Securities and Exchange regulators may ease a proposed rule tomorrow. If that action takes place, fewer hedge fund advisers would file troves of confidential data with the government. The SEC is scheduled to vote on a final rule for the threshold, which would trigger extensive reporting requirements from large hedge funds as well as other private funds.
The rule is required as a result of the Dodd-Frank oversight law requirements that financial institutions must comply with. As passed into law, the data reporting gives the SEC an inside look into large funds’ concentrations of investments and the proprietary trading strategies.
An anonymous source notes that the suggested easing would take two forms – a raising of the dollar threshold that requires the invasive reporting rules and a relief measure for large private equity fund advisors through merely requiring annual SEC filings instead of the quarterly frequency previously proposed.
Though large hedge fund advisers would still be required to submit more extensive information about the exposure of such funds to various asset classes, those large funds would not have to report detailed position-level data. Private funds do not want their exact holding or trading strategies divulged. Additionally, some lawmakers as well as former SEC commissioners have expressed concern about the cost of preparing such extensive filings.
In the original January, 2011 plan, a tiered regulatory approach was suggested in which funds with over $1 billion in regulatory assets under management would be required to submit the extensive and detailed reports each quarter. Smaller funds would be subject t the rule if registered with the SEC and managing at least $150 million in regulatory assets. The revised rule expected Wednesday requires smaller funds to report to the SEC annually with basic data (fund strategy, leverage and credit risk).
Critics of the hedge fund requirements accused the SEC of not adequately balancing the costs and benefits of the rule, a criticism that caused an SEC rule to be overturned regarding how shareholders can nominate candidates to company boards. Congressman Darrell Issa has been critical of the simplified approach the SEC is pursuing.
Summarized from: http://news.yahoo.com/exclusive-sec-weighs-easing-hedge-fund-data-rule-214637375.html
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What the SEC, Congressman and
Reporter Are Not Telling You
By the blog author
How the SEC itself describes its mission in 2011:
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
-- http://www.sec.gov/about/whatwedo.shtml
Original reason for the SEC as of 1934:
The modern mission of the SEC is to maintain fair, orderly, and efficient markets, facilitate capital formation, and, by the way, appear to protect investors.
-- http://www.sec.gov/about/whatwedo.shtml [emphasis and "by the way, appear to" added]
Investors are secondary to the modern SEC. Maintaining orderly markets and facilitating capital formation are the primary functions. This was demonstrated clearly in the fall of 2008 during the financial crisis and collapse of the stock markets. The SEC, on September 28, 2008, forbade corporations with listed stocks from complying with a new accounting rule, FAS #157. This new rule would have required corporations to mark their derivative contracts to market, which would have revealed the genuine precariousness of their financial positions, as of November 15, 2008.
The SEC did not have the authority to tell the accounting governing body of rules, the Financial Accounting Standards Board, to retract a pronouncement, let alone a complex and well-studied new rule that would have clarified the risks of derivatives for investors.
So the SEC violated its original mission a well as asserted power which it did not have for the political purpose of "calming" the roiled markets, especially the securities of the largest banks (all of them huge holders of derivatives) and the largest insurance company (A.I.G., about to go broke for its exposure to derivatives as an underwriter, legally termed a counterparty).
The actual financial bailout legislation of 2008 granted the SEC supervisory and veto power over all formal accounting rules – making the SEC the czar of financial accounting rules, a power that until that crisis was exclusively the prerogative of certified public accountants, academic (Ph.D.) accountants, and senior bankers serving on the Financial Accounting Standards Board. FAS #157 went through four iterations before finally becoming a final, weakened version that surely does not adequately inform investors about the risks of securities issued or underwritten by counterparties. The flimsy final version is what the SEC wanted. A key danger here is that the SEC has legislated for itself supervisory authority over a profession (public auditing) which it demonstrably does not understand at a professional level.
So in accordance with these actions, the investor is not "served" by the SEC. Politicians, desperately wanting the appearance of market stability and the securities industry (especially the issuers of stocks, bonds, new issues and derivatives themselves) are the primary focus of the SEC.
