6.17.2009 The Obama Administration introduced a white paper, Financial Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and Regulation (the White Paper), proposing significant and comprehensive regulatory reform in response to what the White Paper calls the “most severe financial crisis since the Great Depression.” The White Paper offers targeted recommendations intended to address the following five key goals: (1) promote robust supervision and regulation of financial firms; (2) establish comprehensive supervision and regulation of financial markets; (3) protect consumers and investors from financial abuse; (4) improve tools for managing financial crises; and (5) raise international regulatory standards and improve international cooperation.

As part of the effort to strengthen and augment the existing regulatory framework, the White Paper: (1) recommends restructuring the federal financial regulatory system, including the formation of new agencies and coordinating bodies, a new consolidated bank regulator, and a more powerful Federal Reserve; and (2) proposes greater regulation and robust reporting requirements on securitizations, stronger regulation of credit rating agencies, comprehensive regulation and oversight with respect to all over-the-counter (OTC) derivatives and derivatives dealers, and granting new authority to the Federal Reserve to oversee payment, clearing and settlement systems and related activities.  

The proposal impacts money market funds, hedge funds and investment advisers, their parent companies, and government agencies that regulate them.  

With respect to money market funds, Treasury states that the SEC should consider:

  • Requiring money market funds to maintain substantial liquidity buffers;
  • Reducing the maximum weighted average maturity of money market fund assets;
  • Tightening the credit concentration limits applicable to money market funds;
  • Improving the credit risk analysis and management of money market funds; and
  • Empowering money market fund boards of directors to suspend redemptions in extraordinary circumstances to protect the interests of fund shareholders.

Turning to hedge funds, Treasury recommends that all investment advisers to hedge funds and other private pools of capital, including private equity funds and venture capital funds, whose assets under management exceed a certain threshold should be required to register with the SEC under the Investment Advisers Act of 1940. Such funds would be subject to:

  • Recordkeeping requirements;
  • Requirements for disclosures to investors, creditors and counterparties;
  • Regular periodic examinations; and
  • Regulatory reporting requirements for reporting on a confidential basis of the amount of assets under management, borrowings, off-balance sheet exposures, and other information necessary to assess whether the fund or fund family is so large, highly leveraged or interconnected that it poses a threat to financial stability.

Treasury addressed perceived confusion by investors with respect to investment advisers and broker-dealers. It states that new legislation should bolster investor protections and bring important consistency to the regulation of broker-dealers and investment advisers by:

  • Requiring that broker-dealers who provide investment advice about securities to investors have the same fiduciary obligations as registered investment advisers;
  • Providing simple and clear disclosure to investors regarding the scope of the terms of their relationships with investment professionals; and
  • Prohibiting certain conflicts of interests and sales practices that are contrary to the interests of investors (in particular, forms of compensation that encourage intermediaries to put investors into products that are profitable to the intermediary, but are not in the investors’ best interest).  

Click http://www.financialstability.gov/docs/regs/FinalReport_web.pdf to access the White Paper.

Click http://sutherland-news.com/ve/ZZRs9996a73Waayk5/stype=dload/OID=709623222226386/VT=0 to access a recent Sutherland legal alert regarding the White Paper, its proposals and its implications.

Click http://www.ici.org/pressroom/news/09_news_reg_reform_proposal to access a statement by the Investment Company Institute’s President, Paul Schott Stevens, about the proposal.