Talks Commence At SEC Hedge Fund Forum

by Phillip Morton, Investors Offshore.com

16 May 2003

Speaking at the opening of two days of hearings concerning future regulation of the burgeoning hedge fund industry, SEC chairman William Donaldson said that steps are being considered to better protect investor's interests in the largely unregulated market.

"The time has come for us again to advance our review of hedge funds and how they are operated, managed and regulated,'' explained Donaldson. "We're looking to insure investor protection and are focusing on issues such as retailization of hedge funds, transparency, risk management, conflicts of interest and fraud."

These hearings are the conclusion of a year long investigation by the SEC into the practices of hedge funds. However, Cynthia Fornelli, deputy director of the SEC's investment management division told Bloomberg this week that the commission has yet to reach any concrete decisions regarding future regulatory requirements.

"We have no preconceived notions," Fornelli said to Bloomberg, adding that at the moment the SEC is keeping its options wide open from light regulation to full regulation and disclosure.

One of the main concerns felt by the SEC is the increasing 'retailization' of the hedge fund industry. Traditionally, hedge funds were only open for those with a net worth of $1 million to invest. However, there has been an increasing tendency for funds to target more middle class investors, and in some cases minimum investment requirements have dropped to $25,000. Also, mutual funds have begun to increase their involvement in the hedge fund market by offering funds of funds. These track a basket of hedge funds allowing the more average investor to profit from their higher returns.

In addition to representatives from some of the more high profile hedge funds, lawyer, academics and accountants have also been invited to express their views in the discussions.

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