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'The Watchdog': Self-Regulation Of Hedge Funds May Not Be Effective, Says GAO


First Posted: 07/11/11 05:04 PM ET Updated: 09/10/11 06:12 AM ET

Allowing the hedge fund and private equity fund industry to regulate itself might not be very effective, according to a new Government Accountability Office audit released Monday.

Since the Securities and Exchange Commission lacks adequate resources to police the sector, the GAO was tasked under the Dodd-Frank Act with determining the feasibility of forming a self-regulatory organization to provide primary oversight of private fund advisers.

Though such an SRO could supplement oversight, it presents challenges and trade-offs, according to the report. By "fragmenting regulation between advisers that advise private funds and those that do not, a private fund adviser SRO could lead to regulatory gaps, duplication and inconsistencies," concluded the GAO.

Some of the disadvantages of a private fund adviser SRO include its potential to (1) increase the overall cost of regulation by adding another layer of oversight; (2) create conflicts of interest, in part because of the possibility for self-regulation to favor the interests of the industry over the interests of investors and the public; and (3) limit transparency and accountability, as the SRO would be accountable primarily to its members rather than to Congress or the public.

Treasury Deputy Secretary Neal Wolin offered a vigorous defense of Dodd-Frank in Politico, warning that to carry out the reforms effectively, "we need to make sure regulators have the resources they need to do their jobs."

Warren Heads Back Into The Lion's Den

Elizabeth Warren, the presidential adviser who temporarily heads the Consumer Financial Protection Bureau, heads back to the lion's den on Thursday -- to testify before the House Oversight Committee. At the close of her last appearance before the committee, Rep. Patrick McHenry (R-N.C.) accused her of lying during a YouTube-worthy exchange about how much time she would be testifying. As iWatchNews.com notes, the hearing to be led by Chairman Darrell Issa (R-Calif.) is ominously titled, ""Consumer Financial Protection Efforts: Answers Needed."

Elsewhere in the world of financial regulatory reform, Monday is the deadline for public comments on a proposal to set margin and capital requirements for swap dealers and traders, and on an SEC proposal to raise the threshold at which investment advisers can charge a performance fee.

'Fracking' Wastewater Ruins National Forest

Wastewater from natural gas hydrofracturing -- known as "fracking" -- decimated a national forest in West Virginia, according to a new study by a U.S. Forest Service researcher. The fracking fluids killed more than half of the trees and caused radical changes in soil chemistry in a quarter-acre section of the Fernow Experimental Forest in the Monongahela National Forest, reported Public Employees for Environmental Responsibility.

The study found the following effects of the application of 75,000 gallons of fracking fluids over a two-day period in June 2008:

• Within two days all ground plants were dead;
• Within 10 days, leaves of trees began to turn brown. Within two years more than half of the approximately 150 trees were dead; and
• "Surface soil concentrations of sodium and chloride increased 50-fold as a result of the land application of hydrofracturing fluids..." These elevated levels eventually declined as chemical leached off-site. The exact chemical composition of these fluids is not known because the chemical formula is classified as confidential proprietary information.

SEC Slow to Police Problems at U.S.-Listed Chinese Companies

After the SEC promised to overhaul and beef up its enforcement in the wake of the Bernie Madoff scandal, the agency been caught flat-footed with mounting problems at U.S.-listed Chinese companies. Since March, more than two dozen companies have announced auditor resignations or accounting problems, reported Reuters.

Yet the SEC has been slow to respond, say critics, taking too long to tighten oversight of U.S. shell companies acquired by Chinese firms through "reverse mergers," which allow the companies to avoid initial public offerings. Part of the problem is that such mergers fall under state law.

This week, SEC officials are in China trying to get Chinese auditors access to inspect such companies.

How Big Pharma Cornered Market On Asthma Inhalers

Today's must-read: how pharmaceutical companies took advantage of the 1987 ban on the use of ozone-depleting chlorofluorocarbons to corner the market on CFC-free asthma inhalers -- squeezing out competitors and raising prices.

Mother Jones' Nick Bauman reports:

Many of the patents for the new inhalers won't expire for another six years, so there likely won't be any generics until then, unless the patents are challenged in court. The switch to the new inhalers will cost American consumers, insurance companies, and the government some $8 billion by 2017, according to FDA estimates. That's money in the drug companies' pockets. In 2007, a top market-research firm alerted investors that the US inhaler market "will soon change from low-value to significant." Sure enough, at nearly $1 billion a year, sales of the market-leading inhaler, ProAir, now rival Viagra's.

The FDIC vs. Forbes

After Forbes published a tough piece on the Federal Deposition Insurance Corporation's outgoing director, Sheila Bair, the agency's counsel penned a sharp retort, calling the editorial "more personal attack than commentary." That of course prompted editorial co-author Vern McKinley to write his own reply to the reply.

It's not exactly as scintillating as the volleys between Nadal and Djokovic at Wimbledon, but here's the back and forth.

Meanwhile, Bair will have plenty of space to vent in her upcoming book for the Free Press. In a proposal obtained by the New York Times, she wrote: "I will share perspectives on the problems of regulatory capture and the continuing reluctance of bank regulators to fully acknowledge current problems in the financial sector, which are substantial."

The Goat Watching Over The Lettuce Patch

A 14-year-old program in Puerto Rico that allows companies to regulate themselves on workplace health and safety issues may not be adequately protecting the workers, reported the Centro de Periodismo Investigativo.

Since 1997, the program has resulted in only two findings of a serious nature -- one involved a non-work-related death in a parking lot of a company and a second incident, which was resolved outside of court and is confidential.

CPI reports:

Think it sounds too good to be true? Well, maybe that is precisely the problem with the Voluntary Protection Programs (VPP) - that it contradicts its own definition because it leaves in the hands of employers the establishment of health and safety parameters, with the supposed participation of the workers, and far from the eye of the state's regulatory agencies. All of this in exchange for less inspections and exemption from fines in the majority of cases.
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