SEC Asserts Authority to Sue Hedge Funds for Fraud (Update2)
By Jesse Westbrook
July 11 (Bloomberg) -- The U.S. Securities and Exchange Commission adopted new rules ensuring it can sue hedge funds for misleading investors, following a court ruling that put in doubt the regulator's authority over the $1.6 trillion industry.
The SEC barred hedge funds from lying about investing strategies, performance, a manager's experience and the risks of putting money in a fund. SEC commissioners unanimously approved the rule at a public meeting in Washington today.
``This rule will give the commission an important tool to help us police this market,'' SEC Chairman Christopher Cox said. It allows the agency to hold responsible hedge funds that ``have breached their obligations to investors,'' he said.
The SEC acted after a federal appeals court rejected regulations last year that required hedge funds to report their size and submit to routine inspections. In its decision, the court said the client of a hedge-fund adviser was the fund itself, raising questions about whether the SEC could target managers for defrauding individual investors.
Hedge funds are private pools of capital that allow managers to participate substantially in investment gains. The industry has more than doubled its assets under management in the past five years, according to Hedge Fund Research, a company that tracks the industry.
The court ruling hadn't dissuaded the SEC from suing hedge- fund managers, and no hedge fund accused of fraud asserted the agency lacked authority to bring an enforcement case, said agency spokesman John Nester.
Previous Rules
``Whether we believe the rule was necessary or not, if the commission didn't believe they had the authority to pursue cases,'' today's action was appropriate, said Nora Jordan, co- head of the investment management group at Davis Polk & Wardwell, a New York-based law firm that represents hedge funds.
The SEC in 2004 approved rules requiring hedge-fund advisers to register, citing concern that the industry's rapid growth and the lack of regulatory oversight would hurt investors and financial markets.
Phillip Goldstein, founder and principal of Bulldog Investors, a Saddle Brook, New Jersey-based hedge fund, sued the SEC, prompting the U.S. Court of Appeals in Washington to strike down the rule in June 2006. Instead of appealing the decision, Cox proposed the anti-fraud measure.
The measure gives the SEC the authority to sue hedge-fund managers for making false or misleading statements to investors even if a fund is not registered with the agency as an investment adviser.
`Not Quite Finished'
The SEC is also considering making it harder to put money in hedge funds by requiring that potential clients own at least $2.5 million in investments. Anyone with $1 million in assets, including the value of their home, can currently invest.
That proposal is ``not quite finished,'' Cox told reporters after today's meeting. The commission expects to take it up ``very soon,'' he said.
In February, a Bush administration working group on hedge funds, including representatives from the Federal Reserve and Treasury Department as well as the SEC, endorsed a hands-off approach to regulation. The group said it was best to rely on market pressures to deal with the risks posed by hedge funds. |
