Self-Regulate Or Else, Warns Ex-SEC Chair

May 17 2007 | 10:43am ET

It’s hardly breaking new ground, but former Securities and Exchange Commission Chairman Harvey Pitt’s call for U.S. hedge funds to regulate themselves—or else—could hardly be timelier.

“Regulation of hedge funds is on the horizon,” he warned a conference of the New York State Society of CPAs. “The only question is whether that regulation will come from the government or from hedge funds themselves.”

Pitt’s dire words come the same week that the senior Republican on the Senate Finance Committee proposed giving the SEC the power to force hedge funds to register, and in advance of a meeting of G8 finance ministers expected to be dominated Germany’s proposals for international hedge fund oversight.

While he praised Britain’s Financial Services Authority for giving retail investors greater access to hedge funds, he cautioned that a hunger for retail investors in the U.S. is likely to be a disaster for hedge funds.

“I believe that hedge funds that try to raise so-called ‘permanent capital’ from ordinary investors are embarking upon a course of action that is sure to lead to significant problems,” he said.

The only solution, Pitt suggested, is a self-regulatory organization.

“If the hedge fund industry is able to realize that the benefits of self-regulation outweigh their costs, for a few dollars more the industry can protect itself from unwelcome government intervention,” he said.

But, “absent any concrete suggestions from hedge funds,” Pitt warned, “legislators and regulators will be happy to propose their own solutions, no matter how impractical.”


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