[Congressional Record (Bound Edition), Volume 152 (2006), Part 15]
[House]
[Pages 20166-20168]
[From the U.S. Government Publishing Office, www.gpo.gov]




                          HEDGE FUND STUDY ACT

  Mr. GARRETT of New Jersey. Madam Speaker, I move to suspend the rules 
and pass the bill (H.R. 6079) to require the President's Working Group 
on Financial Markets to conduct a study on the hedge fund industry, as 
amended.
  The Clerk read as follows:

                               H.R. 6079

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Hedge Fund Study Act''.

     SEC. 2. STUDY AND REPORT ON HEDGE FUND INDUSTRY.

       (a) Study.--The President's Working Group on Financial 
     Markets shall conduct a study of the hedge fund industry. The 
     study shall include an analysis of--
       (1) the changing nature of hedge funds and what 
     characteristics define a hedge fund;
       (2) the growth of hedge funds within financial markets;
       (3) the growth of pension funds investing in hedge funds;
       (4) whether hedge fund investors are able to protect 
     themselves adequately from the risk associated with their 
     investments;
       (5) whether hedge fund leverage is effectively constrained;
       (6) the potential risks hedge fund pose to financial 
     markets or to investors;
       (7) various international approaches to the regulation of 
     hedge funds; and
       (8) the benefits of the hedge fund industry to the economy 
     and the markets.
       (b) Report and Recommendations.--Not later than 180 days 
     after the date of enactment of this Act, the President's 
     Working Group on Financial Markets shall submit a report on 
     its findings to the Committee on Financial Services of the 
     House of Representatives and the Committee on Banking, 
     Housing, and Urban Affairs of the Senate. The report shall 
     include recommendations, including--
       (1) any proposed legislation relating to appropriate 
     disclosure requirements for hedge funds;
       (2) the type of information hedge funds should disclose to 
     regulators and to the public;
       (3) any efforts the hedge fund industry or regulators of 
     financial institutions should undertake to improve practices 
     or provide examples of successful industry initiatives; and
       (4) any oversight responsibilities that members of the 
     President's Working Group should have over the hedge fund 
     industry, and the degree and scope of such oversight.

  The SPEAKER pro tempore. Pursuant to the rule, the gentleman from New 
Jersey (Mr. Garrett) and the gentleman from Massachusetts (Mr. Frank) 
each will control 20 minutes.
  The Chair recognizes the gentleman from New Jersey.


                             General Leave

  Mr. GARRETT of New Jersey. Madam Speaker, I ask unanimous consent 
that all Members have 5 legislative days within which to revise and 
extend their remarks on this legislation and to insert extraneous 
material thereon.
  The SPEAKER pro tempore. Is there objection to the request of the 
gentleman from New Jersey?
  There was no objection.
  Mr. GARRETT of New Jersey. Madam Speaker, I yield myself such time as 
I may consume.
  Madam Speaker, before I begin, I would first like to wish my friend 
and colleague and the chief sponsor of this legislation, Congressman 
Mike Castle, a very speedy recovery. Our thoughts and prayers are with 
him and his family, and we hope to see him back here on the floor soon.
  I also, Madam Speaker, wish to take this time to thank both Chairman 
Oxley and Chairman Baker for their support of this study and the 
ongoing efforts to address the evolving hedge fund industry.
  Madam Speaker, I come to the floor tonight to support H.R. 6079, the 
Hedge Fund Study Act, introduced by my colleague, Mike Castle. This 
legislation will better enable this House to examine the role of hedge 
funds in our economy through a thoughtful study and report by the 
President's Working Group on Financial Markets, the PWG.
  The hedge fund industry represents a vital sector of the American 
economy, as evidenced by its market growth and capital development. 
Hedge funds are now a $1.2 trillion industry; and they can be a high-
risk, high-stake investment. While they are usually targeted to wealthy 
investors, hedge funds are increasingly tied to pension plans and, 
consequently, to the financial earnings of millions of middle-class 
Americans. For that reason, I think it is necessary that we further 
explore hedge funds and the potential impact and benefits that they 
offer to the financial markets and investors as well.
  Specifically, H.R. 6079 will help Congress learn more about this 
vibrant industry. The study will examine hedge fund growth and the 
potential risks as well as the benefits of the hedge fund industry to 
the economy and the markets.
  The hedge fund industry has such a significant impact on the markets 
and was last reviewed by the PWG study on this topic way back in 1999. 
But the growth of the hedge fund industry over the past 7 years makes 
this legislation timely. I would call your attention to the 
improvements of the hedge fund industry risk management function, 
improvements that were recommended in that study in 1999.
  Counterparties and financial institutions have taken affirmative 
steps over the past 6 years now to mitigate exposures to risk through 
innovative financial products and the allocation of

