Thursday, June 14, 2007

Tussle over regulation of hedge funds

Should hedge funds be regulated?
The tussle over regulation of hedge funds has resulted in a number of missteps and failed attempts.
Last year, for instance, regulators tried to get a better handle on the industry by requiring them to register with the SEC and submit to random inspections. But an appeals court last year overturned the rule, saying the SEC lacked the authority to regulate hedge funds.
Firmly in the 'more regulation of hedge funds is better' camp is House Financial Services Committee Chairman and Massachussetts Democrat Barney Frank, who has called for global leaders to study the funds' effects on markets. Reuters reports on a letter written by him to President Bush: "Private equity and hedge funds have, in a short period, become owners and movers of vast pools of financial capital, with significant influence on the real economy, employment and long-term competitiveness for our companies."
Protection of the small investor is another important reason proposed to support more hedge fund regulation.
However people on the other side of the issue argue that confidentiality is essential for hedge funds to be able to maintain their superior returns in an increasingly crowded market. They also argue that the hedge fund investor, is not a 'typical' small investor - has higher net worth on average - and consequently may not need the SEC's help.
Currently, the SEC requires hedge funds to submit Form D disclosing how much it intends to raise, how much it has already raised, the names of its managers and the 10-percent beneficial owners in the fund. However, the changes the SEC is considering -- dropping the beneficial owner disclosure and requiring electronic filings -- would make it easier for hedge funds to comply. Still, it will mean that regulators and others who want to know more about who owns the funds are likely to get even less information.
A final decision is expected in early July.

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