At her first Senate confirmation hearing, Mary Schapiro — Barack Obama’s nominee to head the Securities and Exchange Commission — bridled at suggestions that she was weak on enforcement during her time as CEO of the Financial Industry Regulatory Authority. The SEC has also come under fire from skeptics.
As a result, Schapiro is bound to have hedge fund managers in her sights. In a shot across the bow that mirrors the political mood in Washington, the SEC in January took the unusual step of publicly reopening an investigation into allegations of insider trading at Westport, Connecticut–based hedge fund firm Pequot Capital Management.
“Mary Schapiro is a strong supporter of enforcement,” says Barry Goldsmith, a partner in the Washington office of law firm Gibson, Dunn & Crutcher and a former Finra head of enforcement under Schapiro. “But I also think she will carefully consider all of the ramifications of new regulations and laws to expand the agency’s reach before putting them forward.”
The swing toward more hedge fund oversight will likely come about as part of the new administration’s broader review of how the capital markets operate.
Timothy Geithner, Obama’s nominee for Treasury secretary, is expected (should he survive a personal tax scandal) to bring more transparency to the credit derivatives market, where hedge funds are big players.
And discussions over the creation of a systemic-market-risk monitor — a risk czar, perhaps — may lead to greater hedge fund oversight. Congress has already held hearings on this.
The Obama administration has also indicated an interest in streamlining regulation, which could lead to a merger of the SEC and the Commodity Futures Trading Commission, which have a history of turf wars, especially when it comes to monitoring over-the-counter derivatives.
But Schapiro may have to grapple with finding a way to require hedge funds to register (many already do so, voluntarily). Iowa Republican Senator Charles Grassley — a longtime critic of the industry — has said he will reintroduce a bill to enact the requirement. Its passage seems probable given that Grassley’s view reflects that of most Democrats, who now control Washington.
