The CEOs and chairmen of
The reforms are intended to shore up the capital markets and prevent systemic failures within major
One proposed law, the Private Fund Investment Advisers Registration Act, would require private advisers to hedge funds and other pools of capital to register so that regulators can better grasp how they operate and determine whether their actions pose a threat to the country’s financial system.
Another legislative reform, the Investor Protection Act, aims to strengthen the Securities and Exchange Commission (SEC) so it can more effectively regulate securities markets and prevent frauds such as those perpetrated by financier Bernard Madoff. Madoff, former chairman of the NASDAQ stock exchange, pleaded guilty and was convicted of defrauding thousands of investors of billions of dollars.
The investor protection bill being considered by the House Committee on Financial Services would require investment advisers to undertake a fiduciary duty toward their clients and put their customers’ interest ahead of their own desires.
The CEO and president of the Washington, D.C.-based Private Equity Council, Douglas Lowenstein, told the committee that his organization supports registration of managers of private equity, venture capital and hedge funds. The two-year-old Council represents 12 of the nation’s largest private equity firms, including the New York-based Blackstone Group, a global real estate investor that operates several investment funds, and The Carlyle Group, which manages $85 billion in 64 funds, including real estate investments, according to its 2008 annual report.
“In the interest of restoring confidence in financial markets generally and the credit markets in particular, we have and continue to support requiring registration of managers of private equity, venture capital and hedge funds,” Lowenstein testified.
However, he added that when it comes to the Obama Administration’s effort to prevent further systemic risk to the U.S. financial system and the economy, in his view private equity did not pose a danger. “Private equity presents none of these systemic risk factors and thus should pose little concern for policymakers seeking to develop a new regime to guard against catastrophic, cascading financial shocks.”
Private equity firms do not rely on short-term funding, but instead commit their capital for at least 10-12 years, Lowenstein said. “Therefore, investors cannot withdraw their money on short notice, triggering ‘asset fire sales’ to find cash to make the repayments.”
The funds invest in long-term illiquid assets, typically the equity of operating companies, he said. The funds don’t normally invest in short-term instruments such as derivatives, options, or swaps.
Although the Private Equity Council supports registration, complying with the Investment Advisers Act, if it becomes law, would impose burdens on equity companies because of the detailed business and accounting information and procedures required, Lowenstein said. Still, the council basically agrees that registered advisers should provide information to the SEC about the funds they manage.
Besides recording capital income and expenses, written communications and agreements, the bill would also require such detail as client referrals and calculation of performance rates. The companies would be subject to yearly accounting examinations and periodic audits by the SEC.
Smaller firms might have to hire a compliance officer to meet the new requirements while larger private equity funds could require as many as a dozen specialists, the council says. Although the group’s members report more than $10 billion in assets under management, the country’s remaining 2,000 private equity firms are largely small organizations.
Get tough, coalition says
James Chanos, chairman of the Coalition of Private Investment Cos., a diverse group of investment firms including pension funds, asset managers and wealthy individuals, said the coalition strongly supports registration with the SEC and examination by the regulators. “Each fund and its investment manager should be subject to SEC inspection, enforcement authority, and record-keeping requirements.”
Private funds should be subject to tough, comprehensive oversight and audit requirements to protect investors from theft, Ponzi schemes and fraud, Chanos said. Larger funds should provide additional reports that would allow regulators to spot potential systemic risks posed by private funds and other large financial institutions, he added.
Spokesmen for the funds pointed out that many of them have generated income for the communities in which they invested as well as for the fund investors.
The broad-ranging hearing dealt not only with oversight of private capital pools, but also with the regulation of securities investment firms and a proposal to create a national insurance office.
A number of officials said the SEC needs to retool to better protect the nation’s investors. “They’re not what I would call nimble and scrappy. They need more MBAs. They need more accountants,” said Denise Voigt Crawford, president of the North American Securities Administrators Association, which represents state securities administrators, who enforce securities laws. Crawford is Texas Securities Commissioner.
States have long been on the front lines in fighting securities fraud, she said. “Through the years, states have been the undisputed leaders in criminal prosecutions of securities violators because we believe in serious jail time for securities-related crimes.” State regulators in particular exposed and dealt with the “profound conflicts of interest” among Wall Street analysts, she said.
The collapse of major Wall Street financial institutions is widely blamed for contributing to the nation’s credit crisis, which in turn has damaged fundamentals and transactions in the commercial real estate industry.