Proposed Rules Worry Hedge Funds, Private Equity

Mar 30 2009 | 1:20am ET

As hedge funds and private equity firms brace for a new regulatory regime that is all but inevitable, many in the industry are beginning to express their fears, or, for the bolder, their outright opposition.

U.S. Treasury Secretary Timothy Geithner last week unveiled the broad frameworks of his financial regulation overhaul, with new rules for the alternative investment industry among his proposals. Geithner’s plan would require hedge and private equity fund managers to register with the Securities and Exchange Commission. It would also impose new transparency and reporting standards, and give the Treasury Dept. permission to seize financial institutions, including hedge funds and private equity funds, if their collapse presents a systemic risk.

While many of the measures were expected, industry players aren’t happy about any of them. There are reservations about the registration rule—it could be onerous for smaller hedge funds. Others are concerned about the increased reporting requirements. One Boston hedge fund manager asked Reuters—anonymously—“How many people do I have to allow to come through my front door demanding a look at my books?”

Unsurprisingly, Phillip Goldstein, who sued the SEC four years ago in a successful effort to have its hedge fund registration rule struck down, is skeptical.

“The devil is in the details,” the Bulldog Investors chief told Dow Jones Newswires. “What is it exactly they are looking for and what do they want to do with the information?”

“What does registration mean?” the registration opponent asked. “If it’s like registering your car, it’s not a big deal. I don’t think anyone objects to giving basic information on a confidential basis to the SEC or any regulator. But if it becomes something where the cost is significant, then you have to do a cost-benefit analysis.”

“We’re not in this mess because we need new rules,” Seattle hedge fund manager William Fleckenstein told the Associated Press. “We need to enforce the rules we already have.” And he warned, “You could register all 10,000 hedge funds, and it probably would just overwhelm the regulator.”

“It’s not hedge funds that are a problem,” Locksmith Capital Management’s Timothy Brog insisted. “The problem is the instruments they are trading. A $100 million hedge fund is not going to have a material effect on the overall market.”

Goldstein also objects to Geithner’s focus on systemic risk.

“To throw out the phrase ‘systemic failure’ without any objective criteria is a very, very scary thing for our country,” Goldstein, who once felt compelled to remind Bay State regulators that the U.S. is still a free country, “and that includes Massachusetts.”

“What if they’re wrong and they seize the wrong bank or wrong hedge fund?”

The private equity industry, for its part, is trying to create some separation between p.e. and hedge funds.

“Private equity firms invest in companies, not exotic securities, and their investors are long-term investors, eliminating the ‘run on the bank’ type of risk that helped create the current financial crisis,” Douglas Lowenstein, president of the Private Equity Council, said in a statement. He complained that Geithner’s proposals would “for the first time impose significant regulation on the private equity industry,” which, the Treasury Secretary might say, is the point.

Geithner’s plan requires Congressional approval, and there are some in Congress—mostly members of the minority party—who are promising all-out opposition.

“Forgive me if I am a skeptic,” Rep. Scott Garrett (R-N.J.) said at the hearing where Geithner offered his plan, “when I hear that if we only have a systemic regulator, it will never happen again.”

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