Earlier today, the House Financial Services Committee’s Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing entitled “Perspectives on Hedge Fund Registration.” Witnesses at the hearing included:
- Todd Groome, Chairman, Alternative Investment Management Association (AIMA
- Richard H. Baker, President, Managed Fund Association (MFA)
- James S. Chanos, Chairman, Coalition of Private Investment Companies
- Orice Williams, Director, Financial Markets and Community Investment Team, Government Accountability Office
- Britt Harris, Chief Investment Officer, Teacher Retirement System of Texas
Subcommittee Chairman Paul E. Kanjorski (D-PA) opened the hearing by calling for “narrowly tailored regulatory treatment” for hedge funds. “Hedge funds are not villains,” said Kanjorski, “although there are almost certainly a very small number of bad ones.” Kanjorski also praised H.R. 711, the Hedge Fund Adviser Registration Act of 2009, introduced by Congressmen Michael Capuano (D-MA) and Michael Castle (R-DE), that seeks to close a legal loophole exempting hedge fund managers with fewer than 15 clients from registering with the SEC.
AIMA Chairman Todd Groome expressed support for H.R. 711, acknowledging that the process of registration “creates a relationship and dialogue” between “managers and the appropriate national supervisor.” He did caution against the impracticality of requiring all funds to register, suggesting a minimum threshold of $500 million in assets under management. He also expressed AIMA’s general support for “increased transparency and disclosure by managers” and “global coordination” in regulation. Groome specifically advocated disclosure as an “early warning system.”
The MFA’s Richard Baker advocated what he called “a ‘smart’ approach to financial regulatory reform. The objectives of such an approach, said Baker, are “strengthening investor protection and market integrity and monitoring systemic risk.” Baker advised that regulation is “not a panacea for the structural market breakdowns that currently exist,” and pointed to a general lack of confidence in financial institutions. He did acknowledge that regulation can play a role in promoting investor confidence. Like Groome, Baker also supported the registration bill before the committee, stating it would be an “effective way to achieve” the desired result, but conceding that MFA’s decision to support the bill did not “come easily.”
Mr. Chanos disagreed, stating that the bill “will ultimately prove ineffective to mitigate systemic risk.” Chanos favored legislation with “targeted controls and safeguards” that also preserve “operational flexibility,” and encouraged Congress to give legal effect to the Asset Managers’ Committee Best Practices. Chanos defended hedge funds as performing “beneficial functions” in the markets,” and he warned about “demonizing the funds.”
Mr. Harris stated that H.R. 711 was “likely to prove unsatisfactory.” He highlighted the amorphous definition of hedge funds, stressed that this alone will hinder targeting any class of advisers typically referred to as “hedge funds,” and cautioned against a “one-size-fits-all” solution. Harris also criticized the bill, stating that it is overbroad and does not preserve the exemption from counting foreign investors as “clients.” He pushed lawmakers to encourage investors to “take responsibility for their own due diligence,” arguing that “’buyer beware’ should augment the law, not contradict it.”
Ms. Williams, Director of Financial Markets and Community Investment at the GAO, discussed the GAO’s 2008 reports on hedge funds. Williams stated that regulators recommended increased risk management of hedge funds, including increased stress testing. She noted that regulators and observers are especially concerned about counterparty risk management “because it is a key factor in controlling the potential for hedge funds to become a source of systemic risk.”
The subcommittee also asked the panelists about their thoughts on the European Commission’s recently-proposed directive on hedge fund managers. Groome criticized the directive for demonstrating a lack of “coordination between the Commission and the G20-ordered work” in the area. Conversely, Mr. Chanos advocated the EC’s “carefully tailored proposal” as an alternative to extending the “coverage of the existing framework.” However, Chanos did criticize the directive’s requirement for regulatory approval before private funds can retain certain service providers.