Derivatives are legal contracts that present a bet, payable by one party (or its underwriting counterparty) in the unlikely event that specific facts and event present themselves. Thus derivatives offer a corporation the opportunity to, in effect, take out insurance. And this insurance is taken without any requirement for reserves (such reserves being required, state-by-state, in the home state of the insurance organization). Derivatives also allow the underwriters, which are the counterparties, usually large banks, to collect remunerative fees while performing no work whatsoever, unless unusual and unpredictable events occur.
Derivatives also allow hedge funds to make large profits unless unusual and unpredictable events occur. There are computerized mathematical models for these unusual and unpredictable events. All a bank or hedge fund needs to do is "balance" these risks to achieve stability – and – substitute for that archaic insurance industry need for "reserves."
There are two problems here: the computerized method of balancing derivatives is, itself, flawed and cannot be absolutely relied upon to minimize risk (see Robert Bookstaber, A Demon of Our Own Design, 2007).The second problem is that, in the logical processes of an experienced auditor, there is no substitute for reserves when one underwrites betting or risk sharing. The European Union nations have reserves set aside of 1:61 (and underwent a more serious crisis in 2008 than the US). The USA banks set aside reserves of about 1:26, and many were quasi-acquired by the federal government during the 2008-2009 financial crisis. Canadian banks are required to have reserves of 1:18 and that nation’s financial sector was essentially unaffected by the meltdown of 2008-9.
The SEC is setting the bar low for banks and hedge funds over transactions (derivative) for which there are no reserves. The SEC has no authority to require banks (acting as counterparties) to increase their reserves. Yet it presumes for itself under Dodd-Frank the authority to protect the public through a review of large hedge fund transactions and trading strategies.
The SEC lacks the expertise to perform this function. A key element they are reviewing are those computerized derivatives balancing formulae – which are inherently flawed.
Worldwide, there are over one quadrillion dollars in derivatives’ "notational value" (the sum of all the bets if those bets had to be paid off). One quadrillion dollars is a thousand trillion dollars, or, if you will, a million billion dollars. The GDP of the world is about $70 trillion. The world economy is therefore leveraged through these derivative bets at a ratio of at least 14:1.
Real estate derivatives account for only 30% to 35% of these instruments, but that was enough to cause an economic crash in 2008 from which the USA has yet to recover after three years of struggle.
In early 2009, the current administration came into power. They were told of these dangers, specifically by former Federal Reserve Chairman Paul Volker and by former Chair of the Commodities Futures Trading Commission, Brooksley Born [see http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html ] .
Obama and Geithner could have pushed through a new Glass-Steagall Act (forcing the separation of banks from brokerages and both from insurance activity), raised bank reserves, allowed the Financial Accounting Standards Board its full independence (including implementation of FAS #157 in its original form with respect to derivatives) and legislatively sunsetted all derivatives that are not traded on an exchange (most of the $1 quadrillion plus in derivatives are traded off-market on Bloomberg machines, thus a bubble can build and burst without warning and without reserves). The president’s political party controlled the White House and both houses of Congress in 2009.
Instead, Tim Geithner recommended that the derivative situation be "managed" rather than solved. This was the approach that was approved.
The can was kicked down the road. And the instrument that kicked the can was the Dodd-Frank legislation which the SEC is frantically trying to simplify for itself to avoid an avalanche of impossible-to-analyze reports.
The SEC is going to be way, way, way too busy to perform its trivialized, secondary modern responsibility of protecting investors.
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
Conjecture: those secret agreements that the Federal Reserve doesn’t want audited almost certainly contain the agreement to supply money to major banks in lieu of the reserves those banks should have been maintaining as counterparties -- and those USA major banks had (and still have) hundreds of trillions of dollars of notational value in derivative contracts.
Post Script: Too bad "Occupy Wall Street" hasn’t done its homework on who did what to create the situation they are protesting about. The other bank protesters, the Tea Party, have done a significantly better job of looking into the origins of the problem, though their suggested solutions do not manage risk competently, nor do the Tea Party reforms prevent a future repeat of derivatives-based manufactured crises.
