WASHINGTON -- The Obama administration has sent legislation to Congress that would bring hedge funds and other private pools of capital under government supervision.
The proposal calls for the Securities and Exchange Commission to oversee hedge, private equity and venture capital funds. By registering with the SEC, their books would be open to federal inspection and they would be subject to disclosure requirements to investors and creditors.
During the financial crisis, private funds had to come up with money when their capital was put at risk, contributing "to the strain on financial markets," the Treasury Department said Wednesday in a statement.
The new proposal, part of the administration's sweeping plan to overhaul financial regulation, "would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks (of the funds) ... pose a threat to our overall financial stability," the Treasury said.
A bill proposed by Sen. Jack Reed, D-R.I., chairman of a key Senate Banking subcommittee, similarly would require advisers of such funds to register with the SEC if they have at least $30 million in assets under management.
"The financial crisis is a stark reminder" of the need for greater transparency in the world of private investment funds, Reed said at a subcommittee hearing.
The SEC "supports this approach," Andrew Donohue, director of the agency's investment management division, said at the hearing. The legislation would allow private investment funds, which play an important role in the capital markets, "to retain the current flexibility in their investment strategies," he added.
Officials of the groups representing hedge funds and private equity funds expressed support for requiring registration with the SEC.
Venture capital officials, however, warned against a "one-size-fits-all" approach.
"We agree that those entities and industries which could cause financial system failure should be better monitored so that the events of 2008 are never repeated," said Trevor Loy, the founder and general partner of Flywheel Ventures based in Santa Fe, N.M. "However, venture capital is not one of those industries."
Venture capital firms invest in startup companies that are run by entrepreneurs.
Throwing regulatory reins around hedge funds -- the vast pools of capital that largely escape government supervision and draw hundreds of millions of dollars from pension funds, charities, university endowments and wealthy individuals -- is a central part of efforts to revamp the system of financial oversight spurred by the global economic crisis.
Private equity firms buy, turn around and resell troubled companies a few years later. The industry and its supporters say it plays a unique role in the economy by spurring investment and restructuring.
Mark Tresnowski, representing the Private Equity Council, said the group generally supports requiring registration while recognizing that it would impose substantial administrative and financial burdens on firms, especially smaller ones.
New reporting requirements should be tailored to the nature and size of firms and the degree of potential risk to the financial system they might pose, he said.