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Donaldson Speaks to NASD: Hedge Funds and Risk Maps

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BALTIMORE, Md. (–The National Association of Securities Dealers has convened its annual meeting, and its two keynote speakers both are well known to the hedge fund community: William H. Donaldson, chairman of the Securities and Exchange Commission, and Paul Sarbanes, ranking minority member of the Senate Banking Committee.

Mr. Donaldson made his now-familiar point, in a Wednesday [May 12] address, about the need for more information about the hedge fund industry. “Given the rapid rate of growth of hedge funds,” he said, “the size of their assets–about US$800 billion and rapidly approaching US$1 trillion–and the involvement of some hedge fund managers in illegal behavior, the Commission staff is evaluating a form of registration and an oversight regime for hedge fund managers.”

He said that his critics can’t have it both ways: blaming the SEC for failing to prevent and detect emerging abuses, while handicapping its ability to gather the information that would allow it to do so.

He said that he is not persuaded by the view that hedge fund investors are sophisticated and not in need of protection. They are directly or indirectly providing advisory services for many U.S. investors, he said, with impact not only on those investors but also on the overall operation of the securities markets. Furthermore, he said, institutional investors in hedge funds often themselves have “small investor beneficiaries” such as retirees.

Mr. Donaldson also congratulated the SEC’s office of compliance inspections and examinations for its bottom-up work in creating a “risk map” of the mutual fund and broker-dealer industries, which he believes will allow the SEC to “proactively anticipate potential problem areas across the securities industry, focusing on early identification of new or resurgent forms of fraud and illegal or questionable activities.”

He accompanied his remarks with the standard disclaimer that these are his own views, not necessarily those of the SEC or its staff. Mr. Donaldson, appointed to the top SEC job by President George W. Bush in late 2002, and Democratic appointees Harvey Goldschmid and Roel Campos are generally said to favor a requirement that hedge fund managers register as investment advisers, whereas Republican appointees Cynthia Glassman and Paul Atkins oppose it (seePrevious HedgeWorld Story).

Sen. Sarbanes also gave a keynote address, although no text is yet available.

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