SEC Closes Hedge Fund Fraud Loophole

Jul 11 2007 | 2:42pm ET

Closing a loophole opened by a federal court decision, the Securities and Exchange Commission today banned hedge funds from misleading investors. But Bulldog Investor’s Phillip Goldstein says more rules are not the answer to fraud. 

Phil GoldsteinPhil GoldsteinThe new rule, which unlike the controversial hedge fund registration rule, enjoyed unanimous support on the five-member commission, and allows the SEC to sue hedge funds for lying about investment strategies, performance, a manager’s experience or risk. The SEC’s authority to do so was called into question by the Goldstein decision, when the Court of Appeals in Washington tossed the agency’s registration rule.

“This rule will give the commission an important tool to help us police this market to deter misconduct,” SEC Chairman Christopher Cox said.

While Goldstein lauds the SEC intentions, he thinks the Commission needs to do more than just come up with new legislation.

“It’s like if there are a lot of bank robberies in the neighborhood, then you don’t need more laws against bank robberies; you just have to go out and arrest the robbers” Goldstein told FINalternatives.

“If managers lied to investors, they can get sued anyway so what’s the difference? They should spend more of their resources going after the fraudsters than adopting new rules. Unfortunately, they’re very slow about acting in a lot of cases.”   

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