

The SEC reconsidered the imposition of a short sale price rule following the unprecedented events and market turmoil in 2008.  As Chairman Schapiro stated during the open meeting last week on the 24th:

Today’s rule grows out of the lessons learned two years ago when the market began to drop precipitously. . . In arriving at the rule we are considering, the Commission was cognizant of the benefits that short selling can provide to the markets. . . However, we also are concerned that excessive downward price pressure on individual securities, accompanied by the fear of unconstrained short selling, can destabilize our markets and undermine investor confidence in our markets.  Today’s rule addresses these concerns in two ways: First, it will prevent short selling, including potentially manipulative or abusive short selling, from further driving down the price of a security that has experienced a 10 percent price decline.  Limiting the potential for abuse is an important goal of these rules.  And, second, it will enable long sellers to stand in the front of the line, and sell their shares before any short sellers once the circuit breaker is triggered.

Hedge fund regulation on the federal seems to be stuck in the Senate right now.  Although the house has already passed their financial reform bill (which includes hedge fund registration), the Senate version seems to be stuck.  It looks like some Connecticut legislators have gotten fed up with the slow progress and may take their own steps towards regulation for hedge funds in the state.

The Regulations define “personal information” as a Massachusetts resident’s first name and last name (or first initial and last name) in combination with any one or more of (a) Social Security number, (b) driver’s license number or State issued ID card number; or (c) financial account number or credit/debit card number that would permit access to the resident’s financial account.

In summary, the Regulations require the business to develop, implement and maintain a “comprehensive information security program.”  This program should contain administrative, technical, and physical safeguards that are appropriate to (a) the size, scope and type of your business; (b) the amount of resources available to such person; (c) the amount of stored data; and (d) the need for security and confidentiality of both consumer and employee information.  The safeguards contained in such program must be consistent with the safeguards for protection of personal information and information of a similar character set forth in any state or federal regulations by which the person who owns or licenses such information may be regulated (e.g. Regulation S-P).  The Regulations provide some specifics about content of the information security program, including but not limited to designating someone to maintain the program, risk identification and assessment as to effectiveness of the program, security policies related to storage, access and transportation of personal information, disciplinary measures for violations, preventing terminated employees from accessing such information, oversight of service providers, reasonable restrictions upon physical access to such personal information, and regular monitoring to ensure that the program continues to operate in a manner that is reasonably calculated to prevent unauthorized access to, or use of, such personal information (with upgrades to the program as needed).

The Regulations also call for “computer system security requirements.”  In summary, if you electronically store or transmit personal information, then your security program shall include the establishment and maintenance of a security system covering your computers, including any wireless system, that, at a minimum, and to the extent technically feasible, shall have the following elements: (1) Secure user authentication protocols (e.g., control of user IDs, a reasonably secure method of assigning/selecting passwords, control of data security passwords, restricting access to active users and active user accounts only, and blocking access to user identification after multiple unsuccessful attempts to gain access); (2) Secure access control measures that restrict access to personal information to those who need such information to perform their job duties, and that assign unique identifications plus passwords to each person with computer access (reasonably designed to maintain the integrity of the security of the access controls); (3)Encryption of all transmitted records and files containing personal information that will travel across public networks, and encryption of all data containing personal information to be transmitted wirelessly; (4) Reasonable monitoring of systems, for unauthorized use of or access to personal information; (5) Encryption of all personal information stored on laptops or other portable devices; (6) For files containing personal information on a system that is connected to the Internet, there must be reasonably up-to-date firewall protection and operating system security patches, reasonably designed to maintain the integrity of the personal information; (7) Reasonably up-to-date versions of system security agent software which must include malware protection and reasonably up-to-date patches and virus definitions; and (8) Education and training of employees on the proper use of the computer security system and the importance of personal information security.

The above is only a summary of the Massachusetts Regulations and is not intended as a complete, detailed description of its requirements.  You are encouraged to review the Massachusetts regulation and determine the impact, if any, that it will have on your existing privacy policies and procedures.  As stated above, the Regulations will go into effect on March 1, 2010.

But more than a year after Schapiro took office, the SEC has not yet written into the Wall Street rulebook the short-selling limits — or most of the other measures that the agency has proposed to more tightly regulate the financial system. According to the Washington Post, whether Schapiro can achieve more of her reform agenda will be a test of how much she can change the SEC, which gained a reputation as a weak Wall Street regulator in the years leading up to the financial crisis………