US Senators Introduce Hedge Fund Transparency Bill

by Glen Shapiro, LawAndTax-News.com, New York

30 January 2009

United States Senators Chuck Grassley and Carl Levin have introduced legislation that they say would no longer allow hedge funds to operate under a "cloak of secrecy."

According to the Senators, the Hedge Fund Transparency Act of 2009, introduced on January 29, would clarify current law to remove any doubt that the Securities and Exchange Commission (SEC) has the authority to require hedge funds to register, "so the government knows who they are and what they’re doing."

It would amend legislation previously used by hedge funds to escape the definition of an 'investment company' under the Investment Company Act of 1940. Hedge funds that want to avoid the requirements of the Investment Company Act would be exempt only if they file basic disclosure forms and cooperate with requests for information from the SEC.

“There wasn’t much of an appetite for this sort of legislation before the financial crisis. I hope attitudes have changed and that Congress takes up this important legislation without delay,” Grassley, an Iowa Republican, said.

“A major cause of the current crisis is a lack of transparency. The wizards on Wall Street figured out a million clever ways to avoid the transparency sought by the securities regulations adopted during the 1930s. Instead of the free flow of reliable information that markets need to function properly, today we have confusion and uncertainty fuelling an economic crisis" he added.

The bill is a version of legislation filed two years ago by Grassley (S.1402) but never considered by Congress.

“Hedge funds control massive sums of money, and although they can cause serious damage to investors, other financial firms, and to the entire US financial market, they are largely unregulated,” said Levin, a Michigan Democrat.

“If the events of the last year have taught us anything, it’s that we need to regulate firms that are big enough to destabilize our economy if they fail. It’s time to subject financial heavyweights like hedge funds to federal regulation and oversight to protect our investors, markets, and financial system," he argued.

The new bill would also subject hedge fund to the same money laundering laws which apply to other financial institutions. As a result, hedge funds would, if the bill is enacted, be required to establish anti-money laundering programs and report suspicious transactions.

The senators said their legislation is needed because of a 2006 decision by the D.C. Circuit Court of Appeals which overturned a regulation imposed by the Securities and Exchange Commission requiring hedge funds to register. The court said the SEC was going beyond its statutory authority and effectively ended all mandatory registration of hedge funds with the regulator unless and until Congress takes action.

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