Lawmakers voice division over consumer-protection proposal

By Marcy Gordon
Associated Press / October 7, 2009

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WASHINGTON - Regulators and investor advocates voiced support yesterday for a proposal that addresses consumer protection and would bring investment funds under government supervision as part of Congress’ efforts to revamp the US financial rule book.

Republicans objected to key elements of the plan and said the Democrats crammed too many complex topics into one sparsely attended hearing of the House Financial Services Committee.

The draft legislation by Representative Paul Kanjorski, Democrat from Pennsylvania, also would give the federal government some oversight of the insurance industry now regulated by the states. It calls for creation of a federal insurance office within the Treasury Department to monitor the industry and watch for potential risks.

Insurance industry players, represented at yesterday’s hearing, were split over the proposal.

Kanjorski’s broader plan closely tracks the Obama administration’s proposals for investor protection and bringing hedge funds and other private pools of capital under government supervision.

House Majority Leader Steny Hoyer, Democrat of Maryland, said the entire package of changes designed to prevent another financial meltdown could be put to a House vote next month. But Kanjorski told reporters after the hearing that timing may be “very optimistic.’’

“This has been a heavy lift,’’ he said. “We’re moving swiftly.’’

The proposed legislation would give the Securities and Exchange Commission the authority to ban clauses in contracts that investors sign with their brokers that mandate arbitration to resolve disputes and exclude court action. That “could substantially increase dispute-resolution costs for investors and compliance costs for firms,’’ said Representative Spencer Bachus of Alabama, the panel’s senior Republican.

In addition, Bachus said, the proposal does not go far enough to restructure the SEC to prevent another breakdown like the agency’s failure to uncover Bernard Madoff’s massive fraud scheme over nearly two decades.

But Denise Voigt Crawford, the president of the North American Securities Administrators Association - which represents state securities regulators - said the current arbitration process involving panels with industry representatives should t not be forced on investors. “I think that investors want choices,’’ she said. “They have no options.’’

Kanjorski’s proposal also would put stockbrokers and investment advisers providing services to retail investors under the same standards of conduct.

His legislation would put private pools of capital - hedge funds and private equity funds - under government supervision by requiring they register with the SEC. That would open their books to federal inspection and be subject to disclosure requirements to investors and creditors.

During the financial crisis, private funds had to come up with money when their capital was put at risk, contributing to the strains on the financial markets, regulators have said.

At the hearing, officials of groups representing hedge funds and private equity firms expressed support in principle for requiring registration with the SEC. A venture capital industry official said it would be unfairly burdensome for firms.

The administration’s plan and a bill proposed by Senator Jack Reed, Democrat from Rhode Island, chairman of a key Senate Banking subcommittee, would require venture capital firms to register along with hedge funds and private equity. Venture capital firms invest in startup companies run by entrepreneurs, in exchange for an ownership stake.