The July 2009 edition of the
International Association of Hedge Funds Professionals (IAHFP)
newsletter
Breaking News: Hedge Funds and the new White House Financial
Regulatory Overhaul Plan
The Financial Regulatory Reform: A New Foundation from the White
House covers all the hot issues around the supervision and
regulation of hedge funds.
Promote robust
supervision and regulation of financial firms.
Financial institutions that are
critical
to
market functioning should be
subject to strong
oversight.
No financial firm that poses a significant risk to the financial
system should be unregulated or weakly regulated.
We need clear accountability in financial oversight and supervision.
We
propose:
· A new Financial Services Oversight Council of financial regulators
to identify emerging systemic risks and improve interagency
cooperation.
· New authority for the Federal Reserve to supervise all firms that
could pose a threat to financial stability, even those that do not
own banks.
· Stronger capital and other prudential standards for all financial
firms, and even higher standards for large, interconnected firms.
· A
new National Bank Supervisor to supervise all federally chartered
banks.
· Elimination of the federal thrift charter and other loopholes that
allowed some depository institutions to avoid bank holding company
regulation by the Federal Reserve.
· The
registration of advisers of hedge funds and other private pools of
capital with the SEC.
Promote Robust Supervision and Regulation of Financial Firms
In the years leading up to the current financial crisis, risks built
up dangerously in our financial system.
Rising asset prices, particularly in housing, concealed a sharp
deterioration of underwriting standards for loans.
The nation's largest financial firms, already highly leveraged,
became increasingly dependent on unstable sources of short term
funding.
In
many cases, weaknesses in firms' risk-management systems left them
unaware of the aggregate risk exposures on and off their balance
sheets.
A credit boom accompanied a housing bubble.
Taking access to short-term credit for granted, firms did not plan
for the potential demands on their liquidity during a crisis.
When asset prices started to fall and market liquidity froze, firms
were forced to pull back from lending, limiting credit for
households and businesses.
Our supervisory framework was not equipped to handle a crisis of
this magnitude.
To be sure, most of the largest, most interconnected, and most
highly leveraged financial firms in the country were subject to some
form of supervision and regulation by a federal government agency.
But those forms of supervision and regulation proved inadequate and
inconsistent.
First,
capital and liquidity requirements were simply too low.
Regulators did not require firms to hold sufficient capital to cover
trading assets, high-risk loans, and off-balance sheet commitments,
or to hold increased capital during good times to prepare for bad
times.
Regulators did not require firms to plan for a scenario in which the
availability of liquidity was sharply curtailed.
Second,
on a systemic basis, regulators did not take into account the harm
that large, interconnected, and highly leveraged institutions could
inflict on the financial system and on the economy if they failed.
Third,
the responsibility for supervising the consolidated operations of
large financial firms was split among various federal agencies.
Fragmentation of supervisory responsibility and loopholes in the
legal definition of a "bank" allowed owners of banks and other
insured depository institutions to shop for the regulator of their
choice.
Fourth,
investment banks operated with insufficient government oversight.
Money market mutual funds were vulnerable to runs.
Hedge funds and other private pools of capital operated completely
outside of the supervisory framework.
To create a new foundation for the regulation of financial
institutions, we will promote more robust and consistent regulatory
standards for all financial institutions.
Similar financial institutions should face the same supervisory and
regulatory standards, with no gaps, loopholes, or opportunities for
arbitrage.
Close Loopholes in Bank Regulation
1. We propose the creation of a new federal government agency, the
National Bank Supervisor (NBS), to conduct prudential supervision
and regulation of all federally chartered depository institutions,
and all federal branches and agencies of foreign banks.
2. We propose to eliminate the federal thrift charter, but to
preserve its interstate branching rules and apply them to state and
national banks.
3. All companies that control an insured depository institution,
however organized, should be subject to robust consolidated
supervision and regulation at the federal level by the Federal
Reserve and should be subject to the nonbanking activity
restrictions of the BHC Act.
The policy of separating banking from commerce should be re-affirmed
and strengthened.
We must close loopholes in the BHC Act for thrift holding companies,
industrial loan companies, credit card banks, trust companies, and
grandfathered "nonbank" banks.
Eliminate the SEC's Programs for Consolidated Supervision
The SEC has ended its Consolidated Supervised Entity Program, under
which it had been the holding company supervisor for companies such
as Lehman Brothers and Bear Stearns.
