Federal Reserve Chairman Ben Bernanke told the US House of Representatives Financial Services Committee Thursday that market discipline, not stricter regulations, will ensure hedge funds to not take on too much risk an threaten the US financial system, Reuters reports.
“Broadly speaking, the best way to make sure hedge funds are not taking excessive risks or excessive leverage is through market discipline,” Bernanke told the committee
Bernanke’s comments follow a federal appeals court decision last month to overturn a SEC rule requiring most US hedge funds to register with the agency.
The rule was the first of the SEC’s attempts to crack down on the hedge fund industry which has become an influential force on Wall Street and has seen its assets double over the past five years.
Though the court ruled that the SEC had overstepped its current legal bounds, two Congressional committees have openly discussed introducing legislation that grant the agency jurisdiction over the funds, with one senator calling them the “Wild West of our financial markets” (see: “Congressman Warns That He May Introduce Regulatory Hedge Fund Legislation” ).
While Bernanke says the SEC has a vital role to play in ensuring that hedge funds provide accurate information to their investors, he thinks hedge funds should answer to oversight outside of introducing tighter regulations.
Bernanke says government supervision of large banks and investment banks who deal with hedge funds combined with hedge funds having to answer to their traditional investors – large, sophisticated ones – are enough to provide market discipline to the funds.