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A Snapshot of Financial Regulation in 2013

By Jessica Sipprelle | Thursday, January 24th, 2013

As 2013 begins, managers of hedge funds and other financial services firms should be aware of upcoming changes within the regulatory environment. Investment firms in the US can expect to be impacted by stricter controls, laws and more detailed investigations imposed by the SEC and other governing agencies. Here’s a high level overview of some of the most important regulations to keep your eye on this year:
The JOBS Act
The Jumpstart Our Business Startups Act, also known as the JOBS Act, was signed into law by President Obama on April 5th, 2012. It’s intended to assist eligible companies in seeking initial public offerings by simplifying the procedure for going public. This legislation eases federal regulations and allows for crowd funding – enabling individuals to become investors. As a result of the JOBS Act, small business startups will be able to collect money from private individuals without making an IPO.

There are many predictions regarding how the JOBS Act will impact hedge funds. Some believe it will likely result in a wider investor base and higher net inflows to the industry. The act will also affect the ways in which firms market themselves in the coming years by encouraging funds to make more detailed information accessible to their investors. In theory, this should make it much easier for investors to compare managers on a number of criteria.

There are conflicting opinions as to whether the JOBS Act will actually increase the number of companies seeking IPOs. One point of contention is the newly permitted confidential filing process, which allows new companies to privately submit draft registration statements to the SEC. Arguments focus on whether the confidential filing process will, in fact, result in a lack of transparency for investors when advising clients.
Although the JOBS Act was signed into law in April, some tenants of the bill have yet to go into effect, including the lift of the solicitation ban that prohibits hedge funds from advertising to potential individual investors. The ban was intended to be lifted in August, but the rule was not finalized because the SEC missed the July 4 deadline, in part due to former SEC Chairwoman Mary Schapiro’s departure and alleged opposition to lifting the ban. While there is no clear date set for when the JOBS Act will take full effect, there is discussion that more investor protections need to be added.

SEC’s Asset Management Unit Directives
In 2013, hedge funds can also expect continued vigilance by the SEC through several initiatives imposed by the Asset Management Unit (AMU) of its Division of Enforcement. The AMU is tasked specifically with preventing fraud in the hedge fund industry. The hedge fund managers and private equity analysts who comprise this unit help provide a more transparent overview of the inner workings of these firms, and aid in developing policies, investigations, exams and trainings. Although in the past, hedge funds and private equity firms were lightly regulated by the SEC, in 2013 managers can expect to see a much stronger SEC presence and a higher level of regulation within their firms. Additionally, expect a higher level of in-person investigations focused on specific workings of the firm. The AMU’s new focus will center on investor/client relationships and aim to prevent hedge fund managers from giving out any recommendations to potential clients that are not well intentioned.

The Dodd-Frank Act
In 2013, hedge fund managers can expect to see the SEC advance with the rulemaking required by the Dodd-Frank Act. Although the Dodd-Frank Act has been passed for some time, there are aspects of this legislation that will be taking effect this year. For instance, there will be a much higher level of onsite risk-based presence exams, during which SEC staff will investigate high risk areas of the fund. The SEC’s continued emphasis on hedge fund regulations requires that a high level of detail and focus is placed on risk and compliance initiatives within these firms.  
Some of the Dodd-Frank updates that will be occurring this year include finalizing the Volcker Rule, which bans proprietary trading by banks (expected in early 2013) as well as the development of a new regulation that will allow for greater supervision of foreign banks’ US operations. The rule will require foreign banks with substantial US operations to uphold stronger capital and liquidity positions in the US as well as create an intermediary holding company over its US subsidiaries. In 2013, the Consumer Financial Protection Bureau (CFPB) will also examine crucial issues surrounding fair lending. Reports indicate that the CFPB is developing new rules in order to reinforce regulation surrounding fair lending practices. These rules are connected to the Truth in Lending Act, Equal Credit Opportunity Act and Home Mortgage Disclosure Act.

Hedge fund regulations knowledge centerFor more information, be sure to check out our collection of complimentary resources on helping your firm navigate the complex regulatory environment, or contact an Eze Castle Integration representative.

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