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Hedge-fund oversight moves closer: SEC approves proposal for advisors to register, open books


Date: Thursday, July 15, 2004

By IE Staff: "U.S. securities regulators moved a step closer toward exercising oversight of the hedge-fund industry, proposing to require fund advisers to register with the government and open their books and records to examiners," writes Deborah Solomon in today's Wall Street Journal. "In a 3-2 vote, the Securities and Exchange Commission approved the proposal over the objections of two of the commission's Republican members, who said the agency had yet to demonstrate that hedge-fund regulation was necessary or that it would help detect or deter fraud." "It was the second split vote at the SEC in less than a month and a sign of increasing tension among some of the commissioners over regulatory policy in the wake of accounting and other financial scandals that have rocked investors in recent years." "SEC Chairman William Donaldson, who has been pushing for hedge-fund oversight since his Senate confirmation hearing last year, said regulators had waited far too long to gain more insight into an industry that is estimated to reach $1 trillion by year end. The funds are high-risk, potentially high-yield investment pools mainly for the wealthy and institutional investors." " 'For many years, it has been acceptable, if not satisfactory, for this agency to take a "sit back and see what happens" approach to hedge funds,' Mr. Donaldson said. 'I believe this course is no longer responsible or acceptable.' " "Mr. Donaldson pointed to the recent mutual-fund scandal, saying that 40 hedge funds have been involved in the market-timing and late-trading cases the SEC is now investigating. Requiring hedge-fund advisers to register with the agency, he said, would serve as a deterrent against abusive behavior and protect investors across the broader market, not just those who invest in hedge funds." "Public comment on the proposal will be solicited over the next 60 days, and if the rule is approved, most hedge-fund advisers would have to register with the SEC, opening them to routine inspection by SEC staff. Fund advisers would have to adopt compliance policies and designate a compliance officer." "The regulation would apply to advisers of funds with more than $25 million in assets and with 15 or more investors. About 40% of hedge-fund advisers already voluntarily register with the SEC." "Restrictions on who can invest in hedge funds would also be tightened because of the industry's proclivity for charging performance fees. Under SEC rules, registered investment advisers may charge performance fees only to clients with a net worth of $1.5 million. Currently, hedge-fund investors must have a net worth of $1 million or an annual income of $200,000 for at least two years."