We propose also eliminating the SEC's Supervised Investment Bank
Holding Company program.
Investment banking firms that seek consolidated supervision by a
U.S. regulator should be subject to supervision and regulation by
the Federal Reserve.
Require Hedge Funds and Other Private Pools of Capital to Register
All advisers to hedge funds (and other private pools of capital,
including private equity funds and venture capital funds) whose
assets under management exceed some modest threshold should be
required to register with the SEC under the Investment Advisers Act.
Expand the Scope of Regulation
1. Determine the appropriate Tier 1 FHC definition and application
of requirements for foreign financial firms.
2. We urge national authorities to implement by the end of 2009 the
G-20 commitment to require hedge funds or their managers to register
and disclose appropriate information necessary to assess the
systemic risk they pose individually or collectively
Require Hedge Funds and Other Private Pools of Capital to Register
All advisers to hedge funds (and other private pools of capital,
including private equity funds and venture capital funds) whose
assets under management exceed some modest threshold should be
required to register with the SEC under the Investment Advisers Act.
The advisers should be required to report information on the funds
they manage that is sufficient to assess whether any fund poses a
threat to financial stability.
In recent years, the United States has seen explosive growth in a
variety of privately owned investment funds, including hedge funds,
private equity funds, and venture capital funds.
Although some private investment funds that trade commodity
derivatives must register with the CFTC, and many funds register
voluntarily with the SEC, U.S. law generally does not require such
funds to register with a federal financial regulator.
At
various points in the financial crisis, de-leveraging by hedge funds
contributed to the strain on financial markets.
Since these funds were not required to register with regulators,
however, the government lacked reliable, comprehensive data with
which to assess this sort of market activity.
In addition to the need to gather information in order to assess
potential systemic implications of the activity of hedge funds and
other private pools of capital, it has also become clear that there
is a compelling investor protection rationale to fill the gaps in
the regulation of investment advisors and the funds that they
manage.
Requiring the SEC registration of investment advisers to hedge funds
and other private pools of capital would allow data to be collected
that would permit an informed assessment of how such funds are
changing over time and whether any such funds have become so large,
leveraged, or interconnected that they require regulation for
financial stability purposes.
We further propose that all investment funds advised by an
SEC-registered investment adviser should be
subject to recordkeeping requirements; requirements with respect to
disclosures to investors, creditors, and counterparties; and
regulatory reporting requirements.
The SEC should conduct regular, periodic examinations of such funds
to monitor compliance with these requirements.
Some of those requirements may vary across the different types of
private pools.
The regulatory reporting requirements for such funds should require
reporting on a confidential basis of the amount of assets under
management, borrowings, off-balance sheet exposures, and other
information necessary to assess whether the fund or fund family is
so large, highly leveraged, or interconnected that it poses a threat
to financial stability.
The SEC should share the reports that it receives from the funds
with the Federal Reserve.
The Federal Reserve should determine whether any of the funds or
fund families meets the Tier 1 FHC criteria.
If so, those funds should be supervised and regulated as Tier 1 FHCs.
Harmonize Futures and Securities Regulation
The CFTC and the SEC should make recommendations to Congress for
changes to statutes and regulations that would harmonize regulation
of futures and securities.
The broad public policy objectives of futures regulation and
securities regulation are the same: protecting investors, ensuring
market integrity, and promoting price transparency.
While differences exist between securities and futures markets, many
differences in regulation between the markets are no longer
justified.
In particular, the
growth of derivatives markets
and the introduction of new derivative instruments have highlighted
the need for addressing gaps and inconsistencies in the regulation
of these products by the CFTC and SEC.
Many of the instruments traded on the commodity and securities
exchanges and in the over-the-counter markets have attributes that
may place the instrument within the purview of both regulatory
agencies.
One result of this jurisdictional overlap has been that economically
equivalent instruments may be regulated by two agencies operating
under different and sometimes conflicting regulatory philosophies
and statutes.
For example, many financial options and futures products are similar
(and, indeed, the returns to one often can be replicated with the
other).
Under the current federal regulatory structure, however, options on
a security are regulated by the SEC, whereas futures contracts on
the same underlying security are regulated jointly by the CFTC and
SEC.
In many instances the result of these overlapping yet different
regulatory authorities has been numerous and protracted legal
disputes about whether particular products should be regulated as
futures or securities.