The rule is required as a result of the Dodd-Frank oversight law requirements that financial institutions must comply with. As passed into law, the data reporting gives the SEC an inside look into large funds’ concentrations of investments and the proprietary trading strategies.
An anonymous source notes that the suggested easing would take two forms – a raising of the dollar threshold that requires the invasive reporting rules and a relief measure for large private equity fund advisors through merely requiring annual SEC filings instead of the quarterly frequency previously proposed.
Though large hedge fund advisers would still be required to submit more extensive information about the exposure of such funds to various asset classes, those large funds would not have to report detailed position-level data. Private funds do not want their exact holding or trading strategies divulged. Additionally, some lawmakers as well as former SEC commissioners have expressed concern about the cost of preparing such extensive filings.
In the original January, 2011 plan, a tiered regulatory approach was suggested in which funds with over $1 billion in regulatory assets under management would be required to submit the extensive and detailed reports each quarter. Smaller funds would be subject t the rule if registered with the SEC and managing at least $150 million in regulatory assets. The revised rule expected Wednesday requires smaller funds to report to the SEC annually with basic data (fund strategy, leverage and credit risk).
Critics of the hedge fund requirements accused the SEC of not adequately balancing the costs and benefits of the rule, a criticism that caused an SEC rule to be overturned regarding how shareholders can nominate candidates to company boards. Congressman Darrell Issa has been critical of the simplified approach the SEC is pursuing.
Summarized from: http://news.yahoo.com/exclusive-sec-weighs-easing-hedge-fund-data-rule-214637375.html
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
What the SEC, Congressman and
Reporter Are Not Telling You
By the blog author
How the SEC itself describes its mission in 2011:
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
-- http://www.sec.gov/about/whatwedo.shtml
Original reason for the SEC as of 1934:
- Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
- People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors' interests first.
The modern mission of the SEC is to maintain fair, orderly, and efficient markets, facilitate capital formation, and, by the way, appear to protect investors.
-- http://www.sec.gov/about/whatwedo.shtml [emphasis and "by the way, appear to" added]
Investors are secondary to the modern SEC. Maintaining orderly markets and facilitating capital formation are the primary functions. This was demonstrated clearly in the fall of 2008 during the financial crisis and collapse of the stock markets. The SEC, on September 28, 2008, forbade corporations with listed stocks from complying with a new accounting rule, FAS #157. This new rule would have required corporations to mark their derivative contracts to market, which would have revealed the genuine precariousness of their financial positions, as of November 15, 2008.
The SEC did not have the authority to tell the accounting governing body of rules, the Financial Accounting Standards Board, to retract a pronouncement, let alone a complex and well-studied new rule that would have clarified the risks of derivatives for investors.
So the SEC violated its original mission a well as asserted power which it did not have for the political purpose of "calming" the roiled markets, especially the securities of the largest banks (all of them huge holders of derivatives) and the largest insurance company (A.I.G., about to go broke for its exposure to derivatives as an underwriter, legally termed a counterparty).
The actual financial bailout legislation of 2008 granted the SEC supervisory and veto power over all formal accounting rules – making the SEC the czar of financial accounting rules, a power that until that crisis was exclusively the prerogative of certified public accountants, academic (Ph.D.) accountants, and senior bankers serving on the Financial Accounting Standards Board. FAS #157 went through four iterations before finally becoming a final, weakened version that surely does not adequately inform investors about the risks of securities issued or underwritten by counterparties. The flimsy final version is what the SEC wanted. A key danger here is that the SEC has legislated for itself supervisory authority over a profession (public auditing) which it demonstrably does not understand at a professional level.
So in accordance with these actions, the investor is not "served" by the SEC. Politicians, desperately wanting the appearance of market stability and the securities industry (especially the issuers of stocks, bonds, new issues and derivatives themselves) are the primary focus of the SEC.
