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Dermot Butler, chairman of Custom House Global Fund Services Ltd and Custom House Group

Comment: Whatever happened to cost benefit analysis?

I have previously discussed some of the pitfalls of the Dodd-Frank Act. But aside from this, there have been thousands of words written concerning the excessive cost that will be imposed upon the industry in complying with all of the regulations introduced globally post-2008, says Dermot Butler (pictured), chairman of Custom House Global Fund Services Ltd and Custom House Group. Over and above the costs of putting in systems and training staff to handle these compliance issues, there will be huge legal costs...

The SEC has already received a bloodied nose (once again) as a result of the Federal Appeals Court decision last month, striking down the so-called Proxy Access Rule that would have made it easier for shareholders to nominate company directors. And obviously there are and will be huge amounts of money spent by lawyers and lobbyists, as well as on programmers, systems analysts and the cost of staff training and operational manuals, let alone amending SAS70s.

Another aspect of regulation was revealed by Mary L. Shapiro, the Chairwoman of the SEC, who disclosed that the Proxy Rule alone, which is 60 pages long, took 21,000 staff hours to draft over a two year period – an incredible amount of resources – and it appears that they still got it wrong. In this context, I think it is worth considering that if that was what was involved in creating just the Proxy Rules (and Dodd-Frank has some 300 new rules and regulations to be complied with), what has the whole gamut of new regulations cost taxpayers in the US and EU in the last 3 years.

In Europe, the AIFM Directive (“AIFMD”), which is still being finalised, was originally introduced in April 2009 and has been the subject of an immense amount of negotiation, lobbying, etc. Even for those who have not yet spent a “red cent” (presumably “red” refers to the metal rather than any political leanings) on the AIFMD, there has been no small cost incurred in just keeping up to date with the debate. In some cases, serious expense has been incurred by those who rushed into a UCITS fund, because UCITS funds are exempt from AIFMD regulation. If the Proxy Rule took 21,000 staff hours to draft, then I dread to think how much time has been spent on drafting and amending the AIFMD by the EU staff. Add to that the hours spent by AIMA’s (the Alternative Investment Management Association) staff, as well as the huge number of hours spent by the hedge fund managers, investors and their advisors.

One has to wonder whether anybody has carried out a cost benefit analysis on all these regulations and, if so, what the result was. This is not such a stupid question as it might originally seem, given the fact that some courts of the United States have used the failure to produce a meaningful cost benefit analysis as one of the grounds for overturning certain SEC rules (the “Bloodied Nose” referred to above).

Inevitably, the investor will pay these costs, either through taxes or increased costs in their investments – but to what benefit?

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