As a partner and head of the financial services group at law firm Sadis & Goldberg, as well as vice president at the Hedge Fund Association, Ron Geffner has a vested interest in seeing how regulatory reforms tied to the Dodd-Frank and JOBS acts play out. His clients are hedge funds, and it will be his job to help his clients deal with the new rules. So far, he’s not liking what he’s hearing from regulators.
Geffner said recently that some of the discussions about certain JOBS Act rule proposals have him thinking the country has passed a “regulatory tipping point.”
“We have too many regulations right now and they keep cranking them out as if there are more trees to knock down and more paper to burn,” Geffner said.
In particular, Geffner said he does not like three Dodd-Frank and JOBS act-related rule proposals he has heard about:
1. Increasing the qualifying requirements for accredited investors. The SEC adopted this provision last year. It basically eliminates a person’s residence from the net worth calculation. Geffner said as of 2007, studies showed 4% of the U.S. population met the requirements to be considered accredited investors, and thus were eligible to invest in alternative strategies like hedge funds. Stiffening the qualifying requirements by raising the asset threshold will make an already small investor pool even smaller, Geffner said, depriving the alternatives industry of capital it needs to invest in securities nobody else wants to buy, or can buy. “The alternatives space is one of the last bastions of hope where people can go to buy Level III and distressed assets,” Geffner said.
2. Requiring legends for alternative investment products to differentiate them from retail products.. Geffner called this a pointless exercise. “It’s not a retail product, so why the legend? Any time you put a legend on something, like cigarettes, it’s designed to keep the industry from growing.”
3. Increasing the burden on managers to ensure purchasers are accredited. Geffner said adding a step whereby investors would have to submit personal financial information to a third party for vetting will cause some accredited investors to just say no. This leads back to his first point about further limiting an already limited source of capital for alternative investment funds.
More rules increase the compliance costs to managers, increase the costs to government to implement the rules and costs the industry assets and talent because of the chilling effect of the new rules on managers and clients. “I want to fight stupidity. There’s a lack of clarity as to what the laws are and how they’re enforced,” Geffner said. “You see it every day. People are afraid to act.” For an entrepreneurial business like hedge funds and alternatives, that means trouble.
Geffner certainly sounds like a man fed up with the direction of things at the regulatory level. And while at first glance it might seem odd for a lawyer whose clients would pay him to help them navigate the new rules to be against those new rules, it’s likely Geffner sees things from the other side. More rules could raise barriers to new fund managers and cause existing fund managers to quit, thus costing him business. And he said he doesn’t think the new rules will do anything to protect investors. They are a show, much like the hearings involving JPMorgan Chase Chief Executive Jamie Dimon, where lawmakers speechified but ultimately accomplished nothing.
It’s unclear at this point what the state of any JOBS Act-related rules is. SEC Chairman Mary Schapiro told the House Oversight Committee on Thursday [June 28] that the commission will not meet its July 4 deadline to adopt final new JOBS Act rules. One of the hold-ups, she said, was the provision that fund managers more thoroughly vet investors.