Baker Tackles the Hill From the Outside

Posted November 14, 2008 at 5:36pm

As the House Oversight and Government Reform Committee grilled five hedge fund managers last week, their trade group’s leader, former Rep. Richard Baker (R-La.), was not only missing from the panel, he wasn’t even in the hearing room.

The absence might be considered emblematic of the hedge fund industry’s historically limited presence in Washington, D.C. But Baker, who left Capitol Hill earlier this year to run the Managed Funds Association, had his reasons for not being physically present: He is still under the one-year Member lobbying ban.

“I’m very careful about not being around the Hill very much because of my prohibitions on lobbying,” said Baker, who was watching the coverage on television and had staffers in the committee room giving him updates.

Baker intended no slight by his absence. Since he left office in February to head the group, he has made it his mission to convince the industry that it needs to increase its presence in Washington. Indeed, as Congress looks to regulate hedge funds, Baker’s taken the group on a counteroffensive, bulking up membership and adding staff and outside lobbyists.

“I have been brought into this position to be more proactive with regulatory matters of public policy,” Baker said. “To think the current hedge fund relationship with Congress is not going to change is incorrect.”

“If we are to preserve our business structure to be able to freely invest capital as we see fit, there must be some measure of disclosure to regulators,” he added. “However, our proprietary information must be protected.”

The industry’s move toward supporting some regulation is an about-face that came with Baker. For years, hedge fund managers have insisted that they could not be effective if they were regulated by Washington, or if they were forced to publicly disclose their stock positions.

Unlike mutual funds and other investment companies, the vast majority of hedge funds provide limited disclosure.

Since the financial crisis, the group’s limited disclosure has caused critics to raise questions about the practice of short selling, or betting against a company. The Bush administration went so far as to ban short selling during the economic meltdown in an attempt to stave off further market volatility.

“Hedge funds were not the proximate cause of the current market upheaval,” Baker said. “We were part of the financial world voluntarily bringing liquidity to the market.”

Still, hedge fund managers know they will be a target next Congress as lawmakers look to strengthen regulations in the financial services industry.

Additionally, the association is likely to continue having to fend off lawmakers looking to regulate offshore tax havens and carried interest.

Baker’s move to the association was hardly a given. Almost 10 years ago, he tried to turn recommendations for more hedge fund transparency into law, a move that the industry almost unilaterally opposed.

Yet as chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises for 12 years, the industry eventually came to see Baker as an ally.

Under his leadership, the group is, for the first time, proactively implementing a set of voluntary best practices.

It’s a move that could win them points with lawmakers, who have accused the industry of everything from working in the shadows to being one of the primary reasons for the economic crisis.

Baker has big plans for the association. Unlike much of the downsizing financial services sector, including its fellow trade group, the Securities Industry and Financial Markets Association, Baker is planning on growing.

In part, the group’s mission in Washington is to re-brand itself, moving away from the image of ultra-rich people making lots of money to telling the story of how hedge funds exist in every state and increasingly include investments from pension funds and college endowments.

Beyond plans to beef up the three-person member services office in New York, Baker is scouting new office space in Washington, with the expectation of finding a new location by next spring.

In three years, he would like the association to be up to 75 employees, essentially tripling the current staff. He is also looking across the Atlantic with plans to open at least one office in London.

Since coming to the trade group in February, Baker has spent most of his time on the road trying to recruit members.

Of the 6,000 hedge funds in the country, only around 700 are members of the MFA. It also has another 300 members who work in related fields.

Baker sees that situation as ripe for growth, which he will need if his vision for the trade group is to come to fruition.

“We are not growing as fast as we would like to grow, but we are on a growth platform,” Baker said.

Currently, membership dues are tiered, with $5,000 as the minimum level and more active members paying around $200,000. Baker said the fee structure is under review.

The MFA was formed in 1991, but it only first registered to lobby last year. DC Navigators and Cypress Advocacy are two of the outside consultants the MFA hired this fall.

The association also keeps Elmendorf Strategies, Patton Boggs, the Nickles Group and Williams & Jensen on retainer.

The MFA spent $1.9 million on lobbying last year and has doled out more than $1.9 million in the first nine months of 2008, according to Senate lobbying reports.

The association has also increased its in-house government relations team, bringing on Roger Hollingsworth, former deputy staff director to Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.).

Democrats faulted the association when it picked Baker, a Republican, as its president and chief executive officer, given the Democratic majorities in Congress.

And while Baker acknowledges the political environment, he said he considers himself a serious policy person.

“I worked in the minority when I came in, and I was in the minority when I left, with 12 years a chairman in the middle,” he said.

“I think the work on Fannie [Mae] and Freddie [Mac] that I did is one of the hallmarks of my time in Congress. Nobody did that to win political favors,” he said.

Financial services lobbyists say Baker could actually be in a good position to cobble together a bipartisan group of sympathetic Democrats and a unified Republican minority to stave of harmful legislation.

“He’s got an incredibly difficult job,”one financial services lobbyist said. “Democrats have shown they are willing to tax these guys in a painful way.”

Phil Anderson of DC Navigators said he thinks Baker is the right guy at the right time for the trade group.

“Richard has a great degree of experience and acumen on these issues,” Anderson said. “Even without the current challenges, he’s logical for them to bring on.”