20/07/2011 Author: Tony Griffiths

Dodd-Frank: one year on

The spectre of regulation has loomed large on the psyche of the US hedge fund industry since the enactment of the Dodd-Frank Financial Reform Act 12 months ago. With the deadline for registration now pushed back, HFMWeek looks back over a year of tension and stilted progress to see what lies ahead

As the one-year anniversary of the day US President Barack Obama signed the Dodd-Frank Act into law, 21 July 2011 was always going to be a notable date. That it was also the day originally earmarked for hedge funds to register under the new law says a lot about how the milestone will be remembered. This has been a year of workloads, deadlines and postponements; of sweat, confusion and relief – Happy Birthday, Dodd-Frank.

Without doubt, the SEC’s extension of the fund registration deadline, to 30 May 2012, has been the most talked-about development of the legislation’s first forays. Few were surprised. Confirmed last month, an extension had been mooted as early as January.

The Commodity Futures Trading Commission’s (CFTC) target date for derivatives registration is also poised for revision, following concerns from swap users about the readiness of providers. Originally slated for mid-July, expectations are that it will now be pushed back to the end of the year at the earliest. Surfacing in April 2011, a Republican-led bill is even attempting to extend that to December 2012.       

“There is no need to rush and meet arbitrary deadlines when the rest of the world is at least 18 months behind the United States,” Spencer Bachus, the chairman of the Financial Services Committee, said in a statement when the bill was introduced.

Commentators disagree as to the extent deadlines were expected to be met behind closed doors – did policy
makers know only months prior to confirmation or was it inevitable? No one, however, is arguing that the task was anything but unrealistic.

“They’ve tried to cover a huge amount within the Dodd-Frank Act and in giving themselves this timeline for getting it all in place have really set themselves up to fall,” says Andrew Rubio, CEO of specialist accountancy and service provider Throgmorton, of US policymakers. “A year later, there are still hundreds of rules that have been mandated that have yet to be written.”

He adds: “You’ve got politicians who are trying to force through something for political gain. But from the regulator’s perspective, it’s been a horrible task. Given what they’ve been told to do within the timeframes I think they’ve done the best they could have done.”

Jonathan Saxton, a US-based member with regulatory consultants Kinetic Partners, also refuses to level blame at the SEC. “They’ve been reflective, thoughtful and really considered how best to use the powers that they’ve been given,” he says.

Likened by one HFMWeek source to a maturing teenager, the SEC has entered new territory in the last 12 months, having to familiarise itself with newly heightened authority and deciding how best to use it. Saxton points to the overhaul of Form ADV Part 2, now a publically disclosed document with additional requirements in terms of leverage and strategy, as a key example.  

Neither Rubio nor Saxton believe the hedge fund industry is, in principle, all that different following a year’s worth of timeline recalibration. The difference is the expectations.  

A deficit in regulatory resources is at the heart of the postponements. But managers will also have to spend the next 12 months building out. “Investment managers should expect significant technology and operational challenges and may need sizeable re-engineering of their infrastructure to prepare for central clearing, oversight and reporting, and increased reconciliations,” said Neeraj Sahai, global head, securities and fund services at Citi, in the firm’s recent white paper on Dodd-Frank-led OTC Derivatives reform.

The last 12 months may have ultimately yielded a series of deadline extensions, but, says Saxton, it means the year ahead will have to be one free from excuses.   

“I think the SEC will expect, in return for this extra time, that firms will hit the ground running and have a strong infrastructure,” he notes. “And I’m sure they will probably look to make some examples of firms that have recently registered, or should have recently registered, making sure that they have done what’s appropriate.”        
   
Although many rules may still be undefined and uncertainty is still rife, the unease has been tempered by the relief of time gained. Expect Dodd-Frank’s second birthday to be an altogether more nervous affair.