New AIMA chair Casey talks shadow banking, SEC reporting, hedge fund public image

By Lawrence Delevingne

Mon Oct 15, 2012

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The former SEC commissioner hopes to use her Washington know-how to shape a plethora of new regulations.

Kathleen Casey at the SEC (Photo: Bloomberg)
Kathleen Casey is a quintessential Washingtonian.

Air Force dad. Law school at George Mason. Thirteen years as a Senate staffer. Five years as a top Securities and Exchange Commission official. And since her five year term as an SEC commissioner ended in August 2011, Casey is now a regulatory consultant at Patomak Global Partners, a fellow at Georgetown, a member of the Library of Congress Trust Fund Board and the Public Company Accounting Oversight Board Advisory Council. A Republican, she's even taken a short term role advising Mitt Romney's presidential campaign.

The hope now is that Casey can use her Washington savvy to benefit hedge funds. The Alternative Investment Management Association, one of two major industry lobbying groups, appointed Casey as its chairman on September 20. London-based AIMA opted for someone with deep regulatory experience--Casey also did extensive work while at the SEC with the G-20 Financial Stability Board and the International Organization of Securities Commissions--instead of an industry insider like Managed Funds Association chair Bill Goodell, the chief operating officer of Maverick Capital.

Casey established herself as a hedge fund advocate at the SEC, meeting numerous times with AIMA staff and members to better understand the industry (as she did with many interest groups). In June 2009, for example, she noted that the financial crisis was "not a hedge fund driven event" and that "hedge funds contribute to market liquidity, price efficiency, risk distribution, and global market integration."

Absolute Return recently sat down with Casey in New York to discuss her then-week old role.

AR: Where do you stand on global regulation of the hedge fund industry?

Kathleen Casey: In jurisdictions like the U.S., you already have new registration and reporting requirements coming online, so we're focused on implementation and ongoing compliance issues with respect to reporting. It's relevant to what we see in Europe with the Alternative Investment Fund Managers Directive, and other jurisdictions, as well. The industry needs to get used to this broader regulatory regime. I think OTC derivatives continues to be another area where getting the rules right is very important, and not just to market participants like asset managers and hedge funds, but more broadly.

If you step up at the global level, which is also relevant to some of the initiatives you see in the U.S. and Europe, shadow banking is another area where the industry is going to be very keen on helping policy makers and regulators understand the role that hedge funds play in the market and as much as possible inform their judgments on what is truly shadow banking and the kinds of risks that they are seeking to address. That is another area where AIMA will be quite keen on trying to inform how regulators look at those issues and ensure that hedge funds aren't unduly caught up in an overly broad view. Especially since they are highly regulated and not necessarily involved in the business of banking.

A lot of industry insiders would look at the shadow banking debate and say this is ridiculous--it seems so obvious that hedge funds shouldn't be included and yet it's this big fight. What are the main obstacles?

I don't think it's a fight. It's a very legitimate concern when you look just at the sheer amount of regulatory activity that has gone on during the past several years. One of the lessons is that you really need to stay engaged. There's always the risk that if not properly informed regulators could take a broader view. There's not a fight. There's a broad recognition that hedge funds by definition, in my view, don't meet the notion and the risks posed by the concept of shadow banking. That being said, AIMA needs to be very engaged in helping policy makers and regulators understand what role hedge funds do play and be responsive to their desire to understand better, whether it's through monitoring or whether it's just getting more information about the way that hedge funds operate so that they can, as much as possible, ensure that you don't have an overly wide net that might include hedge funds.

Speaking of AIFMD, some of the draft proposals have been quite scary to American managers. Where does the process stand and where do you hope to be helpful?

I know that AIMA has remained very engaged with providing comment and input on the concerns that they have on the AIFMD. As that process continues to proceed, the issues have narrowed. We still intend to be very involved. I wouldn't speak specifically on the issue, but I know its an area of particular concern and interest in continuing to monitor what the final directive will look like.

Shifting to Dodd-Frank, John Paulson recently made some comments about manager reporting being "gobbledygook." What are some areas that could be improved?

I think you're obviously going to have an adjustment for many advisors or managers. For now, coming into a more regulated environment, there will always be that kind of knowledge sharing that goes on [laughs]. It will be an adjustment. I think there's recognition of that on both sides. I think communication is really important.

