SEC Votes for Rule Proposal to Regulate Hedge Funds

The Securities and Exchange Commission voted 3-2 on Wednesday to consider rules to get more information out of hedge funds and to get their managers to register with the SEC. Cynthia Glassman, a Republican-appointee to the Commission and one of the two "no" votes, said, "Here we are with a solution without a clearly articulated problem." She clearly has not been paying attention to the developments in the hedge fund industry.

Hedge funds are rather special beasts, most individual investors don't qualify to participate in them. They were originally designed for the super-rich to invest in instruments that would "hedge" the risk in their main portfolios. As time went on, they became vehicles for more speculative investing, still by the very rich who could afford to get slammed by the markets. In both cases, though, the presumption that the sophisticated wealthy knew what they were doing with their money kept regulators away from the hedge fund world.

Setting aside for a moment the fact that a great many wealthy people don't know the difference between a naked put option and a yield-curve, the hedge fund world has changed in two rather significant ways. First, because a lot of pension funds and other vehicles that small, unsophisticated investors use to access the market have started dealing with hedge funds, Main Street retail investors now have risk exposure to them. Second, as Long-Term Credit Management's case a couple of years back shows, hedge funds can go bust quickly with spectacular ripple effects.

The other dissenting Republican commissioner, Paul Atkins, said, "I will not ask taxpayers to foot the bill for a fishing expedition" against hedge fund managers. Meanwhile, Democrat Harvey Goldschmid, a "yes" vote, asked, "What policy sense would it make for the SEC to turn a blind eye?" In a nutshell, they have encapsulated the argument over regulation of the financial markets in general.

What truly fascinates is the split over a proposed rule. Such a proposal, under SEC regulations, is now open for public comment. It is not a final rule that has to be followed, funded or factored into decisions yet. Unanimity, while not always achieved, is attempted among the SEC commissioners most of the time. Here, some rather big toes were stepped on, and they reacted quickly and forcefully. Those who benefit from the status quo have given fair warning that they intend to fight. Perhaps all those pension funds should think of selling, because the SEC's next move, if regulation fails, is to tighten up on who may invest in a hedge fund.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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