Hedge Fund Study Act

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.

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.

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 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.

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.

I yield to the gentleman from Massachusetts.

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.

Madam Speaker, I yield back the balance of my time.

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.

Madam Speaker, will the gentleman yield?

Mr. 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.

Mr. 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.

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.