These disputes have consumed significant agency resources that
otherwise could have been devoted to the furtherance of the agency's
mission.
Uncertainty
regarding how an instrument will be regulated has impeded and
delayed the launch of exchange-traded equity, equity index, and
credit event products, as litigation sorted out whether a particular
product should be regulated as a futures contract
or as a security.
Eliminating jurisdictional uncertainties and ensuring that
economically equivalent instruments are regulated in the same
manner, regardless of which agency has jurisdiction, would remove
impediments to product innovation.
Arbitrary jurisdictional distinctions also have unnecessarily
limited competition between markets and exchanges.
Under existing law, financial instruments with similar
characteristics may be forced to trade on different exchanges that
are subject to different regulatory regimes.
Harmonizing the regulatory regimes
would remove such distinctions and permit a broader range of
instruments to trade on any regulated exchange.
Permitting direct competition between exchanges also would help
ensure that plans to bring OTC derivatives trading onto regulated
exchanges or regulated transparent electronic trading systems would
promote rather than retard competition.
Greater competition would make these markets more efficient, which
would benefit users of the markets, including investors and risk
managers.
We also will need greater coordination and harmonization between
these agencies as we move forward.
The CEA currently provides that funds trading in the futures markets
register as Commodity Pool Operators (CPO) and file annual
financials with the CFTC.
Over 1300 CPOs, including many of the largest hedge funds, are
currently registered with and make annual filings with the CFTC.
It will be important that the CFTC be able to maintain its
enforcement authority over these entities as the SEC takes on
important new responsibilities in this area.
Expand the Scope of Regulation
1. Identify Foreign Financial Firms that are Tier 1 FHCs.
Determine the appropriate Tier 1 FHC definition and application of
requirements for foreign financial firms.
As discussed above in Section I, we propose that a stricter regime
of supervision and regulation apply to Tier 1 FHCs than to other
BHCs.
This regime should include, among other things, stronger capital,
liquidity and risk management standards for Tier 1 FHCs than for
other BHCs.
Similarly,
the G-20 Leaders agreed in April that "all systemically important
financial institutions, markets, and instruments should be subject
to an appropriate degree of regulation and oversight."
In consultation with Treasury, the Federal Reserve should develop
rules to guide the identification of foreign financial firms as Tier
1 FHCs based on whether their U.S. operations pose a threat to
financial stability.
This evaluation should be similar to that used to identify domestic
Tier 1 FHCs.
The Federal Reserve could consider applying the criteria to the
world-wide operations of the foreign firm.
The Federal Reserve could also choose to apply the criteria only to
the U.S. operations of the foreign firm or to those operations of
the foreign firm that affect the U.S. financial markets.
Several options are available for foreign financial firms.
In determining which foreign firms are subject to the Tier 1 FHC
regime, the Federal Reserve should give due regard to the principle
of national treatment and equality of
competitive opportunity
between foreign-based firms operating in the United States and
U.S.-based firms.
The Federal Reserve should also consider the implications of these
determinations for international agreements negotiated by the
executive branch.
Under our proposal, Treasury would not play a role in the
application of these rules to specific firms.
In addition,
the new "well-capitalized" and "well-managed" tests for FHC status
proposed in this report should apply to foreign financial
institutions operating in the United States in a manner comparable
to that of U.S. owned financial institutions, while taking into
account the difference in their legal forms (such as branch) from
their U.S. counterparts.
Under the current
Gramm Leach Bliley (GLB) Act
regime, a foreign bank that owns or controls a U.S. bank must comply
with the same requirements as a domestic BHC to achieve FHC status,
namely, all the U.S. subsidiary banks of the BHC or foreign bank
must be "well-capitalized" and "well-managed."
A
foreign bank that does not own or control a U.S. bank, but instead
operates through a branch, agency, or commercial lending company
located in the United States must itself be "well-capitalized" and
"well managed" if it elects to become an FHC.
If a foreign bank operates in the United States through branches and
subsidiary banks, both the foreign parent bank and its U.S.
subsidiary bank must be "well-capitalized" and "well-managed" if the
foreign bank elects to become an FHC.
Although we propose to change the FHC eligibility requirements in
this report, we do not propose to dictate the manner in which those
requirements are applied to foreign financial firms with U.S.
operations.
We propose to permit the Federal Reserve, in consultation with
Treasury, to determine how to apply these new requirements to
foreign banks that seek FHC status.
