SEC gains power to sue hedge funds for fraud

Date: Thursday, July 12, 2007
Author: Jesse Westbrook, Bloomberg News

WASHINGTON -- The U.S. Securities and Exchange Commission has adopted new rules ensuring it can sue hedge funds for misleading investors, following a court ruling that put in doubt the regulator's authority over the $1.6-trillion (U.S.) industry.

The SEC barred hedge funds from lying about investing strategies, performance, a manager's experience and the risks of putting money in a fund. SEC commissioners unanimously approved the rule in Washington yesterday.

"This rule will give the commission an important tool to help us police this market to deter misconduct," SEC chairman Christopher Cox said. It allows the agency to hold hedge funds responsible "who have breached their obligations to investors," he said.

The SEC acted after a federal appeals court rejected regulations last year that required hedge funds to report their size to the agency and submit to routine inspections. In its decision, the court said the client of a hedge-fund adviser was the fund itself, raising questions about whether the SEC could target managers for defrauding individual investors.

The measure gives the SEC the authority to sue hedge fund managers for making false or misleading statements to investors, even if a fund is not registered with the agency as an investment adviser.

The SEC is also considering making it harder to put money in hedge funds by requiring that potential investors own a minimum of $2.5-million in investments. Anyone with $1-million in assets, including the value of their home, can currently invest.