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News October 2, 2006 Issue

Congress Calls for Hedge Fund Study

A bill that would require the Presidentís Working Group on Financial Markets to conduct a hedge fund study has flown through the House of Representatives.

As they say, timing is everything.

H.R. 6079, the "Hedge Fund Study Act," was introduced September 14, just a few days before the $6 billion Amaranth hedge fund loss made headlines. The bill passed the House September 27 and was immediately referred to the Senate for consideration.

While nothing in Congress is done until itís done, the bill looks to be a legislative no-brainer. Even the Managed Funds Association, a hedge fund lobbying group, has endorsed the study.

As passed by the House, the bill would give the Presidentís Working Group six months to prepare a hedge fund report analyzing:

  • the changing nature of hedge funds and what characteristics define a hedge fund;
  • the growth of hedge funds within financial markets;
  • the growth of pension funds investing in hedge funds;
  • whether hedge fund investors are able to protect themselves adequately from the risk associated with their investments;
  • whether hedge fund leverage is effectively constrained;
  • the potential risks hedge funds pose to financial markets or to investors;
  • various international approaches to the regulation of hedge funds; and
  • the benefits of hedge funds to the economy.

The report would include recommendations on proposed legislation relating to disclosure requirements for hedge funds, the type of information that hedge funds should disclose to regulators and to the public, any efforts the hedge fund industry or regulators of financial institutions should undertake to improve practices or provide examples of successful industry initiatives, and any oversight responsibilities that members of the Working Group should have over the hedge fund industry, including the degree and scope of such oversight. The report would be submitted to the House Financial Services committee and the Senate Banking committee.

Rep. Barney Frank (D-MA) spoke on the floor of the House in support of the bill. The Goldstein court, he noted, "ruled that the SEC had twisted a statute further out of shape than is permissible to get some jurisdiction over hedge funds." In Frankís view, that was the correct legal interpretation. "The SEC had been reaching, and I think the decision was a correct one." He noted that the he had introduced a bill to legislatively codify the SECís hedge fund rule, "not because I ó or I think anyone else ó is able to be sure right now exactly what we should do about hedge funds," but because hedge funds are "an important, relatively new phenomenon" that have a major impact in the economy.

"At the rate at which they are growing, it may be we will reach the point in which there is more money in hedge funds than there is money," he added. "That at least ought to call up some attention."

Frank said that he did not want Congress to adjourn for the year "with some people thinking that we have now decided that the appropriate action is nothing at all" when it comes to hedge funds. "That may in the end be a decision," he added. Hedge funds are "something we want to look at," said Frank. "We will come back next year and deal with it further."

If the Democrats retake the House, Frank would chair the House Financial Services committee in the next Congress.