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Managed Funds Association Looks to Future Regulatory Challenges

By Mark Melin

With an increasing regulatory burden, the Managed Funds Association (MFA) is fighting battles on a number of fronts.  With an average of seven regulatory comment letters written in a year, 2011 was active by any standard with the industry association submitting 92 comment letters on behalf of its hedge fund and managed futures CTA members.

"All our regulatory efforts are designed to be a unified expression of how efficient markets operate with as little friction as possible," said MFA president Richard Baker, a former Congressman from Louisiana's Sixth Congressional district.  "We have five to ten years of regulatory challenges in the US and Europe," he said, noting the association may open a European office to handle the regional regulatory burden.

In the wide ranging interview, Mr. Baker discussed issues in SWAPs regulations, managed futures mutual funds, Dodd-Frank and MF Global. At a macro level, Mr. Baker noted the goal of the association's regulatory push was to enhance transparency and regulate investments.  The association's efforts with SWAPs, for instance, have promoted transparency, common clearing and regulation in a market that is generally unregulated.  The current regulatory battle is over variation margin, which as it stands is written to benefit one party in a SWAPs transaction," according to MFA general counsel Stuart Kaswell.   MFA is working with regulators to ensure balance and simplification in rules impacting hedge funds and managed futures programs.

Regarding issues in the current Dodd-Frank bill, the association noted it is less than halfway through this work.  "In today's regulatory environment, it is difficult for an emerging managed futures CTA to handle the regulatory, legal, marketing and trading duties," Mr. Baker said. "The regulatory responsibilities are much too complex."

Managed Futures Mutual Funds

When discussing complexity, a logical bridge occurs to the managed futures mutual funds.  Equity mutual funds are subject to very light risk disclosure, despite the fact of significant risk of loss.  The current debate over managed futures mutual funds centers in part on risk disclosure. 

In regards to "40-Act" managed futures mutual funds, Mr. Kaswell noted the difficulty in harmonization between the SEC and CFTC disclosure regulations. "We're watching the collision of two regulatory frameworks," he said.  Current disclosure requirements would require extensive documentation, sometimes hundreds of pages in length.  "As it currently stands, for example, two sets of fee tables are required despite communicating essentially the same information."  When considering the priority in their regulatory structure, Mr. Baker noted mutual funds are primarily an investment targeted towards retail investors, while the association's primarily focuses on non-public investors. 

MF Global

When considering the MFA's action on MF Global, the association said it has reached out to the MF Global bankruptcy trustee's office, efforts which have met with various degrees of success.  "Our actions with MF Global were consistent with actions regarding the Lehman bankruptcy," Mr. Baker noted.  While focused on preventing future problems, he said "Nobody can build a bullet proof system.  Sometimes people do bad things.  If what we think occurred is accurate, that's a problem."

Managed Futures In Focus

"The Pinnacle Awards focus on an important sector of alternative investment performance, managed futures," Mr. Baker noted.  "We started as the Managed Futures Association."  The association later changed their name to the Managed Funds Association and focused on the wider interests of the hedge fund industry at large.  Noting the increased emphasis on the largest hedge fund subcategory with $328 million under management, Mr. Baker noted "We have re-constructed our governance that allows CTAs a greater degree of participation."  The association indicated it works to support education regarding managed futures as the asset class grows.  For their part, this education takes place in both Washington D.C. and financial centers such as New York, Chicago and London.

The Futures Challenge

"In Washington D.C. our industry needs to change perceptions," Mr. Baker stated.  "They think the investment is highly speculative, but tend not to understand the benefits our investment offers to pensions, family offices and other investors looking to diversify their holdings. We need to explain what we do and why it's beneficial."