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Copyright © 2007, Gerald Bamberger


Having found that the largely unregulated hedge fund industry poses a danger to the American economy, Congress enacted the Hedge Fund Oversight Act of 2007 (the “Act”). The Act provides for the creation of the Hedge Fund Oversight Board (the “Board”).  The Act further provides that the Board will investigate, and, where appropriate, promulgate regulations to bring hedge funds under the oversight of appropriate governmental bodies. The Board, which will report to the Chairman of the SEC (Securities and Exchange Commission), is to conclude its work within a five-year timeframe.

Because of the high risk that members of the executive branch may be aggressively lobbied by hedge funds, the Act provides that two members of the five-member Board be appointed by the President, with one member appointed by the Secretary of the Treasury, and the remaining two members appointed by a Special Division of the United States Court of Appeals for the Second Circuit.

The Board “hits the ground running” after its formation.  It promulgates a series of regulations designed to require hedge funds to report to the Treasury, on a daily basis, their positions in “Credit Default Swaps.”  Paul Revere, who manages a large hedge fund and is a major trader of Credit Default Swaps, files an approrpiate action in the U.S. District Court for the Southern District of New York, seeking to enjoin enforcement of these regulations.

Will Revere succeed?

(a)     Yes, because the Act violates the Appointments Clause of Article II, Section 2.
(b)     Yes, because the formation of the Board exceeds Congress’s power under the Commerce Clause.
(c)     No, because this method of appointment, under the circumstances, is necessary and proper to the exercise of Congress's power to regulate interstate commerce, even though such an appointment scheme is not provided for in Article II, Section 2.
(d)     No, because the Secretary of the Treasury is a “Department Head.”

To see Professor Bamberger explain the answer in detail click here





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