Dominion In the News
Hedge Fund Lobbyists Spend More to Avoid What May Be Inevitable: Greater Oversight
By Matt Squire , MoneyLaundering.comHedge fund lobbyists increased their spending by over 700 percent between 2006 and 2008 in an effort to stave off stricter oversight, according to data provided by a non-partisan research group.
Representatives of the $2.5 trillion industry increased their total spending on lobbying from $870,000 in 2006 to $6.7 million the following year, according to Washington, D.C.-based Center for Responsive Politics. Hedge fund groups upped their spending by an additional $900,000 in 2008, according to the center, which collects data on money spent on U.S. lobbying efforts.
The largest industry advocate, the Managed Funds Association (MFA), spent $2.5 million in 2008 to lobby lawmakers. The same year, the MFA hired prestigious lobbying firms Patton Boggs LLP and William & Jensen and hired the former chairman of the House Capital Markets Subcommittee, Richard Baker, as the group’s president, according to the center.
To what degree the MFA and other groups, including Cerebus Capital Management and Citadel Investment Group, will be able to shape future regulation of the widely criticized industry remains unclear, however, according to Drew Chapman, a partner with law firm DLA Piper LLP in New York.
“The industry will be taking the view that regulation will be inevitable, but they will be trying to get a seat at the table so they can help formulate a sensible approach,” said Chapman.
Documents provided by the Center for Responsive Politics show that representatives from the MFA met with lawmakers and regulators in 2008 to sway the direction of legislation seeking to impose greater federal oversight of the industry. The MFA has stopped short in recommendations of agreeing that federal oversight is necessary.
On February 24, the U.K.-based Alternative Investment Management Association proposed a “transparency initiative” recommending that its 1,280 members take steps to share with federal regulators some risk exposures and large investment positions held by hedge fund managers.
The proposal was intended to “dispel once and for all this misconception that the hedge fund industry is opaque and uncooperative,” according to the association’s chief executive officer, Andrew Baker.
The MFA also plans to incorporate best practices developed by a federal working group of financial regulators, which recommended in April that funds disclose asset valuation and risk management practices to investors. The MFA plans to adopt the group’s suggestion that hedge funds develop certain Bank Secrecy Act standards as well, according to a spokesperson with the group.
But if those overtures from the hedge fund industry are intended to deflect federal oversight, the efforts are likely to prove futile, according to David Caruso, managing director of Dominion Advisory Group, a consulting firm in Centreville, Va.
“The momentum is so strong right now; I just don’t see how successful that industry or any member of the financial services sector is going to be in fending off increased regulation,” he said.
The MFA has already attempted to be influence legislation introduced by Sen. Charles Grassley (R-Iowa) in 2007 that would require hedge funds to register with the Securities and Exchange Commission, according to documents filed by the MFA with the Center for Responsive Politics.
On January 29, Grassley joined with Sen. Carl Levin (D-Mich.) to sponsor a bill that combined Grassley’s legislation with Levin’s own bill from 2007 that would require hedge funds to enact money laundering controls and suspicious activity reporting policies.
During 2008, MFA representatives met with unnamed members of the House and Senate, and officials with the SEC, U.S. Treasury Department and the U.S. Commodity Futures Trading Commission, according to the center.
Calls to the MFA were not returned at press time.
Of the likely oversight, anti-money laundering regulations have been a lesser issue for the industry, which is more concerned about countering a proposed change in how the carried interest income earned by managers is taxed, said Massie Ritsch, a spokesman for the Center for Responsive Politics.
Under legislation introduced in 2007 by Rep. Sander Levin, a Democrat from Michigan, income generated by private equity fund managers would be taxed at a 35 percent marginal income tax rate rather than by a 15 percent capital gain rate. The Obama administration’s proposed 2010 budget contains language that also would reclassify carried interest income from capital gains to ordinary income.
“More than doubling their taxes is not particularly appealing to [hedge fund managers] so they’ve been trying to fend off that legislation,” said Ritsch. “They were successful in doing that for a while, but I think that’s probably come to an end, and as the government looks for more revenue, one place to look for it would be hedge funds.”
Sander Levin’s bill passed the House of Representatives during the last Congress but the bill was not picked up by the Senate. The bill will be reintroduced “as soon as possible,” and could have a better chance of passing the Senate this time around said Levin spokeswoman Hilarie Chambers.
“Anytime that you start with a proposal that is supported by the President and included in his budget, you are much further ahead,” said Cambers.
