WASHINGTON – Rep. Nydia Velazquez, D- N.Y., introduced a bill Wednesday that would substantially increase hedge fund reporting requirements in response to ongoing concerns about the role of hedge funds in Puerto Rico's financial crisis.
The Hedge Fund Sunshine Act, H.R. 3921, would institute a new requirement that funds holding a 1% or more ownership stake in an entity's debt or equity securities file quarterly reports with the Securities and Exchange Commission.
The measure was referred to the House Committee on Financial Services, where Velázquez is a senior member.
"It has become increasingly clear that hedge funds, which have purchased a sizeable part of Puerto Rico's debt, are exacerbating the crisis and profiting from the island's misery," Velázquez said in a release. "This bill will allow regulators and the public to see exactly what role these funds are playing in Puerto Rico's financial crisis and in our broader economy."
She added that the bill, which would also apply to derivatives like options and swaps, would mark the first time that the funds would publicly report on their larger debt holdings. A number of hedge funds hold a significant amount of Puerto Rico debt.
Another provision of the bill would require funds to report to the SEC when they acquire ownership of 1% of a class of equity securities instead of the current rule that requires disclosure if funds take ownership of 5%.
It is not known exactly how much Puerto Rico debt hedge funds control, but Velázquez quoted various media reports as saying the funds now hold up to half the debt they bought when prices fell along with the commonwealth's fiscal stability. That "outsized role" that the funds are playing is particularly concerning, Velazquez said, because many of them have been pushing for greater austerity measures instead of debt restructuring.
A group of six funds has actively lobbied against a proposed bill in the House that would extend Chapter 9 bankruptcy powers to the commonwealth's municipalities and public authorities -- powers they currently do not have under federal bankruptcy law.
"Rather than working to help resolve Puerto Rico's financial crisis in a fair, orderly fashion, these funds are lobbying to cut basic services that 3.5 million American citizens in Puerto Rico rely upon," Velázquez said.
Matt Fabian, a partner at Municipal Market Analytics, said Velázquez's bill would give muni participants better insight into what hedge funds are doing and a clearer view of the breakdown of ownership in Puerto Rico debt. He likened the bill to attempting to "name the vultures" and scare hedge funds out of their Puerto Rico exposure, but said the measure would have trouble getting passed.
"Even if it were approvable, it's hard to see those things actually happening," Fabian said. "For the most part, major hedge fund owners of Puerto Rico debt have been identified."
The bill follows another proposal Velázquez introduced in late September that would extend the Investment Company Act of 1940 to Puerto Rico. The absence of the act caused Puerto Ricans to suffer losses when they invested in mutual funds heavily stocked with the financially struggling commonwealth's bonds, Velázquez said when she introduced the bill.
