A stringent plan to regulate hedge funds’ leverage, capital and risk management that is backed by Obama administration aide Paul Volcker won the support today of an influential Democratic senator.
Senator Jack Reed, D-R.I, chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment, said that
hedge fund oversight should go beyond proposals to register fund pools from high-income investors with regulators.
Registration would provide “a little more visibility into the
hedge fund world, but nothing comprehensive,” he said at a Brookings Institution conference in Washington.
New Securities and Exchange Chairman Mary Schapiro called for
hedge fund registration at her Senate confirmation hearing last month.
A bill introduced last month by Sens. Charles Grassley, R-Iowa, and Carl Levin, D-Mich., would require hedge funds with more than $50 million in assets to register with the SEC and file annual disclosure forms.
The plan backed by Mr. Reed today was released last month by the Group of 30, an international collection of individuals from the private and public sectors headed by Mr. Volcker. He is chairman of the President’s Economic Recovery Advisory Board.
Treasury Secretary Timothy Geithner and Obama economic adviser Lawrence Summers were also part of the G-30 group.
James Chanos, the head of a
hedge fund lobby, today predicted that the Volcker-backed proposal will become law. “Something along the G-30 lines is what we’re going to see,” he said.
Mr. Chanos is president of the Coalition of Private Investment Companies in Washington.
The group represents dozens of hedge funds with assets of more than $100 million apiece.
Hedge funds’ leverage would end up being overseen by a systemic-risk regulator created by Congress, said Robert Greifeld, chief executive of The
NASDAQ OMX Group Inc. of New York.
“If I were to make a prediction, I think there will be a regulator on [leverage] in years to come,” he said at the Brookings conference. Mr. Greifeld avoided commenting on whether there will also be regulation of hedge funds’ capital and risk management.
Nasdaq OMX is a stock exchange company with 3,900 traded companies with $5.5 trillion in market value.
Mr. Volcker said last month that he would make the recommendations to President Obama and that the G-30 report on financial reform is “a reasonable indication of the direction in which we might go.”
It called for a regulator to oversee hedge funds and perhaps private-equity funds that are “potentially systemically significant.” This regulator should be able to require registration, periodic reports and public disclosure, the report said.
The regulator also should “establish appropriate standards for capital, liquidity and risk management,” the report backed by Mr. Volcker said.
“This conclusion represents an emerging consensus that I share,” Mr. Reed said today.
He said that he wants to convene hearings on which federal agency should oversee hedge funds and what kind of information it should review. The hearings also should consider the size of the hedge funds to be regulated, the extent to which leverage should be restricted and the risks in various business models and strategies.
They also should examine how transparency can be improved, how feeder funds might be evaluated and whether corporate governance should be reviewed, Mr. Reed said.
“Once we answer these questions, we need to ensure that regulators have the right resources and authority to prevent systemic problems,” he said.
Hedge funds are largely unregulated and rely heavily on leverage. Registration with the SEC is voluntary.
The SEC under Chairman William Donaldson required registration, but the rule was struck down by a federal court in 2006 after being in effect for seven months.
The
Federal Reserve will likely get authority to monitor systemic risk in the economy under legislation to be proposed in the months ahead, House Financial Services Committee Chairman Barney Frank (D-Mass.) said last week. He said that this regulator will have the power to shut down financial institutions that face too much exposure.
Brookings is based in Washington.