What will the JOBS Act practically mean for hedge funds? Will it really change the under-the-radar culture of the industry?

I think it remains to be seen. The regulators have identified this as an area where they are going to be particularly interested to see how folks address advertising and solicitation. How much the hedge fund industry engages in it remains to be seen. I know AIMA has also been very supportive of the objectives of the JOBS Act, particularly with respect to eliminating the solicitation ban. And that makes sense, I think. Certainly when you look at the maturity of the industry and the sophistication of investors and the protections that are in place by virtue of that. And also the fact that the industry is highly regulated. I think that's all good. How that develops it will be interesting to see.

A criticism of the JOBS Act I've never quite understood is about the new wave of frauds that will target investors, even though the anti-fraud provisions still apply...

I completely agree with you.

What's your perspective on the carried interest debate?

I would say that's an area where I wouldn't have a comment at this point, other than obviously knowing that from AIMA's perspective concerns have been raised.

Do you think the hedge fund industry is unfairly singled out from other alternatives like private equity and venture capital?

As the industry continues to grow and certainly as you have a greater institutional investor base and a much more regulated industry, I think that naturally those kinds of perceptions should diminish. More generally, from a capital markets perspective, I never looked at it that way or had that perception just because of an understanding of how important hedge funds are in capital markets. I think there's a great appreciation for the role that they play.

What would you say to managers who don't have the best view of regulators?

[Laughs] Who are they?

What would you tell managers so that they would better appreciate the job of regulators?

I think regulators value the input they get in terms of helping them more effectively achieve their regulatory objectives and understanding what that means for the industry. That kind of technical as well as policy input is really quite important. So it's going to be a developing relationship. You have an industry facing much greater regulatory oversight. The spirit is one of really trying to make sure that regulators are effective in their objectives. And that means working with the industry to make sure that its more likely that they are going to be successful. Whether its through reporting, like the ADV in the U.S. for example, or just understanding how the regimes work together and how that incents behavior. All of that is really important to hear from the industry and it more likely that regulators will be successful achieving their objectives.

Do hedge funds need to work on their public image?

AIMA has been engaged with educational research efforts. Two of the products just came out that AIMA did with KPMG. One was on the trends in the industry as well as the trends in institutionalization. So you have that as well as this broader effort to speak more clearly to what the role of hedge funds are the social and economic value that they offer. Those kinds of products that AIMA has recently put out are consistent with a lot of work they've done. It connects them with their base. That educational element has always been in AIMA's roots. As we continue to move forward, that kind of work will continue to be an important priority.

What do you think of hedge fund press coverage, for example around Simon Lack's book The Hedge Fund Mirage?

I know AIMA did offer up some counter perspective than what was offered in that book in the spirit of really trying to help people understand how you should look at the industry. And to the degree they thought there were methodological or factual errors, it was helpful that they were able to offer their perspective on that and counter what they thought were some of the book's weaknesses. More generally, that's the kind of engagement that organizations like AIMA have to have to try and be a voice that people can look to in understanding more clearly the truths of how the industry works, and it's not always that apparent. To the degree that there are views or commentaries out there where you really think it gets it wrong, organizations like AIMA can be helpful in providing a counter view.

You've been working as an advisor to the Romney campaign. Can you talk about the election?

No. It probably wouldn't be relevant or appropriate to the hat I'm wearing.

Andrew Ross Sorkin of The New York Times recently criticized former Minnesota governor Tim Pawlenty for becoming CEO of the Financial Services Roundtable because of the so-called revolving door between government officials and lobbyists. What's your take on the issue?

I didn't see that article, but to the revolving door issue I would just say that to the degree you seek expertise in government, you want to be able to attract people who understand the markets. You want to attract people who are expert in those areas. It's not unnatural that you would have people from the private sector to do that. To the degree that they decided they want to commit themselves to public service for whatever that period of time is, it's natural that afterwards they would go back in some role to the private sector. You have a variety of different laws in place to address very legitimate concerns about conflicts. And, again, they serve very important purposes. But I think it would be a danger if you didn't have a situation where government could attract the best and brightest and that you didn't get the benefit of the kind of expertise and knowledge that you have from people in the private sector. It's really important that you do that. I don't know what is revolving in and out--I've only been in. This is my first time out. So I don't know if that's revolving.

ISSN: 2151-1845 / CDC10004H

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