Hedge Fund Registration Will Be Ineffectual And Damaging, Says Greenspan

by Phillip Morton, Investors Offshore.com

26 July 2004

In Congressional testimony last week, Federal Reserve Chairman Alan Greenspan doubted that the Securities and Exchange Commission’s proposed system of registration for hedge funds will achieve its intended goal of placing a degree of regulatory control on the industry.

"My problem with the SEC's current initiative is that the initiative cannot accomplish what it seeks to accomplish," and will do very little to prevent cases of fraud, Greenspan told the Senate Banking Committee.

Consequently, the SEC may be forced to consider ever more draconian methods to regulate the largely unpoliced industry which could eventually do more harm than good and have implications for the health of the US economy, he warned.

"Hedge fund arbitrageurs are required to move flexibly and expeditiously if they are to succeed. If placed under increasing restrictions, many will leave the industry - to the significant detriment of our economy," Greenspan observed, adding that hedge funds provide a vital source of flexibility in the financial system, helping the US to absorb economic shocks.

SEC chiefs recently voted 3-2 to advance a proposal requiring hedge funds to register with the regulator subject to a 60 public comment period. The Commission’s chairman, William Donaldson, is a firm advocate of the idea, commenting:

"It is imperative that the commission be proactive and have the means to detect and prevent emerging, but as of yet unforeseen, harms and abuses that could work against those newly exposed to hedge funds and those on the other side of transactions with hedge funds."

However, according to Greenspan, even if the system was successful at uncovering hedge fund abuses, they would in all probability be discovered too late.

"By the time of detection, hedge funds would have long since moved on to different strategies," he predicted.

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