Bear Mountain Capital Inc.

Regulatory Reform

| December 18, 2009


I received the following Member e-mail from the CFA Institute.  It discusses the state of the current financial reform regulations being pushed through Congress and stresses the areas that need further attention.  I think it does a good job of highlighting the real risks that are still prevalent in the industry, even if this recent round of reforms become law.  Read below:

“Dear Member:

After significant debate, the House of Representatives has passed the Wall Street Reform and Consumer Protection Act of 2009, a sweeping bill that potentially affects many aspects of our profession. CFA Institute has engaged legislators over the past year to urge that investor interests be foremost, but many of the investor-friendly recommendations from CFA Institute and other investor advocacy groups are not reflected in the House bill. We are monitoring the debate in the Senate, and hope that a stronger bill emerges from that body. Following is a brief analysis of the House bill and the investor “reaction” as developed from our own member surveys and the report of the Investors’ Working Group sponsored by CFA Institute.

Systemic Risk Oversight: The House legislation establishes the Financial Services Oversight Council, overseen and chaired by the Fed and Treasury. The Council’s purpose is to tighten risk limits and regulatory controls on firms that are in distress or judged to pose a threat to financial stability. The proposed Council members include all the same regulators previously responsible for systemic risk oversight.

Investor Reaction: This new “council” approach is flawed in several respects. In particular, investors expect there to be a robust and independent oversight body that provides for proper systemic risk detection and action. This body should address the vital goals of being independent, free from conflicts of interest and experienced in systemic oversight. The House bill preserves the status quo control over the process with existing regulators who lack these attributes.

Furthermore, recent survey findings by CFA Institute and the report by the Investors’ Working Group advocate instead for the creation of a Systemic Risk Oversight Board with full-time staff and experts who are independent of governmental agencies and financial institutions. We encourage the Senate to develop a new architecture along these lines that will be truly effective for systemic risk oversight.

OTC Derivatives: The House legislation requires only certain standardized OTC derivatives to go through central clearing and exchanges or equivalent facilities where possible. Such a limited requirement leaves open a whole segment of “non-standard” swaps and other customized derivatives that only require reporting to a swap registry or regulators. In other words, it leaves a robust OTC market intact for a variety of exotic instruments.

Investor Reaction: This plan fails to implement needed controls. Many investors are very concerned about a system that allows a broad range of customized derivatives to remain OTC traded and subject to minimal oversight. Investors want a more comprehensive federal oversight of all derivatives, allowing only minor exceptions. The Senate needs to improve this proposal and ensure appropriate levels of transparency, a means of tracking adequate capital backing for exotic and other derivative obligations, and exchange trading that allows for clear and documented pricing for most derivatives. (Read more.)

Regulation of Asset Managers: The House legislation makes several improvements, but it does not address a big concern of investors: the gap in regulation of U.S. and offshore private-fund vehicles (e.g., hedge funds and private equity and venture capital firms). The House proposes that only hedge funds with assets of more than $150 million be required to register and provide information to the SEC.

Investor Reaction: Investors are greatly concerned about private asset managers because their unregulated activity and lack of transparency helped facilitate frauds and ethical lapses that caused significant losses for a wide range of individual and institutional investors, including pension beneficiaries. This concern has weighed heavily on the confidence and trust in global markets. The House bill seems to acquiesce to industry pressures and has removed oversight of a large segment of private investment managers and funds.

The Senate has the opportunity to close these gaps in regulatory coverage. It should act to ensure that the vast majority of investment management industry be subject to some level of regulatory oversight. The most investor-friendly approach advocated by the Investors’ Working Group and others is to require all private fund managers, regardless of size, to register with the SEC and disclose positions to regulators on a real-time basis. (Read more.)

Thank you. We will continue to provide you with updates and our views on these critical issues.”