WASHINGTON (HedgeWorld.com)–The chairman of the Securities and Exchange Commission told a subcommittee of the House of Representatives that he believed the SEC’s round table on hedge funds last week was a resounding investigatory success.
It was an “excellent example of how the SEC can operate as an effective regulator, by assembling a highly knowledgeable group of experts representing a variety of viewpoints to debate important issues,” according to William H. Donaldson’s prepared testimony, Thursday morning, to the capital markets subcommittee of the Financial Services Committee.
The subcommittee chair, Rep. Richard Baker (R-La.) said that the committee eagerly awaits the SEC report, which now is expected early this fall.
The SEC chairman stressed that the investigation continues, that the round table was only a part of it and that no conclusions have been reached. He said the reason an investigation is appropriate is due to the rapid growth in the hedge fund industry in recent years. Panelists at the round table estimated that over the last few years, there have been approximately US$25 billion a year in new assets invested in hedge funds.
If Mr. Donaldson’s remarks are a good sign of the way the wind is blowing within the SEC, it seems unlikely that the ongoing investigation will lead to new restrictions on short selling. Mr. Donaldson was reassuring on the subject, observing that the short selling, at least with regard to exchange traded stocks, is already subject to greater regulation than other trading strategies, and that “if short sellers make false statements about issuers for the purpose of lowering their stock prices, that conduct is actionable under the anti-fraud and anti-manipulation provisions of the federal securities laws.”
He did express concern, though, about the fee structure of hedge funds. It aligns the interests of managers and investors, he said, on the upside but not on the downside. Furthermore, a single investment adviser sometimes manages both a hedge fund and a mutual fund, where the former offers the manager an opportunity to earn a performance fee that the latter does not. “Round table panelists generally agreed,” the chairman said, “that this situation does raise a conflict of interest that requires appropriate disclosure, allocation and other procedures on the part of the adviser.”