House Democrats to offer hedge funds bill
By Kevin Drawbaugh
WASHINGTON (Reuters) – Top U.S. House of Representatives
Democrats said on Wednesday they plan to introduce legislation
to revive a government effort to regulate hedge funds that was
blocked last week by a court.
Massachusetts Rep. Barney Frank said he will unveil a bill
on Thursday to give the Securities and Exchange Commission
“clear authority to require registration and monitoring” of
hedge fund advisers.
A federal appeals court last week threw out an SEC rule
narrowly adopted in late 2004 that required most U.S. hedge
fund advisers to register with the investor protection agency
and open their books for occasional inspections.
The rule was the agency’s first step toward policing a
secretive industry that has doubled its assets in the past five
years to become a powerful Wall Street force.
“Given the increasing size of hedge funds and the growing
role they are playing in the economy, it would be a grave error
to allow the court decision denying any authority by the SEC to
stand,” said Frank, senior Democrat on the House Financial
Services Committee, in a statement.
“At the very least, Congress should give the SEC the power
it has sought to require registration,” he said.
Separately, the attorney general of Connecticut — home to
many U.S. hedge funds — called for prompt action to fill the
regulatory void left behind by the appeals court’s ruling.
Connecticut Attorney General Richard Blumenthal told the
Senate Judiciary Committee in a hearing that the $2.4-trillion
hedge fund industry is “a regulatory black hole — lacking even
minimal disclosure and accountability.”
BIG AND POWERFUL
Blumenthal said, “If federal agencies abandon the field,
(the states) will join forces, as we have done before in joint
legal action, or act separately to protect our citizens.”
Blumenthal, a Democrat, told reporters after the hearing
that he has been in discussions with other state officials
about what to do next if Washington fails to act. “We’re not
setting any deadlines” for the SEC or Congress, he said.
Hedge funds are investment partnerships that invest in ways
not available to more traditional mutual funds, such as selling
short and taking certain arbitrage and derivative positions.
Once exclusively invested in by the rich and large
financial institutions, hedge funds increasingly are being
marketed to less well-to-do investors and pension funds.
Well-financed and free to seize any opportunities, hedge
funds have an increasingly significant impact on many markets.
“Hedge funds are too big and too powerful … not to have
some oversight,” Sen. Arlen Specter, the chairman of the
Judiciary Committee and a Pennsylvania Republican, told
reporters after his panel adjourned.
“The oversight that this committee has … is in the
criminal law field and I plan to pursue that,” Specter said.
The Senate Banking Committee typically has jurisdiction
over hedge funds. Specter said his panel needs to know if the
Justice Department was doing enough in the hedge fund area.
New York Democrat Charles Schumer, a member of both the
Senate Banking and Judiciary committees, raised questions at
the hearing about Judiciary’s purview. “Many of these issues
are best addressed in the banking committee,” Schumer said.
Sen. Orrin Hatch, a Utah Republican on the judiciary panel,
said he had questions about the SEC’s hedge fund rule.
“I am not necessarily calling for new regulations … but
we need to monitor this field,” Hatch said. “Hedge funds are
the wild west of our financial markets.”
A Senate Banking Committee spokesman said the panel plans
to hold a hearing on hedge funds before Congress’s August
recess. He said committee Chairman Richard Shelby, an Alabama
Republican, had no comment on Frank’s bill.
(Additional reporting by Susan Cornwell and John Poirier)