WASHINGTON (HedgeWorld.com)–William H. Donaldson, chairman of the Securities and Exchange Commission, used the occasion of a speech to a mutual fund directors’ group to make the case for the SEC’s recent and continuing reform agenda, including the hedge fund adviser registration initiative.

Mr. Donaldson, speaking to the Independent Directors Council Oct. 21, said the past 13 months have been a difficult time for the mutual funds industry, a time when mutual funds have lost the trusting relationship they once enjoyed with the broad investing public. He presented many of the SEC’s recent enforcement and regulatory moves as an effort to help asset managers win back that lost trust.

The registration of hedge fund advisers, as included in a proposal on which the SEC is expected to vote next week, is “a prime example of this forward-looking approach,” he said, adding, “I believe we need to know more about the activities of hedge fund managers and the impact their trades have on what I call the ‘other side of the transaction.’”

Hedge funds have played roles in a number of late-trading and market-timing abuses, which have left many mutual fund investors financially disadvantaged and distrustful.

But rule-making alone, Mr. Donaldson said, can’t reform an industry. The industry must be committed to reforming itself. The front line in the self-regulation of mutual funds is represented by the independent directors, who should use more than their voices to that end; specifically they should use their votes, he said. “Do not be forced to vote for an initiative for the sake of expedience or efficiency if, in your judgment, there could be negative implications for fund investors,” he urged his audience. He also encouraged its members to comment on SEC proposals such as the hard 4 o’clock close and the 2% redemption fee rule, and to make suggestions for further regulatory moves.

The IDC was formed in May 2004, as an enhancement of parent Investment Company Institute’s directors’ committee, which had been in existence since 1995 but was primarily focused on directors’ education. The IDC was designed to have a broader focus.

James Bodurtha, of Merrill Lynch Funds, is the chairman of the new council. In his speech Wednesday, Mr. Donaldson praised Mr. Bodurtha for taking on that responsibility.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.