Famed hedge fund manager James Chanos, best known for his early spotting of Enron’s flaws, last week called on the U.S. Congress to pass a law requiring
Chanos, head of New York-based hedge fund
In testimony to the subcommittee last week, Chanos said lawmakers should go even further to introduce oversight over private investment funds.
“A modernized financial regulatory system—one that addresses overall risk to the financial system and that regulates market participants performing the same functions in a consistent manner—will include appropriate regulation of hedge funds and other private pools of capital,” Chanos said.
Chanos spoke on behalf of the Coalition of Private Investment Funds, a lobbying group he formed. The coalition declines to identify its membership beyond Chanos.
Under Reed’s bill, the SEC would have full authority under over private fund managers and inspection authority over all fund records. But Chanos said that approach does not provide enough direction about what elements of the 1940 Investment Advisers Act should be retained and what should be added.
“The legislation, as currently drafted, could leave some doubt as to how broadly Congress intends the SEC to act in this area,” he said.
Under current rules, fund managers are exempted from SEC registration if they comply with certain conditions: they either have less than 100 shareholders or they exclude investors with less than $5 million of investments. Tearing down the old exemptions, Chanos contends, is not enough.
He said ideal hedge fund legislation should, among other things, require registration of private funds with the SEC, require funds and investment managers be subject to SEC inspection and enforcement just as mutual funds and registered investment advisers are, and require custody and audit protections to prevent fraud.
The largest funds would have to adopt risk management plans and plans for orderly wind-downs.
These requirements would benefit investors by enabling regulators to monitor systemic risks and provide clearer authority to prevent fraud, Chanos said.
Earlier this year, global hedge funds endorsed SEC registration plans in hopes of avoiding even more restrictive rules. The Obama administration recently proposed sweeping changes to financial regulation, including calls for greater oversight of the $1.3 trillion hedge fund industry.
Under Reed’s bill, the SEC would have the authority to collect information from hedge funds and then would be required to cooperate with other agencies to evaluate systemic risk.
Last year, hedge funds were blamed for manipulating debt and credit default swap markets, while short sellers were accused of bringing down some of Wall Street’s largest banks.
The SEC previously tried to force hedge fund advisers to register with the agency, but a federal court overturned its rule in 2006.
Some private fund managers have decried the proposed changes to nearly 70 years of hands-off treatment.
Chanos and other hedge fund executives have argued it was regulated banks and brokerages who nearly destroyed the financial markets through reckless lending, excessive leverage and poor management. —Joseph A. Giannone, Reuters