Connecticut is cracking down on one of its biggest homegrown industries: hedge funds. Lawmakers are pushing for stricter regulation of the state’s approximately 300 funds, but it’s a tricky proposition because neighboring New York, with no such regulatory upgrade in progress, beckons.
“Neither side wants to drop the H-bomb here,” says Robert Duff, co-chairman of the Connecticut Senate Banking Committee and a sponsor of the three bills that would tighten rules on hedge funds. “We want to support the good part of the industry and make sure any kind of areas that need improvement are improved.”
Duff’s proposals call for independent financial audits, state licensing and full reporting of assets and liabilities to pension fund clients based in the state. They would also require investors who put money in hedge funds to have at least $2.5 million in assets (federal law has a $1 million threshold). The ideas aren’t new. They were put forth in 2007 but didn’t go anywhere, Duff notes, because “we were assured Congress would take action.”
Duff has until June 3 to bring them to the full Connecticut Senate. He says his decision will depend on whether the U.S. Congress acts.
The global cry for more hedge fund regulation seems to be gaining momentum as the financial crisis deepens (hedge funds’ cause wasn’t helped by the news on March 18 that they had benefitted from the American International Group’s bailout). At a February 27 hearing of the European Union’s executive European Commission, central bankers and government officials promised tighter oversight of the industry. A few weeks before that, the Washington-based North American Securities Administrators Association, a group of state regulators, called for Congress to allow the Securities and Exchange Commission to regulate hedge funds. And bipartisan U.S. legislation has been proposed — the Hedge Fund Transparency Act — that would require the SEC to register hedge funds with more than $50 million in assets under management.
“I’ve consistently said this is a role for Congress, not the states,” says Duff, who is a real estate agent by trade. But now, he argues, with state-sponsored employee pensions invested in hedge funds, “it becomes the purview of the legislature whether we need to do more to protect consumers.”
