Overhaul Would Impose Oversight, Regulation On Alts.

Mar 26 2009 | 10:56am ET

Treasury Secretary Timothy Geithner will unveil the Obama administration’s sweeping plan to overhaul the U.S. financial system, with the alternative investment industry squarely in its sights.

Geithner’s plan to reform the country’s financial regulatory system is more far-reaching than initially expected. If approved by Congress, it would give the government, most notably a new “systemic risk regulator,” not only broad new oversight powers, but also the authority to directly intervene in “systematically important” financial institutions.

Among those powers would be one that allows the government to seize those companies “too big to fail”—those whose collapse present a systemic risk to the financial system. Hedge and private equity funds could, theoretically, be covered by the proposal. What’s more, regulators would be able to impose strict capital requirements on such firms.

Under the proposal, hedge fund, private equity and venture capital firms would be required to register with the Securities and Exchange Commission. Alternative investment managers would also be forced to report on their investors and trading partners, and how much leverage they use, although that information is to be kept confidential.

On the bright side for alts. firms, the administration’s proposals fall short of the strict regulation of hedge funds and private equity called for by some European leaders.

Another part of the plan that is likely to profoundly affect the alternatives industry is that covering derivatives. The plan would regulate such previously unregulated securities as credit-default swaps, standardizing them and requiring that they be traded through clearinghouses.

Geithner is to set out the outlines of the plan at a Congressional hearing. SEC Chairman Mary Schapiro is expected to back the proposals at the hearing, as well.

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