Mary Jo White’s Hedge Fund Follies

*Mary Jo White’s Hedge Fund Follies*
**By Phil Hall**

new-PhilH***When President Obama nominated Mary Jo White to become chairwoman of the Securities and Exchange Commission (SEC), he spoke glowingly about her prosecutorial record as a U.S. Attorney. However, he said nothing about her work as a high-priced Wall Street attorney. Since she took office in April, we’ve seen very little of the courtroom toughie promised by Obama and a bit too much of White’s less-discussed behavior as a C-suite consigliere.

****Last week, White announced that the SEC was lifting a restriction that prevented hedge funds and other private firms from raising funds from potential investors via advertising. These restrictions were in place since the 1930s, and one could argue that the federal limitations on marketing did nothing to stunt the growth of the hedge fund industry – the SEC reported that $899 billion was raised through private offers during 2012.

****And although White was not personally responsible for this dramatic shift in policy – it was part of the sprawling JOBS Act that passed last year – she nonetheless gave the impression that it was a great idea, noting that her agency would “pursue additional investor safeguards if and where such measures become needed.”

****This major policy shift offers an equal serving of hope and dread for the mortgage banking industry. Let’s start with the good news. First, the SEC policy also states that accredited investors with a certain net worth or income are the only ones that can make purchases based on this new advertising push. Anyone with an income exceeding $200,000 (or $300,000 for married couples) or a net worth of more than $1 million can qualify as being an accredited investor. The SEC estimates that 8 million homes, or 7% of the U.S. population, qualify as accredited investors.

****As for the mortgage banking industry, this new policy could see more hedge fund involvement in the securitization process. Indeed, mortgage hedge funds have been the sector’s top performers: according to CNN Money, the average hedge fund rose 5.5% in 2012, while mortgage hedge funds were up 20% on average during the same 12-month period. In comparison, the S&P 500 only saw a 13% rise last year.

****Considering the mortgages being packaged into today’s securities represents a new level of high quality, this investment vehicle is being seen by many hedge fund managers as the ultimate win-win situation. And if Washington ever gets serious about winding down Fannie Mae and Freddie Mac (cough, cough), the hedge funds will become even more powerful in the secondary market.

****Ah, but now the bad news. Critics of the policy change, ranging from consumer advocates to the North American Securities Administrators Association, are warning that there is almost nothing in place to ensure investor protection or define what constitutes appropriate advertising. I am afraid that they have a point. This situation feels like a rerun of the circumstances that shaped the pre-2008 housing market – a concern raised by Luis A. Aguilar, an SEC commissioner and the lone dissenter on this policy shift.

****“Without common sense protections, general solicitation will prove to be a great boon to the fraudster,” Aguilar warned in a statement. “Experience tells us that this will lead to economic disaster for many investors.”

****Equally concerning is that the hedge funds will be able to solicit new investors outside of the reach of the Consumer Financial Protection Bureau (CFPB) – the SEC’s new policy does not allow for Richard Cordray and his team to share oversight responsibility in this new channel of financial marketing. Needless to say, it is more than a little peculiar for the CFPB to put a muscular headlock around a neighborhood mortgage broker and a church credit union, but it cannot put a finger on a billion-dollar hedge fund industry that will soon be running ads on social media sites and television stations.

****As for White, this new policy has opened her to criticism by longtime Obama supporters about her abilities to run the SEC. Sen. Carl Levin (D-Mich.) issued a damning statement that openly questioned her judgment.

****“Proceeding today with this flawed rule will ultimately damage the investing public and investor confidence in U.S. markets,” Levin said. “I am disappointed that Mary Jo White, who knows what it’s like to combat financial fraud, let this rule go with so few investor protections.”

****Barbara Roper, the investor protection director at the Consumer Federation of America, was even blunter. “It sends a disturbing message about the Commission’s likely priorities under her leadership,” she said in a Reuters interview.

****Yeah, but I doubt that White will be upset by this criticism. After all, she won’t be at the SEC forever, and I am sure her big money pals will recall her kindness to them and gladly welcome her back to Wall Street after the Obama administration is out of office.