The US Dodd-Frank Act: Implications for Luxembourg

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Business Review
February 2012

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) was signed into US law by President Obama in July 2010. The objectives of the 2,300+ page Act includes promoting financial stability by improving accountability and transparency in the financial system and protecting consumers from abusive financial services practices. The Act has far reaching implications for financial institutions around the world. As a result the impact on Luxembourg will be substantial.

Since the Act was signed into law, various US regulatory bodies (including the US Securities and Exchange Commission (SEC)) have been drafting new and amending existing laws and regulations to address the requirements of the Act. Financial institutions and industry groups across the financial sector are assessing the impacts of the new and amended laws and regulations including the impacts to non-US companies.

Recent developments
New or amended rules adopted by US regulatory bodies include amendments to the US Investment Advisers Act of 1940 (the Advisers Act) by the SEC. Other rules, such as the widely debated “Volcker Rule”, are still in draft form.

Volcker Rule: In October 2011, the SEC issued the draft of the much anticipated rule, Prohibitions and restrictions on proprietary trading and certain interests in, and relationships, with hedge funds and private equity funds. This 300 page proposed (draft) rule is available for public comment. The final rule is expected to come into effect in July 2012.

This proposed rule is sending shockwaves throughout the financial services sector. As currently written, the rule will have broad implications for financial institutions in the US and globally. As the title of this rule implies, the proposed rule prohibits banks and certain other financial institutions from engaging in propriety trading of any security, derivative and certain other financial instruments for the banking entity’s own account. Furthermore, this rule prohibits owning, sponsoring or having certain relationships with hedge funds or private equity funds and requires banking institutions to provide additional reporting to the SEC.

Amendments to the US Investment Advisers Act: In June 2011, the SEC adopted the amendments to the Advisers Act, putting into law certain provisions of the Dodd-Frank Act. These amendments to the Advisers Act will require certain US and non-US investment advisers to register, provide reporting and be under the oversight of the SEC. Investment advisers will be required to register with the SEC by 30 March 2012 unless the investment adviser meets one of the following exemptions.

  • Advisers solely to venture capital (VC) funds
  • Advisers solely to private funds with less than US$150 million in assets under management in the US. Private funds include hedge funds, private equity funds and other types of pooled investment vehicles that are excluded from the definition of “investment company” under the Investment Company Act of 1940
  • Foreign private advisers (FPA) who do not have a place of business in the US, have fewer than 15 US clients and less than US$25 million in AUM from US clients and US private fund investors

Registration with the SEC will require the adviser to comply with requirements including establishing and maintaining a compliance program, record-keeping and reporting requirements, preparing regular filings with the SEC, being subject to periodic SEC examinations and adopting and enforcing detailed code of ethics and personal trading rules for their personnel.

Advisers relying on either the private fund or VC fund exemptions will be required to complete certain reporting requirements with the SEC despite being exempt from registration with the SEC.

European financial institutions, with US affiliates or certain indirect relationships in the US, should work closely with their service providers and in-house / SEC legal counsel to assess the impacts of the rules issued by the various US regulatory bodies, including the SEC.

By Ted Anderson, Executive Director, EY Luxembourg