Business Compliance Partners Notes Regulatory Delays

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The Securities and Exchange Commission announced that the implementation of several much anticipated key financial market regulations has been delayed. In addition, several other important regulations have been stalled, including money market mutual fund regulation, a JOBS Act interim rule and a crucial decision on whether an SRO will be given supervisory authority over investment advisers.

Money Market Funds

For the second time the SEC’s Financial Stability Oversight Council canceled their August 22nd vote on money market reform because they could not muster a majority vote of the five commissioners on how to address the systemic risks posed by money market funds.

Proposals included requiring money market funds to disclose their share prices like other mutual funds, making it clearer that the funds were not bank accounts with an implied guarantee. This proposal would allow share prices to float above or below the traditional one dollar share price.

Another proposal would have required money market funds to hold more capital to protect against losses and would require owners of shares who wanted to withdraw funds to wait 30 days to get a portion of their cash back, in order to reduce the risk of a run on the accounts.

Money market funds have traditionally been considered to have a risk profile that is the equivalent of a bank savings account. According to testimony by SEC Chairman Mary L. Schapiro before the Committee on Banking, Housing, and Urban Affairs of the United States Senate, during 2008 this myth was shattered when the Reserve Primary Fund suffered a loss causing its value fell below a dollar per share.

Investors in the Reserve Primary Fund and the Reserve’s family of money market funds withdrew approximately $300 billion over the $2 trillion held by the Reserve’s money market funds over the course of a week. At the time approximately $4 trillion was held in all money market funds.

The Reserve fund family had to sell assets to meet the redemptions and their selling depressed prices for those assets impacting other funds and caused them to also sell assets. In less than two weeks, close to $1 trillion was pulled from money market funds. Money markets are a primary source of capital for companies that rely on short term borrowing to finance operations so problems spread to other markets. The Treasury Department had to temporarily guarantee the $1.00 share price for more than $3 trillion in money market fund shares in order to stabilize the industry,

Money market regulation is considered important because the run on the industry contributed to the 2008 financial meltdown.

This issue may now be taken up by the Financial Stability Oversight Council, set up under the auspices of Dodd-Frank and charged with assessing systemic risks to the financial markets.

Jumpstart Our Business Startups Act (“JOBS Act”)

The SEC announced a delay in passing an interim rule that would allow general solicitation for private securities issued under SEC Rule 506 of Regulation D and mandated under the JOBS Act.

Congress and the President fast tracked the JOBS Act which was enacted in April of 2012 in an attempt to stimulate job growth by reducing some financial reporting and auditing requirements for companies with annual gross revenues of less than $1 billion, allowing smaller companies to raise up to $1 million annually through “Crowdfunding”, and relaxing communication restrictions related to initial public offerings.

The SEC was also mandated by the JOBS Act to conduct a comprehensive analysis of public offering registration requirements for additional opportunities to reduce the costs and simplify the process but also have failed to complete this requirement.

Investment Adviser SRO Bill Withdrawn

The measure to create one or more Self Regulatory Organizations to provide oversight and examinations for investment advisers has been shelved for now. Originally introduced by House Financial Services Committee Chairman Spencer Bachus (R. Ala.) and co-sponsored by Representative Carolyn McCarthy (D. NY.), the bill is designed to remedy the lack of regular examinations of investment advisers by regulators. The SEC examines only about eight percent of the approximately 12,000 SEC registered advisers and some state covered advisers have not been examined in several years (if ever). The bill was designed to remedy this problem and offer additional investor protection by facilitating more frequent examinations.

However, the bill unleashed a firestorm of protest by investment advisers who feared that the Financial Industry Regulatory Authority (“FINRA”) would be selected as the SRO. Many advisers do not wish to be supervised by an organization that oversees broker-dealers and are concerned that FINRA would not have the necessary level of expertise to carry out the new role.

The recently released House Financial Services Committee scheduled does not include a scheduled vote on the bill as alternatives are considered.

Regulators and legislators appear to be falling increasingly behind schedule in implementing the rules and regulations mandated by Dodd-Frank as political opposition increases and lack of agency staffing and funding make mandates more difficult to implement in a timely manner.

It has been two years since the Dodd Frank Act was signed into law by the President in July 2010, but regulators have written only 224 of the 400 associated rules. Two Years Later, Dodd-Frank is Only Half Finished, Roland Li, International Business Times (August 28, 2012)

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