SEC Disclosure Rules Attacked
October 26, 2011 (washingtonpost.com) As regulators draft new rules for hedge funds, private-equity funds and other money managers, some of these companies and their supporters have been laying a foundation that could be used to challenge the requirements in court.
The Securities and Exchange Commission is scheduled to vote Wednesday on another installment in the government's Wall Street overhaul - a set of rules that would require private money managers to divulge information about their business to federal overseers. The confidential disclosures are meant to help the government avert another financial crisis by identifying potential risks to the system.
But money managers and others have criticized a draft of the rules, arguing they would be unduly costly and burdensome. And their letters offer a roadmap for potential lawsuits to overturn the regulations.
Those complaints have special resonance, because over the summer a federal appeals court struck down a major SEC initiative to expand shareholder rights on the grounds that the SEC had not done enough to weigh the potential costs - and that it had not paid enough attention to the concerns expressed in public comments to the agency.
The court ruling, which the SEC declined to appeal, shows how the agency's work can be undone.
One of the sterner protests against the current proposal comes from Rep. Darrell E. Issa (R-Calif.), chairman of the House Committee on Oversight and Government Reform.
In a recent letter to the SEC, he complained that the benefits "are too narrow" while "the cost in terms of jobs and capital are ignored."
Issa quoted at length from the court opinion, adding: "I suspect that this rule, like the one the District of Columbia Circuit recently struck down, likely results from a flawed cost-benefit analysis process."
Similar comments run through letters from others, including comments filed while the court case against the SEC was still in progress.
The proposal "places an enormous burden on advisers" which "is significantly underestimated in the draft proposal," wrote Michael E. Cahill of TCW Group.
ArcLight Capital Partners cited "an undue burden and expense."
"Obliging smaller and midsized hedge fund advisers to report detailed information that is unlikely to be material to the detection and assessment of systemic risk and could impose unjustifiably high compliance costs," wrote Jiri Krol of the Alternative Investment Management Association.
The draft of the SEC's proposal calls for fund managers to fill out at least part of a 44-page questionnaire addressing such topics as their funds' borrowing, their investment positions and the firms to which they have the greatest exposure.
Congress directed the SEC to require disclosures for two purposes - protecting investors and shedding light on systemic risk - but it left details to the agency.
AFL-CIO President Richard L. Trumka urged the SEC to collect even more information than its proposal would require.
"It is clear that a large hedge fund could trigger a systemic crisis," he wrote. "The activities of smaller funds, however, can also have a systemic impact when they exhibit herding behavior."
Trumka noted that the onset of the financial crisis in 2008 was marked by the failure of hedge funds managed by Bear Stearns.
In an Oct. 14 letter to Issa, SEC Chairman Mary Schapiro said the agency is carefully considering the comments it has received and the court's criticism. Some costs and benefits can be impossible to estimate with precision, particularly those that are indirect, she wrote.
"We greatly appreciate getting this feedback and have incorporated it into our consideration of the costs and benefits," SEC spokesman John Nester said Tuesday.