The Managed Funds Association (the “MFA”), a global alternative investment industry organization, had a busy December, 2010, submitting seven comment letters to the SEC and/or the CFTC, five of which related to proposed rulemakings in the derivatives area and two more broadly to investment advisers. Links to all comment letters may be found here.
In a December 16, 2010 comment letter, the MFA addressed Section 914 of the Dodd-Frank Act which calls for the SEC to “seek authority to establish one or more self-regulatory organizations (SROs) for investment advisers” and requires the SEC to conduct a study to “review and analyze the need for enhanced examination and enforcement resources for investment advisers.” The MFA reiterated its position that the SEC should retain its authority to oversee investment advisers, rather than have an SRO perform that function, arguing that an SRO would “lack experience in regulating private fund managers, create inconsistent regulation for investment advisers, face difficult conflicts of interest, increase regulatory costs and ultimately diminish the quality of regulatory oversight of the industry.”
Section 914 has elicited many comment letters from industry participants. In November, the Financial Industry Regulatory Authority (“FINRA”) filed a comment letter supporting the establishment of one or more SROs and exploring the possibility that FINRA be the SRO to oversee investment advisers. FINRA has its supporters; however, a number of comment letters have been submitted to the SEC opposing the oversight of investment advisers by SROs. These include a September comment letter from the MFA, letters in October from the Investment Company Institute and the Investment Adviser Association, a letter in November from the American Institute of CPAs and letters in December from the Financial Planning Coalition and the CFA Institute. The Association of Institutional Investors had opposed the creation of such an SRO in a meeting with the SEC staff.
The deadline for these letters is closing in. The SEC is required to submit a report to Congress by January 17, 2011, including a discussion of “regulatory or legislative steps that are recommended or that may be necessary to address concerns identified in the study.”
In a December 22, 2010 letter, the MFA commented on the SEC’s “say-on-pay” proposal under which institutional investment managers would report how they vote proxies relating to executive compensation matters, as required by Section 951 of the Dodd-Frank Act The MFA agreed with the comment letter submitted by the American Bar Association, recommending that the SEC require an institutional investment manager to report its votes on Form N-PX only when the manager has instructed an intermediary to vote its shares. As currently proposed, the rule would require the manager to file a report even if the manager elects not to vote the proxy. In addition, the MFA suggested that, because of the difficulty a manager may have in determining how its shares were actually voted by the intermediary, the manager should be required to report how it instructed the shares to be voted, rather than how they were actually voted.
It is expected that the SEC will adopt “say-on-pay” rules in the first quarter of 2011.
The Wall Street Journal Online reports that the Senate voted 82-14 this morning to end debate on a continuing resolution for $250 billion to fund the government through March 4, 2011. It is expected that, after a final vote in the Senate, the resolution will be sent to the House of Representatives for a vote prior to the expiration of the current stop-gap measure at midnight tonight.
According to a Senate Appropriations Committee summary produced late Sunday, the resolution provides a small increase of $1.16 billion over 2010 spending, but it appears that there will be no new funds to help the SEC or CFTC with regulatory reform under Dodd-Frank. According to the Wall Street Journal Online, the proposed spending plan would give the SEC authority to set up five offices mandated by Dodd-Frank, including a whistleblower office.
A $1.1 trillion omnibus bill, supported by the Democrats and hailed by the SEC and CFTC, would have included an 18% increase in the SEC’s budget ($200 million in new funding), and a 69% increase in the CFTC’s budget ($100 million of additional money). That bill failed to garner sufficient support and, last Thursday night, the Dow Jones Newswire reported that Senate Majority Leader Harry Reid (D-Nev.) had announced that the Senate would focus instead on a short-term funding measure. At that time, it was reported that the Senate Republicans were considering only a resolution proposed by Minority Leader Mitch McConnell (R-Ky.), which would have simply maintained funding at the 2010 budget levels until February 18, 2011. The House’s version of a new measure, released in early December, would have shifted more funds to the SEC and the CFTC while maintaining the 2010 budget.
The SEC and CFTC had expected to use the new funding under the omnibus bill to allow the agencies to more effectively carry out their new responsibilities and implement the many new rules under the Dodd-Frank Act. These include both agencies’ supervision of the over-the-counter derivatives markets and the SEC’s new power to regulate and examine certain private fund advisers and municipal advisers. Now, it appears that, despite these new duties, which both SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler have said require hiring hundreds of new staff members and significant upgrades in technology, the SEC and CFTC will be forced to operate within their 2010 budgets.
Although the Obama administration could shift money around to help the SEC and CFTC, it is likely that the Republicans, who did not support Dodd-Frank and will take control of the House of Representatives in January 2011, will attempt to block any such shifts through legislation.
The Wall Street Journal Online reports that Senate Finance Committee Chairman Max Baucus (D., Mont.) remains confident that the Democrats could still win funding battles for financial regulation. Sen. Richard Shelby (R., Ala.), however, is quoted as saying, “It’s going to be a big political fight. I think the odds shift toward Republicans.”
