Conn. Moves Closer To Hedge Fund Regulation

Mar 8 2007 | 11:37am ET

While the leaders of the hedge fund industry heard only sweet nothings from Connecticut regulators and elected officials at the World Hedge Fund Conference in Greenwich, up the road in Hartford, it was a different story.

The Connecticut General Assembly’s banks committee on Tuesday proposed legislation that Senate Minority Leader Pro Tempore John McKinney warns could drive hedge funds out of the state. McKinney, who represents Fairfield County, home to Greenwich and most of the rest of the state’s hedge fund industry, says the proposed legislation, which passed the committee by a vote of 13 to five, would be the most restrictive in the country.

“Why would we want to make doing business in Connecticut a competitive disadvantage for one of our most important and prosperous industries?” he asked. “Why would a hedge fund manager want to stay in Connecticut if this law is passed? It doesn’t make any sense.”

McKinney, who does not sit on the banking committee, went on to warn, “State-specific regulation in this case will only serve to encourage the hundreds of hedge funds currently based in Fairfield County to pick up and move to a less-threatening home—perhaps New York or New Jersey.”

But Rep. Ryan Barry, co-chair of the banks committee and a sponsor of the bill, disputes McKinney’s claims.

“The committee received input from the industry, and the bill was drafted as an industry bill,” he told FINalternatives. “We didn’t impose something that they didn’t want. We worked with the industry closely and communicated back and forth.”

According to Barry, Connecticut Attorney General Richard Blumenthal’s support for the bill was decisive.

“When the attorney general testified, I asked him about the chilling effect that passing this legislation might have,” Barry said. “I was very concerned about the jobs that the hedge fund industry provides to the citizens of Connecticut.”

But Barry says Blumenthal “was not concerned at all about any kind of chilling effect.”

The bill, SB01171, would raise the requirements for investing in hedge funds to $2.5 million in investment assets for individual investors—a move also being considered by the Securities and Exchange Commission—and $5 million for institutional investors. In addition, it would require disclosure of potential conflicts of interest, changes in investment strategy, the existence of side letters and any major litigation facing the fund to investors. Also, funds would be required to annually disclose to investors a fund’s fee structure, including brokerage and trading fees, and an audited financial statement of the investor’s capital balance.

“This bill requires a certain amount of accountability and disclosure, and it doesn’t put enormous constraints on hedge funds,” he says. “What it does do is puts out there a regulation that’s the first of its kind, and could be looked at as a role model to be adopted by other states. I don’t get the impression that this is going to be a disaster for the economy.”

The bill is set to be consider by the full State Senate in the spring—there is no timetable for House consideration, according to Barry—and its likelihood of becoming law is not at all apparent. Barry himself says he has some concerns about the size of the regulatory workforce needed should the bill pass the full General Assembly and win the governor’s signature. But he notes that Tuesday was the deadline for bills to come out of committee, and so approving it there was necessary for it to be considered further.

“The intent of the bill is good, and it is sound, and the bill deserves to be considered by the full Assembly,” he says. “With that being said, it’s just a first step.”


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