SEC considers major changes for hedge funds

Date: Thursday, January 30, 2003

"Wrapping up an eight-month investigation into the hedge-fund business, Securities and Exchange Commission officials are eyeing a push for sweeping changes in the way hedge funds operate," writes Gregory Zuckerman in today's Wall Street Journal. "The staff's moves were prompted by concerns about a rush of small -- and, at times, inexperienced -- investors into hedge funds at the same time that a number of high-profile funds have imploded, often after defrauding investors." "The staff's ideas are being compiled and likely will be presented to William Donaldson, the agency's incoming chairman, over the next month or so. The options for change likely will include forcing more hedge-fund managers to register as investment advisers with the agency and imposing stricter restrictions on who can buy funds, said people close to the situation. The commission also may try to slow down the number of hedge-fund vehicles available to smaller investors and to change the way funds market themselves by making funds provide investors with better information about their performance and assets. 'The investing public is susceptible,' says SEC Commissioner Roel Campos. 'At the minimum we may need more disclosure about the risks.' " "Traditionally pitched to wealthy individuals, hedge funds are lightly regulated investment pools that can bet on a variety of global markets -- both on the upside and down -- and often use leverage to boost their returns." "One question even for some people on the SEC staff is whether a recent increase in fraud cases is a result of problems in the business, or simply an outgrowth of the fact that now there are so many more hedge funds operating. In the past five years, the number of hedge funds has doubled to about 7,000 as traders of all stripes have tried their luck as hedge-fund managers." "Some SEC staff members are less convinced that big modifications in the hedge-fund business are necessary, and dubious about whether the agency can handle the added workload that would come with more oversight of the growing hedge-fund world. Indeed, hedge-fund regulation has been a topic of scrutiny in Washington for years, especially after the near-collapse of Long-Term Capital Management LP in 1998, but little new oversight has resulted." "It will be up to Mr. Donaldson to determine which changes to pursue, if any, in what will be one of his most high-profile early decisions. People who have spoken with him recently say he has expressed interest in pursuing possible hedge-fund regulations and is particularly interested in focusing on possible trading violations." "Continuing investigations by the SEC and New York Attorney Eliot Spitzer into a well-known fund could add to the pressure on Mr. Donaldson to act."