Proposed US Treasury rules would increase fund oversight

The US government's moves to gain greater regulatory control over large financial instutions would obligate some private equity firms to register with the SEC and supply data including the names of LPs and leverage levels on deals.

Private equity firms would be subjected to heightened government oversight under regulations proposed today by US Treasury Secretary Timothy Geithner as part of the Obama administration's moves to gain greater regulatory power from Congress over large financial institutions.

Geithner told the House Financial Services Committee this morning the regulations would require leveraged private investment funds with assets under management over a certain threshold to register with the Securities and Exchange Commission, including reporting any information “necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability”.

Timothy Geithner

Such information would include names of investors, trading partners and details as to how much firms borrow to leverage investments. This data would be shared by the SEC with a new “systemic risk regulator” which would determine whether a firm’s failure would pose a risk to the economy, as was the case when the government decided to intervene in saving AIG from bankruptcy last September.

Although Geithner hasn’t yet provided details as to the new proposed regulatory body, it would have the power to impose stricter capital requirements on firms deemed “at risk”.

“There are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability,” he said. “However, in the wake of the Madoff episode it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage.”

There are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability.

Timothy Geithner

Geithner did not reveal what the  threshold for assets under management would be, although he said the SEC has been considering this type of requirement for some time. He added that the SEC’s role would not be expanded, and stressed that he is not suggesting that private investment funds be regulated like banks, nor will he seek to impose capital requirements on private investment funds.

Following his testimony, Washington, DC-based lobbying group the Private Equity Council released a statement saying that it would seek to ensure that any new legislation does not impose undue burdens on the industry. “The proposal unveiled today by Treasury Secretary Geithner for the first time would impose potentially significant regulation on the private equity industry,” the group added. “We believe that private equity investments do not create systemic risk. Private equity firms invest in companies, not exotic securities and their investors are long-term investors, eliminating the “run on the bank” type of risk that helped create the current financial crisis.”

The proposals come a few days after Geithner unveiled the Public-Private Investment Program (PPIP) which will use up to $100 billion from the Troubled Asset Relief Program and capital from private investors to buy up to $1 trillion in toxic real estate loans on bank balance sheets and securities backed by loan portfolios. Private investors who wish to buy pools of loans will be able to do so with as much as 6-to-1 government leverage and 50 percent matching equity.

The partnership programme was seen as a signal that the Obama administration is planning to rely heavily on private sector capital to help unfreeze the credit markets, with share prices for firms such as Blackstone and Fortress Investment Group rising following the news.

Geithner's testimony on Capitol Hill was ongoing at press time.