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Latest Hedge Fund Saga is Underway (June 25, 2007)

Location: New York
Author: Lenny Broytman
Date: Monday, June 25, 2007

They really just can't make up their minds. With yet another dispute on the table, the latest battle in the hedge fund regulation saga is underway.

As of last week, new legislation was introduced and the potential bill has a lot of people nervous. The bill's aim is to raise taxes on publicly traded private equity firms, a move that's been prompting many within the hedge fund industry to play the lobbyist card.

One man at the forefront of the entire thing is New York Senator Charles Schumer, whose experience with private equities and hedge funds has made him just the man for the job.

According to the New York Times, the New York Democrat raised $54,500 during the 2003 and 2004 election cycle, utilizing several leading private equity firms. Less than two years after that, Schumer helped the Democratic Senatorial Campaign Committee raise even more money, a figure the Center for Responsive Politics reports to be $385,450.

Speaking privately, many hedge fund insiders are speculating that Schumer's goal is to find ways to combat a significant tax hike. Instead, he hopes to impose things such as carried interest at a higher rate.

Estimates as to just how much revenue this might generate as well as the deferral offshore of hedge fund compensation are not yet available.

"The senator is mindful of the importance of this industry to New York and is making sure that all sides get an opportunity to be heard by the policy makers in Washington while he studies the issues carefully," said Andrew Koneschusky, a spokesman for Schumer.

The Times reports that Schumer is not alone in his fight and is joined by some other Senate members from around the nation. Connecticut Senator Christopher Dodd and Alabama Senator Richard C. Shelby have joined forces in penning a letter to the Securities and Exchange Commission (SEC) about their opposition to the proposed measure.

Schumer has also ventured to the southern tip of his state to join forces with New York City Mayor Michael Bloomberg. Together, the pair have managed to co-sponsor a report on some of the current obstacles for US capital markets. One of the report's findings centered on the fact that interest in US stock among many foreign markets has been declining.

Furthermore, the past year saw a US economy that included domestic companies paying some $17 billion in lawsuit settlements brought in the name of shareholders. 2006 also saw only 7.2 percent of all initial public offerings worldwide, down from 50 percent just seven years prior.

Adding even more fuel to the fire is the emerging possibility of slackening enforcement and investor protection by the SEC.

Chairman of the House Financial Services Committee Barney Frank is set to host a hearing as to whether or not the GOP-led SEC is actually loosening its grip on shareholder protection.

One of Frank's primary "concerns" is that the SEC might soon allow shareholders to use arbitration and not a class-action lawsuit to handle investor complaints. Frank has reportedly written a letter to SEC Chairman Chris Cox, citing his many reasons for his opposition to the possible legal changes.

According to the Wall Street Journal, the SEC might not even need to "allow" anything. As last week's article on the matter states, a company charter is simply a contract among its owners. After a certain company goes public, investors are free to choose whether to buy or not to buy, since companies spell out the shareholder rights in the charters themselves. And the changes to these charters can only be implemented if a majority of the shareholders agree to it.

There are those, such as Harvard litigation critic Hal Scott who question all of this, doubting whether or not companies should be allowed to adopt an arbitration requirement when they finally do go public.

All in all, the fight for an increase on publicly traded private equity firms will not be an easy one. The industry has grown far too much over the past decade to ignore and with the booming BSE index in India, the quiet and forceful presence of Africa and the exploding economies of the far east, the US cannot afford to slow down. Increasing taxation will only further hamper a domestic hedge fund industry that isn't allowed to grow in the way it could or should be growing.

And the push for a market in which the shareholder is allowed to be more vocal only aides the nation's strive for a healthier and freer hedge fund industry.

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