If the hedge fund adviser registration bill that sailed Tuesday through the House Financial Services Committee becomes law, it had better come with a budget supplement for the Securities and Exchange Commission.
If it does not, there might be a lot less present than meets in the eye in the bill to force hedge fund advisers along with those working for private equity firms and other private pools of capital to register with the SEC.
The committee approved the measure by a vote of 67 to 1.
A little history is needed. A few years back when William Donaldson led the SEC, the watchdog agency on its own decided to make hedge fund advisers of a certain size register and be subject to periodic inspections by SEC staff .
Donaldson and others argued back then that hedge funds were cumulatively too important a force in U.S. markets for the SEC to have so little information about them. Indeed, no one really knows how many hedge funds there even are. Certainly there are estimates and estimates of assets under management, but that’s all.
That measure was eventually tossed out by a court after a hedge fund challenged it. One of the commissioners at the time who dissented, Republican Paul S. Atkins, argued that having hedge fund advisers register would spread SEC inspection resources too thin without sufficient cause.
Indeed, investors might get an undeserved sense of security about investing in registered hedge funds, thinking that the SEC was on the beat when its budget wouldn’t allow widespread contacts with the hedge fund advisers.
The expectation of SEC oversight was expressed Tuesday by the bill’s sponsor, Rep. Paul E. Kanjorski, D-Pa., who said in a statement: “Under this legislation, private investment funds would become subject to more scrutiny by the SEC and take more responsibility for their actions.”
Registration for hedge fund advisers and others makes sense, as the House committee statement says. “By mandating the registration of private advisers to private pools of capital regulators will better understand exactly how those entities operate and whether their actions pose a threat to the financial system as a whole.”
But it has not be real, not theoretical.
Just Tuesday, in a speech text, SEC Chairman Mary Schapiro said “For an agency of just 3,700 the numbers of complaints were virtually impossible to keep up with, let alone manage.” She said the agency is revamping to be able to better process leads about possible regulatory violations, but her statement gives you a sense of the agency’s ability to cope with new obligations without new funding.
One suggested answer is to let the SEC fund itself, as some other agencies of government do, through the fees it collects from the industry for various services.
That entails some other issues, but it is a way to alloow the SEC to keep up with growing responsibilities and in fact enhance its independence.