Dodd-Frank News Center

Senate clears TRIA with relief for derivatives end-users

This story appeared in Bank Digest.

The Senate passed by a vote of 94 to 4 the Terrorism Risk Insurance Program Reauthorization Act, H.R. 26, which contains relief for non-financial derivatives end-users, such as airline companies hedging the price of jet fuel, from the margin and capital requirements of Title VII of the Dodd-Frank Act. A proposed amendment to strip out the derivatives end-user provision was defeated on a 66 to 31 vote. Since the House passed the bill by a vote of 416 to 5 earlier this week, the measure is now cleared for the President, who is expected to sign it.

Hedge Fund Industry Examined

By Serena Lynn, Editor, the Federal Banking Law Reporter and Bank Digest.

The Treasury Department's Office of Financial Research has released a working paper analyzing the hedge fund industry. According to the authors, the hedge fund industry has become an increasingly important part of the financial markets in the last two decades. Their findings show that co-movement in hedge fund returns is not restricted to times of extreme financial turmoil. The authors examine two phenomena they believe influence the hedge fund industry--contagion and time variation in risk-adjusted return. They find that both flight to safety and large funding liquidity shocks play important roles in explaining the abrupt shift of the common factor to the crash state.

JPMorgan’s Dimon Faces Senate Scrutiny

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

JPMorgan Chase CEO Jamie Dimon assured lawmakers that recent trading losses at the firm, which totaled over $2 billion, were an isolated incident that underscores the need to “never, ever get complacent” with regard to risk management.

Appearing June 13, 2012 before the Senate Banking Committee (webcast), Dimon acknowledged that the incident came about in part because the firm’s Chief Investment Office in London had “done so well for so long,” which created “a little bit of complacency and overconfidence.” Dimon noted that the CIO investment strategy was poorly conceived and vetted, and “violated common sense,” while traders did not have adequate understanding of the risks involved. Yet despite the losses, Dimon stressed that JPMorgan’s “fortress balance sheet” remains intact, and that capital ratios are extremely strong.

NFA Proposes New Seg Funds Requirement, AKA “Corzine Rule”

By Lene Powell, J.D., Commodity Futures Law Reporter.

The National Futures Association (NFA), the self-regulatory organization for the U.S. futures industry, has proposed several measures to tighten control over customer segregated funds held by commodity futures brokers, known as futures commission merchants (FCMs). Most significantly, the rule would require written approval by the CEO or CFO of withdrawals of more than 25% of the FCM's “residual interest” in customer segregated funds.

The proposed measure is popularly referred to as the “Corzine Rule” after the former CEO of MF Global, a major FCM that suddenly went bankrupt last fall.  In the days leading up to the firm’s failure, funds were transferred from customer segregated funds to cover the firm’s proprietary trades. Jon Corzine has stated that he was not aware of the fund transfers.

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.