[[Page 20167]]

greater resources toward a dedicated risk management role.
  Additionally, the hedge fund industry has in the past demonstrated 
its willingness on its own to resolve market challenges. For example, 
through a self-imposed obligation, derivative market participants, 
including hedge funds, directed their efforts toward eliminating a 
credit derivatives paperwork backlog that in past years was caused by 
explosive growth within those markets. The industry has now 
successfully reported that it has made substantial progress in 
increasing operational efficiencies and operational risks.
  Again, at this time, I support this legislation; and I also should 
point out that I would like to thank Congressman Chris Shays from 
Connecticut for his expertise in this area, as many of the hedge funds 
that we speak of here tonight are near in his district. I compliment 
the Congressman and his efforts to getting this bill through this 
House.
  Madam Speaker, I reserve the balance of my time.
  Mr. FRANK of Massachusetts. Madam Speaker, I yield myself such time 
as I may consume.
  Madam Speaker, I am in substantial agreement with my colleague from 
New Jersey, but, first, and most of all, in expressing our best wishes 
to our colleague, the gentleman from Delaware, who has been such a 
constructive Member and whom we hope to see back with us very soon.
  Secondly, I think the gentleman has accurately portrayed the 
situation. About a month or so ago, the Circuit Court of Appeals ruled 
that the SEC had twisted a statute further out of shape than is 
permissible to get some jurisdiction over hedge funds.
  I think the Circuit Court made the correct legal interpretation. The 
SEC had been reaching, and I think the decision was a correct one. I 
then, however, filed a bill to change the statute, not because I or I 
think anyone else is able to be sure right now exactly what we should 
do about hedge funds, but because I would agree with the gentleman from 
New Jersey, this is an important, relatively new phenomenon. It has a 
major impact in our economy.
  At the rate at which they are growing, it may be we will reach the 
point in which there is more money in hedge funds than there is money; 
and that at least ought to call up some attention. I simply did not 
think we should adjourn for the year with some people thinking that we 
have now decided that the appropriate action is nothing at all. That 
may in the end be a decision, but I do not think it is one that we have 
yet had a chance to look at.
  So there were various ways that we were looking at this. I had a 
bill, the gentleman from Louisiana, the chairman of the subcommittee, 
had a bill. The gentleman from Delaware, a very thoughtful Member, 
suggested this as an approach. It has the advantage, I think of saying, 
look, we believe there is something that has to be looked at.
  The gentleman from New Jersey correctly mentioned one of the things 
that has a number of people particularly concerned, which is the 
increasing interface between hedge funds and pension funds. That is 
something that we want to look at. So I think that we have an 
appropriate vehicle today, legislatively, to say this is something we 
want to look at. We will come back next year and deal with it further. 
I think this is the appropriate way to do it.
  Madam Speaker, I yield back the balance of my time.
  Mr. GARRETT of New Jersey. Madam Speaker, I would just point out with 
regard to that court case, an interesting thing with regard to that 
court case was the fact that the court, in part, reached a decision as 
it did because it said, I am not quoting it, but, in essence, that they 
could not define exactly what a hedge fund was.
  So perhaps with the benefit of this study that we can be able to rein 
that in and to address that issue as well.
  Mr. FRANK of Massachusetts. Madam Speaker, will the gentleman yield?
  Mr. GARRETT of New Jersey. I yield to the gentleman from 
Massachusetts.
  Mr. FRANK of New Jersey. Madam Speaker, I would say yes to the 
gentleman, that this is a case when we could all agree, apparently, 
that a little judicial activism was a good thing.
  Mr. GARRETT of New Jersey. Madam Speaker, reclaiming my time. I would 
like to make one final point on this. I mentioned during my earlier 
remarks the improvements that the industry has made on its own in this 
year.
  And I should also point out, I think Mr. Castle would appreciate the 
fact, that the Managed Funds Association, which is the funds of the 
association of the hedge funds, in essence, are in support of this 
legislation as well. They have indicated the hedge funds are currently 
subject to numerous regulations already relating to advertising and 
broad reporting requirements, ERISA and other securities. But they do 
as well see the benefit to look at both sides of the equation from a 
balanced approach, both the risk and the potential difficulties as 
well.
  So I just wanted to add that to the record as well.
  Mr. SHAYS. Madam Speaker, I rise in support of the Hedge Fund Study 
Act and appreciate the work of our colleague, Mike Castle, to craft 
this legislation and bring it to the floor.
  Madam Speaker, the hedge fund industry plays a critical and special 
role in our capital markets and is enormously important to helping 
institutional investors diversify their investment portfolios and meet 
their future funding needs.
  While the numbers fluctuate some, there are believed to be close to 
8,000 hedge funds that manage approximately $1 trillion in assets. 
Connecticut's Fourth Congressional District, which I'm grateful to 
represent, is home to several hundred of the most successful hedge 
funds.
  Over the past few years, the industry has received increasing 
attention from the media, Congress and the Securities and Exchange 
Commission (SEC). I happen to believe that strong oversight of our 
financial markets is critical to our Nation's economic well-being. 
While hedge funds, which have knowledgeable and sophisticated 
investors, do not require the same level of scrutiny as is paid to the 
mutual fund industry, it seems to me more transparency and better 
government and regulator understanding of the industry will ultimately 
benefit investors and managers alike.
  In my judgment, this act is a sensible approach to the issues raised 
by the growth and importance of hedge funds to the capital markets. We 
should require the Presidential Working Group on Financial Markets to 
study and make recommendations in a final report regarding efforts of 
both the industry and its regulators to improve practices.
  Again, I appreciate this legislation coming to the House floor and 
urge its passage.
  Mr. CASTLE. Madam Speaker, I rise today in support of my bill H.R. 
6079, the ``Hedge Fund Study Act.'' I want to thank both Chairman, 
Oxley, and Chairman Baker for the Financial Services Committee's 
support for this study and efforts to address the evolving hedge fund 
industry.
  This legislation will require the President's Working Group on 
Financial Markets to study the growing marketplace and make 
recommendations regarding hedge fund disclosure. It is a good first 
step towards determining what type of disclosure hedge funds should 
provide to regulators and will establish some standards for increased 
transparency in our financial system that is important for market 
discipline and investor confidence.
  Hedge funds are now a $1.2 trillion industry and can be high-risk, 
high stake investments. While usually targeted to wealthy investors, 
hedge funds are seeing an increase in ties to pension plans and 
consequently, the financial earnings of millions of Americans. For that 
purpose, I think it is necessary that regulators explore hedge funds 
and the potential risks they pose to financial markets and investors.
  This study will come at a good time, as there is much recent 
discussion over the Securities and Exchange Commission's ruling that 
required hedge fund advisors to register with the SEC and undergo 
routine inspections. This ruling was rejected by the U.S. Circuit Court 
of Appeals for the District of Columbia and thrown out partly because 
the court called hedge funds notoriously difficult to define. A 
contemporary study of the hedge fund industry would allow legislators 
to better understand risks born by our economic structures. Moreover, 
it will allow legislators to best protect the American economy from any 
unnecessary financial risks.
  Although the President's Working Group was created originally to 
address issues related to the 1987 stock market crash, it now serves as 
a forum through which the participating agencies exchange information 
on and