Derivatives are legal contracts that present a bet, payable by one party (or its underwriting counterparty) in the unlikely event that specific facts and event present themselves. Thus derivatives offer a corporation the opportunity to, in effect, take out insurance. And this insurance is taken without any requirement for reserves (such reserves being required, state-by-state, in the home state of the insurance organization). Derivatives also allow the underwriters, which are the counterparties, usually large banks, to collect remunerative fees while performing no work whatsoever, unless unusual and unpredictable events occur.
Derivatives also allow hedge funds to make large profits unless unusual and unpredictable events occur. There are computerized mathematical models for these unusual and unpredictable events. All a bank or hedge fund needs to do is "balance" these risks to achieve stability – and – substitute for that archaic insurance industry need for "reserves."
There are two problems here: the computerized method of balancing derivatives is, itself, flawed and cannot be absolutely relied upon to minimize risk (see Robert Bookstaber, A Demon of Our Own Design, 2007).The second problem is that, in the logical processes of an experienced auditor, there is no substitute for reserves when one underwrites betting or risk sharing. The European Union nations have reserves set aside of 1:61 (and underwent a more serious crisis in 2008 than the US). The USA banks set aside reserves of about 1:26, and many were quasi-acquired by the federal government during the 2008-2009 financial crisis. Canadian banks are required to have reserves of 1:18 and that nation’s financial sector was essentially unaffected by the meltdown of 2008-9.
The SEC is setting the bar low for banks and hedge funds over transactions (derivative) for which there are no reserves. The SEC has no authority to require banks (acting as counterparties) to increase their reserves. Yet it presumes for itself under Dodd-Frank the authority to protect the public through a review of large hedge fund transactions and trading strategies.
The SEC lacks the expertise to perform this function. A key element they are reviewing are those computerized derivatives balancing formulae – which are inherently flawed.
Worldwide, there are over one quadrillion dollars in derivatives’ "notational value" (the sum of all the bets if those bets had to be paid off). One quadrillion dollars is a thousand trillion dollars, or, if you will, a million billion dollars. The GDP of the world is about $70 trillion. The world economy is therefore leveraged through these derivative bets at a ratio of at least 14:1.
Real estate derivatives account for only 30% to 35% of these instruments, but that was enough to cause an economic crash in 2008 from which the USA has yet to recover after three years of struggle.
In early 2009, the current administration came into power. They were told of these dangers, specifically by former Federal Reserve Chairman Paul Volker and by former Chair of the Commodities Futures Trading Commission, Brooksley Born [see http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html ] .
Obama and Geithner could have pushed through a new Glass-Steagall Act (forcing the separation of banks from brokerages and both from insurance activity), raised bank reserves, allowed the Financial Accounting Standards Board its full independence (including implementation of FAS #157 in its original form with respect to derivatives) and legislatively sunsetted all derivatives that are not traded on an exchange (most of the $1 quadrillion plus in derivatives are traded off-market on Bloomberg machines, thus a bubble can build and burst without warning and without reserves). The president’s political party controlled the White House and both houses of Congress in 2009.
Instead, Tim Geithner recommended that the derivative situation be "managed" rather than solved. This was the approach that was approved.
The can was kicked down the road. And the instrument that kicked the can was the Dodd-Frank legislation which the SEC is frantically trying to simplify for itself to avoid an avalanche of impossible-to-analyze reports.
The SEC is going to be way, way, way too busy to perform its trivialized, secondary modern responsibility of protecting investors.
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
Conjecture: those secret agreements that the Federal Reserve doesn’t want audited almost certainly contain the agreement to supply money to major banks in lieu of the reserves those banks should have been maintaining as counterparties -- and those USA major banks had (and still have) hundreds of trillions of dollars of notational value in derivative contracts.
Post Script: Too bad "Occupy Wall Street" hasn’t done its homework on who did what to create the situation they are protesting about. The other bank protesters, the Tea Party, have done a significantly better job of looking into the origins of the problem, though their suggested solutions do not manage risk competently, nor do the Tea Party reforms prevent a future repeat of derivatives-based manufactured crises.
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