Today, the House Committee on Financial Services held a hearing entitled “Industry Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals” to discuss proposals for financial regulatory reform. Testifying before the committee were:

Mr. Baker, speaking on behalf of the MFA, which represents hedge funds, focused his testimony on (1) registration of advisers to private pools of capital, (2) systemic risk regulation and (3) regulation of short selling. While noting that hedge funds were not “the root cause of the problems in our financial markets and economy,” he stated that MFA is committed “to working with the Obama Administration and Congress to restore investor confidence in and stabilize our markets and strengthen our nation’s economy.” He said that the MFA “supports the registration of currently unregistered investment advisers to all private pools of capital, subject to a limited exemption for the smallest investment advisers with a de minimis amount of assets under management.” He emphasized MFA’s support for the proposal’ s scope, stating that many of the regulatory issues will be relevant to all private pool managers, including firms that manage hedge funds, private equity funds, venture capital funds, commodity pools and real estate funds. With respect to the creation of a systemic risk regulatory regime, he suggested that factors that should be considered in determining whether an entity is of systemic relevance include the amount of assets under management, the concentration of its activities, and its interconnectivity with other market participants. He also encouraged policy makers to consider what type of heightened regulation is appropriate for different types of systemically relevant firms, stressing that a one-size-fits-all regulation may not be appropriate. For example, the hedge fund industry as a whole may be systemically relevant, but individual hedge funds may not. With respect to the regulation of short selling, Mr. Baker stated that rather than requiring investors to publicly disclose short position information, which could be misleading to the public by implying an investor has a negative view of a particular stock even when that is not the case, regulators should require prime brokers and clearing brokers to provide short position information on an aggregate basis.

Mr. Brodsky focused on the need to address the jurisdictional divide between the SEC and the CFTC. Since the creation of the CFTC in 1974, there have been jurisdictional conflicts between the SEC and CFTC, particularly involving financial instruments that have elements of both securities and futures. Mr. Brodsky stated that the bifurcated regulatory system has resulted in delays in bringing new products to market in the United States because of legal uncertainties regarding product regulation. While the Obama Administration’s Financial Regulatory Reform Proposal recognizes that the split is harmful, Mr. Brodsky does not believe it does enough to remedy the problem. It advocates harmonizing the two regulatory bodies, while Mr. Brodsky recommends merging the SEC and the CFTC.

Mr. Snook addressed (1) the proposed creation of a Systemic Risk Regulator and a Financial Services Oversight Council, (2) financial market regulatory reform, such as the regulation of over-the-counter (OTC) derivatives, or swaps, and (3) consumer protection initiatives. SIFMA strongly endorses the designation of a single oversight body, whether the Federal Reserve or another entity, as a systemic risk regulatory. “A single systemic risk regulator, in combination with [a newly created Financial Services Oversight Council that collects information system-wide], would be best positioned to efficiently and effectively assess threats to financial stability and ensure that appropriate action is taken promptly.” With respect to OTC derivatives, Mr. Snook remarked Congress should not mandate exchange trading of derivatives products because doing so might reduce market liquidity. He instead proposed that in order to meet transparency goals, information about market participants’ transactions and open positions should be submitted to a data repository. Importantly, he noted that any legislation by Congress to create new derivatives regulation should include a provision that broadly preempts state law to avoid inconsistency and unnecessary expense to the financial services industry. In terms of consumer protection initiatives, he voiced support for a consumer protection agency, but cautioned against duplicating regulatory regimes already in place. Mr. Snook also touched on SIFMA’s support for holding broker-dealers that provide personalized investment advice to the same standard of care as investment advisers. He concluded by focusing on the need for common regulatory standards across global markets so as not to put the American firms at a competitive disadvantage because of the burdens of complying with regulations.

Mr. Stevens began his testimony by expressing support for the Obama Administration’s position that the proposed Consumer Financial Protection Agency should not have jurisdiction over funds and their investment advisers, which are already appropriately regulated by the SEC. Like the other commentators, he also discussed his support of the proposal to impose fiduciary duties on broker-dealers and discussed the regulatory inefficiencies of the overlap between the SEC and CFTC. In addition, he discussed the proposal to create a systemic risk regulator. He stated that ICI is in favor of a systemic risk regulator but cautioned against “imposing undue constraints or inapposite forms of regulation on normally functioning elements of the financial system that may stifle innovations, impede competition or impose needless inefficiencies.” He warned against simply adding on another “layer of bureaucracy.” He also stated that the Obama Administration’s approach would strike the wrong balance “by expanding the mandate of the Federal Reserve well beyond its traditional areas of expertise and failing to draw appropriately on the expertise of the other federal functional regulators.”

Mr. Lowenstein addressed four issues. First, he said that it is important for Congress to enact a new regulatory regime to restore investor confidence and emphasized the need to do so quickly so that businesses will understand how they will be regulated. Second, he pointed out that private equity contains none of the three fundamental factors articulated by the Obama Administration that trigger systemic risk concerns. Third, he discussed the Private Equity Council’s support for the creation of an overall systemic risk regulator “capable of acting decisively in a crisis, empowered to implement needed policies, and possessing sufficient international credibility to instill confidence in global markets.” Finally, he noted the Private Equity Council’s support for requiring private equity firms to register as investment advisers with the SEC, but cautioned that Congress should make sure to tailor the requirements to the nature and size of the individual firm and the degree of systemic risk it may pose.

Ms. Lassus voiced support for holding broker-dealers who provide investment advice to the same fiduciary standard as investment advisers. She also is in favor of the creation of a professional oversight board for financial planners and advisors “that would establish baseline competency standards for financial planners and require adherence to a stringent fiduciary standard of care.”

Mr. Nichols discussed the problems with the current financial regulatory regime, namely the inability to see the “forest for the trees.” He discussed the need to create an agency charged with assessing risks to the financial system as a whole and the Financial Services Forum’s support for the creation of a systemic risk supervisor. He indicated that the Federal Reserve might be best suited for such a role because of its tremendous institutional experience. He also stated that it is essential that there be increased national uniformity in the regulation of insurance.

Finally, he remarked that no institution should be too big to fail. “Failure is an all-American concept because the discipline of potential failure is necessary to ensure truly fair and competitive markets.”