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SEC's Cox Says Hedge Fund Regulation Is `Inadequate'

Date: Tuesday, July 25, 2006
Author: Jesse Westbrook, Bloomberg.net

July 25 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox said hedge funds aren't being regulated enough and Congress may have to pass laws requiring more oversight of the industry with $1.2 trillion in assets.

Cox said the regulatory vacuum is partly the result of a court ruling last month that struck down SEC rules requiring hedge fund managers to register with the agency and submit to random inspections.

``The commission stated, when we adopted the hedge fund rule in 2004, that its then-current program of hedge fund regulation was inadequate,'' Cox said in prepared remarks to the Senate Banking Committee in Washington today. ``With the rejection of the hedge fund rule by the Court of Appeals, I believe that is once again the case.''

Cox said regulators ``must move quickly to address the hole that the Goldstein decision has left.'' While ``some improvements will be possible through administrative action,'' he said ``others, however, may well require legislation.''

The U.S. government is intensifying its scrutiny of hedge funds after the industry's assets more than doubled in the past five years. The rejection of the SEC's hedge fund rule gave Congress more reason to consider regulation.

`Dark Void'

``There shouldn't be a large, dark void there where there's no knowledge on the part of the important regulators like the SEC about what's happening,'' Senator Paul Sarbanes, a Maryland Democrat who sits on the Senate Banking Committee, said before today's heading. Lawmakers ``need to have some sense'' of what hedge funds are doing.

The Treasury Department this month started an inquiry into the funds and their impact on financial markets. In addition to Cox, Treasury Undersecretary Randal Quarles and Commodity Futures Trading Commission Chairman Reuben Jeffery will testify at the committee hearing today.

Hedge funds have escaped oversight because they are private investment pools open mainly to institutions and individuals with at least $1 million to invest. Regulators are becoming more concerned because of the risks these funds may pose to financial markets.

More than $42 billion of new investments flowed into hedge funds in the three months ended June 30, the most in one quarter since at least 2003, according to Chicago-based Hedge Fund Research Inc. In the first half of 2006, hedge funds returned 6.2 percent, compared with 2.7 percent for the Standard & Poor's 500 Index, a U.S. stock market benchmark.

Limiting Investments

Cox said the SEC will take steps to restrict the ``marketing and availability of hedge funds to unsophisticated retail investors.''

He's also recommending that the definition of an accredited investor in hedge funds be revised to include only people with a net worth of at least $1.5 million, up from $1 million now. The change would apply to funds that charge investors a performance fee.

``I am concerned that the current definition, which is decades old, is not only out of date, but wholly inadequate to protect unsophisticated investors from the complex risks of investment in most hedge funds,'' Cox said.

To contact the reporters on this story:
Jesse Westbrook in Washington at 
Alison Vekshin in Washington at  avekshin@bloomberg.net.