Hedge-Fund Registration Bill Introduced in Senate - Madoff Fraud

Hedge-Fund Registration Bill Introduced in Senate
By Christopher Stern and Katherine Burton

Jan. 29 (Bloomberg) -- Hedge funds would be forced to register with federal securities regulators under a measure introduced today by two U.S. senators who said the requirement is necessary to protect investors and the financial system.

The Hedge Fund Transparency Act, sponsored by Senators Carl Levin, a Michigan Democrat, and Charles Grassley, an Iowa Republican, would require hedge funds to file an annual disclosure form with the U.S. Securities and Exchange Commission, comply with the agency’s record-keeping standards and cooperate with its investigations.

“The problem is that hedge funds have gotten so big and are so entrenched in U.S. financial markets that their actions can now significantly impact market prices, damage other market participants and can even endanger the U.S. financial system and economy as a whole,” Levin said.

Hedge-fund assets fell by a record $600 billion in 2008 to about $1.2 trillion, according to Morgan Stanley analyst Huw van Steenis in London. Fund managers rushed to sell stocks and bonds in the second half of the year to meet client withdrawals, which accounted for about 45 percent of the industry’s asset drop, and to raise cash because they were unclear about the direction of the markets. The sell-off contributed to the worst stock market decline since the Great Depression.

“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,” said Grassley, who introduced a similar bill in 2007.

Obama Support

Timothy Geithner, President Barack Obama’s new Treasury secretary, and Mary Schapiro, the new SEC chairman, also have called for hedge-fund registration.

The SEC in 2005 passed a registration rule requiring fund managers to provide information, such as their business address and assets under management. The move also opened up their funds to random audits. The rule was thrown out by a federal appeals court in 2006 after it was challenged in a suit by Phillip Goldstein, founder and principal of Bulldog Investors in Saddle Brook, New Jersey.

Legislation is necessary to compel hedges-fund managers to provide information, though many have voluntarily registered.

“Until the SEC responds in an effective manner to whistleblower complaints regarding fraud, what’s the point of adding new rules and regulations,” said Goldstein, referring to complaints made to the SEC going back to 1999 about Bernard Madoff, who was arrested Dec. 11 for allegedly orchestrating a $50 billion Ponzi scheme. Madoff was a registered as an investment adviser with the SEC, Goldstein said.

Soros, Paulson

Four hedge-fund managers -- George Soros of Soros Fund Management LLC; John Paulson of Paulson & Co.; Philip Falcone of Harbinger Capital Partners; and James Simons of Renaissance Technologies Corp. -- testified before Congress in November that some form of federal oversight was appropriate.

Investors “have a right to know what assets companies have an interest in -- whether on or off their balance sheets -- and what those assets are really worth,” Falcone, whose firm is based in New York, said in his testimony.

Soros and Paulson are also based in New York, while Simons works from East Setauket, New York.

To contact the reporters on this story: Christopher Stern in Washington at cstern3@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

Last Updated: January 29, 2009 17:00 EST