Bill Calls for More Hedge Fund Transparency

Legislation authored by Representative Nydia M. Velazquez (D-New York) would significantly strengthen reporting requirements for hedge funds.

Velazquez, who describes hedge funds as large privately organized, pooled investment vehicles not available to the public whose primary investors are wealthy individuals or institutions, says the “Hedge Fund Sunshine Act” (H.R. 3921) comes as media reports repeatedly link hedge funds to the ongoing financial crisis in Puerto Rico.

The bill is the latest move attempting to bring more clarity to the alternative investment industry, which is coming under increasing scrutiny. In 2010, the SEC approved a rule mandating hedge fund and private equity managers to register with the agency and be subject to surprise examinations. The Government Accountability Office (GAO) in 2011 stated that hedge funds and private equity investments pose a number of risks and challenges beyond those posed by traditional investments. More recently, a participant in retirement plans sponsored by Intel Corporation filed a lawsuit claiming its custom target-date funds were too heavily invested in private equity and hedge fund investments, making the funds too risky.

Using Puerto Rico and auto manufacturers as examples of financial opportunism, Velazquez called hedge funds predators that profit from financially distressed entities. “By giving the public and regulators a better sense of hedge funds’ activities, we can finally begin holding this secretive industry accountable for its actions,” Velazquez said in a statement.

Hedge funds are now required to file with the Securities and Exchange Commission (SEC) when they acquire ownership of more than 5% of a class of equity securities. Velazquez’s bill would lower that threshold to 1%, giving the public and the SEC with a better sense of funds’ holdings and financial positions.

H.R. 3921 would also institute a new quarterly reporting requirement for all securities—fixed income as well as equity—in which funds hold a 1% or greater ownership stake. This would mean that, for the first time, these funds would publicly report on their larger debt holdings, such as the significant stake many funds are suspected of holding in Puerto Rico’s debt. These requirements would also take into account derivatives like options and swaps, financial instruments Velazquez says are often used to skirt reporting requirements.

“Hedge funds constitute a $3 trillion industry with enormous impact on capital markets, corporations, local governments and, ultimately, working families’ lives,” Velazquez stated. “Yet, due to loopholes in existing law, they operate largely in the shadows, avoiding scrutiny.”

Estimates range widely as to how much of Puerto Rico’s debt is currently held by hedge funds, but some media outlets have suggested hedge funds could control as much as 50% of the island’s financial obligations. Through this outsized role, many funds have been pushing for greater austerity managers and against extending bankruptcy protections to the island.

“Rather than working to help resolve Puerto Rico’s financial crisis in a fair, orderly fashion, these funds are lobbying to cut basic services that 3.5 million American citizens in Puerto Rico rely upon,” Velazquez noted. “It is time we take a clear-eyed look at the effect these funds are having on Puerto Rico and on other parts of our nation’s economy.”

Velazquez’s bill received wide support from a range of advocacy and labor groups including: Americans for Financial Reform; AFL-CIO; AFSCME; Make the Road New York; Strong Economy for All Coalition; Center for Popular Democracy; and Hedge Clippers. The bill, which is being introduced this week, is expected to be referred to the House Committee on Financial Services, of which Velazquez is a senior member.

“This bill will allow regulators and the public to see exactly what role these funds are playing in Puerto Rico’s financial crisis and in our broader economy,” Velazquez said.