NEW YORK (HedgeWorld.com)–In the two-plus years since it started its investigation into hedge funds, the Securities and Exchange Commission has offered different reasons for wanting to increase oversight of the industry, as the initial grounds turned out to be weak, panel participants at a Managed Funds Association conference said.

“If the SEC staff were a hedge fund manager, it would be accused of being subject to style drift,” said Paul Roth of law firm Schulte Roth & Zabel LLP. “Depending on the time and who you speak to, the reason why hedge fund managers should be registered has changed.”

Some of the original rationales included incorrect claims that hedge fund fraud is exploding and an influx of retail customers is imminent. Protecting investors was the main focus. Then came the mutual fund timing scandal, and the idea of forcing hedge fund managers to register in order to prevent such malfeasance had its day.

Another case is that hedge fund trading and leverage could have a destabilizing effect–but that comes under the authority of the Federal Reserve Bank, not the SEC, and it is not clear how requiring registration would contribute to market stability. The SEC chairman also has cited a need to protect pension plan beneficiaries–but that is the responsibility of the Labor Department (see ).

Rumor has it that the SEC is preparing a lighter regulatory regimen for hedge funds than for other investment advisers and that the new rule will not apply to private equity funds, said Marianne Smythe, currently a partner at Washington-based Wilmer, Cutler & Pickering and a former director of SEC’s Division of Investment Management (see ).

Ms. Smythe said the way the regulator would impose a registration requirement is by changing its interpretation of the Investment Adviser Act and counting each investor as a client rather than each fund as a client as it has done since the 1940 law was passed.

Under the new interpretation, any manager with 15 or more investors would have to register, whereas now the rule is 15 or more funds. She posed the question of how the SEC will turn back its own 64-year interpretation, and do so for reasons that keep shifting.

But the battle is not over, said John G. Gaine, president of the Managed Funds Association. The SEC may be deterred by its shortage of qualified personnel to oversee hedge funds, if by no other considerations.

Joel Press, who heads Ernst & Young’s global hedge fund practice, provided a different perspective. He said funds already are regulated in a variety of ways and have been working on complying with rules and establishing sound practices. For instance, hedge fund directors now are taking a more active role and they come at a higher cost to the funds, he said.

CKurdas@HedgeWorld.com

Contact Robert F. Keane with questions or comments at:

bkeane@ia-mag.com.