Bank rules stalemate spooks private funds

NEW YORK (Reuters) - Private equity and hedge funds say they welcome more oversight of their secretive industry and are pushing the U.S. Congress to pass meaningful financial reforms.

Although more than a year has passed since the economic crisis exposed gaping holes in regulation, lawmakers are still debating how to protect consumers and the financial system.

That has unnerved the trillion dollar alternative investment industry, according to various guests at the Reuters Private Equity and Hedge Funds Summit.

"In this volatile environment where lawmakers are catering to populist passions ... hedge funds are saying 'tell us what the rules are, and we are happy to do them,'" said Ron Resnick co-founder of regulatory consulting firm CounselWorks.

Congress is trying to craft a bill to overhaul financial regulation that would include reining in excessive risk-taking and shedding light on private pools of capital and the $450 trillion over-the-counter derivatives market, as well as ensuring that no firm is too big to fail.

Among the slew of proposals being debated is one that would require advisers to hedge funds, private equity and venture capital funds to register with the U.S. Securities and Exchange Commission.

EMBRACING REGISTRATION

Traditionally criticized by lawmakers for engaging in risky behavior, hedge funds are opening up. The funds and other financial players are also making an effort to be more transparent and highlight their compliance programs in the wake of Bernard Madoff's $65 billion fraud.

"We would not mind seeing regulators be more informed about what we do," said Brian Taylor, the chief executive of Pine River Capital Management, a hedge fund with $1.6 billion in assets. "We are happy to be transparent about what we do." Taylor voluntarily registers with the SEC.

Similarly, the long maligned private equity industry has reluctantly embraced the idea of registration.

"It is not realistic to emerge from the regulatory debate without some regulation of private equity," said Doug Lowenstein, founding president of lobby group the Private Equity Council.

Lowenstein's group represents buyout firms such as Blackstone Group LP (BX.N), Carlyle Group CYL.UL, Bain Capital and Kohlberg Kravis Roberts & Co KKR.AS.

"We believe it's vitally important that we get a regulatory bill, a bipartisan bill, as soon as possible," Lowenstein said.

Another uncertainty is a White House proposal to rein in banks' risky activities. The proposal, known as the Volcker rule because it was inspired by former Federal Reserve Chairman Paul Volcker, would ban banks from proprietary trades or owning hedge fund and private equity businesses and would limit their growth.

Many lawmakers have already questioned why such rules are needed, arguing that proprietary trades, hedge funds and private equity were not responsible for the financial crisis.

Private equity firm Pine Brook Road Partners, which specializes in financial institutions investments, said the Volcker rule might be a way to prevent futures crises.

However the firm's co-founder William Spiegel said Congress should go to the root of the problem. "In my mind there was no regulatory oversight of the shadow banking system and leverage got out of control," Spiegel said.

The shadow banking system generally refers to the widespread securitization of debt by non-banks like mortgage originators, which prior to the credit crisis enabled an explosion in lending not done by traditional banks.

(Editing by Gerald E. McCormick)