Dodd Vs. Hedge Funds et al.
On Monday, Sen. Chris Dodd proudly announced his new financial regulatory reform legislation, among other things, didn’t exempt auto dealers from new regulations like the House version did, according to the Huffington Post. In the summary of the bill, Dodd suggests that one of the primary benefits of his proposed legislation is that it
Closes Loopholes in Regulation: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated – including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.
Upon unveiling the bill, Dodd was quoted by the Huffington Post as saying,
I don’t want to be in the business of carving out large financial providers. I’m trying to allow the [Consumer Financial Protection Bureau] itself to make some determinations so we don’t get into the business of picking winners and losers.
However, some think that Dodd’s version of the legislation makes winners out of hedge funds and private equity by failing to effectively close the loopholes he claims to have. The key loophole is that there is no real common definition of a hedge fund. The only real distinguishing feature of a hedge fund from is that it has under 100 owners, as defined by the The Investment Company Act of 1940. Hedge funds often utilize some combination of a long/short strategy and leverage, but not necessarily.
Under Dodd’s proposal, hedge funds managers with assets in excess of $100 million would be obligated to register with the SEC and to disclose information about risk exposure. Venture capital and private equity would be exempt from this requirement.
In an email to the Huffington Post, Heather Slavkin, a senior policy advisor for the AFL-CIO, wrote,
We are very concerned about the loopholes in the hedge fund title of the legislation released on Monday, particularly the exemption for private equity and the failure to allow the SEC to require that hedge funds and private equity funds make simple disclosures to investors and creditors
These [disclosures] are common-sense ways to protect investors and prevent systemic risk and were included in both the Obama proposal released last summer and in the bill passed by the House. We are working hard to find ways to remove these loopholes.
Others, however, support the bill. According to an interview with Dow Jones, quoted by the Huffington Post, Doug Lowenstein, president of the Private Equity Council trade group, was quoted as saying that he thought Dodd’s proposal was an “excellent approach,” and “well-reasoned.” He went on to say, “Private equity doesn’t create systemic risk, and the bill recognizes that.” So how does Dodd propose to close the loopholes for hedge funds without including venture capital or private equity? The American Spectator pointed to pages 377-378 of the bill, which state:
Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘venture capital fund’ for purposes of this subsection…. Not later than 6 months after the date of enactment of this subsection, the Commission shall issue final rules… to define the term ‘private equity fund’ for purposes of this subsection.
So, essentially, assuming Democrats pass the bill and satisfy their party’s bloodlust for Wall Street big wigs, hedge funds managers will then have six months to either lobby for broad definitions of venture capital or private equity or make whatever organizational changes they must in order to be able to technically classify themselves venture capital or private equity instead of hedge funds.
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Loading ...