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SEC Chief Schapiro Wants Authority to Make Hedge-Fund Rules

Date: Monday, May 4, 2009
Author: Jesse Westbrook, Bloomberg

The U.S. Securities and Exchange Commission should be given authority to regulate what hedge funds can buy and how much money they can borrow to maximize bets because registration falls short of what’s needed to police the $1.33 trillion industry, Chairman Mary Schapiro said.

“It’s probably not enough just to register hedge funds” with the SEC, Schapiro said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “It may well be necessary to put in place particular kinds of rules.”

Treasury Secretary Timothy Geithner’s plan to overhaul financial oversight in response to the worst economic crisis since the Great Depression would force hedge funds to register with the SEC, subjecting firms to new disclosure requirements and inspections by agency staff. Schapiro said the SEC’s authority should be broader, so it can impose further restrictions on funds as “situations evolve.”

President Barack Obama yesterday blamed hedge funds that had lent Chrysler LLC money for triggering the automaker’s bankruptcy. Obama said the funds were “speculators” that refused the administration’s buyout offers because they were holding out for an “unjustified taxpayer bailout.”

Schapiro said “it’s certainly possible” that the SEC would consider forcing hedge funds to publicly disclose short- sale positions, imposing restrictions on leverage and restricting what the firms can invest in.

“We’re not at the point where we’ve made decisions about those things,” she said, adding that the SEC would first consult with other government agencies.

Merrill Probe

Schapiro also said in the interview that the SEC will thoroughly review whether Bank of America Corp. failed to tell investors about growing losses at Merrill Lynch & Co. under government pressure to buy the investment bank.

Bank of America Chief Executive Officer Kenneth D. Lewis told investigators for New York Attorney General Andrew Cuomo that Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson wanted to avoid disclosure of Merrill’s deteriorating finances.

“We will do whatever we need to do to get to the bottom of this issue,” Schapiro said. She declined to say whether SEC investigators will question Paulson and Bernanke, though she didn’t rule it out.

Bank of America, based in Charlotte, North Carolina, and 18 other financial companies have undergone government stress tests to determine whether they have enough capital to sustain a prolonged recession. The Fed and banking regulators plan to make public the results May 7, stoking concern that weaker institutions may suffer a collapse in their stock prices.


Schapiro said the SEC won’t ban short-selling when the results are released. The SEC, under former Chairman Christopher Cox, prohibited bets against stocks for three weeks last September after Lehman Brothers Holdings Inc. declared bankruptcy and the global credit crisis worsened.

The U.S. Senate this week voted to give the SEC $20 million in additional funding next year to hire 60 investigators after Schapiro said the agency lacked resources and it drew criticism for missing Bernard Madoff’s Ponzi scheme. Schapiro said the money is an “enormous help” and that the agency “could use lots more” additional funding.

Schapiro, who has replaced senior SEC staff since taking over in January, said she is still considering candidates to fill the agency’s chief accountant position. One candidate under consideration was Charles Niemeier, a member of the Public Company Accounting Oversight Board who drew criticism for supporting rules opposed by banks and business lobbyists.

“I’m very committed to finding a chief accountant who is pro-investor” and “understands that financial statements are written for investors so they can make rational decisions about how to allocate capital,” Schapiro said.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.