As 2017 unfolds, hedge funds face not only the ever-present reality of uncertain markets, but also the tentative future of the regulations under which they operate. Donald J. Trump’s ascendancy to the Presidency will almost certainly differentiate itself from his predecessors’ approach to market oversight.
The hedge fund industry will be faced with a new paradigm, if, as promised, the Trump administration delivers on its promise of reduced regulation and the promotion of an economic environment conducive to growth.
At the Same Time
Concurrently, the nation’s economy is displaying signs of strength. Unemployment stands at 4.6 percent and the markets have rallied to all-time highs. The Federal Open Market Committee (FOMC) has raised interest rates and has expressed an inclination to do so again, even though its inflation target of 2 percent has not been met. However, many unknowns remain regarding Dodd-Frank, SEC leadership, tax reform, the Department of Labor’s Fiduciary Rule, and changes to the definition of an accredited investor, all of which will impact the hedge fund industry.
The new Secretary of the Treasury, Steve Mnuchin, has vowed to curtail the Wall Street Reform and Consumer Protection Act (Dodd-Frank). Mnuchin describes the legislation as “way too complicated and cuts back lending.”
The legislation is widely regarded as part of the Obama legacy and any changes to it will be met with stiff opposition. There are, however, certain elements of the act that have bipartisan opposition, particularly those aspects of the law that have negatively affected small community banks.
Tax reform is arguably the biggest driver of the recent equities rally. It is unclear at this point, how effective the Trump administration will be in bringing these reforms to fruition.
Three key leadership positions are opening up in the Securities and Exchange Commission (SEC). Mary Jo White, the former SEC chair, will be replaced by Wall Street attorney Jay Clayton, assuming his nomination is approved. Andrew J. Ceresney and Stephan Luparello will also be replaced as Enforcement director, and Trading and Markets director, respectively. The final selections for these positions will send a strong signal to the hedge fund industry.
To Trump’s dismay, Janet Yellen has expressed intentions to finish out her term, which ends in January 2018.
Department of Labor’s Fiduciary Rule
This rule, whose effective date is April 10, 2017, is also a target of the new administration. Although brokerages have spent millions to ready themselves for compliance, the expectations are that it will be halted or dismantled. One thing is certain—until a new Secretary of Labor is confirmed, nothing is going to happen. As you may know, Andrew Puzder has withdrawn his nomination. This represents further delay with regard to any action on the Fiduciary Rule.
Accredited Investor Definition
Proposed changes to the definition of an accredited investor actually benefit the hedge fund industry. The problem, rather, is one of timing. The lame-duck Congress was unable to act and, as a result, the reforms will have to be reintroduced sometime this year. Given the full plate Congress is dealing with, this is an unlikely candidate to receive a high priority. Ironically, it is the absence of this revised definition, which harms the hedge fund industry.
All the usual suspects, in terms of headwinds, are in play for the hedge fund industry. However, the added uncertainties of a revisionist administration compound its frustrations making the next four years fraught with change.