In an address to the Senate Banking Committee yesterday, the Securities and Exchange Commission announced its intention to institute tighter controls and increase oversight of hedge funds, money market managers, and investment advisers who have custody of client assets. In a prepared statement to the Senate Banking Committee, SEC Chairman Mary L. Schapiro told the Committee that "[e]veryday when I go to work, I am committed to putting the SEC on track to serve as a forceful capital markets regulator for the benefit of America's investors." Stating that the size of investments in pooled investment vehicles is "astonishing," Ms. Schapiro informed the Banking Committee that the SEC's efforts with respect to pooled investment vehicles would "be aimed at shoring up money market fund investments and mitigating the risk of a fund experiencing a decline in its normally constant $1.00 net asset value, a situation known colloquially as 'breaking the buck.'

Some view the SEC's proposed changes as too far-reaching, and private analysts question whether the proposed changes would even have the effect of preventing serious frauds. According to this view, enforcement of the existing regulations is sufficient to address problems recently brought to light, and the SEC's intended action is overly broad and a knee-jerk reaction to recent scandals, such as Bernard Madoff's Ponzi scheme.

Nevertheless, the SEC will push for more federal oversight of hedge funds. Larger hedge funds, private equity funds, and venture capital funds above a certain level would be required to register with the SEC. Regulators would then audit their books to determine whether to subject the funds to greater scrutiny.

Ms. Schapiro outlined several steps the SEC intends to take with respect to investment advisers. The proposed changes include:

  • requiring investment advisers who have custody of client assets to undergo an annual, unannounced third-party audit;

  • requiring investment advisers who have custody of client assets to be audited for compliance with the law and forcing senior officers to attest they have safeguards in place; and

  • listing certifying firms, along with the name of any auditor of the firm on the SEC Web site.

Ms. Schapiro further announced that the SEC plans to reveal proposals this spring to "improve credit quality, maturity, and liquidity standards." Additionally, she made clear that the SEC is actively exploring ways to address eliminating disparities over regulations between broker-dealers and investment advisers, reforms for credit-rating firms, and disclosures in the municipal securities market. The SEC will also push for proxy access to allow candidates for corporate boards of minority shareholders to be included on a company-printed proxy ballot, as well as for possible reinstatement of the "uptick rule," which limits the timing of short sales. Lastly, Ms. Schapiro announced that the SEC would ask Congress to allow the agency to pay whistleblowers who provide "key information" on non-insider trading cases.

Given the government's focus on regulatory fixes and enforcement to prevent a repeat of the current economic turmoil, we can expect a very high level of activity to continue, with far-reaching proposals.

For more information, please contact Henry E. Hockeimer, Jr., at 215.864.8204 or hockeimerh@ballardspahr.com, John C. Grugan at 215.864.8226 or gruganj@ballardspahr.com, or any member of the firm's White Collar/Investigations Group.


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