NEW YORK (HedgeWorld.com)–Paul Atkins, one of the five commissioners of the U.S. Securities and Exchange Commission, drew a picture that should discourage investors from relying on the government to ferret out dishonest managers.

He suggested that SEC examiners are likely to be overwhelmed by the task, and a more effective form of control would prevail if managers voluntarily applied the Managed Funds Association’s updated sound practices guide.

Mr. Atkins, who opposed the hedge fund adviser mandatory registration rule passed by the SEC last year in a divided vote, was speaking at a seminar organized by the MFA.

As he sees it, the cost of trying to insure against fraud via registration may be excessively high. The new SEC chairman, Christopher Cox, is receptive to the cost/benefit approach to regulation and acknowledges the positive role of hedge funds in the market, Mr. Atkins said.

But he discouraged hopes that the registration mandate might be revised any time soon to eliminate or lighten requirements. SEC staff will go ahead with registration, examine the information received, and go from there, he said.

If anything, the compliance burden could grow because the complex structure of hedge funds, and their heterogeneity complicates matters for SEC examiners. It is a unique challenge, said Mr. Atkins.

He mentioned one potential hazard: The agency could end up imposing additional requirements that are not necessarily appropriate for all firms, but by standardizing the industry, make it easier for the regulator to monitor.

“As you work hard to get ready for us, we’re struggling to get ready to deal with you,” he told the audience of hedge fund industry people. Advisers with 15 or more investors must register by February 2006, unless they lock up assets for two years or longer, a provision meant to exempt private equity and venture capital firms.

The agency has neither the staff nor other resources to oversee hedge fund advisers, and budget problems make it unlikely that additional examiners can be hired, Mr. Atkins explained.

The SEC is giving priority to inspecting firms with a higher likelihood of problems, since it is impossible for it to watch all the thousands of advisers that are currently registered, let alone the additional thousands of hedge fund managers that may register by February. Only 10% of low-risk investment advisers, randomly selected, will be examined each year.

But it is not a good idea for a manager to try to stay under the SEC radar, Mr. Atkins warned. Instead, implement sound practices, and your investors will be able to sleep more soundly, he advised.

He also expressed doubt that diverting SEC staff for this purpose is the most effective use of regulatory resources, as it means less will be available for overseeing mutual funds.

Hedge fund advisers manage money for maybe 100,000 investors while mutual funds have 90 million investors. The SEC can’t even examine mutual funds every year, he said.

CKurdas@HedgeWorld.com

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