Financial Crisis News Center

US Treasury Concerned about Protectionism of Proposed EU Hedge Fund Directive

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Recently, Dan Waters, Director of Asset Management at the Financial Services Authority, said that the revised proposed Alternative Investment Fund Managers Directive would restrict the access of EU institutional investors to valid investment opportunities in US hedge funds while delivering little real benefit to European market stability or investor protection. In remarks at the recent Euromoney seminar, he said that the current draft can be seen as an attempt to protect European funds from competition from legitimate US and other third-country funds.

Treatment of Hedge Fund Counterparties under House Legislation Resolution Authority Concerns Industry

This story appeared in Jim Hamilton's World of Securities Regulation.

The hedge fund industry has some concerns with the treatment of OTC derivatives in the event a hedge fund’s counterparty is liquidated under the resolution authority established by the House Wall Street Reform and Consumer Protection Act, HR 4173. While the protections afforded swap participants under the Act are substantially similar to those provided under the Bankruptcy Code, noted the Managed Funds Association in a letter to Treasury, the FDIC’s broad authority under the Act to make business decisions on behalf of the troubled firm is a concern.

Securities Regulators Agree to International Template for Hedge Fund Disclosure

This story appeared in Jim Hamilton's World of Securities Regulation.

With pending legislation in the US and EU to regulate hedge funds, securities regulators have agreed to an IOSCO-vetted templatefor hedge fund disclosure to assist in determining systemic risks in the sector. The template was developed by the Task Force on Unregulated Entities following requests from the Financial Stability Board, as well as from IOSCO members. SEC Commissioner Kathleen Casey, Chair of the IOSCO Technical Committee, said that the disclosure template is designed to develop a comparable and consistent set of data to be collected from local hedge fund managers and advisers to monitor systemic risks and prevent gaps in regulatory reporting requirements. The Commissioner recognizes that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector.

Treasury Circulates Draft Legislation Implementing Volcker Rules on Banks and Hedge Funds

This story appeared in Jim Hamilton's World of Securities Regulation.

The Treasury is circulating draft legislative language that would implement the Volcker rules to prohibit banks and bank holding companies from sponsoring and investing in hedge funds and private equity funds. The legislation would also prohibit banks and bank holding companies serving as investment managers or investment advisers to a hedge fund or private equity fund from providing custody, securities lending and other prime brokerage services to the fund. The draft would also prohibit banks and bank holding companies from engaging in proprietary trading.

The draft defines sponsoring a hedge fund to mean serving as a general partner, managing member, or trustee of a fund or selecting or controlling a majority of the directors, trustees or management of a fund or sharing with a fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name.

IOSCO Report Shows Need to Regulate Hedge Funds for Systemic Risk

This story appeared in Jim Hamilton's World of Securities Regulation.

As the US and EU try to pass legislation to regulate hedge fund operators and advisers, a report by an IOSCO working group concluded that hedge funds can have a systemic impact on financial stability and hence the lack of a prudential regime for monitoring hedge funds is a critical gap in the regulatory framework. The failure of a large, highly leveraged hedge fund could systemically impact its investors, other financial institutions and the markets. Further, the G-20 identified hedge funds as one of the most significant group of institutions in the “shadow” banking system.

Exposures to hedge funds are important sources of counterparty risk, noted IOSCO, especially if a hedge fund borrows from multiple brokers or is engaged in multiple trading relationships and individual counterparties do not have a full picture of the hedge fund’s leverage or of its other risk exposures. The current lack of transparency constitutes a major obstacle to risk mitigation.

Jobs Bill Would Establish New Reporting Regime for Foreign Financial Institutions with US Investors, Including Hedge Funds and Private Equity Funds

This story appeared in Jim Hamilton's World of Securities Regulation.

The Chair of the Senate Finance Committee and the Ranking Member have agreed to the Hiring Incentives to Restore Employment Act (HIRE) and this legislation is on the fast track. The tax credits in the bill would be offset by creating a new reporting regime for foreign financial institutions with US accountholders, whether they are participants in the existing IRS Qualified Intermediary program or not. This legislation casts a wide net in search of undisclosed accounts and hidden income.

Hedge Fund Industry Supports EU OTC Derivatives Legislation; Wants CCP Global Competition

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The hedge fund industry generally supports the broad concepts for derivatives legislation set forth by the European Commission as the EU commits to the passage of legislation this year. In a letter to the UK House of Lords, which is collecting comments to form a broad consensus on the legislation, the Managed Funds Association opposed position limits and expressed concern about the international harmonization of OTC derivatives legislation.

Wall Street Firms Criticize Volcker Rules, Dodd Sees Challenges

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

Wall Street firms voiced criticism with the administration’s recently announced Volcker Rules, while Senate Banking Committee Chairman Chris Dodd, D-Conn., said finding a way to implement the proposals is “no easy feat.”

At a Feb. 4, 2010, committee hearing Dodd, who previously had expressed strong support for the Volcker Rules, noted that the administration’s January 21 announcement had come “late in the game.”

President Obama Proposes Legislation Prohibiting Financial Institutions Involvement with Hedge Funds

This story appeared in Jim Hamilton's World of Securities Regulation.

The Obama Administration has proposed new restrictions on the size and scope of banks and other financial institutions in order to rein in excessive risk taking and to protect taxpayers. President Obama joined former Fed Paul Volcker, former SEC Chair Bill Donaldson, House Financial Services Chair Barney Frank; and Senate Banking Committee Chair Chris Dodd in announcing the proposal, which would strengthen the comprehensive financial reform package that is already moving through Congress.

Legislation Ending Hedge Fund Managers Carried Interest Failed at Close of 2009

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Legislation mandating the end of capital gains treatment of carried interest earned by hedge fund and other asset managers did not pass at the end of the first session of the 111th Congress, but the issue is likely to reappear during the second session in 2010. The carried interest provisions were added as a way of paying for the extenders in the Tax Extenders Act of 2009, H.R. 4213, which did pass the House.

The measure would prevent investment fund managers from paying taxes at capital gains rates on investment management services income received as carried interest in an investment fund. It would require such managers to treat carried interest as ordinary income received in exchange for the performance of services to the extent that carried interest does not reflect a reasonable return on invested capital. The legislation would make these changes effective in 2010. The bill would continue to tax carried interest at capital gain tax rates to the extent that carried interest reflects a reasonable return on invested capital. This is consistent with the proposal to change the tax treatment of carried interest that is included in the President's FY2010 Budget. This provision has previously passed the House of Representatives on previous occasions, and died in the Senate.