Former SEC chief urges tough hedge-fund regulation

Date: Wednesday, May 7, 2003

"Former Securities and Exchange Commission Chairman Arthur Levitt Jr. is calling for tough regulation of hedge funds, including registration and periodic audits of the high-risk investment vehicles," writes Deborah Solomon in today's Wall Street Journal. "Mr. Levitt is recommending that the SEC require hedge funds to disclose their holdings and make their activities more transparent to investors, and plans to make that point in a speech Wednesday." " 'My experience in the market tells me that when you develop an investment flavor of the day, it's time to be careful,' Mr. Levitt said in an interview. 'More and more [individual] investors are accessing hedge funds and I think that represents a danger.' " "His comments come as the SEC, now under William Donaldson, prepares for two days of public hearings next week into hedge funds, which are private investment partnerships for large investors and seek quick profits by putting large sums in global currency, bond and stock markets." "The SEC has spent the past several months examining hedge funds and is considering whether to establish rules for the industry, which is largely unregulated. Most hedge funds and their advisers are able to avoid registering with the SEC or disclosing their holdings because of exemptions in the securities laws. The SEC does have jurisdiction to investigate and prosecute fraud at hedge funds." "Mr. Levitt said the SEC needs to force hedge funds to disclose when they hold illiquid securities, such as bank debt and distressed bonds and also needs to prevent funds from engaging in 'performance smoothing,' or withholding gains from a fund's good month to offset a bad month." "The former chairman said there has been enough evidence of abuse to merit greater regulation by the SEC. 'There is evidence that with the popularity of hedge funds has come more than a few bad actors,' he said in a speech prepared for delivery to the Andor Capitol Investors Conference in New York on Wednesday." "As more individual, or retail, investors get into hedge funds, Mr. Levitt said in the interview, the SEC needs to make sure it is protecting smaller investors who may not realize the risks involved. Many smaller investors have gotten into hedge funds through "'unds of funds' -- investment companies that put their assets in hedge funds. Mr. Levitt, a director of Carlyle Group's fund of funds, said those vehicles need to register and disclose their holdings." "Hedge-fund disclosure is something that the SEC's Mr. Donaldson has also said he is interested in seeing. Last month, Mr. Donaldson said there was 'more of a need for sunlight' where smaller investors are concerned. Still, the SEC is unlikely to impose strict regulations that govern how hedge funds can invest their money."