SEC May Hire 160 for Hedge Fund Inspections, Donaldson Says
Feb. 18 (Bloomberg) -- The U.S. Securities and Exchange Commission may hire as many as 160 people to register and inspect hedge funds in anticipation of regulating the $800 billion industry, SEC Chairman William Donaldson said.
``I don't want this agency to wake up, or this country to wake up, two years from now and have some huge disaster'' resulting from hedge funds, Donaldson said in an interview last week in Washington.
Donaldson is pressing ahead even before the agency has approved the plan, which has drawn criticism from Federal Reserve Chairman Alan Greenspan, SEC commissioners Cynthia Glassman and Paul Atkins, and the hedge fund industry. Next year's SEC proposed budget includes money for the additional employees.
John Gaine, president of the Managed Funds Association, the Washington trade group for hedge funds, said he doubts the agency will extend its oversight to hedge funds anytime soon.
``It's a long way off to think there's a hedge fund regulatory system that is going to be put in place by the SEC,'' Gaine said.
Donaldson says his push for regulation stems in part from the increase in hedge fund fraud cases over the last several years. As of September, when the SEC staff recommended oversight of hedge funds, the agency had filed 38 enforcement actions since 1999 against funds or their managers.
Biggest Investigation
Hedge funds, including Canary Capital Partners LLC and Millennium Partners LP, have been named in illegal mutual fund trading cases. Those cases are part of a probe by New York Attorney General Eliot Spitzer, the SEC and other regulators into improper trading at more than 20 mutual fund companies.
Hedge funds, private partnerships for wealthy individuals and institutions, have opposed most efforts to expand oversight of their activities. SEC registration would do little to stop fraud, including illegal mutual fund trading, hedge funds say.
``If the SEC is interested in identifying those who rapidly trade in and out of mutual funds, it should require the mutual funds to produce a list of those who do this,'' said Leon Metzger, vice chairman of Paloma Partners Management Co., a hedge fund based in Greenwich, Connecticut. ``This seems to be the simpler solution.''
15-Month Probe
SEC staff recommended registration after a 15-month study that included interviews with 65 hedge-fund executives controlling more than $160 billion. Registration would let the agency gather information about fund management and operations.
Harvey Goldschmid and Roel Campos, the two Democrats on the commission, have been supportive of the SEC staff plan. Donaldson's fellow Republicans, Glassman and Atkins, expressed reservations about subjecting hedge funds to SEC scrutiny.
Greenspan, testifying before a U.S. Senate committee last week, said he didn't think it was necessary for hedge funds to be regulated by the federal government.
``They have been very helpful to the liquidity and hence the international flexibility of our financial system,'' Greenspan said. ``I grant you that registering advisers in and of itself is not a problem, but the question is what is the purpose of that unless you are going to go further.''
In response to Greenspan's comments, SEC managing executive Laura Cox said Donaldson was concerned that hedge funds were ``willing participants in more than half'' the enforcement cases the SEC has brought in connection with mutual fund trading abuses.
No Threat
``The SEC staff does not believe that their recommendation would impede the manner in which hedge funds operate nor reduce the liquidity hedge funds provide in the marketplace,'' Cox said.
Greenspan and Donaldson are part of the four-member President's Working Group on Financial Markets, which discusses and coordinates financial regulatory policy. The group also includes Treasury Secretary John Snow and Commodity Futures Trading Commission Chairman James Newsome.
The working group, prodded by the collapse of hedge fund Long-Term Capital Management LP, offered a plan for more disclosure by hedge funds in 1999.
In the interview, Donaldson said he would like to set up a computer screening system, using data obtained from hedge fund registration, that would help the SEC look for troubling trends in the industry.
Hedge funds ``are going to be a trillion-dollar industry, before we know it,'' Donaldson said. ``It's growing like a weed.''
Increased Funding
President George W. Bush earlier this month proposed increasing the SEC's funding by 10 percent, to $893 million for fiscal year 2005, which begins next October.
The money for the 160 positions was set aside in anticipation of an SEC vote to register hedge funds, but also could be used for additional mutual fund regulation, Cox said.
Hedge fund managers and lawyers said they expect that Donaldson will prevail in his effort to regulate hedge funds.
``It often takes much more time than people expect to bring about changes at the SEC because the devil's in the details,'' said Ron Geffner, a former SEC enforcement lawyer now at the Sadis & Goldberg law firm in New York. ``But given the resources the SEC has already devoted to the potential additional regulation of hedge funds, I think it will happen.''
To contact the reporter on this story:
Robert Schmidt in Washington at rschmidt5@bloomberg.net.
Last Updated: February 18, 2004 00:03 EST |
