Congress should pass legislation to mandate that hedge funds are regulated, state securities regulators said today.
“Congress should grant the SEC explicit statutory authority to regulate
hedge fund advisers as investment advisers,” Colorado securities commissioner Fred Joseph said at a press conference in Washington held by the North American Securities Administrators Association Inc.
He is president of Washington-based organization, which represents state and provincial securities regulators.
“Advisers to hedge funds should be subject to the same standards of examination as other investment advisers,” Mr. Joseph said in outlining NASAA’s legislative agenda for 2009.
Congress also should grant the Securities and Exchange Commission authority to require hedge funds to disclose to appropriate regulators the contents of their portfolios, including positions, leverage amounts and identities of counterparties, he said.
This is the first time that state securities regulators have called for Congress to pass legislation granting the SEC authority to regulate hedge funds.
In 2006, the U.S. Court of Appeals for the District of Columbia Circuit overturned an attempt by the SEC to require hedge funds to register.
In September, as the financial crisis worsened, the SEC issued an order requiring hedge funds to report their short sale positions on a non-public basis.
The SEC also temporarily halted all short sales of financial company stocks in an effort to dampen volatility in financial stock prices. The ban was later lifted.
The Managed Funds Association of Washington strongly opposed the short-sale ban, arguing that it hurt market liquidity and efficiency.
NASAA is also calling for regulators to raise the minimum wealth standards for “accredited investors.”
Currently, only investors with at least $1 million of assets and incomes of $200,000 a year are accredited to invest in hedge funds.
Mr. Joseph, speaking for himself, questioned whether it is appropriate for the SEC to continue allowing “sophisticated” investors with high net worths to invest in securities while investors with fewer assets cannot. Currently, only investors with at least $1 million of assets can invest in hedge funds.
“Should there even be an accredited investor regulation?” Mr. Joseph asked. “You can take some of the recent scandals. We must assume there are a lot of smart people are out there investing in people like Madoff,” he said, referring to the giant Ponzi scheme allegedly perpetrated by Bernard L. Madoff Securities LLC of New York.
Also today, Sens. Carl Levin, D-Mich., and Charles Grassley, R-Iowa, introduced the Hedge Fund Transparency Act, which would give the SEC the authority to require hedge funds to register.
“Hedge funds control massive sums of money, and although they can cause serious damage to investors, other financial firms and to the entire U.S. financial market, they are large unregulated,” Mr. Levin said in a press release about the bill.
