President Barack Obama addressed Congress this week to unveil his recommendations for transformation of the financial regulatory landscape of the country. In connection with the address, the White House issued a “White Paper” outlining the overall proposal. Among several other recommendations, the White Paper highlighted a number of important regulatory changes that, if enacted, would have a direct impact on the alternative investment industry.
New Registration Requirements for Investment Advisers and the Funds They Advise
One of the most significant proposed changes would require investment advisers to hedge funds and other private pools of capital to register with the Securities and Exchange Commission. All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold would be required to register with the SEC under the Investment Advisers Act of 1940. In registering, the advisers would be required to provide information on the funds they manage.
The proposal calls for all investment funds advised by an SEC-registered investment adviser to be subject to recordkeeping requirements; requirements with respect to disclosures to investors, creditors and counterparties; and regulatory reporting requirements. The regulatory reporting requirements for such funds would require reporting, on a confidential basis, the assets under management, borrowings, off-balance sheet exposures and other information necessary to assess whether the fund or fund family poses a threat to overall financial stability. The proposal also suggests that the SEC conduct regular, periodic examinations of such funds to monitor compliance with these requirements.
New Fiduciary Duty Requirement for Broker-Dealers
The White Paper also outlines a proposal that would establish a fiduciary duty for broker-dealers offering investment advice. New legislation would require that broker-dealers who provide investment advice to investors relating to securities have the same fiduciary obligations as investment advisers. The proposal seeks to harmonize the regulation of investment advisers and broker-dealers.
Strengthening of Supervision and Regulation of Securitization Markets Including Over-the-Counter Derivatives Markets
In order to make the over-the-counter derivatives markets more transparent, the White Paper has proposed an amendment to the Commodity Exchange Act and the federal securities laws that would authorize the Commodity Futures Trading Commission (CFTC) and the SEC to impose recordkeeping and reporting requirements for all OTC derivatives.
The proposal recommends that the CFTC and the SEC provide a report to Congress by September 30, 2009, identifying all existing conflicts in the statutes and regulations with respect to similar types of financial instruments. The proposal calls for the CFTC and SEC then to either explain why the differences are essential to investor protection or make recommendations for changes to those statutes and regulations that would eliminate the differences.
The White Paper also recommends additional regulation that would require the originator or sponsor of a securitized credit exposure to retain a 5 percent interest in a material portion of the credit risk of that credit exposure to deter companies from marketing unsuitable loans.
Creation of a Financial Services Oversight Council
The proposed Financial Services Oversight Council (Council) would serve to: facilitate information sharing and coordination, identify emerging risks, advise the Federal Reserve on the identification of firms whose failure could pose a threat to financial stability and provide a forum for resolving jurisdictional disputes between regulators. The proposed legislation would give the Council the authority to gather information from any financial firm and the responsibility for referring emerging risks to regulators who have the authority to respond.