Leading US law firm, K&L Gates, has posted a very good summary of the current status of the Dodd Bill, the House Bill that was similar and the conference proceedings which begin any day now.

In short the Obama Financial Reforms should be signed into law by early July.

The reforms will bring a lot of change in areas like bank regulation, OTC derivatives, US registration of hedge funds and other private pools of capital, credit agencies and the sale of financial products to consumers.  Each change is actually quite significant and as a group they certainly are the biggest changes to US financial services since the 1930's.

With such considerable change and new rules across multiple types of business models it is all going to take a while to digest.  Indeed as K&L Gates point out, you should expect further legislative amendments and clarifications to as the provisions begin to be tried in real life.

A few wags referred to the Sarbanes Oxley legislation as the Accounting and Audit Remuneration Act and the Dodd Bill is certainly the Legal and Compliance Providers Remuneration Act of 2010.

We expect to see a decent volume of work in 2011 arising from the requirement for overseas managers of hedge funds to be registered with the US SEC and to remain compliant with it rules and directives. 

We also expect broad international acceptance of many of the US banking, OTC, consumer protection and credit reference agency changes to result in corresponding changes at the local level in the major Asian jurisdictions of Japan, Australia, Hong Kong and Singapore.  Hong Kong recently announced it is issuing new guideance for credit reference agencies and it has been quite active over the last 12 months in the area of rule changes for firms selling financial products to the public.  Singapore has of course made similar progess in the area of the sale of financial products and it is expected to soon require all previously exempt asset managers to be licensed by the MAS.

The costs of new provisions across multiple jurisdictions will be high.  This against a backdrop of sub-optimal economic growth in the US and Europe and challenging markets for asset managers and intermediaries in the Asian region.  It is fair to say that this is likely to mean that the industry will be smaller overall.  The larger players will find a way to meet the new requirements - even if it means splitting off parts of their business - while the ones who have been marginal to this point simply won't have the capital to go on.  Mr Dodd may not be the only one retiring soon.

The SFC reported as follows:

The Securities and Futures Commission (SFC) has publicly reprimanded Mr Frank Hu, Ms Peony Ng and Ms Jenny Chang Pui Chun of UBS AG Hong Kong (UBS) and fined them $800,000, $600,000 and $400,000 respectively, for negligence in handling a client’s trade orders (Note 1).

An SFC investigation found that Hu, Ng, and Chang, were negligent in relation to a series of trades that they carried out on behalf of one of their clients at UBS which constituted wash sales and may have misled the market (Note 2).

Both Hu and Ng are executive directors at UBS and Chang is an associate director.

In February 2008, the client, who was facing margin calls from UBS decided to transfer part of his portfolio at UBS (Note 3) to his account at Morgan Stanley Asia Ltd (Morgan Stanley) in order to ease his margin position with UBS.

This could have been achieved through a simple delivery versus payment arrangement, such as by using the Central Clearing and Settlement System. Instead, a series of on-exchange matched sales and purchases (Note 4) was coordinated among Hu, Ng and Chang at UBS and the client’s account executive and her assistants at Morgan Stanley (Note 5) between 28 February and 26 March 2008.

In deciding the penalty for Hu, Ng and Chang, the SFC took into account that the three individuals had not carried out the matched trades with manipulative intent to interfere with the market, that they had sought internal compliance advice at UBS but failed to follow the advice due to misunderstanding, that they had co-operated with the SFC, and that each of them has a clean disciplinary record.

End

Notes:

1. Hu, Ng and Chang are relevant individuals registered with the Hong Kong Monetary Authority. Hu and Chang are authorized to carry out Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities whilst Ng is authorized to carry out Type 1 regulated activities.
2. Wash sales are transactions that do not involve any change in beneficial ownership. In this case, the sell orders of UBS and the buy orders of Morgan Stanley were matched on 82 occasions where there was no change in beneficial ownership of the shares involved.
3. The securities involved in the transfer were Fosun International Ltd (stock code 656), Tiangong International Company Ltd (stock code 826), Centron Telecom International Holding Ltd (stock code 1155), and Kingsoft Corporation Ltd (stock code 3888).
4. Upon receiving the client’s instructions, Chang would input sell orders on The Stock Exchange of Hong Kong. She would then inform the account executives handling the client’s account at Morgan Stanley by telephone immediately of the volume and price of the orders who would then arrange for Morgan Stanley, on behalf of the client, to purchase from the market similar quantity of the same stock at the same prices or at prices lower than UBS’ sell orders.
5. The SFC has also taken disciplinary action against the account executive at Morgan Stanley (See SFC press release dated 17 August 2009).

The proposed amendments include:

1. Introducing a list of permissible investments and accompanying criteria to enhance clarity in the application of the liquidity and diversification limits
2. Strengthening safeguards on the use of financial derivatives through prescription of counterparty limits and acceptable forms of collateral used to mitigate counterparty risks. 
3. Introducing additional guidelines on the use of the commitment approach and Value-at-Risk (VaR) method.
4. Enhancing existing guidelines on funds’ securities lending activities through comprehensive requirements on the counterparty, custodian and the use of collateral.
5. Establishing new investment guidelines for funds seeking to track indices, introducing principles for the naming of funds and requirements to standardise the methods used for calculating performance fees. 
6. Modifying existing operational requirements, including allowing the sending of accounts and annual reports to unitholders by electronic means.

Comments are due to MAS by 25 June 2010.

For further information please use the following link CIS Consultation Paper