Financial Regulatory Forum

US congressional panel backs new rules for hedge funds, short of White House aims

By Reuters Staff
October 28, 2009

By Kevin Drawbaugh and Rachelle Younglai
WASHINGTON, Oct 27 (Reuters) – U.S. regulators would be able to peer into the secretive world of hedge funds and private equity funds under a bill passed by a key congressional committee on Tuesday.

The House Financial Services Committee voted 67-1 to require advisers to hedge funds, private equity and offshore funds to register with regulators to bring more transparency to a segment of the financial world that is only loosely policed.

Democratic Representative Paul Kanjorski amended his own bill to add the offshore funds, saying it would help regulators get a better grasp of financial system risks.

“There is a common psychology to use the Cayman Islands to hide funds. The whole point of these bills is to get a large enough understanding of the total amount of capital that the systemic risk regulator should be aware of,” said Kanjorski.

But the bill fell short of a White House proposal to oversee private pools of capital. The committee exempted venture capital funds and funds with less than $150 million in assets.

In the aftermath of the worst financial crisis in decades, congressional Democrats and the Obama administration are trying to tighten regulation of banks and capital markets. The House panel has already passed a bill to regulate over-the-counter derivatives and another to create an agency to protect consumers from risky financial products.

Securities and Exchange Commission Chairman Mary Schapiro warned broadly at a Wall Street conference on Tuesday against too many exemptions, saying she would work with Congress to avoid creating new carve-outs that “could come back to haunt investors in later years.”

Lawmakers amended the private capital pools bill to require periodic inflation adjustments of the minimum net worth thresholds for eligibility to invest in hedge funds and other sophisticated investments. The bill is expected to go to a full House vote in November.
PANEL TO VOTE ON RATINGS AGENCY BILL
The Financial Services Committee also on Tuesday debated a bill to regulate credit ratings agencies, which have been widely blamed for failing to spot credit market problems ahead of the crisis.

The legislation would affect agencies such as Moody’s Corp, Standard & Poor’s and Fitch Ratings.

The panel voted to scrap an SEC provision that exempts ratings agencies from widely disclosing material information and took steps to force investors to rely less on credit ratings while doing more due diligence on bonds and complex securities.

The panel also voted to require the SEC to establish a board to ensure that it was properly supervising the ratings agencies.

Democrats and Republicans clashed over whether to subject the credit ratings agencies to greater liability with Republicans favoring a narrower approach.

“I am very struck by the notion that we should immunize the rating agencies from being sued by people who were misled,” said Barney Frank, the Democratic Chairman of the House Financial Services Committee.

The panel is due to vote on the bill early on Wednesday. It will also draft an investor protection bill that would beef up the SEC and create a fiduciary standard for all financial professionals who provide investment
advice.

That bill is widely seen as lacking controversy save for a provision that would end mandatory arbitration for investors who claim that their brokers defrauded them.

The push for reform faces stiff opposition from banking industry lobbyists and Republicans. It is making incremental progress in the House, where Democrats enjoy a healthy majority.

The bill’s outlook is unclear in the Senate, where the political parties are more closely split and lawmakers are still far apart on fundamental financial reform issues.

INSURANCE ACTION DELAYED
The committee delayed action on legislation that would impose federal government oversight for the first time on the insurance industry, possibly the most contentious of the four proposals being handled by the panel this week.

Now regulated at the state level, the country’s 6,000 insurers are divided on the proposal to set up a National Insurance Office inside the Treasury Department, which would gather data on the industry and represent the United States in international insurance discussions.

While the office would not regulate the industry, some opponents of federal regulation fear the office is a first step toward that. Some large insurers favor federal regulation.

Debate and a vote on the bill were scheduled for this week, but Frank postponed it.

“I’m not going to bring it up … I believe that within a fairly short period of time we’ll be able to bring up the insurance bill,” Frank said at the opening of a two-day committee working session.

((Reporting by Kevin Drawbaugh, Editing by Gary Crosse)) ((kevin.drawbaugh@thomsonreuters.com; +1-202-898-8390, +1-202-488-3459 fax)) Keywords: FINANCIAL REGULATION/CONGRESS

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