WASHINGTON (HedgeWorld.com)–The chairman of the Securities and Exchange Commission testified before a committee of the Senate on investor-protection issues as they relate both to mutual funds and hedge funds.

In his address to the banking committee April 8, William H. Donaldson commended its members on the breadth of their oversight hearings since late trading and market-timing abuses came to light last fall.

“Like you,” he said, “I am outraged by the conduct that has come to light in the recent mutual fund scandals. In large part, I believe that the [mutual fund] industry lost sight of certain principles–in particular its responsibility to millions of investors who entrusted their life’s savings in this industry for safekeeping.”

The chairman told the committee that he doesn’t believe the SEC requires new statutory mandates in order to take remedial action. If, as the SEC moves to reform the mutual fund industry, it discovers critical issues that Congress should address with new legislation, it will inform Congress of that discovery but “I do not believe that legislation is necessary at this time.”

Mr. Donaldson spent much of his time addressing what he called his “personal concerns related to hedge funds,” with the caveat that his views on hedge funds are his own and do not reflect the views of the entire SEC.

He had five questions that he believes the SEC must consider about hedge funds:

1.How are hedge fund managers pricing the securities in their portfolios?

2.What practices are in place regarding hedge funds’ use of and access to inside information?

3.How do hedge fund managers conduct their securities trading?

4.What prevents hedge funds from front-running mutual funds or other large investors?

5.What are hedge funds’ activities regarding initial public offerings?

Under current rules, he said, the SEC is limited in how it can gather information on these subjects. He complained that unnamed critics of the SEC have been having it both ways: on one hand urging that the SEC become more proactive in preventing emerging abuses, on the other hand handicapping its ability to obtain the information that would make that possible.

Although Mr. Donaldson made it clear that he believes record keeping and other regulatory requirements may be or become appropriate for the hedge fund industry, he also said that he recognizes that hedge funds have a distinctive role in today’s financial markets and should be allowed to function as they do, without regulatory impediment. In order to strike the right balance, he said, “we could consider both a form of registration for hedge fund managers and an oversight regime different from that which we use for other, more heavily regulated industries, like mutual funds. They could be specifically tailored to the unique dynamics of these types of managers.”

CFaille@HedgeWorld.com