Senate Spending Bill
Reuters is reporting that a Senate spending bill released today will give an increase of 18% in the SEC’s 2011 budget to $1.3 billion and an increase of 69% in the CFTC’s 2011 budget to $286 million (in excess of the funding requested by that agency). These increases should give the agencies the monies they need to implement the many new rules being put in place pursuant to Dodd-Frank, in particular the rules governing the over-the-counter derivatives market. Both agencies had warned of delays resulting from lack of funds and the SEC (whose fiscal year began October 1) recently announced that, because of budget uncertainty, it was deferring setting up new offices, including the whistleblower office and those overseeing credit rating agencies and municipal securities.
In order for the agencies to receive their funds, the Senate must now pass the bill and then merge its bill with the House spending bill which has already been passed and includes large increases for these agencies.
SEC Open Meeting
Among the items to be discussed at tomorrow’s Open Meeting at the SEC:
CFTC Public Meeting
The CFTC will hold a public meeting on Thursday, December 16, to consider rules whose effect will be to limit speculation in the commodity derivatives markets. The CFTC plans to propose rules that will set:
The CFTC is expected to produce new rules by late January.
The SEC staff continues to carry out the rulemaking and proceed with the studies mandated by the Dodd-Frank Act.
The SEC’s “Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act” web page consolidates links to all of the SEC’s related accomplishments to date, includes a calendar of its planned activities implementing the Dodd-Frank Act through July 2011 and provides a link to comments the SEC has received on both rulemaking and planned studies.
In November, the SEC proposed the following: an anti-manipulation rule for security-based swaps, a Whistleblower Incentives and Protection Program, rules regarding the registration and regulation of security-based swap repositories and security-based swap reporting and, most recently, exemptions from investment adviser registration for venture capital firm advisers and certain private fund advisers, as well as rules and changes to forms to implement the transition of mid-sized investment advisers from SEC to State regulation.
Highlights of the December, 2010 calendar most relevant to hedge funds and investment advisers include: Continue reading
The SEC continues to closely follow its calendar of anticipated Dodd-Frank rulemaking activity and has posted a notice of an Open Meeting, to be held on Friday, November 19, 2010 at 10:00 a.m.
The SEC plans to propose Investment Advisers Act of 1940 rules:
The SEC will consider proposed security-based swaps rules: Continue reading
Whistleblower Program
The SEC proposed a new whistleblower program under the Dodd Frank Act. The SEC’s proposed rule provides a simple, straightforward procedure for potential whistleblowers to provide critical information to the agency. To be considered for an award, a whistleblower must voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million. The SEC is asking for comments on or before December 17, 2010. To see the proposed rule please go to: http://www.sec.gov/rules/proposed/2010/34-63237.pdf
Rule to Prevent Fraud in Connection with Security-Based Swaps:
The rule is proposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally authorizes the SEC to regulate security-based swaps. The proposed rule would add a definition of “security-based swap” to the U.S. Exchange Act of 1934 (the “Exchange Act”). “Security-based swaps” will be subject to the general antifraud provisions of the federal securities laws (for e.g., section 10(b) of the Exchange Act.
The proposed rule would ensure that market conduct in connection with the offer, purchase or sale of any security-based swap is subject to the same general anti-fraud provisions that apply to all securities. The rule also would explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap. The proposed antifraud rule would apply not only to offers, purchases and sales of security-based swaps, but also to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to security-based swaps. Further, the rule would make explicit the liability of persons that engage in misconduct to trigger, avoid, or affect the value of such ongoing payments or deliveries. For further details please see http://www.sec.gov/rules/proposed/2010/34-63236.pdf
The SEC staff continues its hard work on the rulemaking and studies mandated by the Dodd-Frank Act, signed into law by President Obama on July 21, 2010.
The SEC’s webpage captioned “Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act” consolidates links to all of the SEC’s related accomplishments to date, and includes a calendar of its planned activities implementing the Dodd-Frank Act through July 2011.
Highlights of the November, 2010 calendar relevant to hedge funds and investment advisers include:
The SEC has been working closely with the CFTC to coordinate their respective agencies’ rulemakings related to derivatives markets. Most recently, the SEC and CFTC staffs held a joint public roundtable on October 22 from 9 a.m. to noon to discuss issues related to the clearing of credit default swaps. The roundtable is meant to assist both agencies in the rulemaking process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Agenda for the Roundtable follows. A transcript of the public roundtable discussion will be published on the CFTC’s website. Continue reading
The SEC is steadily working through the rulemaking required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). In October 2010 alone, the SEC proposed eight new rules and adopted an Interim Final Rule. The SEC has been working closely with the CFTC to coordinate their respective agencies’ rulemaking related to derivatives markets.
On October 13, 2010, the SEC adopted Interim Final Exchange Act Rule 13Aa-2T requiring certain swap dealers and other parties to report any security-based swaps entered into prior to, and not expired as of, the July 21, 2010 passage of the Dodd-Frank Act. The Interim Final Rule requires parties to report security-based swap information to the SEC, or to a registered security-based swap data repository, by a compliance date to be set in the rules or within 60 days after a registered security-based swap data repository commences operation, whichever is earlier. Until such date, the parties are required to provide information regarding the swaps to the SEC upon request. An Interpretive Note provides guidance on the type of information and documents that reporting parties should preserve in order to be prepared for the reporting requirements.
The Interim Final Rule became effective upon publication in the Federal Register on October 20, 2010, and will remain in effect until the earlier of January 12, 2012 or the date on which a permanent rule is published. The SEC will continue seeking public comments until December 20, 2010.