SEC Mulls a Formal Look
At Exposure to Hedge Funds
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
The U.S. Securities and Exchange Commission, concerned about Wall
Street's dealings with hedge funds, is considering conducting a formal,
in-depth inspection of major brokerage firms to measure their exposure to
the hedge-fund business.
The agency's scrutiny of Wall Street's hedge-fund-related exposure, at
least so far, has tended to be routine and informal. However, following the
near-collapse of Long-Term Capital Management LP, government
regulators are under pressure from Congress to keep a closer eye on this
complex and secretive investment business. And even among regulators,
some fear other hedge funds may be on the brink of trouble and believe an
extra dose of scrutiny may be in order.
As a result, the SEC, which regulates the securities industry, is considering
a plan to conduct "sweeps" in which its Office of Compliance Inspections
and Examinations would do on-site inspections of brokerage firms,
according to people close to the matter.
This would involve reviewing books and records, as well as interviewing
key executives to get a more precise picture of their dealings with the
hedge-fund industry, these people say. Should the compliance office find
instances of possible fraud, it could refer them to the SEC's enforcement
division. No final decision has been made. The SEC is clearly concerned
about hedge-fund exposure on Wall Street, but heightened scrutiny of the
sort it is mulling would likely be unsettling to the securities industry. So far,
brokerage firms' relationships with hedge funds have largely been kept out
of the regulatory spotlight. Because these investment portfolios cater to
very wealthy, sophisticated investors, they aren't required to register with
the SEC and face minimal government scrutiny.
SEC Chairman Arthur Levitt has indicated that other hedge funds may be
at risk of failing. Speaking last week before a House Commerce
subcommittee, Mr. Levitt also said he is concerned about the negative
effect -- particularly for individual investors -- if another large hedge fund's
problems were to roil an already tumultuous stock market.
Mr. Levitt stopped short of saying he will push for tighter regulatory
control of hedge funds. However, by increasing surveillance of Wall
Street's dealings with the funds, the SEC could address lawmakers' calls
for greater scrutiny without a change in current law.
SEC officials started gathering information on the impact of Long-Term
Capital's near-collapse several weeks before news of its huge losses
stemming from a series of leveraged bets on international bond markets
became public.
They contacted members of Long-Term Capital, of Greenwich, Conn., to
discuss the fund's deteriorating finances, and got in touch with Wall Street
firms to learn about their exposure to the problem-plagued hedge fund.
"Of course, the SEC is checking to see the firms' exposure in light of the
Long-Term Capital and bond-market situation," one SEC official said.
However, people close to the matter say this has mainly involved informal
phone checks and is far more relaxed than the sort of rigorous examination
now under consideration. |
