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As With Mutual Funds, So With Hedge Funds

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As the Securities and Exchange Commission continues its crackdown on the mutual fund industry, the new president of the Investment Company Institute (ICI) is urging the securities regulator to do the same to hedge funds.

During a recent speech in Washington, Paul Schott Stevens, the new ICI president, said that, “Unregistered hedge fund advisors oppose even a modicum of regulation because, well, it might screw up their business model.” But Stevens urged SEC Chairman William Donaldson to move forward with his controversial plan to have hedge fund advisors register with the SEC. “…With mutual funds regulated so comprehensively and competing investment vehicles not at all, it will simply invite sharp operators to go where they can escape scrutiny and maximize profits.” Some in the industry speculate that any day now the SEC will approve its proposal that hedge fund managers register with the commission.

Stevens said that while the ICI “strongly supports” the SEC reexamination of how mutual funds are regulated, the road ahead “will be demanding and test us in new ways.” Since the mutual fund trading scandals began to surface last September, he said, the SEC has issued 16 new rules that affect mutual funds, 12 of which are “a direct result of the trading scandals.” The ICI has even given its okay to the SEC’s controversial rule requiring board chairmen of mutual funds to be independent, which was adopted June 23. The SEC rule says that 75% of the board members must now be independent of the fund company, independent directors must meet quarterly without fund executives, and that the board must have annual self-assessment meetings.

A recent poll of brokers, financial advisors, and bank reps performed by MFS Investment Management found that these groups endorse the SEC’s rule that fund boards have an independent chairman, as well as the SEC’s rule to prevent late trading after 4 p.m. But these groups were divided on their support for the SEC’s proposals on mandatory fees for fund redemptions, bans on soft dollars for research, and the elimination of 12b-1 payments.