[Congressional Record (Bound Edition), Volume 154 (2008), Part 16]
[Senate]
[Pages 22221-22222]
[From the U.S. Government Publishing Office, www.gpo.gov]




                             SEC OVERSIGHT

  Mr. GRASSLEY. Mr. President, 2 years ago I started conducting 
oversight of the Securities and Exchange Commission. I did it only in 
response to a whistleblower who came to my office complaining that the 
Securities and Exchange Commission supervisors were pulling their 
punches in their investigation of major hedge funds. Nearly a year and 
a half ago, I came to this floor to introduce an important piece of 
legislation based on what I learned from my oversight 6 months before. 
The bill was aimed at closing a loophole in our security laws.
  Now, in light of all the discussion going on about the problems of 
our financial markets and Wall Street and a very unusual weekend 
session we are having, as people are attempting to work compromises to 
help on Wall Street in light of all this current instability, it is 
critical that Senators take another look at this bill I introduced. It 
is S. 1402, introduced a year and a half ago, not just because it has 
become clear that we have a lot of financial problems up on Wall 
Street. S. 1402 is called the Hedge Fund Registration Act. It is pretty 
simple. It is only two pages long. All it does is clarify that the 
Securities and Exchange Commission has the authority to require hedge 
funds to register so the Government knows who they are and what they 
are doing. In other words, a little transparency that seems to be 
lacking in our ability to quantify the instruments that are securitized 
mortgages that are creating problems. So if there was a little more 
transparency there, unrelated to the issue I bring before the Senate, 
transparency makes a difference. We know what is going on. We quantify 
it.
  Given the Securities and Exchange Commission's current attempts to 
halt the manipulative short selling and other transactions by hedge 
funds that threaten the stability of our markets, I am disappointed the 
Senate did not adopt this legislation a long time ago. If it had, the 
Securities and Exchange Commission might have more of the tools it 
needs now in these very nervous markets.
  One major cause of the current crisis is, as I have said just now, 
the lack of transparency. Markets need a free flow of information to 
function properly. Transparency was the focus of our system of 
securities regulations adopted in the 1930s. Unfortunately, over time, 
the wizards of Wall Street figured out a million clever ways of 
avoiding transparency. The result is the confusion and uncertainty 
fueling the crisis we are trying to solve this weekend on the helping 
of Wall Street financially and stopping a credit crunch in this 
country. This bill would have been one important step toward greater 
transparency on Wall Street, but so far it has been a lonely effort on 
my part from the standpoint of this bill I introduced a year and a half 
ago. Perhaps attitudes have changed in the last several months, so I 
would urge my colleagues to support this legislation and help me assure 
it becomes law.
  Technically speaking, the bill would amend section 203(b)(3) of the 
Investment Advisers Act of 1940. It would narrow the current exemption 
from registration for certain investment advisers. This exemption is 
used by large, private pooled investment vehicles, commonly referred to 
as ``hedge funds.'' Hedge funds are operated by advisers who manage 
billions of dollars for groups of wealthy investors in total secrecy. 
They should at least have to register with the Securities and Exchange 
Commission, such as other advisers do.
  Currently, the exemption applies to any investment adviser who had 
fewer than 15 clients in the preceding year and who does not hold 
himself out to the public as an investment adviser. The Hedge Fund 
Registration Act I introduced narrows this exemption and closes a 
loophole in the securities laws that these hedge funds use to avoid 
registering with the Securities and Exchange Commission and operate in 
secret. Hedge funds affect regular investors. They affect markets as a 
whole.
  My oversight of the SEC has convinced me that the Commission and the 
self-regulatory organizations need much more information about the 
activities of hedge funds in order to protect the markets. 
Organizations that wield hundreds of billions of dollars in market 
power every day should be registered with the agency Americans rely on 
to regulate financial markets.
  As I explained when I first introduced this bill 1\1/2\ years ago, 
the Securities and Exchange Commission has already attempted to do this 
by regulation. So bravo, SEC. In other words, they acted, and bravo to 
them. But Congress needs to act now because of a decision by a Federal 
appeals court. In 2006, the DC Circuit Court of Appeals overturned an 
SEC administrative rule that required registration of these same hedge 
funds. That decision effectively ended all registration of hedge funds 
with the SEC unless and until Congress takes action--hence, my 
legislation.
  The Hedge Fund Registration Act would respond to the court decisions 
by narrowing the current registration exemption and bring much-needed 
transparency to hedge funds. Most people say the devil is in the 
details. Well, let's go over the details so I am not trying to hide 
something.
  The bill would authorize the Securities and Exchange Commission to 
require all investment advisers, including hedge fund managers, to 
register with the SEC. Only those that meet all four of the following 
criteria would be exempt. No. 1, managed less than $50 million; No. 2, 
had fewer than 15 clients; No. 3, did not hold himself out to the 
public as an investment adviser; and, No. 4, managed the assets of 
fewer than 15 investors, regardless of whether investment is direct or 
through a pooled investment vehicle, such as a hedge fund.
  The Hedge Fund Registration Act is a first step in ensuring that the 
SEC simply has clear authority to do what it already tried to do and 
the courts said it could not do. Congress must act to ensure that our 
laws are kept up to date as new types of investments appear. 
Unfortunately, this legislation, introduced more than a year and a half 
ago, has not had many friends. These funds do not want people to know 
what

[[Page 22222]]

they do and have fought hard to keep it that way. Well, I think that is 
all the more reason to shed some sunlight on them, to see what they are 
up to so maybe a couple years from now we are not dealing with problems 
the hedge funds have caused.
  I urge my colleagues to cosponsor and support this legislation, as we 
work to protect all investors, large and small. It does not prohibit 
anything. It just makes sure these folks are registered and that you 
know who they are and how many there are. That is something we ought to 
know. It does need to be emphasized that we ought to know that in this 
day, when we are dealing with the problems we are here on this Friday 
night and Saturday and Sunday and Monday to find a solution to, the 
Wall Street problems this country now faces.
  I yield the floor and suggest the absence of a quorum.
  Mr. BOND addressed the Chair.
  The PRESIDING OFFICER (Mr. Whitehouse). Will the Senator withhold his 
suggestion of the absence of a quorum?
  Mr. GRASSLEY. Oh, yes. I am sorry.
  The PRESIDING OFFICER. The Senator from Missouri.
  Mr. BOND. Thank you very much, Mr. President.

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