The House Financial Services Committee approved 67-1 a bill that would require hedge funds and private equity firms to register as investment advisers with the Securities and Exchange Commission. The bill is expected to go to a full House vote in November.
The registration of hedge fund managers -- an idea balked at by the industry -- has in recent months been supported by major hedge fund associations. Still a point of contention, however, is the disclosure of positions and leverage, as required by the bill. (See this earlier Dealscape post to read more about the issue of disclosure.)
The committee exempted venture capital funds and funds with less than $150 million in assets.
SEC Chairman Mary Schapiro, speaking at the Securities Industry and Financial Markets Association, or SIFMA, conference Tuesday, said that hedge funds will be the focus of regulatory reform, commenting that there isn't even a comprehensive database that tracks the industry. Indeed, the point of the bill is to give lawmakers a better sense of how large the private capital industry is so it can better gauge the systemic risk it poses to the financial system, if any.
A number of experts oppose forcing funds to disclose their positions, even though the information would be kept confidential. Hedge funds argue that disclosure would reveal their "secret sauce," which would be particularly problematic if it were leaked. However, as Stephen Brown, professor of finance at the New York University Stern School of Business, pointed out to The Deal, all of that information is available to investors for a measly $12,000 via due diligence reports. For hedge fund investors, this is a small price to pay, particularly when investing millions. The other argument is that it is not important, particularly for smaller funds.
"What I think will happen is that the largest funds that are investment banks in everything but name will have to disclose their positions," Brown speculates. The rest, he thinks, will be exempt in the final versions of the bill. - Sara Behunek
Continue reading below
