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Hedge Fund Implications & Impact of the Dodd-Frank Reform

New York (HedgeCo.net) – Hedge funds and private equity funds will be impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act signed by President Obama, according to Sadis and Goldberg.

The Dodd-Frank Act includes the Private Fund Investment Advisers Registration Act of 2010, which will require many investment advisers and hedge fund managers to register as investment advisers with the SEC. It also will require some investment advisers and hedge fund managers that are presently registered with the SEC to, instead, register with a state.

Also revising one of the definitions of an “accredited investor”, the new bill excludes the value of a person’s primary residence from the $1 million net worth calculation. After four years, and at least once every four years thereafter, the SEC is required to review the definition of “accredited investor” for natural persons and determine whether adjustments should be made.

This change has been made effective immediately.

“A natural person is generally considered to be accredited if he/she: (1) has $200,000 in annual income (or $300,000 jointly with a spouse); or (2) a net worth of $1M. ” Law firm Holland and Knight said of the reform.

Client Impact:

The new “accredited investor” definition may be subject to further interpretation, but as of now appears to not require expulsion, but will limit new investors or additional subscriptions from existing investors.

Clients acting as advisers to private funds should amend their subscription agreements to comply with the new definition of accredited investor as applied to natural persons each time it’s promulgated by the SEC.

Implications for Hedge Funds

Regarding hedge funds and private equity funds, Deutche Bank said: “The Government Accountability Office (GAO) is to to complete a study on feasibility of forming a self-regulatory organization to oversee private funds and submit a report regarding the same to Congress within 1 year of the date of enactment.”

  • Tighter leverage requirements at U.S. banks will continue to impact hedge funds significantly
  • Higher capital charges for banks also has implications
  • SEC registration requirements for funds > $150 million
  • Central clearing requirement on derivatives
  • Possibility of certain hedge funds being designated a systemically important financial institution, which would be accompanied by strict regulatory oversight, higher capital levels, and very tight monitoring of risk activities

“The U.S. is ‘way out in front’ on comprehensive financial regulatory reform, especially on OTC derivatives,” Deutsche Bank concluded in their report. ” The Dodd-Frank Act is very aggressive in its reforms in the derivatives title….and has also built in various anti-evasion provisions to mitigate the impact of regulatory arbitrage.”

Other Noteworthy Changes

  • Increases to the FDIC DIF Reserve Ratio: FDIC reserve ratio of the Deposit Insurance Fund will increase from 1.15% to 1.35% of insured deposits by September 30, 2020, raising ~$6 billion (banks with assets < $10 billion exempt)
  • Amendments to Sarbanes-Oxley Act:  Sox Section 404(B) Exemption: permanent exemption from Sarbanes-Oxley Act’s Section 404(b) auditor attestation requirements for small companies (< $75 million market capitalization)
  • Foreign auditor oversight: enables information to be shared with foreign auditor authorities without waiving confidentiality as long as confidentiality is ensured
  • Preemption: the OCC is allowed to preempt state laws if they “prevent or significantly” interfere with the business of banking
  • Equity-indexed annuities exempt from SEC oversight: treated as insurance products and therefore under the regulation of insurance regulator rather than SEC
  • Restriction on use of US funds for foreign governments: requires a review of IMF loans to countries where public debt is greater than GDP and opposition to loans unlikely to be repaid
  • Provision regarding Congo Minerals: manufacturers disclosure on source of minerals originating from the Democratic Republic of Congo and requirement for State Department to issue a strategy for addressing trade of conflict minerals
  • Reporting requirements for coal and mine safety
  • Extraction industry provisions: requirements for greater transparency including public disclosure on payments related to the commercial development of natural resources

Compiled and edited by Alex Akesson

For HedgeCo.net


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One Response to Hedge Fund Implications & Impact of the Dodd-Frank Reform

  1. Verena Kämpken says:

    Hello, I have some questions reffering to the Provision regarding Conflict Minerals. What is its function and in what way does it help to stop the Congo conflict?

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