Treasury has submitted its bill to extend SEC oversight and registration requirements to hedge funds. Here's the release, and the legislation. Among other things the bill would require investment advisers with more than $30 million of assets under management to register with the SEC, and then require them to report assets, leverage, off-balance sheet exposure, trading practices and trading and investment positions of their advised funds; make disclosures to investors, creditors, and counterparties concerning their advised private funds; impose conflict-of-interest and anti-fraud regulation; and apply SEC examination and enforcement authority and recordkeeping requirements.
According to the Treasury press release,
[t]his information would help determine whether systemic risk is building up among hedge funds and other private pools of capital, and could be used if any of the funds or fund families are so large, highly leveraged, and interconnected that they pose a threat to our overall financial stability and should therefore be supervised and regulated as Tier 1 Financial Holding Companies.
Let's review some of the reasons why this is misguided:
- Hedge funds are not part of the systemic risk problem. It's more likely they're part of the solution in the sense that they use proprietary and business methods to bet against the accepted wisdom, rather than following all the other lemmings off of financial cliffs. For a good statement of this argument, see Jon Macey, Promises Kept, Promises Broken, 275-82 (2008). Increased disclosure may reduce the funds' incentives to invest in developing these strategies, which could actually increase systemic risk.
- More generally, as I've said, hedge funds, through short selling and takeovers, have been an important source of market discipline.
- Hedge funds have already had an opportunity to opt into registration and didn't do so. Apparently their wealthy and sophisticated investors didn't demand this mandatory disclosure.
- Of course, one notorious adviser did opt into the registration requirement -- Bernie Madoff. As I've said, what his investors got from that was a false assurance of legistimacy. Indeed, I had earlier argued that "more laws lull investors into falsely assuming that the government has all potential problems in hand."
Increased regulation of hedge funds is probably the last form of financial regulation we need right now.
Comments