Dodd Frank
US financial regulatory reform
Signed into law on 21st July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act is the most comprehensive financial reform package in history of the US and touches every area of financial services. Given the scale and complexity of the Act and associated measures, it is easy to lose sight of the two key objectives which are relatively simple:
- “De-risk” the financial system by constraining individual institutions’ risk-taking activities and capturing a broader set of institutions, including the so-called “shadow” banking system, in the regulatory net
- Enhance consumer protections
The effects of Dodd Frank will be felt outside the US and could impact fund managers and service providers in a number of key areas.
SEC Registration
Hedge fund managers previously exempt under the “Private Adviser Exemption” will be required to register with the SEC by Q1 2012 and as under the EU’s AIFM Directive, these managers will be subject to ongoing regulatory requirements. Non-US Investment advisers and funds are potentially impacted if they manage assets from the US, advise US individuals or have custody of US client assets.
Investment managers need to determine if they are in scope and required to comply with the Investment Advisors Act 1940.
Regulation of OTC Derivatives and Swaps
Dodd Frank provides for a complete overhaul of the $600 trillion OTC derivatives market in order to increase transparency and oversight. The reforms proposed by the Commodity Futures Trading Commission and the SEC will introduce centralised clearing for OTC derivatives and a range of new reporting requirements. The changes will affect all market participants with ramifications for operations and technology, risk management, tax, and compliance, as well as other functions. While the rulemaking process is still in progress, it is clear that firms should consider establishing a plan and initiating change today.
The EU is also progressing with the regulation of the OTC derivatives market under the European Market Infrastructure Regulation (EMIR) and compatibility and interoperability between the two regimes will be important for global investment managers.
Incentive-based compensation rules
Registered Investment Advisers (RIAs) will be required to follow new rules that aim to prevent inappropriate risk-taking behaviour. Key provisions include deferred payment of bonuses for executive officers of larger financial institutions, shareholder approval of bonuses and shareholder review of “golden parachutes”.
Whistleblower Programme
Through a new whistleblower programme the SEC aims to get “high-quality, original information about securities violations directly into the hands of Commission staff”. Financial rewards will be granted to employees who provide original information on securities violations that lead to successful action amounting to more than $1 million in monetary sanctions. In response companies will need to review existing practices and codes of conduct and develop effective procedures to handle whistleblower allegations.
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