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Senators Bid to Regulate Hedge Funds

Date: Friday, January 30, 2009
Author: Stephen Labaton, New York Times

Two senior senators introduced legislation on Thursday to impose government oversight of hedge funds.

The legislation by Senator Carl Levin, Democrat of Michigan, and Senator Charles E. Grassley, Republican of Iowa, was filed as the Obama administration was preparing a broader legislative overhaul of the regulatory system, including an effort to more tightly regulate hedge funds.

State regulators and a panel created by Congress to oversee the $700 billion Troubled Asset Relief Program issued separate but similar regulatory proposals on Thursday. The proposals also seemed to closely mirror many of the provisions that administration officials say will be part of their plan.

The regulatory overhaul is one piece of the administration’s effort to restore confidence in the financial system.

Other pieces include a stimulus bill that the House passed on Wednesday and that is moving through the Senate, and an overhaul of the financial assistance program for the nation’s largest banks.

Senior administration officials have been in discussions this week with Wall Street executives over proposals for managing the remaining $350 billion in the troubled assets program. A new plan is expected to be announced soon.

At the same time, the administration is preparing to propose tighter regulation of credit rating agencies, new federal oversight of mortgage brokers and greater supervision of credit-default swaps, the unregulated financial instruments that experts say contributed to the economic crisis.

Lawmakers have also signaled that they intend to take up legislation to more tightly regulate the markets. Meeting with reporters on Thursday afternoon, Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee, outlined an ambitious schedule for hearings next month on regulatory issues.

They will feature testimony from Treasury Secretary Timothy F. Geithner, Federal Reserve Chairman Ben S. Bernanke and Paul A. Volcker, a former Fed chairman who is an adviser to President Obama.

Mr. Dodd acknowledged that the administration was hoping to complete many of its proposals before a meeting of the Group of 20 nations in London on April 2.

Administration officials have expressed a particular interest in tightening regulation over hedge funds, a move that was opposed by the Bush administration even though William H. Donaldson, chairman of the Securities and Exchange Commission under President Bush, tried to force the funds to register as investment advisers.

His effort was successfully challenged in 2006 when the United States Court of Appeals for the District of Columbia ruled that the commission’s regulation had exceeded its authority.

The Levin-Grassley legislation would correct that problem by giving the commission the unambiguous authority to regulate hedge fund advisers.

“If the events of the last year have taught us anything, it’s that we need to regulate firms that are big enough to destabilize our economy if they fail,” Mr. Levin said. “It’s time to subject financial heavyweights like hedge funds to federal regulation and oversight to protect our investors, markets and financial system.”

Mr. Grassley said he believed the political winds had shifted since he made a similar proposal two years ago. It was never considered by Congress.

“The wizards on Wall Street figured out a million clever ways to avoid the transparency sought by the securities regulations adopted during the 1930s,” Mr. Grassley said. “Instead of the free flow of reliable information that markets need to function properly, today we have confusion and uncertainty fueling an economic crisis.”