Dodd-Frank News Center

Volcker Defends Namesake Rule As Comment Period Closes

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest.

Former Federal Reserve Board chairman Paul Volcker, in comments to regulators, defended the need to restrict the risky trading activities of large banks, saying commercial bank proprietary trading is at odds with the basic objectives of financial reform. The comment period for the namesake Volcker Rule closed on Feb. 13, 2012.

“Proprietary trading of financial instruments…does not justify the taxpayer subsidy implicit in routine access to Federal Reserve credit, deposit insurance or emergency support,” Volcker wrote. 

House Members Ask SEC to Delay Registration of Private Equity Fund Advisers

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

In a bi-partisan letter to the SEC, seventeen House Members, including Capital Markets Subcommittee Chair Scott Garrett (R-NJ), asked the Commission to delay the March 30, 2012 implementation of regulations requiring the registration of investment advisers to private equity funds and to exclude advisers of private equity funds that are not highly leveraged at the fund level from the registration. The Members believe that applying these new requirements to private equity is detrimental to capital formation and job creation and does little to protect consumers and address potential systemic risk. Given the lack of systemic risk associated with private equity funds and the sophistication of the investors in private equity funds, the substantial costs of registration outweigh any potential benefits.

Volcker Rule Comment Deadline Extended

By J. Preston Carter, J.D., LL.M., Editor, Financial Privacy Law Guide, CCH Federal Banking Law Reporter, State Banking Law Reporter and Bank Digest; co-author, Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis.

The federal bank and securities regulatory agencies have decided to accept comments on the proposed rule that would restrict financial institutions' ability to engage in proprietary trading and have relationships with hedge and private equity funds--usually called the "Volcker Rule"--for an additional month. The comment period, which originally was to close on Jan. 13, 2012, will continue until Feb. 13, 2012. Prior to the agencies' action, Rep. Randy Neugebauer, R-Texas, released a bipartisan letter to regulators, signed by 121 members of the House of Representatives, expressing deep concerns with the proposed "Volcker Rule."

SEC Charges Multiple Hedge Fund Managers with Fraud as Part of Aberrational Performance Inquiry

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

As part of an initiative to combat hedge fund fraud by identifying abnormal investment performance, the SEC has filed enforcement actions against multiple advisory firms and individuals for various misconduct including improper use of hedge fund assets, fraudulent valuations, and misrepresenting fund returns. Under the Aberrational Performance Inquiry initiative, the SEC uses proprietary risk analytics to evaluate hedge fund returns. Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny.

House Passes Legislation Raising Regulation A Exemption Amount

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The House overwhelming passed the Small Company Capital Formation Act, HR 1070, introduced by Rep. David Schweikert (R-AR) to make it easier for small businesses to go public by increasing the offering threshold for companies exempted from SEC registration under Regulation A from $5 million to $50 million. HR 1070 also directs the GAO to conduct a study on the impact of state blue sky laws on offerings made under Regulation A and report to Congress on the results of the study within three months of enactment. HR 1070 encourages small companies to access the capital markets by creating a less burdensome process for raising capital.

SEC and Banking Agencies Propose Regulations Implementing Dodd-Frank Volcker Rule; Exceptions to Hedge Fund Ban Spelled Out

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The SEC and the federal banking regulators have proposed regulations implementing Section 619 of the Dodd-Frank Act, the Volcker Rule, which prohibits two activities of banking entities: short-term proprietary trading of any security, derivative, and certain other financial instruments for the entity’s own account and owning, sponsoring, or having certain relationships with a hedge fund or private equity fund (called covered funds under the regulations.

The proposal would exempt from the prohibition on relationships with covered funds the organizing and offering of a hedge fund or private equity fund under certain conditions, including limiting investments in such funds to a de minimus amount, the making of risk-mitigating hedging investments, and the making of investments in certain non-U.S. funds.

Carried Interest Provisions Are Key Revenue Raising Offset Provisions in American Jobs Act

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The draft of the American Jobs Act proposed by President Obama indicates that a major revenue raising offset provision in the legislation would be a carried interest provision taxing the income of hedge fund managers and other asset managers at ordinary income rather than at capital gains rates. Subtitle B of Title IV of the Act would amend the Internal Revenue Code to tax carried interest in investment partnerships as ordinary income

Current law allows service partners to receive capital gains treatment on labor income without limit, according to the White House, which creates an unfair and inefficient tax preference. Section 411 of the draft Act would tax as ordinary income, and make subject to self-employment tax, a service partner’s share of the income of an investment partnership attributable to a carried interest because such income is derived from the performance of services.

Hedge Fund Industry Comments on SEC Proposed Business Conduct Standards for Security-Based Swap Dealers and Major Participants

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

In a letter to the SEC, the hedge fund industry asked the Commission to clarify that the definition of special entity in the proposed business conduct standards for security-based swap dealers and major security-based swap participants does not apply to investment vehicles, such as hedge funds, in which the special entity may invest. Similarly, the Managed Funds Association asked the SEC to clarify that it will not look through an investment vehicle to its investors to determine whether the investment vehicle is a special entity.

House Financial Services Committee Approves Legislation Exempting Private Equity Fund Advisers from SEC Registration

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

By a voice vote, the House Financial Services Committee approved legislation exempting private equity fund advisers from SEC registration so long as the fund does not employ leverage that is greater than a ratio of 2-1. Specifically, the Small Business Capital Access and Job Preservation Act (H.R. 1082), sponsored by Rep. Robert Hurt (R-VA), exempts advisers to private equity funds that have not borrowed and that do not have outstanding a principal amount in excess of twice their funded capital commitments. The bill was amended in the Committee to limit the exemption to advisers of funds that are levered by less than a 2-to-1 ratio.

By tailoring registration requirements to exempt advisers to private equity funds, said the Committee, the legislation strikes a better balance between the benefits of adviser registration and its costs. The legislation is co-sponsored by House Financial Services Committee Chair Spencer Bachus (R-ALA) and Capital Markets Subcommittee Chair Scott Garrett (R-NJ). It has some bi-partisan support.

Senate Legislation Would Close Credit Default Swap Tax Loophole and Increase Off-Shore Disclosure

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Hedge Funds and Private Equity: Regulatory and Risk Management Update.

As part of a host of measures to combat offshore and tax shelter abuses, Senate legislation would would close an existing tax loophole that allows credit default swap payments to escape taxation if sent from the United States to persons offshore, such as an offshore hedge fund or foreign bank. The Stop Tax haven Abuse Act would close this credit default swap loophole by treating CDS payments sent offshore from the United States as taxable U.S. source income. Another provision would increase publicly available information about multinational corporations by requiring them to include basic information on a country-by-country basis in their filings with the SEC to increase transparency and facilitate IRS inquiries into transfer pricing, foreign tax credits, and abusive offshore tax shelters. The legislation was introduced by Senator Carl Levin (D-MI) and has picked up a number of co-spnsors. A companion bill is expected to be introduced in the House.