NEW YORK (CNNfn) - The hedge fund industry would be forced to make quarterly disclosures of previously private financial information under legislation proposed by the Clinton administration Thursday.
The recommendations, developed by top financial regulators, would require hedge funds to publish "meaningful information" about their activities on a quarterly basis.
The proposal also would extend either the Securities and Exchange Commission or the Commodity Futures Trading Commission more authority to collect and verify the now unregulated practices of broker-dealer affiliates that enter into hedge fund contracts.
It also recommends the SEC institute new regulations requiring all public companies to disclose any material exposure to hedge funds or institutions relying heavily on borrowed money.
The legislation -- developed by top Federal Reserve, Treasury, SEC and CTC officials -- marks the federal government's first attempt to clamp down on the very private industry.
The proposal was outlined at a Capitol Hill briefing by Treasury officials Thursday morning. It grew out of the much-publicized collapse of the Long-Term Capital Management LP hedge fund last fall, which reverberated through several of the country's top banks and brokerage houses, which had provided the fund with $125 million in loans to be used as leverage.
The rule changes, while not as strict as some had hoped, drew immediate criticism from the hedge fund industry, which contends it is being punished for the lack of due diligence conducted by lenders involved in the Long Term Capital debacle last year.
"The feeling in the industry is any regulation at the hedge fund level will be very difficult," said David Friedland, president of Magnum U.S. Investments in Miami. "The regulations, if any, have to come at the prime brokerage level.
"We're sort of missing the big picture here. You don't lend money if you don't know what you're lending to."
But administration officials believe the proposed regulations accomplish that goal as well by providing greater oversight over unregulated broker-dealer relationships and mandating full disclosure of hedge fund exposure by public companies.
However, officials also contend the hedge fund industry should bear some responsibility, claiming in many instances, fund managers have not been willing to fully disclose information, to either their investors or lenders, on exactly where their money is going.
Hedge funds, by their nature, are extremely private investments that generally don't operate under the purview of federal regulatory agencies the way mutual funds or public companies do.
The funds often require very large minimum investments and, in some cases, are located outside the country's borders at exotic locations such as the Bahamas or Cayman Islands, making their regulation difficult.
More red tape?
Still, some question whether the regulations proposed Thursday simply add an extra layer of bureaucratic red tape to help lenders and investors to perform the due diligence they should be doing anyway.
"Clearly, this is a knee-jerk reaction to Long-Term Capital," said Jeffrey L. Benjamin, a consultant with Cerulli Associates Inc., a financial services consulting firm in Boston that recently published an extensive report on the hedge fund industry.
"There were a lot of things that went wrong with Long-Term Capital," Benjamin said. "One of them was blind lending. Even though there's no requirement in place [now], that doesn't stop a bank from saying, 'Tell me more.'"
There is also a concern too many regulations will force more funds to relocate outside the country, making their regulation even more difficult. Administration officials are hoping to mitigate such a reaction by asking other countries to ensure offshore funds meet global regulatory standards.