The Federal Reserve should also make its determination giving due
regard to the principle of national treatment and equality of
competitive opportunity.
2. Expand Regulation of Hedge Funds.
We urge national authorities to implement by the end of 2009 the
G-20 commitment to require hedge funds or their managers to register
and disclose appropriate information necessary to assess the
systemic risk they pose individually or collectively.
The G-20 Leaders agreed to require registration of hedge funds or
their managers subject to threshold limits and to require hedge
funds to disclose appropriate information on an ongoing basis to
allow supervisors to assess the systemic risk they pose individually
or collectively.
Our regulatory reform proposal expands upon the G-20's
recommendations to include registration of advisors to other private
pools of capital, along with recordkeeping and additional disclosure
requirements to investors, creditors and counterparties.
HEDGE FUND JOBS - CASE STUDIES
Title: Hedge Fund - Operations Manager
Location:UK-London
Remuneration: £85K + Bonus
Position Type: Permanent
Hedge Fund seeks top performing Operations Manager with high degree
of autonomy
This Growing Hedge Fund is seeking to make an experienced addition
to its operations team, the successful employee to join this Global
Macro fund will play a key role in designing and implementing its
operational infrastructure.
You will already have experienced working for a fund and will be
able to deal with a great deal of responsibility.
You will have experience implementing processes and dealing with
fund administrators, producing daily P&L, running the NAV etc.
This is a broad role and the right individual will have dealt with
most products and is used to project managing new installations and
management systems.
Please get in touch if you have been a senior member of an
Operations team with otherHedge Funds and feel you would work well
in a stable and growing fund.
Title: Hedge Fund - Sales
Location:UK-London
Remuneration: £75-100K base + bonus
Position Type: Permanent
A long/short equity hedge fund with a strong 3 year track record
requires an experienced institutional sales person.
The company:
- Very good 3 yr track record, over $100m under management and well
backed. High calibre investment team with great potential for
growth.
- The role:
- The main focus is sales to the UK and European institutional
market place. There will be investor relations duties as part of the
job, but the sales person will receive support in this area from
colleagues.
- Now that the business has achieved a very positive 3 year track
record, there is a real opportunity to grow the business
significantly.
Title: Hedge Fund - Credit Analyst
Location:UK-London
Remuneration: £100-120,000k+equity/bonus
Position Type: Permanent
With redemptions almost non existent and with the fund continuing to
attract new capital, this distressed credit fund is currently
looking to add an experienced credit analyst.
At an exciting time of growth and with a very strong infrastructure,
this fund is looking to generate some excellent returns with the
help of this hire.
Individuals must posses a degree at top university and minimum of 3
years experience at either an Investment bank or Hedge Fund.
You must have demonstrated your thought process behind the ideas you
have generated with a real focus on the analysis of distressed and
turnaround opportunities.
Making of investment recommendations for thefund will be key and
experience working on mandates of $500m+.
Other activities will be on your list of day to day responsibilities
which will lead to a very attractive package including a very
healthy bonus and potential equity within the fund.
Title: Hedge Fund - Research Assistant
Location: USA-IL-Chicago
Remuneration: $60,000 - $80,000
Position Type: Permanent
1-2 years of financial services experience.
Strong excel skills.
Project management abilities and attention to deadlines.
Undergrad degree in business
A multi-billion dollar hedge fund, is engaged in a search for a
research assistant. The research assistant's role is to support the
portfolio management and research teams by preparing portfolio
research, project management and internal research reporting. The
research assistant will be apart of the front office, your work will
play a role in the investment decisions made.
Dear members,
Visit the website of our association.
www.hedge-funds-association.com
Write in your CV, resume, websites etc. that you are members of the
International Association of Hedge Funds Professionals.
Take advantage of the distance learning and online certification
program of our Association - at a cost that is unheard of.
www.hedge-funds-association.com/Distance_Learning_and_Certification.htm
Best Regards,
George Lekatis
President of the International Association of Hedge Funds
Professionals (IAHFP)
General Manager, Compliance LLC
1200 G Street NW Suite 800, Washington DC 20005, USA
Tel: (202) 449-9750
Email: lekatis@hedge-funds-association.com
Web: www.hedge-funds-association.com
HQ: 1220 N. Market Street Suite 804, Wilmington DE 19801, USA
Tel: (302) 342-8828
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