Legislation introduced Thursday by Sens. Charles Grassley, R-Iowa, and Carl Levin, D-Mich., would give the Securities and Exchange Commission the authority to regulate municipal or other hedge funds with $50 million or more in assets.
Grassley said that the Hedge Fund Transparency Act is aimed at "closing a loophole in the securities laws that allows hedge funds to operate under a cloak of secrecy." Under the current securities laws, hedge funds are not treated as regulated investment companies such as mutual funds or closed-end funds that must submit public documents to the SEC on a periodic basis.
Grassley introduced a similar version of the legislation in 2007 that never came to a vote. The bill introduced last week includes a provision added by Levin that requires hedge funds to establish anti-laundering programs and report suspicious transactions.
"There wasn't much of an appetite for this sort of legislation before the financial crisis," Grassley said in a statement. "I hope attitudes have changed and that Congress takes up this important legislation without delay."
The legislation comes as the hedge fund industry has been weakened by the turmoil in the financial markets and scandals. Hedge funds received bad publicity from a series of high-profile fraud cases last year. The sector suffered more than $1 trillion in losses in 2008 from investment declines and client withdraws, according to hedgefund.net.
The new disclosure requirements would peel back the secrecy cherished by the hedge fund industry. Statements of investment gains or losses that are now privately sent to clients could be made publicly available and standardized. Additionally, the hedge funds, known for leveraging large amounts of their investors' principal, might be subject to capital requirements.
The legislation would explicitly give the SEC regulatory authority over hedge funds, following a court battle over the issue two years ago. The D.C. Circuit Court of Appeals in 2006 overturned an SEC rule that would have required hedge funds to register with the commission. The court ruled that the SEC had misinterpreted the definitions hedge fund "clients" as "investors" to extend its regulatory reach over hedge funds. Grassley said the new legislation would include hedge funds in the definition of an investment company.
Certain hedge funds could still receive an exemption from the investment company definition under the legislation. However, firms with more than $50 million in assets that were granted such an exemption would need to register with the SEC and comply with any requirements to maintain certain accounting records. These funds will also be required to annually provide public information about the value of current assets, the number of investors and a statement of any minimum investment commitment.
