by John M. Stahl, Esq.
The word on Wall Street for months was that the SEC was very serious regarding the March 30, 2012, deadline that required that every private equity and hedge fund advisers who oversaw at least $150 million in assets register with the SEC. Indications that many impacted advisers were banking on the SEC repealing the requirements or extending the deadline suggested that these financial industry professionals were recklessly turning a deaf ear to that message.
A speech by SEC Commissioner Daniel Gallagher at an Investment Adviser Association event the week of March 5 suggested that not heeding the looming deadline might have been justified. Gallagher reported that the SEC's authority included exempting advisers from the new Dodd-Frank related registration requirements based on adequate proof that that exemption would be "necessary or appropriate in the public interest." Gallagher added that that exemption's scope might include excusing private fund advisers from the requirement with the March 30 deadline.
Gallagher stated that some new regulatory requirements could be unduly broad and costly regarding private fund advisers and other financial industry professionals.
Gallagher's remarks seemed contrary to SEC Chairman Mary Schapiro's statement in a June 2011 press release that SEC-adopted rules that implemented the new requirements "will fill a key gap in the regulatory landscape."
Daniel LeGaye, Esq. of the LeGaye Law Firm P.C., whose practice includes legal issues related to compliance requirements, shared his thoughts regarding the reasons for the seeming inconsistencies between Schapiro's press release and Gallagher's speech.
Tinna Hung, vice-president of Product, Marketing and Strategy at ExamFX, reported on how publishers ensure that readers receive accurate information despite apparently dramatic policy changes such as the current apparent about face.
Background
The regulatory gap to which Schapiro referred related to an exemption under the federal Investment Advisers Act that Dodd-Frank eliminated and to which the March 30 deadline applied. The press release expressed the concern regarding that exemption as "some advisers to hedge funds and other private equity funds have remained outside of the [Securities and Exchange] Commission's regulatory oversight even though those advisers could be managing large sums of money for the benefit of hundreds of investors."
Gallagher's statement indicated that that concern might not have been very significant.
Resolving the Inconsistency
LeGaye commented in a telephone interview that "it's too easy to say they're [Schapiro and Gallagher] inconsistent." He added that registration and disclosure issues were "very complex" and that that complexity did not excuse not studying and resolving concerns regarding the standards under Dodd-Frank.
LeGaye addressed the heart of the matter in saying that "She [Schapiro] is talking more philosophically; he [Gallagher] is talking more statutory." This referred to Schapiro's tough stance regarding both transparency in the financial services industry and anti-fraud provisions in the Investment Advisers Act of 1940 and Gallagher commenting on what the letter of the law did, and did not, require.
More specifically, LeGaye observed that Schapiro referred to registration and disclosure requirements and that Gallagher apparently limited his remarks to SEC registration requirements. This interpretation included pointing out that "it is clear that there are exceptions to registration" and that Gallagher determined that those exceptions provided the basis for the "necessary or appropriate in the public interest" exemption to which he referred.
LeGaye added that regardless of the exemptions from disclosure, the disclosure requirements helped meet the SEC's objective of wanting to know which funds are out there. He noted that those requirements filled gaps that exceptions to registration created.
A general portion of our discussion evoked memories of a common sense principle that members of the financial services industry advocated while Congress debated Dodd-Frank. This group recognized the benefits of doing the right thing before the regulators required doing so.
LeGaye's slant on "do the right thing" coincided with concerns that Gallagher expressed. LeGaye commented that satisfying new regulatory requirements that acts by some industry professionals triggered can be "very hard, very cumbersome for those who did it right."
Study Guide Publisher's Perspective
Hung provided the following statement regarding the broader issue of policy corrections by the SEC and other regulatory agencies.
"With the uncertainty in the latest regulations, we [ExamFX] are concerned that advisers may be delayed in seeking the training needed to be compliant when new regulations are enforced. Being in the regulatory exam preparation business, ExamFX continually tracks regulatory changes and updates to ensure that our curriculum is current and relevant – this is getting increasingly more difficult. Our content development experts regularly attend conferences and keep up with industry resources to stay current, however a consistent position from financial services regulators would provide clarity for ExamFX and the advisers we serve."
John M. Stahl, Esq., is a freelance legal writer who is a graduate of Babson College and Vermont Law School. Topics about which he has written since 1997 include securities regulation, tax law changes, and developments in workers' compensation law. His e-mail address is jstahl87@gmail.com.
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