Paulson Calls For Hedge Fund Charters

Nov 20 2008 | 4:58pm ET

U.S. Treasury Secretary Henry Paulson is proposing that hedge funds and other financial institutions be required to obtain a charter allowing oversight of systemic risk.

The former Goldman Sachs chief said that the Conduct of Business Agency that he proposed earlier this year should cover hedge funds. The CBA would be empowered to grant charters, which would include clauses giving the new agency oversight powers.

“To ensure the market stability regulator can fulfill its role, large, systemically-important institutions, including hedge funds, should be required to have a charter that would permit some type of oversight,” Paulson said at the Ronald Reagan Presidential Library in Simi Valley, Calif. Hedge fund would be required to show their books to the new regulator, which would also impose net capital requirements and might force greater transparency.

The proposal goes far beyond the Securities and Exchange Commission’s hedge fund registration rule, which was struck down by a federal court two years ago, and would require Congress to create and empower the new CBA. The top Republican on the Senate Finance Committee, Sen. Charles Grassley (R-Iowa), already plans to introduce legislation giving the SEC the power to compel hedge fund managers to register.

It is unclear how far Paulson’s proposal is likely to go. The Treasury Secretary will be replaced by President-elect Barack Obama’s nominee after Obama is inaugurated on Jan. 20.

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