Speech by SEC Commissioner: Remarks at the Symposium on “Hedge Fund Regulation and Current Developments”

Troy A Paredes

On June 8, 2011 a commissioner of the SEC, Troy A. Paredes addressed the Center for Law, Economics & Finance (C-LEAF), in New York.  For reference sake, Mr. Paredes was appointed a Commissioner by George W. Bush in 2008.  I have highlighted a few key sections of his speech that I feel is somewhat news breaking.     

Short Sales and Public Comments

“Because short selling was such a focal point during the peak of the financial crisis in 2008, I should also note that Dodd-Frank calls upon the Commission to conduct two studies of short sale disclosure that hedge funds undoubtedly have an interest in. 

Dodd-Frank requires the SEC to study the effects of requiring the reporting of short sale positions in real time, either publicly or confidentially to the SEC. Second, the statute requires the agency to study the prospect of a pilot program that would require that trades be marked as “long,” “short,” “market maker short,” “buy,” or “buy-to-cover” in real time on the Consolidated Tape. The Commission has issued a request for comment to receive input on these studies."

Can we really define Systemic Risk?

“Title I — including which nonbank financial companies will be designated as “systemically important” (that is, as “SIFIs”) and thus subject to heightened prudential supervision and more intrusive government dictates — is still uncertain.

Personally, I am concerned about the ability of even a conscientious and well-intentioned systemic risk regulator to accurately identify when a firm is “systemically important” and to properly calibrate the source of future danger to the financial system.

And questions persist, at least to my mind, as to what the limits are on the government’s authority to regulate under the Financial Stability Act once SIFIs are designated".

Too much information might compromise a hedge fund’s competitive edge

When regulating, we need to account for the risk that these economy-wide benefits could be sacrificed if the regulatory regime unduly burdens and constricts the activities of hedge funds. It would be concerning, for example, if hedge funds were required to make public disclosures that compromise their proprietary investment strategies or if the regulation of our equity markets changed so that it became more costly to provide liquidity.

Let’s not rush into anything

"I also want to emphasize my view that, in advancing the numerous Dodd-Frank rule makings that the SEC is charged with, the agency cannot rush. The scope and complexity of the rulemaking is daunting and unprecedented. Trying to adopt too many rules and regulations too quickly is fraught with risk. Nor should we rush the implementation of the new rules and regulations, whatever their substance may be when enacted. Market participants, including hedge funds, will need to evaluate their business and investment options in light of the new regulation; structure their operations and activities accordingly; and develop and implement the systems, procedures, policies, and controls they will need to comply with the new regulatory regime.

This will take time. Thus, we need to be realistic about how quickly after being adopted the new rules and regulations should become effective in order to ensure that the transition to the new regulatory environment is orderly and workable in practice."