Tag: Senator Dodd

Financial Overhaul Moves Forward

Senator Dodd

With the health care reform now out of the hands of Congress, there is now movement with financial overhaul. Senator Dodd introduced the Restoring American Financial Stability Act of 2010 last week  without a Republican co-sponsor [Dodd Goes Solo].

Instead plugging in amendments, the Senate Banking Committee voted on straight party lines to advance the bill as introduced by Senator Dodd. The bill is moving so fast that it has not even made into the Thomas system for tracking legislative activity. The vote on Monday night lasted less than 25 minutes.

According to reports, Republicans filed more than 200 amendments on Friday, but withdrew all of them and let the bill pass quickly through committee. I assume the strategy will be to attack the bill in the full Senate instead of in the Banking Committee.

UPDATE: There were 114 pages of amendments made to the bill. Most look like clean-ups and small changes that do not have a big impact on the bill.

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Dodd’s Solo View on Private Investment Funds

Senator Dodd

Senator Dodd did not forget about private investment funds. Tucked into page 366 of his 1366 page Restoring American Financial Stability Act of 2010 is the Private Fund Investment Advisers Registration Act.

This is largely the same language in the Private Fund Investment Advisers Registration Act of 2009 contained in Dodd’s draft Restoring American Financial Stability Act of 2009. He circulated that draft back in November to start negotiations with Republicans.

Venture Capital Fund Advisers

There is an exemption from registration for the “provision of investment advice relating to a venture capital fund.” The bill gives the SEC the responsibility for defining a “venture capital fund.”

Private Equity Fund Advisers

Unlike the bill passed by the House, Dodd proposes an exemption from registration or reporting requirements with respect to advice given to private equity funds. The SEC is tasked with defining the term “private equity fund.”  Unlike venture capital funds, private equity funds will be subject to SEC record-keeping requirements to the extent the SEC determines it is “necessary and appropriate in the public interest and for the protection of investors.”

State versus Federal Registration of Investment Advisers

Section 410 of the bill raises the federal registration level to $100 million from $25 million. So investment advisers and funds of less than $100 million will be subject to state regulators instead of federal regulators. David Tittsworth, executive director of the Investment Adviser Association, said the change would shift about 4,200 of the 11,000 money managers now registered at the SEC to state regulation.

Accredited Investors

The Dodd bill would change the threshold for “accredited investor.” Currently, the threshold is $200,000 income for a natural person (or $300,000 for a couple) or $1,000,000 in assets. The SEC would have the power to increase those levels  as “appropriate and in the public interest, in light of price inflation since those figures were determined.”

The Comptroller General is also directed to study the financial thresholds for investor eligibility in private funds.

Regulation D Offerings

Separately in the bill, Senator Dodd is proposing to tinker with exemption from registration under Rule 506. Section 926 of his bill, gives the SEC the power to designate certain Rule 506 offerings to not be “covered securities.”  That would get the states more involved in the review and regulation of private offerings, including private fund offerings.

Now What?

This bill still has a long way to go in the Senate. Most reports indicate that private funds are not one of the hotly contested issues in the bill. Assuming the Senate passes the bill, they will need to negotiate the differences between the House and Senate. Assuming it passes, it looks like a big chunk of work would be dropped onto the SEC to define the fund types.

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Dodd Goes Solo

Senator Dodd

After months of negotiation, Senator Dodd gave up on his negotiations with Republicans and decided to introduce a financial industry reform bill all by himself.

To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Now what?

Well, there’s a lot of reading. The Restoring American Financial Stability Act of 2010 is a whopping 1,336 pages. That’s a hundred or so pages longer the House’s Wall Street Reform and Consumer Protection Act passed in December.

Apparently none of the 10 Republicans on the Senate Banking Committee endorse Dodd’s Restoring American Financial Stability Act of 2010. I assume he can muster the Democrats on the committee to pass the bill. Then he has to get the votes lined up in the full Senate. That will likely mean having to make some changes to the bill. Assuming he can gather that many votes, then they need to negotiate a compromise law with the House so that the bill is in a final form that both legislative bodies will approve (or vote down).

I wouldn’t get too attached to anything in the Restoring American Financial Stability Act of 2010. One thing that’s certain: the bill will look different.

How will it be different? I’m not even going to guess.

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Another Private Fund Registration Bill

I'm just a bill from Schoolhouse Rock

As expected, Senator Dodd introduced a comprehensive bill for revising the regulatory system for the U.S. financial services industry.
Restoring American Financial Stability Act of 2009.pdf-icon

You can tell its comprehensive because the discussion draft weighs in at 1,136 pages. I have not read all of it, but I did focus in Title IV: Regulation of Advisers to Hedge Funds and Others, also labeled as the Private Fund Investment Advisers Registration Act of 2009. This is apparently the Senate counter-proposal to the House version passed by the House Financial Services Committee at the end of October: Private Fund Investment Advisers Registration Act is Passed by House Committee.

What are some of the differences between the House bill and the Senate bill:

Exemption level. The Senate bill has a threshold of $100m assets under management, the House bill an exemption for “small” funds under $150m.

Venture Capital. The Senate bill exempts both venture capital and private equity funds, the House bill only venture capital funds. Neither bill makes any attempt to define a “venture capital fund” or a “private equity fund.”

Reporting Requirements. Both bills contain similar requirements for funds to regularly report in certain basic information to the SEC, including information about the amount of assets under management, the use of leverage, counter-party risk exposure etc.

Investor Qualifications. The Senate bill contain provisions to continually update the accredited investor qualification standard to keep pace with inflation.

Further Study. The Senate bill provides for a further study regarding the feasibility of a hedge fund self-regulatory agency, the state of short-selling in the market, and the appropriate level for the accredited investor standard.

Independent Custodian Requirement. The Dodd bill calls for an independent custodian to be used by hedge funds to hold client assets.

The Restoring American Financial Stability Act of 2009 would also create a single bank regulator, provide for self-funding the SEC, and establish a new consumer financial protection agency and install plethora of other changes.

What does this mean for the likelihood of mandatory registration of private investment funds? It’s much more likely. But the venture capital exception and private equity exception are potentially very big. Of course that will depend on how the SEC defines these terms.  It also shows that the House and Senate are taking very different approaches to financial regulation. The House is looking at a series of small bills to fix some of the holes. The Senate is looking for a comprehensive change.

(Not to be a cynic, but Senator Dodd is up for re-election in 2010. I would guess that he is looking for a big new law to tie to his name and his re-election campaign. Not that it is bad. Just politics. Critics Question Dodd’s reform proposal.)

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U.S. Senate Hears About Madoff

On Tuesday, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the background and implications of the Madoff scandal: Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform.

Video Archive

Member Statements

Witness Testimony