Given the economic and political climate, the industry may have to accept that “sometime in this presidential term” there is going to be regulation of the hedge fund industry, according to Jason Pickholz, a lawyer with Duane Morris LLP in New York. “Hedge funds are too large of a sector of the economy to go unregulated.”
Representatives of the $2.5 trillion industry increased their total spending on lobbying from $870,000 in 2006 to $6.7 million the following year, according to Washington, D.C.-based Center for Responsive Politics. Hedge fund groups upped their spending by an additional $900,000 in 2008, according to the center, which collects data on money spent on U.S. lobbying efforts.
The largest industry advocate, the Managed Funds Association (MFA), spent $2.5 million in 2008 to lobby lawmakers. The same year, the MFA hired prestigious lobbying firms Patton Boggs LLP and William & Jensen and hired the former chairman of the House Capital Markets Subcommittee, Richard Baker, as the group’s president, according to the center.
To what degree the MFA and other groups, including Cerebus Capital Management and Citadel Investment Group, will be able to shape future regulation of the widely criticized industry remains unclear, however, according to Drew Chapman, a partner with law firm DLA Piper LLP in New York.
“The industry will be taking the view that regulation will be inevitable, but they will be trying to get a seat at the table so they can help formulate a sensible approach,” said Chapman.
Documents provided by the Center for Responsive Politics show that representatives from the MFA met with lawmakers and regulators in 2008 to sway the direction of legislation seeking to impose greater federal oversight of the industry. The MFA has stopped short in recommendations of agreeing that federal oversight is necessary.
On February 24, the U.K.-based Alternative Investment Management Association proposed a “transparency initiative” recommending that its 1,280 members take steps to share with federal regulators some risk exposures and large investment positions held by hedge fund managers.
The proposal was intended to “dispel once and for all this misconception that the hedge fund industry is opaque and uncooperative,” according to the association’s chief executive officer, Andrew Baker.
The MFA also plans to incorporate best practices developed by a federal working group of financial regulators, which recommended in April that funds disclose asset valuation and risk management practices to investors. The MFA plans to adopt the group’s suggestion that hedge funds develop certain Bank Secrecy Act standards as well, according to a spokesperson with the group.
But if those overtures from the hedge fund industry are intended to deflect federal oversight, the efforts are likely to prove futile, according to David Caruso, managing director of Dominion Advisory Group, a consulting firm in Centreville, Va.
“The momentum is so strong right now; I just don’t see how successful that industry or any member of the financial services sector is going to be in fending off increased regulation,” he said.
The MFA has already attempted to be influence legislation introduced by Sen. Charles Grassley (R-Iowa) in 2007 that would require hedge funds to register with the Securities and Exchange Commission, according to documents filed by the MFA with the Center for Responsive Politics.
On January 29, Grassley joined with Sen. Carl Levin (D-Mich.) to sponsor a bill that combined Grassley’s legislation with Levin’s own bill from 2007 that would require hedge funds to enact money laundering controls and suspicious activity reporting policies.
During 2008, MFA representatives met with unnamed members of the House and Senate, and officials with the SEC, U.S. Treasury Department and the U.S. Commodity Futures Trading Commission, according to the center.
Calls to the MFA were not returned at press time.
Of the likely oversight, anti-money laundering regulations have been a lesser issue for the industry, which is more concerned about countering a proposed change in how the carried interest income earned by managers is taxed, said Massie Ritsch, a spokesman for the Center for Responsive Politics.
Under legislation introduced in 2007 by Rep. Sander Levin, a Democrat from Michigan, income generated by private equity fund managers would be taxed at a 35 percent marginal income tax rate rather than by a 15 percent capital gain rate. The Obama administration’s proposed 2010 budget contains language that also would reclassify carried interest income from capital gains to ordinary income.
“More than doubling their taxes is not particularly appealing to [hedge fund managers] so they’ve been trying to fend off that legislation,” said Ritsch. “They were successful in doing that for a while, but I think that’s probably come to an end, and as the government looks for more revenue, one place to look for it would be hedge funds.”
Sander Levin’s bill passed the House of Representatives during the last Congress but the bill was not picked up by the Senate. The bill will be reintroduced “as soon as possible,” and could have a better chance of passing the Senate this time around said Levin spokeswoman Hilarie Chambers.
“Anytime that you start with a proposal that is supported by the President and included in his budget, you are much further ahead,” said Cambers.
Given the economic and political climate, the industry may have to accept that “sometime in this presidential term” there is going to be regulation of the hedge fund industry, according to Jason Pickholz, a lawyer with Duane Morris LLP in New York. “Hedge funds are too large of a sector of the economy to go unregulated.”