WASHINGTON (AP) — The Securities and Exchange Commission will consider tightening oversight of the high-risk, largely unregulated $600 billion hedge fund industry, the head of the agency saidMonday.
Following an investigation of the industry — which traditionally has offered investments for the wealthy but increasingly is luring smsall investors — the SEC staff recommended in a new report that the agency require that managers of the funds be registered.
SEC chairman William Donaldson said he and the four other SEC commissioners will thoroughly review the report with an eye to taking action.
Donaldson noted that the $600 billion invested in hedge funds is expected to balloon to more than $1 trillion in the next five to 10 years.
“The substantial growth in hedge fund assets, and the (SEC’s) lack of information about these investment pools, make the study released today particularly important,” he said.
The SEC began investigating in the spring of 2002 how hedge funds are operated and managed, after seeing an increase in fraud among the 5,700 or so funds in the United States. SEC staff reviewed documents from 65 advisers managing more than 650 hedge funds with more than $160 billion in assets.
Among the report’s findings:
–Smaller investors increasingly are investing in hedge funds and need education to help understand the risks.
–There is a need for some hedge funds to improve the disclosure of financial information.
–Fraud is growing among hedge funds.
In the latest case, a federal judge last Thursday granted the SEC’s request for a temporary restraining order to halt sales by Arizona-based Millennium Capital Hedge Fund. The judge also ordered a freeze on brokerage account assets.
The Managed Funds Association, a trade group representing the hedge fund industry, said that requiring fund managers to register “places a significant and unnecessary burden on the SEC as well as investors.”
The staff report recommends that the SEC review whether the benefits of mandatory registration would outweigh the costs.
State securities regulators urged the SEC to quickly adopt mandatory registration — already a requirement in some states — which they called “a positive step toward increased investor protection.”
Earlier this month, New York Attorney General Eliot Spitzer charged that a hedge fund gained unfair trading privileges at several big-name mutual fund companies in an illegal arrangement that possibly cost investors billions of dollars.
Hedge fund Canary Capital Partners LLC and its managers agreed to pay $30 million in restitution for profits generated from unlawful trading and a $10 million penalty.
In exchange for big-money investments, Spitzer said, several mutual funds bent the rules applied to most investors and allowed Canary to make after-hours trades and short-term “in and out” deals. Canary arranged to make such trades with several leading mutual fund families, including Bank of America’s Nations Funds, Banc One, Janus and Strong, Spitzer said.
The SEC issued an “investor alert” in February advising prospective investors to check out the background of hedge fund managers as well as the fees charged by funds.
Like mutual funds, the speculative hedge funds pool money from investors and invest it in various ways in an effort to get the highest return. Unlike mutual funds, they mostly are not registered with the SEC and therefore subject to few controls.
To attract smaller investors, funds of hedge funds — which invest in several hedge funds rather than individual securities — have sprung up recently and offered lower minimum entry requirements than traditional hedge funds, such as $25,000 compared with $1 million. Some funds of hedge funds have registered with the SEC and are thereby required to provide prospectuses to investors and file semi-annual reports with the federal agency.
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On the Net:
The hedge fund report is available on the SEC’s Web site at http://www.sec.gov
