The question on all of our minds: “What impact will the Trump administration have on the hedge fund industry?”
By Ron Geffner (pictured), Sadis & Goldberg – With the Trump administration in the White House, regulatory uncertainty permeates the financial services industry. While many on Wall Street are very excited by the Trump presidency, others are approaching this new era with trepidation. President Trump is unpredictable in many ways and the industry eagerly awaits his actions hoping that the financial markets do not respond negatively and create chaos in the global marketplace.
While we should expect that the Trump administration will aim to cut back financial regulation implemented during the last eight years, it is unrealistic that these laws will be eliminated in their entirety. Though the financial markets have been extremely volatile of late and react very swiftly upon the announcement of any meaningful global news, various aspects of recent financial regulation have been positive for the industry. For example, the requirement for many investment advisers to register with the US Securities and Exchange Commission (SEC), one of the requirements of The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) which was signed into federal law by President Obama on 21 July, 2010, in retrospect, has been viewed as a positive change within the industry. Understandably, when initially introduced in 2010, many asset managers located within the United States and abroad who were required to register as investment advisers with the SEC as a result of Dodd-Frank were opposed to the changes. However, many advisers, investors and regulators now agree that requiring a larger number of advisers to be accountable to higher regulatory standards has created an environment where investors and counter-parties have more confidence in the oversight of those managers and the industry as a whole.
It is also important to remember that any time the government or a regulator changes the laws, rules or regulations, those businesses affected incur capital and opportunity costs in connection with analyzing the changes in law and implementing operational changes to comply with the new laws. For example, when Dodd-Frank was originally enacted, at the time of registration, those investment advisers who were required to register as advisers with the SEC were required to adopt written policies and procedures and invested capital into their operations and technology to support compliance. Therefore, we expect that caution will be exercised before significant change is made to avoid the various costs associated with implementing change. A case in point is the new DOL Rule (discussed below) set to take effect in a few months. Investment advisers impacted by the DOL Rule, have already been forced to analyse the DOL Rule and its impact on their businesses and some have already begun to implement changes to their operations and procedures. If the DOL Rule is modified or eliminated, some advisers may have to reverse their recently implemented changes.
A good test case to see how the new administration addresses legislation regarding advisers is the new U.S. Department of Labor (DOL) final rule issued in relation to fiduciary investment advice (DOL Rule) set to take effect on 10 April, 2017. The DOL Rule has been the subject of much debate. In short, the DOL Rule requires financial advisers to act in the best interest of their clients who have their assets managed, in part, through 401(k) or individual retirement accounts. While some industry experts believe that the DOL Rule is onerous and materially increases the costs associated with providing services to clients, supporters of the DOL Rule believe that it is necessary to protect investors against brokers from unnecessarily selling high-fee investments to their clients. As a result of the Trump administration, proposals have been made to delay, modify, or abandon the DOL Rule. According to the media, some industry experts expect a six month to two-year delay in the implementation of the DOL Rule, which could give Congress time to revoke the regulation entirely. We expect that some middle ground will be implemented to re-assure the investment community that advisers do have fiduciary duties to their clients.
In conclusion, we do not believe that regulations in the financial industry will be eliminated in their entirety. For example, if the requirement to register as an investment adviser with the SEC was materially modified or no longer required, we expect many investment advisers would maintain their registration as it is perceived to be a competitive advantage versus those managers who are not registered. While we expect the Trump administration to improve the financial services industry by having more balanced regulations, we believe that this administration will quickly realise that there are a lot of reasonable and sensible regulations currently in place that are working well and eliminating rules wholesale can create chaos in the financial markets and will come at a high price to their constituents.