Brieifing Notes on Regulation and Compliance: G-20

The communiqués that came out of the G – 20 meetings identified at least three areas that may well affect our clients.

1. The G – 20 agreed to the creation of a global regulator, The Financial Services Board (FSB), to work to prevent financial and economic crises, and to respond to them effectively when they do occur. This organization provides structure around global regulatory cooperation. Housed at the Bank for International Settlements (also home to the Basel Accords), this organization is likely to request information to assess the behavior and stability of financial markets. I expect that most data will be aggregated by country with the exception of the major global financial institutions that will be required to report individually.
   
   For our clients the FSB is yet another recipient of information that they will have to satisfy. What is not clear is how much will be provided by the regulators and how much will have to be provided by the large financial institutions directly. If the burden is on the regulators then little or no additional work will be required of our clients. If, however, the requirement for information directed to the company level our already overtaxed IT clients may find themselves with yet more to do.
   
   
2. The likelihood of hedge funds being regulated has increased. Hedge fund regulation was explicitly addressed in the communiqués. I would expect hedge funds to be subjected to less regulation and disclosure requirements than bank holding companies; most likely they will be covered, at least in the U.S., by a watered down version of the Investment Act of 1940. Briefly, I would expect that disclosure of balance sheets on some periodic basis, and perhaps also client lists (see 3 below) would be required. If possible, hedge funds are likely to rely on outside agents to ensure compliance. Whether those agents will be prime brokers, fund administrators or someone else will depend on the nature of the requirements.
   
   
3. Tax havens will no longer be tolerated. I found it surprising that this was a focus of the outcome of the meetings since tax havens have had little to nothing to do with our current situation. I can only assume that many nations are concerned about paying for their stimulus packages and associated activities, and are no longer willing to overlook a source of substantial revenue.

This suggests that financial institutions will have to disclose more information about their clients, in addition to greater focus on anti money laundering. Although most financial institutions currently have to comply with AML regulations, I anticipate a re-examination of what is currently required and how all categories of financial institutions comply. Some tightening of requirements may occur and additional reporting is likely to be part of any new regulations designed to eliminate tax havens.

Amidst the G – 20 display of global cooperation it was clearly stated in communiqués and by key participants, Treasury Secretary Geithner included, that financial industry regulation is a sovereign responsibility that cannot be relinquished to a global organization. Therefore I would anticipate that globally agreed on principles and guidelines will be subject to interpretation when it comes to implementation. This is not unlike the Basel Accords, which are drafted and agreed on by a globally representative committee, but put into action on a country level where they often need to be modified so that they are consistent with each country’s regulations. We will continue to monitor these developments.

Ben Wolkowitz
Headstrong

(This entry was published right after the G-20 meeting earlier this year; however we felt it was worth reviewing what came out of that meeting and how we felt about the outcome.)