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M. Continuo

States urge Congress to regulate hedge funds


    By Rachelle Younglai

    WASHINGTON (Reuters) - State regulators urged Congress on Thursday to restore their authority to protect investors from fraud in the banking sector and to beef up oversight of hedge funds.

    Hedge fund advisers should be subject to the same kind of scrutiny as investment advisers, the North American Securities Administrators Association told reporters.

    The NASAA said Congress should give the Securities and Exchange Commission explicit authority to regulate the $1.4 trillion industry, which has the potential to destabilize markets.

    The group, which represents 67 state, provincial and territorial securities administrators in the United States, Canada and Mexico, wants hedge funds to disclose their portfolios, including positions, leverage amounts and identities of counterparties.

    Key policymakers, including Treasury Secretary Timothy Geithner and SEC Chairman Mary Schapiro, have said they support a registration requirement for hedge funds.

    Geithner and Schapiro have also called for oversight of over-the-counter derivatives, which have been blamed for spreading the risks of bad mortgages.

    NASAA President Fred Joseph said, at a minimum, derivatives like credit default swaps needed to be traded on exchanges. He said credit default swaps, which have been used to speculate on borrowers' credit quality, needed to be regulated at the federal level and overseen by the SEC.

    FIDUCIARY DUTIES NEEDED FOR BROKER-DEALERS

    NASAA urged Congress to apply fiduciary duties to all financial professionals who give investment advice. Currently broker-dealers do not have fiduciary duties, whereas investment advisers must meet those standards.

    "This will enhance investor protection (and) eliminate confusion," said Joseph, who is also Colorado's securities commissioner.

    Regulation of investment advisers and broker-dealers is under scrutiny in the wake of the Bernard Madoff scandal. For decades, Madoff ran a broker-dealer that was registered with the SEC. Now he is accused of running a $50 billion scheme where he paid off earlier investors with money from those who invested later.

    NASAA wants Congress to restore states' authority to license independent agents who sell certain certificates of deposit, including those that exceed Federal Deposit Insurance Corp limits.

    The group also wants Congress to preserve the authority of states to protect investors from fraud in the banking and securities sectors.

    (Reporting by Rachelle Younglai; Editing by Lisa Von Ahn)