SEC Chief To Stick By Hedge Fund Registration

by Leroy Baker, for LawandTax-News.com, New York

20 September 2005

In his first major interview since taking over the reigns of the Securities and Exchange Commission, Christopher Cox told the Wall Street Journal that hedge fund registration is here to stay, and that the SEC would seek more transparency in the disclosure of executive compensation for investors.

After the hawkish tenure of his predecessor, William O. Donaldson, the appointment of Cox, a 52-year-old former Republican Representative for Orange County, California, and a one time securities lawyer, was seen by many observers as a prelude to a more business-friendly and less heavy-handed regime at the SEC. Donaldson frequently provoked the ire of the business community over his apparent willingness to crack the regulatory whip, while his controversial championing of hedge fund registration also alienated him from his Republican colleagues at the SEC. Donaldson eventually resigned from the post earlier this year, with two years of his term still to run.

However, contrary to popular expectation, the WSJ report, published Monday, revealed that Cox, while open to change, is likely to adopt a fairly cautious approach in his role as SEC chairman.

"If a particular approach is working well and is cost-effective, we should use it as a model. If another approach is unduly expensive and produces little in the way of worthwhile results, we should amend our approach," he said.

Neither will there be a reversal in the plan to force hedge funds to register as investment advisors from next year, as many observers thought when Cox's name was first mentioned as Donaldson's replacement. According to the new SEC chief, the regulator can "learn from" information collected under the hedge-fund rule and would implement it "exactly as adopted."

"There has been a 14-month transition period which is exceptionally long to ensure that implementation is not burdensome," he said. "In many cases, the investment advisers are already registered with the SEC," he noted.

As SEC chairman, one of Cox's first challenges will be to respond to the lawsuit brought by the US Chamber of Commerce over rules on the independence of mutual fund board directors which were controversially pushed through during the final days Donaldson's tenure. There is also the question of whether Cox will make changes to Donaldson's policy of punishing corporate wrongdoing with heavy fines, which critics argue ultimately punish shareholders and are therefore self-defeating.

On this latter point, Cox did not rule out the use of fines, but indicated that changes may be made to make the system more effective at punishing deterring corporate wrongdoers.

"I'm hopeful that the commission can adopt a framework for the imposition of penalties so that we can, with a high degree of predictability, use all of the tools in our arsenal to meet the objectives of both punishment and deterrence," he told the WSJ.

Nonetheless, one issue that Cox is eager to tackle is that of executive compensation, which, he believes, needs to be disclosed to investors in a much more open and honest fashion.

"Over time, the prevalent forms of compensation have migrated away from what is transparent to what is opaque," Mr. Cox said.

"In many cases, the lion's share of an executive's compensation might come in forms that almost entirely elude disclosure. That clearly needs to be addressed," he added.

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