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The U.S. Financial Reform law attracts a variety of reactions

Tuesday, July 27, 2010
Opalesque Industry Update – The reactions were swift and varied with some welcoming the signing of the U.S. financial reform law (otherwise known as the Dodd-Frank Wall Street Reform and Consumer Protection Act), others describing it as “lacking in teeth”, and some taking a cautious stance.

Global professional services firm Kinetic Partners explained that the new law, which was signed by President Barack Obama on July 21, would have a far-reaching effect on the U.S. and foreign alternative investment industry as it was the most sweeping regulatory reform legislation since the great depression in the 1930s.

Neil Morris, a member at Kinetic Partners said that the new law expanded the powers of the Securities and Exchange Commission (SEC) and would now require investment advisers to register with it and report their obligations. “Therefore, advisers need to consider how they will respond to the heightened scrutiny and the SEC’s new demands,” Morris explained.

Under the new law, the amount of AuM and the types of clients or investors served will determine the registration requirements for investment advisers. The basic thresholds are:
- AUM of $150m or greater = registration with the SEC
- AUM of $25m to $150m = registration with the state regulator

Foreign private adviser exemption
Non-US investment advisers are exempt from registration if:
- No place of business in US
- Less than $25m of investments from US investors
- Less than 15 US investors
- Adviser does not hold itself out generally to the public in the US as an investment adviser

In praise of the new law
The California Public Employees’ Retirement System (CalPERS) hailed the financial reform law saying it was an historic step toward protecting markets and advancing shareowner democracy.

CalPERS’ President Rob Feckner stated: “At long last shareowners have achieved the kind of protections critical for restoring confidence. We applaud President Obama and Congress for achieving this comprehensive overhaul that protects the pension assets of our 1.6 million members and all shareowners. We have worked for many of these protections for upwards of a decade, especially for independent boards, access to the proxy, and better executive compensation policies. This reform goes a long way to plug the gaps that contributed to the recent financial crisis. It’s good for shareowners, good for business and for taxpayers.”

CME Group, a large derivatives exchange, also welcomed the passage of the Dodd-Frank Act and praised the “dedication and hard work of [Obama] administration and Congress” for crafting the historic piece of legislation.

In a statement, CME Group said that the new law reinforces their core tenets, which are price transparency, liquid markets with low transaction costs, market integrity, customer protection, and safety and soundness in central counterparty clearing services. It added that it looks forward to the full implementation of the new law so that it can serve the public interest, foster competition and innovation “and do not place the U.S. financial services sector at a competitive disadvantage in our rapidly globalizing financial markets."

Reform law lacks ‘teeth’
But in a survey issued on July 23 of more than 2,000 people in the financial industry by Complinet, a provider of risk-based compliance information and technology solutions for the financial industry, showed that majority of industry experts do not believe that the reform law would create a viable regulatory framework. Complinet said that more than 50% of those surveyed lacked confidence in the ability of the Obama administration to construct new practical regulation methods.

“The results suggest bankers and traders the world over see the Reform Bill as something that will not make enough of an impact for real change. The experts we surveyed know the financial sector better than politicians, and the results show they felt disillusioned by the bill and those who were writing it even before it was passed,” says Chris Pilling, CEO at Complinet.

60% of the financial experts did support Obama on one point – agreeing that it is important to prevent firms from becoming too big to fail.

However many other statistics in the survey make bleak reading; 78% said smaller firms will be adversely affected by the new regulations and half agreed that the global banking community would not be able to cope with another crisis in the next 12 months.

“The bill has over 500 new regulations, many of them aimed at protecting the consumer in the event of a future crash,” Pilling said. “But those in the industry clearly think these reforms will limit their ability to do their job effectively and increase economic growth.”

For their part, insurers felt relieved that the financial reform law exempts the insurance industry from the authority of the new Bureau of Consumer Financial Protection within the Federal Reserve. Howard Mills, chief adviser for Deloitte’s national insurance group and former New York Superintendent of Insurance said the new law would bring significant change, but will not have a major impact on the insurance industry.

The American Council of Life Insurers (ACLI) welcomed the legislation but said they are approaching it with cautious enthusiasm.

Financial Reform Act to ‘flash freeze’ ABS market
Another major implication of the Dodd-Frank Act is that it could halt the asset backed securities market, because the new measure removes the credit-rating companies’ shield from lawsuits in case underwriters use their credit ratings when selling debts.

As a result, Moody’s Investors Service and Fitch Ratings have already informed Wall Street that they will no longer let underwriters use ratings in bond-registration statements because of the increased risk of liabilities, reported Bloomberg. Tom Deutsch, executive director of the American Securitization Forum warned that because of the new law, the sales of asset-backed debt would be put on a “flash freeze” without ratings in offering documents.
- Precy Dumlao

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