Senate Bill Would Bring Hedge Funds under SEC Scrutiny

The Hedge Fund Transparency Act of 2009, a Senate bill introduced on January 29, may mark the beginning of the end of the “shadow banking system” which has been blamed for aggravating the subprime mortgage crisis and ultimately contributing to the global recession.

“A major cause of the current crisis is a lack of transparency,” said Senator Charles E. Grassley (R-Iowa) who co-sponsored the new bill with Senator Carl M. Levin (D-Mich.). “The wizards on Wall Street figured out a million clever ways to avoid the transparency sought by the securities regulations adopted during the 1930s,” he added.

The Hedge Fund Transparency Act would require hedge funds to file an annual disclosure form with the U.S. Securities and Exchange Commission(SEC), comply with the agency’s record-keeping requirements and cooperate with its investigations … a requirement Grassley and Levin said is necessary to protect investors and the U.S. financial system. (The $100,000 question—whether the SEC is capable of taking on this additional regulatory responsibility—has yet to be answered.)

Bloomberg reports that hedge funds lost $600 billion in 2008 — more than any year previously — and may shed as much as $450 billion in assets this year.

Last November, four hedge-fund managers—George Soros of Soros Fund Management; John Paulson of Paulson & Co.; Philip Falcone of Harbinger Capital Partners; and James Simons of Renaissance Technologies—testified before Congress that some form of federal oversight was appropriate.