SEC and CFTC under-resourced to deal with hedge fund regulation

Date: Thursday, June 16, 2011
Author: Charles Gubert, COO Connect

The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission’s (CFTC) lacking resources mean they will face an uphill struggle implementing many of the regulatory requirements geared towards hedge funds.

A significant number of the provisions outlined in the Dodd Frank Act were meant to be realised by July 21, 2011. However, it is becoming increasingly apparent that the regulators will not meet this deadline. In some cases, they have even pushed back the dates – most notably, mandatory hedge fund adviser registration will now take place at some point in the first quarter of 2012. The CFTC also announced on June 14 that it would delay imposing the rules governing swaps until December

Hedge fund advisers will now be required to register with SEC and report their activities in significant detail in the new Form PF. This will inevitably add another burden to the already under-pressure SEC. “What the regulators are trying to do is admirable, in attempting to gain transparency into the markets and participant activities,” said Holland West, a New York-based partner at international law firm Dechert. “But the reporting forms are far too detailed and the regulators presently do not have the systems or staff in place to make meaningful use of the information they will be receiving. The broad reporting requirements are an area that needs to be re-examined by regulators,” he added.

“The SEC is under-resourced and they do not have the staff or the infrastructure to implement effectively a lot of this regulation. The regulators have so much to accomplish in a short time period since the enactment of Dodd Frank. At the end of the day, the regulators were given a one year deadline to overhaul the financial regulatory system. There was too much focus on deadlines by Congress. Dodd Frank was initiated in an environment of unprecedented market dislocation and participant defaults and failures or near ones, and politicians and administration officials felt they had to fix the system quickly. More importantly is ‘to get it right,’” he added.

Others have also expressed reservations about whether the authorities will actually be able to cope with the influx of regulatory requirements and the substantial workload these rules will bring. “There are dozens of new rules and every new regulatory requirement is a burden for a financial institution and its customers,” said Anthony Belchambers, chief executive officer at the Futures and Options Association (FOA), the industry body representing firms engaged in derivatives trading. “But the real burden is on the regulator. We need to ask ourselves whether the regulators will be able to monitor and enforce all of these new requirements effectively and analyse the huge amount of consequential data flows,” he acknowledged.

The SEC and CFTC’s woes have been exacerbated by political wrangling in Congress over the budget. Republicans, much to the chagrin of the Democrats, have been calling for severe cuts to the SEC and CFTC’s budgets. If enacted, the SEC and CFTC’s ability to apply meaningful reform would be questioned given that both regulatory bodies have repeatedly asked for more funding.

Despite this political stalemate, West highlighted the only way for the regulation to be successful would be if the SEC and CFTC hired more staff and enhanced its systems infrastructure. Furthermore, he added these bodies ought to revisit a lot of their original policies, particularly the controversial issue surrounding extraterritoriality, such as the rules governing non-US investment advisers. “I doubt the SEC will become significantly more accommodating to US advisers in finalising the proposed rules although some changes deserve to be made. But I suspect there will be some changes for non-US advisers since the proposed rules are too restrictive at this point without any compelling need to be so,” said West.