US Senators Chuck Grassley and Carl Levin have introduced legislation designed to close a loophole in securities law that, they argue, currently allows hedge funds to operate under a cl
US Senators Chuck Grassley and Carl Levin have introduced legislation designed to close a loophole in securities law that, they argue, currently allows hedge funds to operate under a cloak of secrecy.
The Hedge Fund Transparency Act of 2009 would clarify current law to remove any doubt that the Securities and Exchange Commission has the authority to require hedge funds to register, closing the loophole previously used by hedge funds to escape the definition of an ‘investment company’ under the Investment Company Act of 1940.
Under the new legislation, hedge funds seeking to avoid the requirements of the Investment Company Act would be exempt only if they file basic disclosure forms and co-operate with requests for information from the Securities and Exchange Commission.
‘There wasn’t much of an appetite for this sort of legislation before the financial crisis,’ Grassley says. ‘I hope attitudes have changed and that Congress takes up this important legislation without delay.
‘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 is a version of legislation filed in two years ago by Grassley but never considered by Congress.’
Levin, with then Michigan senator Barack Obama and Norm Coleman, introduced the Stop Tax Haven Abuse Act in 2007, although it was also never enacted. That proposed legislation would have clamped down on tax avoidance by US companies using offshore jurisdictions and also would have required hedge funds to establish anti-money laundering programmes under the supervision of the US Treasury Department.
‘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,’ he says.
‘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.’
The Hedge Fund Transparency Act makes clear that hedge funds have the same obligations under US money laundering statutes as other financial institutions. This bill too would require hedge funds to establish anti-money laundering programmes and report suspicious transactions.
The senators say their legislation is needed because of the 2006 decision by the D.C. Circuit Court of Appeals which overturned the SEC’s regulation requiring hedge funds to register. The court said the regulator was going beyond its statutory authority and effectively ended all mandatory registration of hedge funds unless and until Congress took action.