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Expect Proposed Hedge Fund Rules This Month: Donaldson

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FORT WORTH, Texas (–William H. Donaldson kept up the drumbeat for hedge fund regulation over the weekend, telling a conference of business editors and writers on Sunday [May 2] that hedge funds are “an accident waiting to happen.”

Mr. Donaldson, chairman of the Securities and Exchange Commission, said the SEC needs the increased oversight that greater regulation of hedge fund managers would provide in order to learn more about the industry.

One published report indicated rules regulating hedge funds could be proposed as soon as this month.

SEC officials said no text of Mr. Donaldson’s speech was available. Officials with the Society of Business Editors and Writers, which held the conference, did not return calls seeking additional information by press time.

Reports on wire services and in local newspapers indicated Mr. Donaldson sees hedge fund regulation as the only way the SEC can effectively protect hedge fund investors, who comprise a much larger group than merely the ultra-wealthy. Mr. Donaldson has been hammering home this point since September, when the commission released a report on the growth of the hedge fund industry. Among the recommendations in the report was requiring hedge fund managers to register as investment advisers with the SEC.

In recent speeches, Mr. Donaldson has portrayed hedge funds as available to everyday investors via corporate and public pension funds, a growing number of which now invest in hedge funds.

This may be in response to criticism leveled by commissioners Cynthia Glassman and Paul Atkins, who have said they see no need for hedge fund regulation in part because they are not widely available on a retail level (seePrevious HedgeWorld Story). They have said the SEC’s primary mission should be to protect smaller investors and that greater scrutiny of mutual funds was the best way to accomplish that.

Commissioners Roel Campos and Harvey Goldschmid have said publicly that they support requiring registration. With Mr. Donaldson’s support, the commission would have the necessary votes eventually to propose and approve rules that include mandatory registration.

By making the link between hedge funds and pension funds, Mr. Donaldson can argue that SEC regulation of hedge funds would, in fact, protect the same smaller investors Ms. Glassman and Mr. Atkins have said should be the focus of the SEC’s efforts.

At the business editors and writers conference, Mr. Donaldson was quoted as saying, “There’s not a pension fund in the country that’s not using hedge funds. This is an US$800 billion industry on its way to US$1 trillion. We don’t know what’s going on in these industries because we do not have the authority to go in and look at them.”

Many expect that the SEC will change the way hedge fund managers count clients so that each individual investor counts as a single client. Those with more than 14 clients will be required to register as investment advisers with the SEC (seePrevious HedgeWorld Story).

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