05/10/2010 04:22 pm ET Updated May 25, 2011

Jack Reed Introduces Amendment To Close Dodd Bill 'Loophole'

Sen. Jack Reed (D-R.I.) announced Monday his plans to introduce an amendment to close a "loophole" in Wall Street reform legislation that would allow private equity and hedge funds to avoid registering with the Securities and Exchange Commission.

"At the heart of it is the need for increased transparency, particularly when it comes to the large pools of money," said Reed on a conference call with reporters. "We also believe that this type of registration is not cumbersome to the industry but will afford the regulators a better sort of sense of the overall market. It will help in a way to diminish potential systemic risk. It will also be something that will allow investors to have more confidence in the market."

The legislation drafted by Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, requires hedge funds managing more than $100 million to register with the SEC, but contained a loophole or "carve-out" for private equity funds and venture capital funds.

Representatives of the AFL-CIO and SEIU said they support Reed's amendment.

"A good example of the dangers of unregulated private equity would be to look at what happened when [Thomas H. Lee Partners] bought the Simmons mattress company," said Stephen Lerner of the SEIU. "This company had been in business for 130 years and because of how private equity leveraged up the deal, loaded up the debt, took millions out in fees, then ended up taking hundreds of millions in dividend recaps, they ended up bankrupting the company.

"The PE firm got to keep the profits, workers lost their jobs, communities lost tax revenue and it's part of this bigger problem we have of, how do we create a bigger sustainable economy not one based on gambling and secret deals," said Lerner.

Reed said he does not expect private equity or hedge fund associations to lobby against his amendment.

Reed's amendment would also require hedge funds managing less than $100 million to sign up with either the SEC or a state regulator. It would not, however, require hedge funds to pay into a fund for the liquidation of systemically risky firms -- the version of Wall Street reform that passed the House of Representatives did have such a requirement.

Hedge funds favor Democrats in campaign donations -- and the richest hedge fund managers favor Democrats overwhelmingly.

Here's a summary of the amendment from Reed's office:

• Close the loophole on private equity and venture capital exemptions. Right now, only hedge fund advisers would be required to register under the bill, and there are exemptions for other private pool advisers, including private equity and venture capital advisers. Reed's amendment would require all of these advisers to private pools to register with the SEC.

• Ensure that the new adviser registration threshold does not weaken existing oversight. Reed's amendment requires advisers that fall below the new $100 million adviser registration threshold to either be registered and examined by a state regulator, or registered with the SEC.

• Free up SEC resources to focus on larger companies without sacrificing oversight of those that will fall below the new threshold.