Testimony Amounts To A Hill of Been There, Done That

Date: Wednesday, July 11, 2007
Author: Hedge Fund Daily

Hearings held on Capitol Hill produced nothing new under the D.C. sun as it applies to the burning issues of the day: hedge funds, private equity and taxation – except for one little tidbit of news. Speaking before the House Committee on Financial Services, Robert Steel, under secretary of Treasury for domestic finance, noted, “While hedge funds can provide benefits to investors and the overall marketplace, they represent some challenges as well,” adding that the “scale, complexity and dynamic nature” of the business makes “heightened vigilance...necessary.” As a representative of the President’s Working Group, charged with studying the industry, Steel said that its principles and guidelines “seek to preserve the benefits that these hedge funds provide, while highlighting how risks posed by such funds are best addressed by increased vigilance within the existing regulatory environment.” Notch one vote against tighter regulation. Also addressing the committee was Kevin Warsh, a Federal Reserve Board governor, who testified that while the potential for systemic risks exists, widening credit spread as of yet “does not appear to have imposed significant strains on the financial system.” Warsh continued that if market participants prove “unwilling or unable” to meet “formidable challenges” presented by the recent growth of hedge funds, “losses in the hedge fund sector could pose significant risks to financial stability.” The Fed also opposes stricter HF regulation. Meanwhile, the committee’s chairman, Rep. Barney Frank (D-Mass.), said at the hearing, “I don’t think anybody can be confident that all’s entirely well here. But neither is there any obvious thing we ought to be doing.” Frank did offer something new: He said he’s mulling a law that would require hedge funds to maintain all sorts of records, such as trading data and e-mails, for the purpose of due diligence and recovery. Frank gave no timeline for such legislation. At a Senate Finance Committee hearing on proposed changes to tax rates on hedge fund and private equity managers, Eric Solomon, assistant Treasury secretary for tax policy, in prepared testimony, suggested that the status quo is just fine. “While it is important to review our tax laws and policies, we must be cautious about making significant changes to partnership tax rules that we worked successfully to promote and support entrepreneurship for many decades.”