Donaldson Says Commission's Hedge Fund Knowledge 'Woefully Inadequate'

PALM BEACH, Fla. (HedgeWorld.com)–Securities and Exchange Commission Chairman William H. Donaldson told an audience of registered investment advisers that the commission’s knowledge of hedge funds was “woefully inadequate” and suggested mandatory hedge fund manager registration with the SEC was the best way to counter that.

Mr. Donaldson also answered critics’ contentions that having hedge fund managers register as investment advisers would not improve the SEC’s policing of the industry and would do little to protect retail investors, most of whom currently cannot access hedge funds. He said such criticism smacked of a double standard.

“Critics of our focus on hedge funds cannot, in my view, have it both ways–on one hand, to demand that the Commission be proactive and prevent and detect emerging but as of yet unforeseen harms and abuses, but on the other hand, to handicap our abilities to obtain simple, fundamental information that facilitates our identification of such abuses,” Mr. Donaldson said.

Mr. Donaldson has said he favors requiring hedge fund managers to register with the SEC, and in recent months has said the Commission is preparing proposed rules to achieve that Previous HedgeWorld Story. He has the support of commissioners Harvey Goldschmid and Roel Campos, however commissioners Cynthia Glassman and Paul Atkins have publicly criticized the registration initiative Previous HedgeWorld Story.

That leaves the commission divided 3-2 in favor of requiring some kind of manager registration.

An April 20 General Accounting Office report on SEC operations indicated staff with the commission’s Office of Compliance Inspections and Examinations and the Investment Management Division said their workload had increased in recent months due to the SEC’s stepped-up policing of mutual fund managers, among other initiatives. According to the GAO report, requiring hedge funds to register as investment advisers would mean monitoring an additional 600 to 1,100 advisers, placing further demands on the staff’s time and threatening goals to increase the frequency of manager examinations.

But as more investors have focused in recent years on risk over return, Mr. Donaldson has zeroed in on risk factors as drivers of SEC policy. Burned by the mutual fund market timing and late-trading scandal, which critics say has spotlighted the SEC’s inadequate oversight of financial markets, the commission has now committed to a proactive course of identifying risks ahead of time and moving to address them sooner rather than later.

Mr. Donaldson is leading the charge.