State lawmakers ease oversight proposals

Date: Monday, April 27, 2009
Author: Greg Bordonaro, Hartford Business.com

State lawmakers have largely backed off efforts to tighten oversight over the hedge fund industry, which has come under intense scrutiny as a result of the financial crisis.

By a 15-1 vote, members of the banks committee recently passed a bill that would require investment advisers to Connecticut hedge funds to disclose potential conflicts of interest that could impair their “duties and responsibilities.”

That requirement is much less intrusive than the committee’s original proposals, which would have required hedge funds to conduct an annual independent financial audit, disclose fees and significant changes in management and management strategy, and provide detailed portfolio information to in-state pension funds.

The policy shift comes after some argued that hedge fund oversight should come from the federal government rather than the state, and that such legislation would make Connecticut too unfriendly to the industry, which brings in tens of millions of dollars each year to the state’s coffers.

“It’s an evolving process,” said state Sen. Bob Duff (D-Norwalk), chairman of the banks committee. “We have a lot of hedge funds in the state and we want them to continue to grow here.” Proposals Pulled Back

Duff noted that the state wanted to go further in certain areas of its legislation but that lawyers indicated that certain proposals were preempted by federal regulation.

The latest bill would also exempt all out-of-state investment advisers without a Connecticut place of business from having to register with the state Department of Banking, according to the office of fiscal analysis.

By some measures, Connecticut is the world’s No. 3 center for the sector, with 9.5 percent of world hedge fund assets mainly located in Greenwich, Stamford and Westport, according to Hedgefund Intelligence, a London-based trade group.

Industry representatives have warned that imposing tight restrictions on hedge funds could drive them out of state.

John Brunjes, a partner at Bracewell & Giuliani in Hartford, who represents many hedge funds, said the latest proposal was a good step but that he’s still concerned that certain language in the bill could force some hedge fund managers in the state to register with the banking department.

“The registration and conflicts of interest disclosure provisions would create substantial legal and practical burdens,” Brunjes said.

A Modest Step

State Rep. John E. Stripp (R-Weston), who has called for more transparency for hedge funds that hold investments from pension funds, said he supports the latest measure.

“It’s fine with me,” Stripp said. “This is a relatively modest step to create more transparency.

We have to move slowly in this area and not make laws that are so draconian that it chases them out of the state.”

The hedge fund industry has come under intense scrutiny in recent months, taking partial blame for the financial crisis because they were major players in short selling and credit default swaps, investment tactics accused of putting intense pressure on the stock market.

Last year, hedge funds also recorded billions of dollars in losses, and some of them had investments with Bernard Madoff’s $50 billion Ponzi scheme.

Pressure Is Increased

Basic information about hedge funds, including who manages them, what they do and how much they own, is not readily available to regulators. That creates deep concerns over how the industry operates and what risks it poses to the financial system.

State officials are facing increased pressure to protect investors, but many, including U.S. Rep. Jim Himes (D-4th), agree that such oversight should come from the federal government.

Federal lawmakers have proposed several bills that would create more oversight over the industry, including one that would require hedge funds to register with the Securities and Exchange Commission. Congress is also trying to develop a regulatory system that would monitor the levels of leverage used by hedge funds.

Feds Fail To Deliver

The federal government has promised to regulate the industry in the past, but some say it has failed to deliver. As a result, Connecticut officials say they have felt some obligation to act where the federal government hasn’t.

“Federal regulation will come soon, but not soon enough,” Attorney General Richard Blumenthal said at a Feb. 27 public hearing at the state Capitol. Blumenthal supported most of the original measures proposed by the banks committee.

Duff said the latest proposal will most likely have “much wider legislative support,” than previous ones.