On February 3, 2017, President Trump signed an executive order that outlined his administration’s core principles for regulating the U.S. financial system. They are:
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(f) make regulation efficient, effective, and appropriately tailored; and
(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
It is difficult to make a case against allowing Americans to make independent financial decisions based on informed choices, saving for retirement and pursuing individual wealth. This principle is closely linked to the broadened definition of an accredited investor, which failed to make it through the lame duck Congress and awaits action by the 115th United States Congress. There is little doubt that the proposed definition, which is more inclusive, would broaden the market of potential hedge fund investors.
Prevent Taxpayer Bailouts
There is only one federal bailout of a hedge fund on record—the bailout of Long-Term Capital Management (LTCM) in September 1998. It is fair to say that the hedge fund industry shares similar views on government bailouts as those shared by Americans in general. In short, the Trump stance on taxpayer bailouts is neither help nor hindrance to the hedge fund industry.
Foster Economic Growth
Promoting economic growth and vibrant markets based on a regulatory philosophy that targets systemic risk and market failure is music to the ears of the hedge fund industry. Current regulatory efforts are a “gotcha” cat and mouse game that serves no one’s best interests. While this is core principle lets no one off the hook, it does remove regulatory uncertainty and hold the promise of an end to “gotcha” regulation.
Hedge funds are wary of this, not because they disagree with the premise, but because the means of achieving this end are unspecified. The potential for trade wars and isolationism are real and concerning to the majority of hedge funds.
Advance American Interests
Again, no one decries the premise; the means by which this end is achieved is the over-riding concern for the industry.
Efficient, Effective and Appropriate Regulation
Hedge fund managers would like nothing more than efficient, effective and appropriately tailored regulation. The single greatest expense for any hedge fund is the expense associated with compliance. If this core principle is realized, hedge funds and their investors will benefit substantially.
Restore Public Accountability
This, the last of Trump’s eight core principles, will likely be the most difficult to achieve. Federal financial regulators are accustomed to their pedestal. They will vigorously resist being toppled from it. The transparency they demand from those they regulate is unlikely to be reciprocated. However, if achieved, it will accrue to the benefit of the hedge fund industry.
Hedge Fund Jobs
Empowered Americans, fostering economic growth and competition, while advancing American interests abroad, coupled with efficient, effective and appropriately targeted regulation and public accountability for the financial regulators bodes well for the hedge fund industry’s success. This success will necessarily be accompanied by increased employment opportunities in the hedge fund industry.