Key Takeaways
- • Hedge funds and private equity firms have largely avoided the regulatory scrutiny directed at major banks during post-financial crisis reform efforts, despite consumer advocacy groups arguing they warrant equivalent oversight.
- • Industry trade groups—the Private Equity Council and Managed Funds Association—spent $7.3 million on lobbying in 2009 and nearly $2 million in the first quarter of 2010, deploying a roster in which more than half of 83 registered lobbyists have prior government experience.
- • The pending Senate financial reform bill requires hedge funds to register with the SEC and disclose information, but does not grant regulators enforcement power to mandate changes or publicly disclose identified problems, according to Public Citizen president Robert Weissman.
- • Key lobbying assets include three former members of Congress (Richard Baker, Vic Fazio, and Martin Frost) and approximately six senior staffers with direct ties to the Senate Banking Committee, including Chairman Chris Dodd and Senator Chuck Schumer.
- • Industry representatives counter that registration requirements will enable regulators to assess systemic risk and close risky ventures, while critics characterize the regulatory framework as delivering the industry "a pretty sweet deal."
Summary
As Washington intensifies its crackdown on Wall Street in the aftermath of the financial crisis, hedge funds and private equity firms have notably escaped the intense regulatory pressure applied to major banks. While Goldman Sachs and other brand-name financial institutions face sustained congressional scrutiny, the alternative investment industry has maintained a considerably lighter regulatory footprint—a disparity that consumer advocacy groups attribute directly to sophisticated lobbying infrastructure.
According to Robert Weissman, president of Public Citizen, the industry has "gotten a free ride," and the explanation lies in the exceptional connectivity of its lobbying apparatus. More than half of the 83 lobbyists registered in 2009 to represent the Private Equity Council and Managed Funds Association have held prior government positions, ranging from Capitol Hill staff roles to Treasury Department assignments. This roster includes three former members of Congress—Republican Richard Baker and Democrats Vic Fazio and Martin Frost—as well as approximately six senior staffers with documented ties to the Senate Banking Committee, including its chairman Chris Dodd and Senator Chuck Schumer. Collectively, these trade groups invested heavily in federal influence, deploying $7.3 million in lobbying expenditures during 2009 and an additional $1.9 million in the first quarter of 2010.
The financial reform bill currently pending in the Senate reflects the results of this lobbying effort. While hedge funds will be required to register with the Securities and Exchange Commission and file disclosure documents, the legislation stops short of granting regulators substantive enforcement authority. Critically, the SEC lacks the statutory power to mandate operational changes if examinations reveal problems, and cannot publicly disclose identified deficiencies. Weissman characterized the regulatory framework as permitting the industry to retain "a pretty sweet deal" relative to the stringency applied elsewhere in the financial sector.
Industry representatives dispute this characterization, arguing that registration and disclosure requirements will furnish regulators with necessary visibility into systemic risk factors and enable enforcement action against problematic market participants. This debate underscores a fundamental tension in the reform debate: whether registration absent enforcement mechanisms constitutes meaningful regulation or merely creates a compliance burden without corresponding safeguards.
According to Robert Weissman, president of Public Citizen, the industry has "gotten a free ride," and the explanation lies in the exceptional connectivity of its lobbying apparatus. More than half of the 83 lobbyists registered in 2009 to represent the Private Equity Council and Managed Funds Association have held prior government positions, ranging from Capitol Hill staff roles to Treasury Department assignments. This roster includes three former members of Congress—Republican Richard Baker and Democrats Vic Fazio and Martin Frost—as well as approximately six senior staffers with documented ties to the Senate Banking Committee, including its chairman Chris Dodd and Senator Chuck Schumer. Collectively, these trade groups invested heavily in federal influence, deploying $7.3 million in lobbying expenditures during 2009 and an additional $1.9 million in the first quarter of 2010.
The financial reform bill currently pending in the Senate reflects the results of this lobbying effort. While hedge funds will be required to register with the Securities and Exchange Commission and file disclosure documents, the legislation stops short of granting regulators substantive enforcement authority. Critically, the SEC lacks the statutory power to mandate operational changes if examinations reveal problems, and cannot publicly disclose identified deficiencies. Weissman characterized the regulatory framework as permitting the industry to retain "a pretty sweet deal" relative to the stringency applied elsewhere in the financial sector.
Industry representatives dispute this characterization, arguing that registration and disclosure requirements will furnish regulators with necessary visibility into systemic risk factors and enable enforcement action against problematic market participants. This debate underscores a fundamental tension in the reform debate: whether registration absent enforcement mechanisms constitutes meaningful regulation or merely creates a compliance burden without corresponding safeguards.
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