The rule may be dead, but the Securities and Exchange Commission’s interest in controlling hedge funds is alive and kicking. Speaking before the Senate Banking Committee, SEC Chairman Christopher Cox stressed, “Hedge funds are not, should not be and will not be unregulated.” Cox went on to say that the agency will “move quickly to address the hole” left by the stricken HF registration rule, adding that changes could come through administrative action or legislation. He also said he intends to urge the SEC to limit the availability of hedge funds, and their marketing to “unsophisticated retail investors, noting that a spike in HF business from this group “should be viewed with alarm.” Among the proposals Cox is considering is raising the minimum investment in hedge funds to $1.5 million from $1 million, a regulation that would allow the SEC to sue managers on behalf of investors, and anti-fraud rules. In addition, Cox said he would urge those who have already registered with the SEC under the original rule to remain, noting that the actual number of registrants has increased since the court struck down the rule – despite the 10 or so reported defections.
When it was his turn to speak, Randal Quarles, an undersecretary at the U.S. Treasury, talked about how investors benefit from hedge funds, but also focused on the negative impact they could have if HFs concentrate too much money in certain assets or sell off illiquid asset quickly. “Many of these issues and concerns have been or are actively being addressed – outside of a formal scheme of direct regulation of hedge funds,” said Quarles, “both by policymakers and by private sector groups.”