Policing Hedge Funds

Robert Plaze, associate director for regulation of the SEC’s Division of Investment Management, noted that the court of appeals, when overturning the hedge fund registration rule, actually recommended that the SEC consider adopting the anti-fraud rule. Plaze also noted that the anti-fraud rule would not be onerous to comply with because it “does not create any new obligations” for advisors to pooled investment vehicles.

Meanwhile, the House Financial Services Committee held a hearing the same day in which the President’s Working Group on Capital Markets reported on hedge funds and their systemic risks. Committee Chairman Spencer Bachus (R-Alabama), noted in his opening speech that earlier this year “the PWG endorsed an approach to hedge-fund regulation that relies primarily on market pressures and incentives to contain risk. The PWG concluded–correctly, in my view–that market discipline, together with statutory limitations restricting access to hedge funds to wealthy investors, can sufficiently mitigate industry risks. By emphasizing the importance of free market forces rather than the heavy hand of excessive government regulation, I believe that the PWG has struck the right balance in regulating the activities of these highly innovative investment vehicles.”