CFTC Regulation and Compliance: Not Just for Commodities Brokers Anymore

Posted by Susan Mangiero on November 03, 2012

Questions and Answers Signpost.jpg

Although the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed over two years ago, regulators and financial market participants are still grappling with its complexities. Some aspects are still being finalized which adds to the challenge of compliance. According to "U.S. regulators yet to implement one-third of Dodd-Frank rules" by reporter Pat Dulnier (Bank Credit News, November 2, 2012), about 40 percent of the 398 mandate creation requirements have not been met. The U.S. Commodity Futures Trading Commission ("CFTC") is cited as having "made the most progress" in doing what it is required by law, "having finalized 40 of the 60 rule-makings for which it was responsible."

Any information that experts can shed on compliance is welcome. One of the areas that is both important and yet not fully understood is the extent to which firms must register with various government bodies. To fill the knowledge gap, Day Pitney LLP investment attorneys Samuel A. Jennings, Henry  ("Hank") Nelson Massey and Joseph F. Morcos are speaking as part of a complimentary webinar about CFTC regulation and compliance. Topics to be discussed include:

  • How the definition of "commodities" has been expanded;
  • Loss of exemption previously relied upon by hedge funds and other private funds;
  • Looming end-of-year 2012 compliance deadlines;
  • What firms must do to register by December 31, 2012;
  • Who must take proficiency exams; and
  • Details related to National Futures Association ("NFA") examinations.

According to Attorney Massey, "The recent changes to CFTC regulations have the greatest impact on funds whose wealthy investors have traditionally been viewed by the private fund community and the public generally as having the ability to fend for themselves. Private funds with large, sophisticated investors may cope by way of Rule 4.7 registration, or 'CFTC Lite', which removes some of the more burdensome compliance requirements of full-scale CFTC registration. However, the deadline for registration is fast approaching, so affected funds need to start the process right away." 

Click to register for "CFTC Regulation and Compliance: Not Just for Commodities Brokers Anymore." Continuing legal credits ("CLE") will be offered.

Risk Management Survey Says More Work Is Needed

Posted by Susan Mangiero on July 05, 2011

Elephant Balancing on Ball.jpg

After the last few years, it seemed that risk managers were finally getting their due respect. Alas, a new survey suggests that more work remains to be done. According to "Too good to fail? New challenges for risk management in financial services" by Rob Mitchell with the Economist Intelligence Unit, "Inculcating and embedding a stronger enterprise-wide risk culture remains an ongoing challenge."

Sponsored by SAS, this March 2011 inquiry (and June 2011 report) finds that organizations still grapple with complexity, with about half of the 315 executives expressing concerns that their "employer's risk management processes are well placed to deal with volatility" and roughly one out of three organizations being able to thoroughly vet tail risk. (Note that "tail risk" is typically defined as the chance that investment prices or returns will be "extreme" in that realized performance falls outside of three standard deviations from the average.)

Other findings of the survey suggest that the risk management function is getting support, albeit limited, from atop the corporate food chain. More than forty percent of respondents announce that "their management boards have beefed up their risk expertise." One-half of polled professionals claim that "their boards are demanding more rigorous risk reporting."

A central message of the survey is that risk management reforms are underway but that risk management needs to be seen as less of a support function and more of a strategic mainstay that addresses organizational fortunes on a holistic basis. When asked about areas in which the skills of risk management professionals should be improved, one out of every three respondents cite the "ability to see the interdependencies between different categories of risks to the organisation."

Main barriers to effective risk management include regulatory uncertainty, "poor communication across departments," incomplete data, absence of authority for the risk management role, "lack of adequate investment" and poor real-time "(intra-day) risk management." With Basel III looming for a 2019 implementation, systematically important financial institutions ("SIFIs") could see profits lowered as capital requirements tighten, forcing more and better attention to be paid to the relationship between the cost of offering various products and services and risk mitigation.

In Risk Management for Pensions, Endowments and Foundations, Dr. Susan Mangiero talks about the urgent need for training across functions and job titles so it is alarming that 44 percent of respondents cite a 7 percent drop in the risk management training of the general workforce in 2011 from 2010. Fifty-four percent of risk executives describe a 9 percent decline in data quality and integrity with mergers and acquisitions leading to a related problem of disparate information technology systems. Without a good process in place to collect information, it is hard to measure and manage risks thereafter.

At a time when risk management is arguably as important as it has ever been in terms of protecting enterprise value, Financial Times reporter Justin Baer writes that "US regulators are warning banks to protect their risk-management staff and systems from any planned cost cuts as Wall Street grapples with a challenging year of meagre results." "US banks warned against shedding risk staff" references the Senior Supervisors Group of global bank regulators as urging financial institutions to do much more in the area of building a robust risk mitigation infrastructure.

Should an elephant fall, the audience will hear a thud. Should global financial institutions give short shrift to improving risk management policies, procedures, systems and practices (for those companies for which this applies), the economic "noise" will be deafening. Now is not the time to move backwards with respect to risk management.

Note to Readers:

Pension Risk Disclosures - Clear As Mud

Posted by Susan Mangiero on January 09, 2011

Doghouse.jpg

While some regulatory efforts are underway to promote transparency about "true" pension economics and the risk to investors, many questions remain about a sponsor's legal liabilities. This concern transcends all types of retirement plans, whether defined contribution or defined benefit. Additionally, as billions of dollars make their way to "hard-to-value" investments, concerns about liquidity and valuation are paramount.

As stated in "The Plan That Didn't Bark" by Susan Mangiero (CFA Magazine, March-April 2008), there are numerous ways to hide problems relating to excess risk-taking, leverage, underfunding and so on. One has to be particularly diligent and knowledgeable in order to understand the extent to which a plan sponsor is on the hook for imprudent process and worse.

Financial Risk Reporting - Recipe For Next Wave of Litigation?

Posted by Susan Mangiero on January 07, 2011

Audit Checklist.jpg

According to today's news reports, the U.S. Securities and Exchange Commission may soon investigate the California Public Employees' Retirement System ("CalPERS") for its disclosures about inherent risks. If true, this type of inquiry could quickly lead to serious trouble for other public retirement plans as well as ERISA plans. For that matter, any issuer of securities (government or corporate) will be fair game if it's found that the investing public was ill-informed about the ticking time bombs associated with underfunded defined benefit plans, mismanaged 401(k) plans or both.

No public information has yet been made available on the topic of CalPERS and a federal regulatory examination so it is imprudent and inappropriate to speculate.

On a general note, at a time when investors are still reeling from losses in 2008 and 2009 and questions abound regarding the rules of the game, transparency and conflicts of interest, the last thing plan sponsors should do is to gin up their performance numbers. It's better by far to get the bad news out and deal with the aftermath in a legitimate fashion. One constructive approach is to engage a risk management expert to conduct an assessment of current economic vulnerabilities and how those risks are being communicated to bond buyers (and, for corporations, equity investors).

Email Dr. Susan Mangiero, CFA and certified Financial Risk Manager if you would like information about what a risk disclosure assessment entails for your organization or on behalf of a client(s). You may likewise be interested in one of our workshops for directors, trustees and/or members of the investment committee about performance reporting within a fiduciary and financial risk management framework.