Funds & Advisers
Senator Dodd, Chairman of the Senate Banking Committee, introduced a 1,300+ page financial reform package on Monday, March 15th, three months after the House approved its version of reform legislation. The bill contains provisions aimed at policing systemically risky financial corporations, regulating hedge fund managers and over-the-counter derivatives, and enhancing investor and consumer protections. Certain provisions are summarized below:
Monitoring systemic risks to the financial industry has been on the front burner of reform discussions since the Obama Administration released its White Paper in June 2009. The primary goals of this legislation are to identify and respond to the various threats to our financial system as a whole; recommend standards for leverage, capital and liquidity of large, interconnected financial firms; and conduct the orderly liquidation of such firms whose failure would present a systemic risk to our financial markets.
The Senate bill creates a Financial Stability Oversight Council, comprised of leaders of several federal regulators, including the SEC, and chaired by the Secretary of the Treasury. While the bill vests supervisory authority in the Federal Reserve, the Council is tasked with identifying what large, interconnected financial companies to place under the Fed’s supervision.
Regulation of Hedge Fund Advisers
Similar to the House bill, the Senate would require registration of hedge fund managers by eliminating the private adviser exemption found in the Investment Advisers Act of 1940 . However, the language under the Senate’s “Private Fund Investment Adviser’s Act of 2010” includes two provisions relevant to all advisers. First, it raises the threshold for federal registration of investment advisers from $25 million to $100 million. Second, it adds a section to the Advisers Act that requires advisers to take steps to safeguard client assets and grants the SEC the power to govern an adviser’s custody of assets. As we know, the SEC has already taken steps to strengthen its Custody Rule, so this portion of the legislation seems a mere formality.
Regulation of OTC Derivatives
The bill states that the unregulated over-the-counter derivatives market, which had a notional value of over $550 trillion before the financial crisis of 2008, poses too great a risk on our financial system. The new requirements call for joint regulation by the SEC and the CFTC, as well as clearing and margin requirements for these complex financial instruments.
As anticipated, the bill establishes an Investor Advisory Committee and grants the SEC the authority to promulgate rules related to mandatory pre-dispute arbitration and whistleblower protection.
Unlike the House version, Dodd’s bill does not include a heightened standard of care for broker-dealers. The bill instead requires the SEC to conduct a study to evaluate the “effectiveness of existing legal or regulatory standards of care” for broker-dealers and investment advisers. The call for a study appears to be a compromise reached between industry lobbyists that are against requiring brokers to adhere to the adviser’s fiduciary duty and consumer groups that believe such a standard is imperative to protect investors. Regardless, many in the industry have found themselves scratching their heads, wondering how this study differs from the Rand Report released by the SEC in January 2008.
Self Funding of the SEC
Under the current law, the SEC receives funding after going through a Congressional appropriations process. The Senate bill establishes an account, into which the SEC deposits the fees and assessments it collects. This move brings the SEC’s funding in line with other agencies, such as the FDIC and the Fed.
Consumer Financial Protection
Both the Obama Administration and the House called for an independent agency devoted to protecting consumers against unfair and abusive financial services. Dodd’s bill creates this agency within the Fed, and it will regulate the “offering and provision of consumer financial products or services.”
You can view the entire bill here. The Senate will begin its debate of the bill next week. Vista360 will update this website as important reform developments occur.