[[Page 20168]]

coordinate regulatory policy regarding U.S. financial markets more 
generally. The chairman of the Working Group is the Secretary of the 
Treasury, and the other members are the chairmen of the Board of 
Governors of the Federal Reserve System, the Securities and Exchange 
Commission, and the Commodity Futures Trading Commission.
  The United States is a global leader in the financial services 
industry. For this reason it is important for regulators to contemplate 
our strong international position during their consideration of hedge 
fund disclosure. I commend our committee for acknowledging this 
important issue and the Senate for their recent attention concerning 
hedge funds. It is essential we understand this rapidly evolving 
industry and the impact hedge funds have on our national securities 
markets.
  Madam Speaker, this legislation is a good bipartisan bill supported 
by other members of the Financial Services Committee including Chairman 
Leach, Chairman Frank and Representative Garrett. I am pleased today 
that we have brought this much needed bill to the floor. I urge my 
colleagues on both sides of the aisle to join me in supporting this 
important and very necessary legislation.
  Mr. GARRETT of New Jersey. Madam Speaker, I yield back the balance of 
my time.
  The SPEAKER pro tempore. The question is on the motion offered by the 
gentleman from New Jersey (Mr. Garrett) that the House suspend the 
rules and pass the bill, H.R. 6079, as amended.
  The question was taken; and (two-thirds having voted in favor 
thereof) the rules were suspended and the bill, as amended, was passed.
  A motion to reconsider was laid on the table.

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