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Section: Regulatory/Legal

Obama Bill Seeks to Shine Spotlight on Hedge Funds

By Reuters Wednesday, July 15, 2009 6:05:39 PM ET

WASHINGTON (Reuters)—The Obama administration on Wednesday [July 15] will propose that hedge fund managerssubmit to new registration and disclosure rules to boost transparency and limit any risks they pose to the financialsystem, a senior U.S. Treasury official said.

The administration is sending legislative language to Congress that would require investment advisers with more than$30 million in assets under management register with the Securities and Exchange Commission and disclose keyinformation to regulators and investors, said Michael Barr, U.S. Treasury assistant secretary for financial institutions.

The bill, if approved by Congress, would give regulators a powerful microscope to peer into the secretive hedge fundindustry to identify potential threats to the financial system.

Mr. Barr, previewing the bill in a speech to a business group on Wednesday, said it aimed to discourage risk takingamong the biggest financial players.

Hedge funds found by regulators to be "so large, leveraged or interconnected that they pose a threat to financialstability" will be regulated as "Tier 1" financial holding companies and will be subject to more stringent requirements forcapital, liquidity and risk management, Mr. Barr said.

"Our proposal would require more exacting forms of prudential supervision, including higher capital requirements forthose firms and higher capital still for conduct within those firms that poses the most risk to the system," he said.

The plan aimed to "counteract any incentive for the largest firms gambling with their size," he added.

However, there is no size threshold for a firm to be classified as a Tier 1 institution, Mr. Barr said, adding that leverage,interconnections to the financial system and risk profiles also will be factors in making such determinations.

New disclosures to be made by hedge funds would include asset size, borrowings and off-balance-sheet exposures,among other information. Hedge funds would be subject to periodic reporting requirements and regulators also wouldhave authority under the bill to gain access to information to determine potential systemic risks that they may pose.

Unknown Risks

Mr. Barr said hedge funds do not appear to have been at the center of the current financial crisis, but their de-leveragingcontributed to strains in financial markets, while lack of transparency contributed to market uncertainty and instability.

"These firms continue to present unknown risks, and that lack of transparency is no longer tenable," Mr. Barr said. "Weneed a system that's flexible enough to adapt to the emergence of other institutions that could pose a risk to the system.And we need a system that lets regulators see risks as they emerge across the financial system."

Mr. Barr also said the Obama administration's goal in revamping regulation was not to limit the activities of financialfirms, but to limit risks posed by those activities.

"Higher capital charges can insulate the system from the build-up of risk without limiting activities in the markets," Mr.

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Barr said. "That's why we have launched a review of the capital regime and have proposed raising capital standardsacross the board, including higher standards for financial holding companies, and even higher standards for Tier 1financial holding companies."

By David Lawder

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