K&L Gates' 2012 Annual Outlook provides a valuable collection of articles that address important industry and regulatory trends and their correlation with government and political developments. This edition highlights regulatory issues in European Union countries, and also covers diverse topics such as: systemic financial risk regulation, anti-corruption and white-collar enforcement initiatives, tax policies, competition and antitrust law matters, intellectual property and international trade developments, energy and climate change, and health care and food safety laws.
Of particular interest in this year's report is the section on financial services. In this chapter, K&L Gates covers, among other things, updates on regulatory efforts and emerging developments that K&L Gates has identified as areas global financial professionals should keep on their radar screens:
- Keeping Up with Dodd-Frank Implementation
- Changing Dynamics in U.S. Regulation of Investment Products
- The Safety of Customer Assets after MF Global Investment Protection at Risk
- U.S. Regulation of Hedge Funds Cresting
- New Payment Technologies Present Challenges for FinCEN
- CFTC Proposes Expanded Duties and Liability for Chief Compliance Officers
- DOL Continues to Press for Regulatory Changes Regarding 401(k) and Pension Plans and Steps Up Enforcement Efforts
The report provides some worthy analysis of the changing dynamics of US regulation of investment products, touching on areas like changes in SEC settlement powers and oversight of SEC regulatory efforts.
Regulatory risk, always a high priority in the heavily regulated investment management industry, is shifting in focus as U.S. regulators respond to increasing congressional and judicial demands. The industry’s primary regulator, the Securities and Exchange Commission (SEC), is working hard to rebuild its reputation as a tough defender of consumer interests after suffering heavy criticism for failing to identify the Madoff Ponzi scheme and to regain ground from a long period of deregulation. The SEC is fighting an uphill battle on various fronts that affects how it approaches regulation going forward, including facing other players that now have a hand in affecting how the fund industry is regulated.
With regard to hedge funds, K&L Gates predicts a wave of regulation in 2012.
In 2012, we will see a wave of regulation begin to crest over the U.S. hedge fund industry. While the U.S. Securities and Exchange Commission (SEC) gave the industry an initial reprieve by delaying the implementation of Title IV of the Dodd-Frank Act from July 21, 2011, the final implementing rules will go into effect on March 30, 2012. By that date, all hedge fund managers with more than $150 million in assets under management (and all of those with more than $100 million that also manage non-fund separate accounts) will have to be registered with the SEC under the Investment Advisers Act of 1940 (the Advisers Act). Advisers Act regulation is primarily oriented toward fiduciary principles and full disclosure (rather than prescriptive or prudential regulation), and many registered hedge fund managers have flourished under the Advisers Act. Nonetheless, regulation will represent significant new compliance burdens and a cultural shift for much of the hedge fund industry.
. . .
While it is impossible to predict precisely how high this regulatory wave will be or where it will crash, there is no doubt that it is building in force. The next several years will see the SEC, and quite possibly the CFTC, develop a regulatory regime that will change the shape of the hedge fund industry.
K&L Gates sees what could be a silver lining in the collapse of former derivatives market leader MF Global—in which hundreds of millions of dollars in customer collateral supporting derivatives disappeared almost instantly.
The silver lining would be a revitalized regulatory rethinking of the safety of customer assets by the principal futures and derivatives regulator in the United States, theCommodity Futures Trading Commission (CFTC).
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This rethinking includes the reconsideration of segregated fund arrangements.
The report also alerts CCOs of swap dealers and major swap participants to new regulatory burdens they must be aware of.
The Dodd-Frank Act’s amendments to the Commodity Exchange Act (CEA) require each of the new types of regulated entities dealing with swaps, i.e., swap dealers (SDs), major swap participants (MSPs), swap execution facilities (SEFs), and swap data repositories (SDRs), as well as traditional futures commission merchants (FCMs), to designate a chief compliance officer (CCO) to assume responsibility for the entity’s regulatory compliance. Under the statute, CCOs will have significantly increased responsibilities including, among other matters, annually self-reporting instances of noncompliance. They will also bear potential personal liability for an entity’s regulatory compliance.
K&L Gates' annual Global Government Solutions Outlook provides a quick reference to some key issues financial professionals may wish to monitor throughout 2012. The full text of the report is available at:
http://www.klgates.com/files/upload/GGS_2012_YearAhead.pdf