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SEC Orders Hedge Funds to Register
October 26, 2004 6:24:00 PM ET
By Kevin Drawbaugh
WASHINGTON (Reuters) - Hedge fund advisers will have to register with the U.S. Securities and Exchange Commission and submit to examinations under a new rule approved on Tuesday in a 3-2 vote by the market-policing agency.
In a setback for the booming, nearly $1 trillion hedge fund industry, the SEC ordered fund managers to begin submitting basic information about the free-wheeling capital pools they administer, catering mainly to the rich and institutions.
The new rule will take effect in February 2006. Funds with less than $25 million under management will be exempt.
SEC Chairman William Donaldson pushed hard for the measure, defying other top Bush administration officials, including Federal Reserve Board Chairman Alan Greenspan.
Donaldson argued for the crackdown as hedge funds targeted less affluent investors and became implicated in a wave of scandals involving improper trading in mutual fund shares.
Not requiring registration ``would be a major dereliction of the commission's responsibility,'' said Donaldson, a former investment banker, in an open meeting of the commission.
``The message to the hedge fund people is, work with us, help us ... But recognize that we will pursue our regulatory obligation and we will not tolerate fraud in any form,'' the chairman told reporters after the controversial vote.
At the same meeting, the SEC proposed a sweeping overhaul of U.S. rules covering stock offerings. The wide-ranging deregulatory measure contrasted with the hedge fund effort, which puts new limits on a once unfettered business.
Some business groups criticized the SEC on the hedge funds measure. The U.S. Chamber of Commerce -- a frequent SEC antagonist -- warned of ``negative implications'' for markets.
The SEC rule was opposed not only by much of the hedge fund industry, but also by Donaldson's Republican colleagues on the SEC -- Commissioners Paul Atkins and Cynthia Glassman.
Glassman called it ``a disappointment to me on many levels,'' and charged it was rushed through the SEC's evaluation period and alternatives were not adequately explored.
In addition, Atkins said, ``There are serious questions about the commission's statutory authority.''
But Herb Allison, chairman of pension fund TIAA-CREF, called the SEC vote ``a victory for the investing public.''
Allison helped steer a 1998 rescue effort that prevented the collapse of hedge fund Long-Term Capital Management from devastating markets. The LTCM debacle drew worldwide attention to the powerful growth and potential risks of hedge funds.
After two years of debate over the SEC rule, many in the hedge fund industry were resigned to living with it.
``A lot of people in the industry have already begun to prepare for the rule by spending more time thinking about compliance,'' said Eliot Raffkind, a partner with the law firm Akin Gump Strauss Hauer & Feld in Dallas, Texas.
SEC Commissioners Harvey Goldschmid and Roel Campos, both Democrats, joined Donaldson in voting for registration.
``We know too little about this dramatically growing industry. ... What little we do know, at least to me, has alarm bells ringing,'' Goldschmid said at the meeting.
Hedge fund assets are up by 260 percent over five years, with hedge fund fraud also growing rapidly, SEC staffers said.
Hedge fund advisers played a key role in the ``scandals involving mutual fund late trading and inappropriate market timing ... They picked the pockets of everyday mutual fund investors,'' said SEC Investment Management Director Paul Roye.
(Additional reporting Svea Herbst-Bayliss in Boston)
© 2004 Reuters
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Released OCT 20, 2004
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