A Regulatory Black Hole

Date: September 24, 2014

I have been spending more time than I ever thought I would as an amateur political pundit. In my early days in the fund business, the things to keep up with almost always involved auditors or product offerings. 

While those two forces haven’t stopped their influence, over the past five or so years post crisis, politics have been taking over from both an operational and a product point of view, and my somewhat rudimentary civics expertise has been put to the test.

Most recently, the House passed HR 4413, which is a somewhat delayed reauthorization of the Commodities Futures Trading Commission (CFTC). HR 4413 also contains many other directives, definitions and requirements, including an exemption to CFTC registration for a number of entities participating in the swaps and futures markets.1

There were also eight amendments to HR 4413. H Amnd 954, the “Garrett Amendment”, would remove the requirement for investment advisers to register as commodity pool operators if their commodity pools are ‘40 Act funds, and if those funds only invest in financial futures.2 H Amnd 954 was included in the bill with 219 Republicans and 33 Democrats voting for, and 2 Republicans and 156 Democrats voting against.3 HR 4413 itself passed with 219 Republicans and 46 Democrats voting for, and 1 Republican and 143 Democrats voting against.4 Not right down party lines, but pretty close.

Between that partisan voting distribution and a Democratic controlled Senate, the bill’s chances to move forward look slim. Overall, of the 10,000 bills considered by each Congress, only 4 percent are ever enacted5. According to the objective analysis conducted by the political transparency website, HR 4413 has a 10 percent chance of being enacted. 6

So what kind of bill does get enacted? Eighty-three percent of the bills that manage to become law are non-substantive, non-controversial, and bi-partisan. Even bills with bi-partisan support have a tough time getting through if they have substance.7 HR 4413 is substantive, controversial, and partisan.

Things are not looking good for the Garrett Amendment – or at least they wouldn’t be looking good if it ever came to a vote, which it probably will not. The Senate is by design a slow moving institution, and votes typically only happen when the parties involved think a bill is sure to pass.8 I doubt anyone thinks that HR 4413 will pass, so no vote – and no closure for mutual fund managers.

When it comes to the Garrett Amendment and what that means for CFTC registration, unfortunately it looks like a lot of uncertainty followed by…nothing.










To learn more about 13f-2 watch our webinar replay Part 1: Unpacking the SEC's New Disclosure Rules for Shareholders
Join us for Part 2: Operationalizing the SEC's New Disclosure Rules, for Shareholders on December 12.