The Securities and Exchange Commission (SEC) is considering new rules for oversight and stress testing of the asset management industry. In response to concerns that hedge funds, mutual funds and other alternative types of investments lack the regulatory control that banks now operate under, regulators are studying whether they need more data about such matters as mutual-fund portfolio holdings and the ability of the asset-management industry to withstand episodes of economic shock. But do such funds have the same potential as banks to inflict systemic risk should there be a sudden seismic event? The sheer value of the sector would seem to suggest that the answer is yes.
A $50 Trillion Industry
As investors stand ready to pump more money into the alternative investment market an industry that has already eclipsed the $50 trillion mark it is clear that if such a market were to collapse, the ramifications for the economy would be every bit as severe as were the big bank crises of 2008. Yet as of now, such funds are not subject to anywhere near the reporting, capitalization or stress testing requirements as are the larger financial institutions. A sudden change in interest rates and the specter of widespread investor redemptions are just two of the scenarios that experts believe could destabilize the financial system.
Derivatives Once Again the Demon
Just as derivatives played a key role in the last financial crisis, the SEC fears that the increasing use of derivatives by alternative mutual funds should also be viewed as a matter of concern. One suggested rule would see a forced limit on the use of derivatives by mutual funds sold to small investors. Also, firms would be required to have in place internal policies designed to manage the risk associated with such products and would have to curb use of derivatives if it were determined that a particular fund was not sufficiently liquid to readily meet redemption demand.
Reporting and Exit Requirements
New reporting requirements would provide the SEC with across-the-portfolio risk data as opposed to gathering such information on a fund-by-fund basis for examination. Advance winding down plans, the so-called living wills of large financial institutions, would apprise the SEC of a funds orderly transition scheme without use of taxpayer dollars in the event of insolvency.
Federal Reserve Oversight
Financial regulators had considered enacting rules that would have placed the largest mutual funds under Federal Reserve oversight but retreated from that position because of objections from both industry leaders and some lawmakers. In any event, new alternative fund rules proposed by the SEC would need to go through at least a months-long if not years-long process before implementation.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI