Hedge Fund Regulation
A report has recently been published by the European School of Management and Technology (ESMT) stating that tighter regulations are likely going to necessary to protect hedge fund investors and prevent managers from employing the use of high-risk strategies. These regulations will be beneficial to both parties, as there will be less temptation and corruption on the part of managers, and less risk and associated anxiety for investors.
The European School of Management and Technology study focused on the unstable and potentially dangerous performance of high-risk strategies in relation to hedge funds. It also noted the persistent propensity of hedge fund managers to continually make investment decision based exclusively on the results they received in the past. In an ever growing and changing marketplace, this practice is by no means effective. Heavy regulation on the hedge fund industry, paired with greater disclosure on the part of the hedge fund managers and operators, will inevitably help the industry become both highly profitable and sustainable, offering investors less risk and more return. Investors and investment managers alike are leery during these difficult economic times, and more regulation will allow both sides of the investment coin to be more at ease.
This new report comes on the heels of an Act that was recently passed by the United States Senate. This Act, called “The Private Fund Investment Advisers Registration Act of 2010”, would require that all hedge fund operators who currently manage $100 million or more register with the Securities and Exchange Commission, or the SEC. As defined by the SEC, some firms can be excluded from the registration requirement. These firms include what the SEC calls managers of “private equity funds” and “venture capital funds.” Also excluded from the Act are “family offices,” which also must be defined by the Securities and Exchange Commission.
The Private Fund Investment Advisors Registration Act of 2010 effectively eliminates exemption of firms that were previously classified as “small advisers,” also known as “private advisors.” This exemption was currently available to firms that possessed less than 15 clients in the preceding 12 months. They must also not have publicly claimed investment adviser status. The repeal of this exemption will require all advisers, hedge fund managers and “small advisers” alike, to register with the Securities and Exchange Commission, or even a state or multiple states.
Currently the requirement for investment advisors to register with SEC is $25 million. By raising the threshold to $100 million, the Act would allow previously registered United States investment managers with assets between $25 and $100 million to deregister and become regulated by a state or state.
The Act, which was passed by the United State Senate on May 20th, 2010 by a vote of 59-39, is part of a more comprehensive Senate Bill, known as “Restoring American Financial Stability Act of 2010.” Though this bill is a democratic proposition, it received much support in the Senate due to its focus on remedying the current economic crisis, especially when placing a focus on hedge fund regulation, as previously mentioned. These regulations will be placed on hedge fund advisers via the Private Fund Investment Advisors Registration Act of 2010, was met with support on both sides of the debate. This Act, within the Restoring American Financial Stability Act of 2010 was A conference committee will be selected to reconcile the differences between this Senate Bill and the “Wall Street Reform and Consumer Protection Act of 2009”, a bill that was passed by the United States House of Representatives in December 2009
While there are a multitude of similarities between the Restoring American Financial Stability Act of 2010 Senate Bill and the Wall Street Reform and Consumer Protection Act of 2009, there are still significant differences between them that the committee will have to work to reconcile. This committee will be primarily made up of select individuals from both the House and Senate. Members of the Senate Committee on Banking, Housing and Urban Affairs will be matched with members of the House Committee on Financial Services to discuss congruency between the bills.
The conference committee has a goal of sending the final bill to President Barack Obama before the July 4th recess, but this only be completed after Congress approves final legislation of the Bill. One particular difference that can be noted between the two bills is that the Senate Bill imposes more restrictions on consumer financial protection and the regulation of over-the-counter derivatives that the House Bill does.
Barney Frank (D-MA), the Chairman of the House Financial Services Committee has often repeated that this bill will most definitely be conference as mentioned above. Both Chairman Frank and Chairman Dodd of the Senate said they will spend around one month working with each other in order to conference the bill via committee. The Chairmen of both the House and Senate Committee’s plan to make the conference as open a process as possible, allowing for as much transparency as is reasonable. There has even been talk about the committee’s negotiation being broadcast live on C-SPAN, though this will likely no come to fruition since the Senate Bill regulations are much more strict than originally anticipated. Even if the conference is not televised in its entirety, it is likely portions will be aired in an effort to increase transparency and put to rest the minds of anxious Americans.
The process of creating better regulations for financial services began more than two years ago, and this is one of the last steps in the legislative process. The need for greater regulations is no mystery. One can cite any number of factors including the high unemployment rate and loss of hundreds of thousands of jobs, foreclosures reaching all-time highs, home values nose-diving, and billions of dollars seeming to disappear overnight from the United States Economy. With the United States debt skyrocketing to upwards of $13 trillion, lawmakers are feeling the burden of past mistakes and are being pushed to make changes to American laws which will help the economy recover.