Commissioner: Sound Industry Practices Offer Better Control than SEC Registration

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.