June 26, 2006
Key Republican wants hearing on hedge funds
By John Poirier
WASHINGTON (Reuters) - A senior Republican on the Senate
Banking Committee said on Monday he wants hearings on how to
protect investors in hedge funds now that the $1.3 trillion
industry has freed itself from regulation by the Securities and
international trade and finance, said he would also work with
members of the president's financial working group to determine
what oversight of hedge funds is needed. The Federal Reserve,
the Treasury Department, the Commodity Futures Trading
Commission and the SEC are members of the group.
Last Friday, a federal appeals court dealt a major blow to
the SEC when it tossed out a rule requiring most U.S. hedge
fund advisers to register with the agency.
The SEC rule, which went into effect in February, was a key
first step in regulating an industry, which saw its assets
double in the past five years as pension funds, endowments and
charities poured in billions of dollars to boost their
"We need to take a look at what is responsible and
appropriate oversight with regard to hedge funds," Hagel said
in a statement in response to a question from Reuters. "This
will require further Banking Committee hearings."
In May, Hagel's subcommittee held a general hearing on the
rapid growth of hedge funds, which are lightly-regulated
No dates have not yet been set for another hearing on hedge
"Investors must understand the full risks and benefits
associated with hedge funds. Transparency and openness are the
cornerstones in protecting the interests of our investors and
the integrity of our financial markets," Hagel said.
Separately, Democrats on the U.S. House Financial Services
Committee asked a non-partisan group to study the hedge fund
industry, according to a letter obtained by Reuters on Monday.
They asked the Government Accountability Office to help
Congress determine what new laws, if any, are needed to police
hedge funds, which primarily attract money from rich and
Barney Frank and Michael Capuano, both of Massachusetts,
and Paul Kanjorski of Pennsylvania sent the request to the GAO
in a letter dated June 16. Frank is the top Democrat on the
House Financial Services Committee.
"We would like the GAO to initiate a comprehensive review
of risks and regulatory framework of hedge funds given the
growing importance and continuing evolution of this industry,"
the House Democrats said in the letter.
A spokesman for Frank said the request to the GAO was even
more important in light of the recent court ruling.
"The congressman is taking a look at the ruling to
determine ... if we need to take a look a legislative vehicle
or something else," the spokesman said.
The court decision prompted SEC Chairman Christopher Cox to
say that the agency will "reevaluate" its approach to the
industry and try to come up with alternatives.
Before the appeals court ruling, the SEC rule covered hedge
funds with more than $30 million in assets and 15 or more
clients. It subjected them to periodic audits and other
procedures to discourage would-be cheaters.
Among the issues the House Democrats want the GAO to
address are the investment strategies used by large hedge
funds, any systemic risk posed by derivatives and lending
activities with hedge funds and fees charged by hedge funds.
They also want to know how extensively pension funds are
investing in hedge funds and what regulators are doing to
ensure banks and securities firms are adequately managing their
exposure to hedge funds.
(Additional reporting by Joel Rothstein)