SEC chief says hedge funds dodge scrutiny by regulators

Date: Friday, April 11, 2003

"Securities and Exchange Commission Chairman William Donaldson said hedge funds are using exemptions in securities laws to avoid regulatory scrutiny, and that the agency needs to 'know more about what's going on at these institutions'," writes Deborah Solomon in today's Wall Street Journal. "But he cautioned against legislation restricting how hedge funds invest money, saying that some investors in these lightly regulated investment pools want more risk. 'It's hard to make a universal move as to how you treat a hedge fund,' he told lawmakers. 'We don't want to come up with legislation that restricts how a fund can invest.' " "Mr. Donaldson's testimony before the Senate Banking Committee came as public scrutiny of hedge funds is heating up. The SEC is conducting its own investigation and plans a two-day public hearing next month. The House Financial Services Committee plans a hearing in the next few weeks. This would be the first major look into the hedge-fund industry since the 1998 collapse of Long-Term Capital Management LP." "Despite that meltdown, the industry has remained largely unregulated, with most hedge funds and their advisers 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." " 'We may have to close the door on some of those exceptions,' said Sen. Paul Sarbanes (D., Md.). 'I get the uneasy sense of people laying these statutes out in front of them and plotting their course through the exemptions and exceptions.' " "Mr. Donaldson said the SEC is concerned about the lack of disclosure and wants to be able to 'get inside the techniques being used' by hedge funds, such as short-selling." "He said he is especially worried when it comes to smaller investors, many of whom are investing in 'funds of funds' -- investment companies that put their assets in hedge funds. 'As you get down to smaller investors there's more of a need for sunlight,' Mr. Donaldson said after his testimony. But he added that investors have a right to put their money into riskier vehicles and the government shouldn't 'go in there and deprive somebody of that investment.' "