Statements On Introduced Bills And Joint Resolutions

Floor Speech

By Mr. GRASSLEY (for himself and Mr. LEVIN):

S. 344. A bill to require hedge funds to register with the Securities and Exchange Commission, and for other purposes; to the Committee on Banking, Housing, and Urban Affairs.

Mr. GRASSLEY. Mr. President, 3 years ago, I started conducting oversight of the Securities and Exchange Commission. That oversight began in response to a whistleblower who came to my office complaining that SEC supervisors were impeding an investigation into a major hedge fund.

Soon afterward, I came to the floor of the Senate to introduce an important piece of legislation based on what I learned from that oversight. The bill was aimed at closing a loophole in securities law that allows hedge funds to operate under the cloak of secrecy. Unfortunately, that bill, S. 1402, was never taken up by the Banking Committee in the last Congress.

In light of the current instability in our financial system, I think it is very critical for the Senate to deal with this issue and do it in the near future. Therefore, I am pleased Senator Levin, who is on the floor, and I worked together to produce an even better version of the bill than I introduced previously, and we are now doing that in the 111th Congress.

I thank Senator Levin because he is on a very important oversight committee as well and does a lot of oversight, as I do. I appreciate everything he does in maybe a lot of different areas than I do, but I appreciate working together with him on this issue.

This new bill, the Hedge Fund Transparency Act, does everything the previous version did, but it does more and does it better.

As in the previous version, it clarifies current law to remove any doubt that the Securities and Exchange Commission has the authority to require hedge funds to register--simply to register--so the Government knows who they are and what they are doing. It removes the loophole previously used by hedge funds to escape the definition of an ``investment company'' under the Investment Company Act of 1940.

Under this legislation, hedge funds that want to avoid the stringent requirements of the Investment Company Act will only be exempt if, one, they file basic disclosure forms; and two, cooperate with requests for information from the Securities and Exchange Commission.

I thank Senator Levin for not only cosponsoring this legislation but also contributing a key addition to this new version of the bill. In addition to requiring basic disclosure, this version also makes it clear that the hedge funds have the same obligations under our money laundering statutes as other financial institutions. They must report suspicious transactions and establish anti-money laundering programs.

One major cause of the current crisis is a lack of transparency. Markets need a free flow of reliable information to function properly. Transparency was the focus of our system of securities regulations adopted way back in the 1930s. Unfortunately, over time, the wizards on Wall Street figured out a million clever ways to avoid transparency. The result is the confusion and uncertainty fueling the crisis today that we see.

This bill is an important step toward renewing commitment to transparency on Wall Street and establishing credibility in our financial sector among the American populace. Unfortunately, there was not much of an appetite for this sort of commonsense legislation when I first introduced it before the financial crisis erupted. Hopefully, attitudes have changed, given all that has happened since the collapse of Bear Stearns last March. It is all very obvious to us, and particularly connected with the credit crunch and with the recession.

Hedge funds are pooled investment companies that manage billions of dollars for groups of wealthy investors, and do it in total secrecy. Hedge funds affect regular investors. They affect the market as a whole. My oversight of the SEC convinces me that the Commission needs much more information about the activities of hedge funds in order to protect the markets. Any group of organizations that can wield hundreds of billions of dollars in market power every day should be transparent and disclose basic information about their operations to the agency that Americans rely on as the watchdogs of our Nation's financial markets.

As I explained when I first introduced this bill, the Securities and Exchange Commission already attempted to oversee the hedge fund industry by regulation. Congress needs to act now because of a decision of a Federal appeals court. In 2006, the DC Circuit Court of Appeals overturned an SEC administrative rule requiring the registration of hedge funds. That decision effectively ended all registration of hedge funds with the Securities and Exchange Commission, unless and until we in Congress take action.

The Hedge Fund Transparency Act would respond to that court decision by, one, including hedge funds in the definition of investment company; and two, bringing much needed transparency to this supersecretive industry. The Hedge Fund Transparency Act is a first step in ensuring that the Securities and Exchange Commission has clear authority to do what it has already tried to do. Congress must act to ensure that our laws are kept up to date as new types of investments appear.

Unfortunately, this legislation hasn't had many friends. These funds don't want people to know what they do or who participates in them. They have fought hard to keep it that way. Well, I think that is all the more reason to shed some light--particularly some sunlight--on them to see what they are doing.

So I urge my colleagues to cosponsor and support this legislation, to support Senator Levin of Michigan and me in this effort as we work to protect all taxpayers, large and small.

Once again I thank Senator Levin. And before I yield the floor, Mr. President, I ask unanimous consent to have printed in the Record a background paper on the Hedge Fund Transparency Act.

There being no objection, the material was ordered to be printed in the RECORD

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