WHICH GOVERNMENT AGENCY WILL
MONITOR RISK?
In early May, Mary Schapiro, the chair of the Securities and Exchange
Commission (SEC) stated that, rather than granting authority to
a single regulator, she favored the creation of a council of existing
regulators to oversee risk in the financial markets. Ms. Schapiro said
“Given the various components of effective financial regulation, I
have long been concerned about effective concentration of power, which
really means effective concentration of point of view in a single regulator.”
By Romano I. Peluso, CCTS
Sheila Bair, chair of the Federal
Deposit Insurance Corp. (FDIC)
proposed this structure a few days
earlier. Under Ms. Bair’s proposal,
the council would be comprised of
representatives from the Federal
Reserve System, the FDIC, the Office of the Comptroller of the Currency, and the SEC. The council
would be responsible for identifying institutions, practices, and markets that create risk, and writing
rules or setting standards to address
those risks. The council would also
have the authority to overrule or
force actions on behalf of other
regulatory entities and would be
able to demand information from
important entities and readily share
the information among members.
Two additional risk-related
regulators were proposed by
Ms. Bair—one for systemically
important firms, and the other
to unwind failed financial institutions. Ms. Schapiro endorsed both
proposed entities which she stated
should remain independent.
Ms. Schapiro indicated that
splitting up the SEC would not
be a good idea and defended the
role of the SEC as an independent
capital markets regulator charged
with investor protection and the
formation of fair and efficient
markets. She said “Any system of
regulation must take as its touchstone the protection of individual
well-being. At the SEC, as you
know, we call that investor protection. Though we are not, as some
would have you believe, focused
solely or even primarily on retail
transactions, and we regulate institutions and markets, our focus
has been and must remain on how
our actions benefit workers, savers, and investors of the United
States.”
Ms. Schapiro indicated that
the SEC will also consider reforms
to money market mutual funds,
“target-date” funds, 12b- 1 fees,
and credit rating agency rules.
PROPOSED AMENDMENTS TO 1940 ADVISERS
ACT TO PROTECT INVESTOR FUNDS
On May 14, 2009, in its Release 2009-109, the Securities and
Exchange Commission (SEC) proposed rule amendments to
substantially increase protections for investors who entrust
their money to investment advisers.
The proposed amendments to the Investment Advisers Act of 1940, Rule 206( 4)- 2 entitled “Custody of Funds or Securities of
Clients by Investment Advisers,”
are meant to address gaps in protections for investors who entrust
their money to SEC-registered
investment advisers that have
been exposed by the revelations
concerning the Bernard Madoff
“Ponzi” scheme and other similar
investment scams.
It should be noted that managers of hedge funds or private
equity funds who rely on the ex-
emption from SEC registration in
Section 203(b)( 3) of the 1940 Act,
as well as state registered advisers,
are not affected by the proposed
amendments.
The amendments provide for:
• expansion of the “surprise
exam” requirement to be performed by a public accountant that meets the standards
for independence described
in SEC Regulation S-X to
verify the existence of the assets regardless of whether a
qualified custodian directly
provides statements to clients.
Most investment advisers
generally do not have physical
custody of their clients’ funds
or securities but maintain
client assets with a qualified
custodian—a broker/dealer
or bank. Under the proposed
amendment, such investment
advisers may be deemed to
have custody because they
have authority to withdraw
clients’ funds held by a qualified custodian.
• preparation of a “SAS 70”
report for investment advisers
with physical custody of client
assets. The investment adviser
would have to obtain a written
